Question 1

1. Which of the following is not a perfect market assumption?
2. A) There are no transaction costs.
3. B) There are an infinite number of buyers and sellers.
4. C) Everyone can borrow and lend at the same interest rate.
5. D) There is no uncertainty regarding expected returns.

10 points

Question 2

You can earn 4% on your bank deposits, but your bank will charge you 8% to borrow money. You are considering a one-year project that will cost $10,000. You have $4,000 that you can invest. What minimum rate of return does this project have to offer before you should consider investing in it?

A) 4.0%

B) 5.6%

C) 6.4%

D) 8.01%

question 3 Which of the following statements is true?

A) A market imperfection exists if the promised borrowing rate is higher than the expected borrowing rate.

B) A market imperfection exists if the promised savings rate is higher than the promised borrowing rate.

C) A market imperfection exists if the expected borrowing rate from the lenders perspective differs from the expected borrowing rate from the borrowers perspective.

D) All of the above are market imperfections.

Question 4

1. You purchased 100 shares of Amazon.com (AMZN) for $50 a share and paid $20 in commissions and other transaction costs. You sold the stock a few months later for $88 a share, again incurring $20 in transaction costs. What was your rate of return?
2. A) 74.9%
3. B) 76.7%
4. C) 75.3%
5. D) 76.3%

Question 5

1. In 2008, the tax schedule for a single taxpayer is as follows:
2. Taxable Income
3. Tax Rate
4. $0 to $8,025
5. 10%
6. $8,025 to $32,550
7. 15%
8. $32,550 to $78,850
9. 25%
10. $78,850 to $164,550
11. 28%
12. $164,550 to $357,700
13. 33%
14. greater than $357,700
15. 35%
16. What is the marginal tax rate and the average tax rate of a single taxpayer who has taxable income of $60,000?
17. A) marginal rate = 25%; average rate = 13.7%.
18. B) marginal rate = 25%; average rate = 18.9%
19. C) marginal rate = 28%; average rate = 32.5%
20. D) marginal rate = 28%; average rate = 15.0%

Question 6

1. An efficient market is defined as one in which
2. A) the current prices reflect all available information.
3. B) there are no transaction costs.
4. C) there are no taxes.
5. D) All of the above are necessary conditions for an efficient market.

Question 7

1. If an investor believes that the stock market is efficient at only the weak level, which of the following activities would he consider to be a waste of time and effort?
2. A) analyzing current information about a firm as it is made public.
3. B) studying a firms financial statements in an attempt to forecast the future cash flows of the firm.
4. C) reading a column in the Wall Street Journal that he believes often hints at insider information.
5. D) plotting the historical prices of a stock to look for a trend that will suggest when it is a good time to buy or sell that stock.

Question 8

1. Which of the following statements is most correct in an efficient perfect market?
2. A) The best predictor of tomorrows stock price is its price today.
3. B) The best predictor of tomorrows stock price is its price today minus any transaction costs.
4. C) The best predictor of tomorrows stock price is its price today plus a tiny drift.
5. D) The best predictor of tomorrows stock price is its price today plus or minus about 1%.

Question 9

1. Which of the following is an example of an arbitrage opportunity?
2. A) You have found an investment that is guaranteed to offer you a 100% return on your investment in one year.
3. B) You are able to borrow money today for one year at 3% and simultaneously invest the proceeds in a project that is guaranteed to return 15% at the end of the year. There are no transaction costs associated with either the loan or the investment.
4. C) You can play a game in which you will win $100,000 if you draw any card but an ace out of a 52-card deck. If you draw an ace, however, you pay only $1.00.
5. D) None of the above is an arbitrage opportunity.

Question 10

1. Assume a zero percent discount rate for simplicity. Your current projects cost $200, and you know they will return $800 next year. There is a new project that will cost $300 and will return $500. Your investors believe, however, that both the current projects and the new projects will return only 50%. If you have no cash and can use only equity financing, what will the value of the combined firm be to the existing shareholders if the new project is undertaken?
2. A) $520
3. B) $780
4. C) $750
5. D) $800