Multiple Choice Answers

Question 1
A stock has a beta of 1.68, the expected return on the market is 14.72, and the risk-free rate is 4.65. What must the expected return on this stock be?
15.67 percent
16.75 percent
17.10 percent
18.46 percent
21.57 percent

Question 2
Which one of the following describes systemic risk?
Risk that affects a large number of assets
An individual security’s total risk
Diversifiable risk
Asset specific risk
Risk unique to a firm’s management

Question 3
Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?
Security market line
Capital asset pricing model

Which one of the following is the slope of the security market line?
Risk-free rate
Market risk premium
Beta coefficient
Risk premium on an individual asset
Market rate of return

Question 5
Standard deviation measures _____ risk while beta measures _____ risk.
systematic; unsystematic
unsystematic; systematic
total; unsystematic
total; systematic
asset-specific; market

Question 6
Northern Wear stock has an expected return of 14.6 percent. Given the information below, what is the expected return on this stock if the economy is normal?
13 percent
16 percent
18 percent
21 percent
23 percent

Question 7
Which one of the following terms refers to a bond’s rate of return that is required by the market place?
Coupon rate
Yield to maturity
Dirty yield
Call yield

Discount rate

Question 8
Western Electric has 23,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. The firm has 6,000 shares of 7 percent preferred stock outstanding at a price of $48 a share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $350,000 and currently sells for 102 percent of face. The yield-to-maturity on the debt is 8.49 percent. What is the firm’s weighted average cost of capital if the tax rate is 34 percent?
12.69 percent
13.44 percent
14.19 percent
14.47 percent
14.92 percent

Question 9
The written agreement that contains the specific details related to a bond issue is called the bond:
registration statement.
issue paper.

Question 10
Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:
bearer form bond.
registered form bond.
call protected bond.

Question 11
Which one of the following commences on the day inventory is purchased and ends on the day the payment for that inventory is collected? Assume all sales and purchases are on credit.
Inventory period
Accounts receivable period
Accounts payable period
Operating cycle
Cash cycle

Question 12
A call provision grants the bond issuer the:
right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds.
option to exchange the bonds for equity securities.
right to automatically extend the bond’s maturity date.
right to repurchase the bonds on the open market prior to maturity.
option of repurchasing the bonds prior to maturity at a pre-specified price.

Question 13
What is the net present value of a project with the following cash flows if the discount rate is 14 percent?

Question 14
T.L.C., Inc. is considering an investment with an initial cost of $175,000 that would be depreciated straight line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years. What is the internal rate of return?
9.27 percent
9.98 percent
10.62 percent
10.79 percent
11.58 percent

Question 15
You want to create a $48,000 portfolio that consists of three stocks and has an expected return of 14.5 percent. Currently, you own $16,700 of stock A and $24,200 of stock B. The expected return for stock A is 18.7 percent, and for stock B it is 11.2 percent. What is the expected rate of return for stock C?
13.67 percent
14.14 percent
15.38 percent
15.87 percent
16.11 percent