expected returns

You own a portfolio that is invested 22 percent in stock A, 36 percent in stock B, and the remainder in stock C. The expected returns on these stocks are 9.7 percent, 14.5 percent, and 11.2 percent, respectively. What is the expected return on the portfolio?

A. 12.48 percent

B. 12.97 percent

C. 13.11 percent

D. 13.33 percent

E. 12.06 percent

32. Which one of the following best exemplifies the concept of a marginal tax?

A. Southern Mills paid $3.2 million more in taxes last year than its competitor, Eastern Mills.

B. High Water Adventures paid $0.18 in tax for every $1 in taxable income last year.

C. As the result of opening a new store, Northern Lights owed an additional $1.1 million in taxes.

D. Alpha Industries received a tax refund due to an error in its tax return that the IRS discovered.

E. Jefferson-Knight paid $2.1 million in taxes last year on revenue of $6.8 million.

33. You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock D?

A. 19.46 percent

B. 18.42 percent

C. 19.07 percent

D. 17.91 percent

E. 17.68 percent

34. Standard deviation measures the _____ of a security’s returns over time.

A. frequency

B. volatility

C. average value

D. arithmetic average

E. mean

35. Over the past six years, a stock had annual returns of 2 percent, 10 percent, 14 percent, 8 percent, -6 percent, and 8 percent, respectively. What is the standard deviation of these returns?

A. 7.04 percent

B. 8.38 percent

C. 11.97 percent

D. 12.27 percent

E. 7.19 percent

36. Given the following information, what is the variance for this stock?

A. .019949

B. .006667

C. .012121

D. .017406

E. .004638

37. Boyes Beach Wear is adding a new product to its sales lineup. Initially, the firm will stock $22,000 of inventory, which will be purchased on 30-days credit from its supplier. The firm will also invest $16,000 in accounts receivable and $54,000 in equipment. What amount should be included in the initial costs for net working capital?

A. $6,000

B. $6,000

C. $0

D. $16,000

E. $38,000

38. Which of the following affect the expected rate of return on a security?

I. multiple states of the economy

II. probability of occurrence for any one economic state

III. market rate of return given a particular economic state

IV. security beta

A. I, II, and III only

B. I, II, III, and IV

C. II and III only

D. III and IV only

E. I and II only

39. Whole Foods has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased six years ago at a cost of $495,000, which the firm paid in cash. To date, the firm has spent another $89,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $689,000. The financial manager of Whole Foods is trying to determine the amount, if any, that should be assigned to the building project for the cost of the land. The project should:

A. be assigned a cost equal to the current market value of the land.

B. be assigned a cost equal to the cash paid to date for both the lot and the improvements.

C. not be charged for the land since it is currently owned, debt-free, by the firm.

D. be assigned a cost equal to the original purchase price only.

E. be assigned a cost equal to the current market value of the land plus the cash paid for the improvements.

40. Given an interest rate of zero percent, the future value of a lump sum invested today will always:

A. be equal to $0.

B. remain constant, regardless of the investment time period.

C. be greater than the initial investment amount.

D. decrease if the investment time period is lengthened.

E. decrease if the investment time period is shortened.

41. Truman Florists pays a constant annual dividend of $2.20 per share on its stock. Last year at this time, the market rate of return on this stock was 12.6 percent. Today, the market rate has fallen to 9.7 percent. What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today?

A. 9.70 percent

B. 2.90 percent

C. 23.02 percent

D. 29.90 percent

E. 14.57 percent

42. Portman’s is considering adding a new product to its lineup. This product is expected to generate sales for three years after which time the product will be discontinued. What is the project’s net present value if the firm wants to earn a 12 percent rate of return?

A. $6,795.61

B. $1,084.41

C. $7,611.08

D. $4,862.07

E. $9,682.26

43. You earned 16.7 percent on your investments for a time period when the risk-free rate was 6.1 percent and the inflation rate was 5.4 percent. What was your real rate of return for the period?

