Part I. 30 Multiple choice questions (2 points each; only one correct answer) 1. You have bought a 10-year bond paying semiannual coupons. The coupon rate is 8 percent and the yield to maturity is 10 percent, the last cash flow you receive at maturity is (A) S1080 (B) S1100 (C) $1040 (D) $1000 2. What is the primary goal of the corporation? (A) Produce as much as possible, thereby using its plant and equipment more efficiently. (B) Compete with other firms in the same industry and win. (C) Maximize shareholder wealth. (D) Increase sales, expand business, and cut costs. 3. Both Absco and Babsco are expected to pay the same dividend of $2 per share next year and both have the same discount rate of 10% for their stocks. Which of the following statement must be true? (A) Absco and Babsco stocks must have the same price. (B) Stock price is independent of dividend growth. (C) Their stock price could be lower than $2 per share. (D) The given information is insufficient to determine their stock price. 4. Both Carco and Darco have the same discount rate of 8% for their stocks. Which of the following statement must be true? (A) Carco's and Darco's stocks must have the same price. (B) They may have different levels of risk. (C) They must have the same beta (value). (D) The given information is sufficient to determine their stock price, 5. Which statement is correct? (A) Long-term bond's price is more sensitive to interest rate fluctuations (B) Short-term bond's price is more sensitive to interest rate fluctuations (C) Short-term bond's price is not sensitive to interest rate fluctuations (D) None of the others is correct BA 12 6. We use variance (or standard deviation) to measure volatility and use volatility to characterize risk. Which of the following is correct? (A) By mixing many stocks and bonds in a portfolio, we can reduce variance to zero. (B) Portfolio risk is independent of how we mix the assets. (C) The total risk in a risky asset seems to have two components, and only one component can be easily diversified away. (D) It is possible that variance is negative in some cases. 7. Suppose the proper discount rate for Garco's stock is 8%, and it is expected to pay a dividend of S0.7 next year. If Garco's dividend is expected to grow at a constant annual rate of 1%. What should be Garco's stock price today? (A) P - $10 (B) P - $8.75 (C) P - $10.10 (D) P - $10.20 8. Stock A has an average rate of return of 15% and stock B's average return is 10%. Which of the following statement is correct? (A) Stock A is definitely better than stock B. (B) It's hard to tell which one is riskier. (C) If A is indeed better than B, investors should choose A only. (D) Even if A is indeed better, investors should still consider a mixture of A and B. 9. Suppose r;= 2%; market risk premium RP=6%; The historical return on Arco stock is Perce = 20%. What is Arco stock's beta? (A)-2 (B) B=3 (C) B = 4.5 (D) B = 3.67 10. BlueSkies stock has a beta equal to 0.2; RedSkies stock has a beta equal to 1.4. Which stock is riskier? (Ignore their unique risk) (A) BlueSkies stock is riskier (B) RedSkies stock is riskier (C) They may be equally risky (D) The given information is insufficient to determine which one is riskier 12 11. Blue stock's total (annual return) variance is 0.04; Red stock's is 0.01. Which one of the following is definitely correct? (A) Blue stock is riskier and must offer a higher rate of return (B) Blue stock is less risky (C) Blue stock certainly has higher total (standalone) risk, but it doesn't mean Blue stock has to offer a higher expected return because Blue stock may have a lower market risk (i.e., systematic risk) than Red stock does. (D) Red stock is safer, hence it is better. 12. Which statement is correct? o denotes standard deviation. (A) If 0, --1, 08--2, then asset A is riskier. (B) If 0-1,98=-2, then asset B is riskier. (C) If 0,- 1.08-0.5, then it must be true that asset A is riskier which must warrant a higher risk premium (D) It is possible that 0, -08, and the risk premiums are different depending on how they are correlated with the market. e 13. Which statement is correct? (A) The CAPM considers two risk sources. (B) The CAPM tells you how to determine the risk-free rate. (C) According to the CAPM, risk premium is lower if the return on the risky asset has a greater tendency to move in sync with the market. (D) The CAPM quantifies the relation between risk and return, even for risk-free assets. 14. Stocks are issued by corporations. They represent ownership of the company. This ownership normally refers to (A) The right to manage the daily routine operations. (B) The voting right and entitlement to the dividends. (C) The right to liquidate their shares of the firm's physical assets at any time. (D) None of the others is correct. BA 12 15. Which statement is correct about common and preferred stocks? (A) Preferred dividends are dividends issued by profitable firms that are preferred by most investors (B) If a firm skips its preferred dividends more than three times, the firm is legally bankrupt. (C) Preferred dividends are cumulative common dividends can be skipped and they are not cumulative. (D) Fimms can choose to pay common dividends before the due preferred dividends are completely paid. 16. Which statement is correct about the financial market? (A) Both IPOs and seasoned offerings are issued in the primary market. (B) IPOs are issued in the primary market: Seasoned offerings are issued in both primary and secondary market. (C) The NYSE is a primary market (D) NASDAQ and AMEX are primary markets. 17. "Stock price reflects all the publicly available information". This is consistent with which form of market efficiency? (A) The weak-form. (B) The semi-strong form. (C) The strong-form. (D) The theoretical form. 18. Ir before (corporate) tax cost of debt is 10%, and corporate tax rate is 40%. What is the after-tax cost of debt? Ignore the flotation cost. (A) 6% (B) 4% (C) 10% (D) 14% 19. Which statement is correct about preferred stock and debt? (A) From investors' perspective, debt is riskier. (B) For the issuing firm, the tax treatments of (paying) coupons and preferred dividends are identical (C) Normally, the after-tax cost of debt and the after-tax cost of preferred stock are equal. (D) When a corporate investor received $10 preferred dividend, only $3 is taxable. 12