1. Which of the following is true regarding an initial public offering?

a. The corporation gets proceeds from the investor.

b. Investors get proceeds from other investors.

c. The security is sold for the first time to the public.

d. Both a and c.

2. The present value of a perpetuity decreases when the _______ decreases.

a. number of investment periods

b. annual discount rate

c. perpetuity payment

d. both b and c

3. The present value of a single sum:

a. increases as the discount rate decreases.

b. decreases as the discount rate decreases.

c. increases as the number of discount periods increases.

d. increases as the discount rate increases.

4. Which of the following statements is true?

a. Systematic, or market, risk can be reduced through diversification.

b. Both systematic and unsystematic risk can be reduced through diversification.

c. Unsystematic or company risk can be reduced through diversification.

d. Neither systematic nor unsystematic risk can be reduced through diversification.

5. Investment risk is:

a. the probability of achieving a return that is greater than what was expected.

b. the probability of achieving a beta coefficient that is less than what was expected.

c. the probability of achieving a return that is less than what was expected.

d. the probability of achieving a standard deviation that is less than what was

expected.

6. What is a practical measure that is used to quantify the risk of a single investment?

a. The systematic variation

b. The coefficient variation

c. The correlation coefficient

d. The standard deviation

7. You are thinking about purchasing 1,000 shares of stock in the following firms:

Number of Shares Firms Beta

Firm A 100 0.75

Firm B 200 1.47

Firm C 300 0.82

Firm D 400 1.60

If you purchase the number of shares specified, then the beta of your portfolio will be:

a. 1.10.

b. 1.20.

c. 1.00.

d. Cannot be determined with information given.

8. Which of the following statements about bonds is true?

a. If market interest rates are below a bonds coupon interest rate, then the bond will

sell below its par value.

b. Long-term bonds have less interest rate risk than do short-term bonds.

c. Bond prices move in the same direction as market interest rates.

d. As the maturity of a bond approaches, its market value approaches its par value.

9. When the intrinsic value of an asset exceeds the market value:

a. the asset is undervalued to the investor.

b. the asset is overvalued to the investor.

c. market value and intrinsic value are the same; therefore, this could not happen.

d. none of the above.

10. The discount rate used to value a bond is:

a. the coupon interest rate.

b. determined by the issuing company.

c. fixed for the life of the bond.

d. the market rate of interest.

11. As interest rates and consequently investors required rates of return change over

time, the ____________ of outstanding bonds will also change.

a. maturity date

b. coupon interest payment

c. par value

d. price

12. Common stockholders expect greater returns than bondholders because:

a. they have no legal right to receive dividends.

b. they bear greater risk.

c. in the event of liquidation, they are only entitled to receive any cash that is left

after all creditors are paid.

d. all of the above.

13. Which of the following statements is true?

a. Common stockholders are the true owners of a firm.

b. Capital obtained from the sale of common stock will ultimately be repaid by the

corporation.

c. A corporation has a legal obligation to pay dividends on common stock.

d. Dividends on common stock usually do not grow.

14. Preferred stockholders:

a. have a right to receive dividends before common stockholders.

b. normally have voting rights.

c. generally receive a dividend that varies with the financial performance of the

firm.

d. are secured creditors.

15. The XYZ Company, whose common stock is currently selling for $40 per share, is

expected to pay a $2.00 dividend in the coming year. If investors believe that the

expected rate of return on XYZ is 14%, what growth rate in dividends must be expected?

a. 5%

b. 14%

c. 9%

d. 6%

16. Given the following information, determine the risk-free rate.

Cost of equity = 12%

Beta = 1.50

Market risk premium = 3%

a. 8.0%

b. 7.5%

c. 7.0%

d. 6.5%

17. A company has a capital structure that consists of 50% debt and 50% equity. Which

of the following is true?

a. The weighted average cost of capital is less than the cost of equity financing.

b. The cost of equity financing is greater than the cost of debt financing.

c. The weighted average cost of capital is calculated on a before-tax basis.

d. Both a and b.

18. The cost of capital is:

a. the opportunity cost of using funds to invest in new projects.

b. the rate of return the firm must earn on its investments in order to satisfy the

required rate of return of the firms investors.

c. the hurdle rate for new capital investments which have typical or average risk.

d. all of the above.

19. A firm has an issue of preferred stock that pays an annual dividend of $2.00 per share

and currently is selling for $20.00 per share. If the firm wishes to raise new capital by

selling additional shares of preferred stock, it will net $18.50 per share. Finally, the firms

marginal tax rate is 34%. This firms cost of financing with new preferred stock is:

a. 10.00%.

b. 6.60%.

c. 10.81%.

d. 7.13%.

20. Sg. Klah Mining Companys beta is 1.16, the 10-year Malaysian Govt. Securities

yields 3.5% and the return on the Kuala Lumpur Composite Index is 10.5%. What is Sg.

Klahs cost of retained earnings using the CAPM approach?

a. 15.685%

b. 11.62%

c. 11.95%

d. 8.12%

21. If the NPV of a project is positive, what will occur?

a. The value of the firm will be increased.

b. The IRR will be greater than the payback period.

c. The equivalent annual annuity will exceed the IRR.

d. The discounted payback period will be greater than the payback period.

22. Why does the NPV method of evaluating an investment proposal require that the cash

inflows of a project be discounted to the present?

a. It is the only way to arrive at the correct amount to divide into the cost in order to

determine the rate of return.

b. The Inland Revenue Board requires it.

c. This enables the analyst to determine the amount of the investment outlay.

d. It provides a measurement of the value of an investment proposal in terms of

todays dollars.

23. Which method of evaluating capital-budgeting decisions has the superior

reinvestment assumption?

a. The payback

b. The NPV

c. The IRR

d. The accounting rate of return

24. A project costs $10,000 and is expected to return after-tax cash flows of $3,000 each

year for the next 10 years. This projects payback period is:

a. three years.

b. three and one-third years.

c. four years.

d. ten years.

25. Consider a project with the following information:

After-Tax After-Tax

Accounting Cash Flow

Year Profits from Operations

1 $ 550 $ 750

2 $ 800 $1,000

3 $1,000 $1,200

Initial outlay = $1,500

Compute the profitability index if the companys discount rate is 10%.

a. 0.77

b. 1.61

c. 1.81

d. 1.97