1. The average accounting rate of return (AAR):

A) considers the time value of money.

B) measures net income as a percentage of the sales generated by a project.

C) is the best method of financially analyzing mutually exclusive projects.

D) is the primary methodology used in analyzing independent projects.

E) is similar to the return on assets ratio.

2. Consider the following information:

State of Economy	Probability of State of Economy	Rate of Return if State Occurs
		Stock A			Stock B
Recession	.04		.097			.102
Normal	.72		.114			.133
Boom	.24		.156			.148

The market risk premium is 7.4 percent, and the risk-free rate is 3.1 percent. The beta of Stock A is ________ and the beta of Stock B is ________.

A) 1.25; 1.89

B) 1.47; 1.76

C) 1.21; 1.76

D) 1.47; 1.41

E) 1.25; 1.41

3. The common stock of Manchester & Moore is expected to earn 14 percent in a recession, 7 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 15 percent while the probability of a recession is 5 percent. What is the expected rate of return on this stock?

A) 8.5 percent

B) 8.7 percent

C) 5.7 percent

D) 7.5 percent

E) 6.2 percent

4. Assume the spot rate on the pound is .5920 and the 6-month forward rate is .5929. Also assume interest rate parity holds and the current six-month risk-free rate in the United States is 3.1 percent. What must the six-month risk-free rate be in Great Britain?

A) 3.25 percent

B) 2.87 percent

C) 2.94 percent

D) 3.10 percent

E) 3.52 percent