Exercise No. Mod 5-2(Multiple Choice)

1.Which of the following betas causes the risk premium of an asset to change the most for every change in the market premium?

a.1.00 b. 1.01 c. 1.10 d. -1.11

2.Stock Zebra has a beta of 0.5 and Stock Lion has a beta of 1.5. Which of the following statements is not correct?

a.Stock Zebra's return this year will be higher than Stock Lion's return

b.Stock Zebra's return has a higher standard of deviation than Stock Lion

c.If expected inflation increases (but the market risk premium is unchanged), the required returns on the two stocks will increase by the same amount.

d.If the market premium declines (leaving the risk-free rate unchanged), Stock Zebra will have a larger decline in its required return than will Stock Lion.

3.Statement 1: The amount of amortization of bond discount increases as it reaches maturity.

Statement 2: The amount of amortization of bond premium decreases as it approachesmaturity.

a.True, Trueb. True, Falsec. False, Trued. False, False

4.Shuri and Kuni are assets with betas of .5 and 1.3 respectively. Which of the following statements is most correct?

a.Shuri is riskier than Kuni and therefore the latter has a higher return than the former

b.If 50,000 is invested in each asset, Shuri will give a higher amount of return

c.Shuri is riskier than the market.

d.Kuni is riskier that the market

5.Which of the following is most correct regarding call feature:

a.The bondholder may demand full payment of the bond anytime until maturity

b.The corporation may pay the bond at any time until maturity

c.The bond is an obligation with period in favor of the creditor

d.Both b & c

6.Market prices of bond usually differs from face value because:

a.Maturity date changes c. old bonds sell for more than new bonds

b.Stated rate changes d. market rate changes

7.If the coupon rate of a bond is less than the required rate of return, the bond is most likely to sell at

a.105 b. 95 c. 100 d. the bond will not sell

8.Which of the following is most likely to appear as an asset in the balance sheet of a corporation?

a.Treasury bond c. unpaid bills

b.Treasury stocks d. unpaid customer

9.Statement 1: Government issues treasury stocks for long term financing.

Statement 2: Treasury bonds are usually used by corporations to obtain long term financing for projects.

a.True, True c. False, True

b.True, False d. False, False

10.All of the following are examples of marketable securities, except

a.Treasury bills b. commercial paper c. common stockd. negotiable certificate of deposit

11.All of the following are not true, except:

a.Higher the beta, lower the risk c. risk is constant

b.Higher the beta, higher the risk d. beta is constant

12.ABC's stock is currently selling for Php 160.00 per share and the firm's dividends are expected to grow at 15% indefinitely. Assuming ABC's most recent dividend was 5.50, what is the required return on ABC's stock?

a.18.95 b. 8.60 c. 15.50 d. 21.35

13.A 1,000 par value bond with a 12% coupon rate currently selling for P825 has a current yield of:

a.7.27% b. 12% c. 14.55% d. 13.45%

14.A firm has an issue price of P1,000 par value bonds with a 15% stated interest rate outstanding. The issue pays interest annually and has 13 years remaining to its maturity date. If bonds of similar risk are currently earning 11%, how much will each bond sell today?

a.1,265.20 b. 1,369.99 c. 1,234.20 d. 1,270.00

15.Assuming the same facts above, how much will the bond sell two years from today?

a.1,259.72 b. 1,248.28 c. 1,235.60 d. 1,221.51

16.If a firm's EPS is P5.00 and the firm is paying a dividend of P1.25 per share, what is the firm's payout ratio?

a.33% b. 6% c. 15% d. 25%

17.Company XYZ has a beta of 1.54. The expected risk-free rate of interest is 1.5% and the expected return on the market as a whole is 10%. Using the CAPM, what is XYZ's expected return?

a.13.75% b. 14.59% c. 13.83% d. 14.05%

18.Trinilla Corp expects rapid growth in its operations. To finance its investment needs, Trinilla issued 1,000 10%, P1,000 face value 5-year bonds dated October 1, 2019 paying interest semi-annually every April 1 and October 1. Bonds of similar risk currently yield 12% interest. What amount of interest payable shall be reported in Trinilla's December 31, 2019 Statement of Financial Position?

a.50,000 b. 25,000 c. 55,918.40 d. 27,959.20

19.Using the above data, what is the amount of interest income to be reported in Trinilla's 2019 Income Statement?

a.100,000 b. 50,000 c. 25,000 d. no answer

20.Using the above data, what is the carrying amount of the bond to be reported in the Dec 31, 2019 Balance Sheet?

a.1,000,000 b. 29,181.70 c. 941,028.56 d. 931,973.40