1) Stock A has a P/E ratio 3.5 while stock B has a P/E ratio 5. If everything else is the same, which stock represents a better investment?

a) Stock A

b) Stock B

c) Neither

d) Not enough information

2) A firm has the Quick Ratio of 2.1. Which of the following is true?

a) The firms primary source of financing is Equity

b) The firms primary source of financing is debt

c) The firm has enough current assets to pay off its current liabilities

d) The firm does not have enough current assets to pay off its current liabilities

3) __________ is better for comparing projects of different length because _____________.

a) Net present value, it tells us whether a project has higher return than expected return or not

b) Profitability Index, it tells gives us the net present value of the project for every dollar invested

c) Equivalent Annual Annuity, it tells us the average annual net present value of a project

d) Payback rule, it tells us the time it takes to recoup the initial investment

4) Suppose that you own a stock (stock A) with 8% return and has a standard deviation of 5. Your friend recommends a stock (Stock B) that has 10% return and standard deviation of 7. Which of the following is true?

a) Creating a portfolio by buying a stock B will lower the risk

b) Stock B has higher return so you should sell stock A and buy stock B

c) Stock A has lower return but is riskier than stock B

d) Dont do anything as stock A has higher return per unit risk than stock B

5) If a stock has beta 1.6 and the expected return is 10%. If the actual return is 8%, which of the following is true? Assume that the efficient market hypothesis holds.

a) The stock is underperforming but likely to yield a higher return in the future

b) The stock is underperforming but likely to yield a lower return in the future

c) The stock is not a good investment opportunity

d) The stock is too risky for the given return