1. The effective rate on a loan is 12.9%. With monthly compounding, which of the following is closest to the quoted rate?
2. A.12%
3. B.12.9%
4. C.13.9%.

2. In a standard amortizing mortgage, which of the following statements is correct?

1. A.Interest portion of payment increases with each payment
2. B.Principal portion of payment decreases with each payment
3. C.Additional principal payments will shorten the time to payoff

3. XYZ bank issued a new mortgage. The purchase price was $1,300,000 with a 20% down payment. Assume 8% APR and 30 year mortgage. The monthly payment is closest to:

1. A.$7,000
2. B.$7,350
3. C.$7,500

4. Keeping all else constant, what is the most likely effect on the IRR of a project if the cost of capital increases?

1. A.Increase.
2. B.Decrease
3. C.No effect.

5. Keeping all else constant, what is the most likely effect on the NPV of a project if the cost of capital increases?

A.Increase.

B.Decrease

C.No effect.

6. The yield curve is typically

A.Inverted

B.Twisted

C.Upward sloping

7. The interest rates on two competing credit cards are as follows:

Card One = 8.99% stated annual rate

Card Two = 9.06% effective annual rate

If Card One compounds monthly, and Card Two compounds quarterly, what is the difference between the two effective interest rates?

A.Card One exceeds Card Two by 0.07%.

B.Card One exceeds Card Two by 0.31%.

C.Card Two exceeds Card One by 0.31%.

8. Sunk costs are most accurately described as:

A.the costs of producing the last unit produced.

B.not relevant to current decisions.

C.not affected by the level of production over the relevant range.

9. Fivelive Company is considering investing in a new communication system that will cost $5.5 million and generate cash flows of $3 million in the first year and $2 million in each of the following two years. Fivelives cost of capital is 9%. The projects net present value is closest to:

A.$420,000.

B.$450,000.

C.$480,000.

10. XYZ Corp. issued a 30-year, 6% annual coupon rate bond 10 years ago at par value.The current yield to maturity of bonds with similar risk is 7%. Currently, the bond is trading at:

A.Par

B.Premium

C.Discount

11. Which of the following is true about a bond trading at a discount?

A.Coupon greater than yield to maturity

B.Present value of anticipated coupons and principal is less than face value

C.Both (A) and (B) are correct

12. An equity analyst has gathered the following information in regard to ZPZ Inc., which has a marginal tax rate of 40%:

Type of capitalMarket value ($ million)Pre-tax cost

Bonds30,0008%

Preferred Stock20,00011.5%

Common Stock50,00015%

ZPZs weighted average cost of capital is closest to:

A. 10.3%.

B. 11.2%.

C. 12.2%.

13. An investor holds two stocks that are perfectly positively correlated. Thirty percent of the investors funds are in the stock with a standard deviation of 15%, and the balance is in the stock with a standard deviation of 12%. What is the standard deviation of the portfolio?

A.11.8%.

B.12.9%.

C.13.7%.

14. The expected return on the market is 16%, the risk-free rate is 8%, and the beta for Stock Y is 1.3. What is the rate of return that would be required on this stock under the capital asset pricing model?

A.18.4%.

B.15.6%.

C.12.0%.

15. The expected market risk premium is 5%, investors can borrow and lend at 3%, and the beta of a security is 1.25. If an analyst forecasts the securitys return to be 5.5%, which of the following statements is most accurate regarding the stocks valuation according to CAPM?

A.The stock is undervalued.

B.The stock is fairly priced.

C.The stock is overvalued.

16. An analyst has plotted his forecast returns for three stocks relative to the security market line. What is the most appropriate investment strategy for the analyst to recommend?

2. StockExpected returnRequired return
3. A12%10%
4. B8%6%
5. C15%16%

A.Buy Stock A and short sell Stock B.

B.Buy Stock A and short sell Stock C.

C.Buy Stock B and short sell Stock A.

17. The ABC Company just paid a $4 dividend. Dividends are expected to increase at 3% per year and the required return is 10%. The price of the stock is closest to:

1. A. $57
2. B. $59
3. C. $62

18. Beth Knight, CFA, and David Royal, CFA, are independently analyzing the value of Bishop, Inc. stock. Bishop paid a dividend of $1 last year. Knight expects the dividend to grow by 10% in each of the next 3 years after which it will grow at a constant rate of 4% per year. Royal also expects a temporary growth of 10% followed by a constant growth rate 4%, but he expects the supernormal growth to last for only 2 years. Knight estimates that the required return on Bishops stock is 9% but Royal believes the required return is 10%. Royals valuation of Bishops stock is approximately:

2. A. Equal to Knights valuation
3. $5 less than Knights valuation
4. $5 more than Knights valuation

19. MMI and MMII assuming tax deductibility of interest but no bankruptcy costs predicts:

1. Maximum amount of debt financing
2. Minimum amount of debt financing
3. Amount of debt financing is irrelevant

20. Which of the following statements is true?

1. Time weighted return is most appropriate for strategic investments
2. Money-weighted return is most appropriate for passive investments
3. Money-weighted return is most appropriate for strategic investments