A. 10.60 percent

B. 9.78 percent

C. 10.72 percent

D. 9.89 percent

E. 11.83 percent

44. A debenture is:

A. long-term debt secured by fixed assets of the borrower.

B. unsecured debt that generally matures in ten years or more.

C. any type of debt that is short-term in nature.

D. unsecured debt that generally matures in less than ten years.

E. long-term debt secured by real estate.

45. Which one of the following has the lowest effective annual rate?

A. 7 percent compounded semi-annually

B. 7 percent compounded daily

C. 7 percent compounded quarterly

D. 7 percent compounded monthly

E. 7 percent compounded annually

46. The National Bank offers personal loans at 8 percent compounded monthly. The Global Bank offers similar loans at 8.25 percent compounded quarterly. Which one of the following statements is correct concerning these two banks?

A. The National Bank loan has a higher effective rate than the Global Bank loan.

B. The National Bank loan has an effective rate of 8.33 percent.

C. The Global Bank loan has an effective rate of 8.30 percent.

D. The National Bank loan has an effective rate of 8.27 percent.

E. The Global Bank loan has an effective rate of 8.51 percent.

47. Conway & Sons had $26,500 in net fixed assets at the beginning of the year. During the year, the company purchased $5,700 in new equipment. It also sold, at a price of $1,000, some old equipment with a book value of $850. The depreciation expense for the year was $4,300. What is the net fixed asset balance at the end of the year?

A. $27,050

B. $26,900

C. $20,800

D. $15,650

E. $31,200

48. A firm is reviewing a project that has an initial cost of $85,000. The project will produce cash inflows, starting with year 1, of $10,000, $15,500, $23,600, $30,100, and finally in year five, $38,700. What is the profitability index if the discount rate is 14 percent?

A. .88

B. .64

C. .95

D. .72

E. 1.06

49. The dividend yield is computed as:

A. (D_{t+1} D_{t}) / P_{t}.

B. D_{t+1} / P_{t}.

C. (P_{t+1} + D_{t+1}) / P_{t}

D. P_{t+1} / D_{t}.

E. (D_{t+1} D_{t}) / P_{t+1}.

50. The amount by which a firm’s tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:

A. opportunity cost.

B. credit.

C. adjustment.

D. erosion.

E. tax shield.

51. An increase in which of the following will increase the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value.

I. interest rate

II. amount of the lump sum

III. frequency of the interest payments

IV. length of the investment period

A. II and IV only

B. II, III, and IV only

C. I, II, and IV only

D. I, II, III, and IV

E. I and III only

52. The control of a corporation ultimately lies with the:

A. chief financial officer.

B. company president.

C. chief executive officer.

D. chairman of the board.

E. company stockholders.

53. Stock X has a beta of 1.6 and an expected return of 19 percent. Stock Y has a beta of 1.2 and an expected return of 15.5 percent. What is the risk-free rate if these securities both plot on the security market line?

A. 4.5 percent

B. 4.8 percent

C. 4.2 percent

D. 4.0 percent

E. 5.0 percent

54. The primary market is:

A. the NYSE.

B. the market where all new issues of debt and equity securities are sold to the public.

C. any large stock exchange accessible to the general public for trading either debt or equity securities.

D. a reference to any dealer market.

E. a reference to any auction market.

55. The Bailey Brothers want to issue 20-year, zero coupon bonds that yield 9 percent. What price should it charge for these bonds if the face value is $1,000?

A. $202.64

B. $157.25

C. $194.49

D. $163.70

E. $178.43

56. Wheaton, Inc. pays a constant annual dividend. Last year, the dividend yield was 3.6 percent when the stock was selling for $28 a share. What is the current price of the stock if the current dividend yield is 3.2 percent?

A. $33.70

B. $33.40

C. $32.90

D. $32.60

E. $31.50

57. Discounted cash flow analysis is the process of discounting the:

A. nominal rate of return to determine the aftertax rate of return.

B. cost of a project to determine its current value.

C. future cash flows of a project to determine the project’s current value.

D. present value of an investment to determine its future value as of a specified date.

E. rate of return to determine the aftertax cash flow from a project.

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