Sue Smith received $100 dividends, which are subject to a gross-up factor of 45% and a dividend tax credit of 19% on taxable dividends. Sue Smith has a marginal federal tax rate of 29%. The dividend tax credit is:

i)$29.00

ii)$27.55

iii)$25.00

iv)$16.67

v)$13.33

2.A new machine costing $50,000 qualifies for an investment tax credit of 20%. It replaces an existing machine with a market value of $5,000. If the existing machine has a book value of $8,000 and both machines belong to the same asset class, the incremental base for the calculation of capital cost allowance for the new machine is:

i)$50,000

ii)$45,000

iii)$42,000

iv)$35,000

v)$32,000

3.The expected market rate of return is 17% and the risk-free rate is 9%.If the beta for a firm's stock is 0.85, then the cost of equity capital for the firm is:

i)25.00%

ii)23.45%

iii)17.00%

iv)15.80%

v)9.00%

4.A firm paid a dividend of $2 per share yesterday and expects the growth rate of dividends to be 5% in the future.If the stock beta is 1.25, the risk-free rate 4% and the return on the market portfolio 15%, the current price of the common share is:

i)$16.47

ii)$15.68

iii)$11.83

iv)$11.27

v)$10.67

5.Given a desired return of 12%, the current price of a 10% perpetual bond, $1,000.00 par value, is:

i)$1,200.00.

ii)$1,100.00.

iii)$1,000.00.

iv)$833.33.

v)$120.00.

6.Which of the following statements isINCORRECT?

a.

The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.

b.

If a loan has a nominal annual rate of 8%, then the effective rate can never be less than 8%.

c.

If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be the same.

d.

An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is less than 6%.

7.Inflation, recession, and high interest rates are economic events that are best characterized as being what?

a.

systematic risk factors that can be diversified away

b.

company-specific risk factors that can be diversified away

c.

among the factors that are responsible for market risk

d.

risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers

8.Which of the following statements best describes the IRR method?

a.

One defect of the IRR method is that it does not take account of cash flows over a project's full life.

b.

One defect of the IRR method is that it does not take account of the time value of money.

c.

One defect of the IRR method is that it does not take account of the cost of capital.

d.

One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

9.Which of the following statements best describes sunk costs?

a.

A sunk cost is any cost that must be expended in order to complete project and bring it into operation.

b.

A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.

c.

A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.

d.

Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the PV.

10.A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements best describes bond yields?

a.

The bond's current yield is less than 8%.

b.

If the yield to maturity remains at 8%, then the bond's price will decline over the next year.

c.

The bond's coupon rate is less than 8%.

d.

If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.