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1 FIN 301 Prof. Thistle Principals of Managerial Finance Fall 2018 EXAM 2 VERSION D PUT YOUR NAME AND TEST VERSION ON THE SANTRON FORM MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following sequences is arranged in the correct order, from highest long term returns to lowest? 1) A) Corporate bonds, treasury bills, international equities B) International equities, U.S. government bonds, U.S. equities C) International equities, U.S. government bonds, treasury bills D) Government bonds, emerging market equities, treasury bills 2) If a company has a return on equity of 25% and wants a growth rate of 10%, how much of ROE should be retained? 2) A) 70% B) 60% C) 50% D) 40% 3) Which of the following portfolios is clearly preferred to the others? Expected Return Deviation A 14% 12% B 22% 20% C 18% 16% 3) Standard A) Investment A B) Investment C C) Investment B D) Cannot be determined 4) Roddy Richards invested $ in Wolverine Meat Distributors (W.M.D.) five years ago. The investment had yearly arithmetic returns of 9.7%, 8.1%, 15%, 7.2%, and 15.4%.What is the geometric average return of Roddyʹs Richardʹs investment? 4) A) 4.63% B) 6.96% C) 8.78% D) 3.38% 5) Siebling Manufacturing Companyʹs common stock has a beta of.8. If the expected risk free return is 2% and the market offers a premium of 8% over the risk free rate, what is the expected return on Sieblingʹs common stock? 5) A) 7.8% B) 8.4% C) 13.4% D) 14.4% 6) Which of the following best measures an assetʹs risk? 6) A) Expected return B) The cash return C) The probability distribution D) The standard deviation 7) Bond ratings directly affect a bondʹs 7) A) maturity date. B) spread over the Treasury yield. C) coupon rate. D) call provisions.

2 8) If a stock has a much higher than normal P/E ratio, investors probably expect 8) A) slow growth in earnings. B) rapid growth in earnings. C) large increases in the price of the stock. D) a declining stock price 9) If current market interest rates rise, what will happen to the value of outstanding bonds? 9) A) It will remain unchanged. B) It will fall. C) It will rise. D) There is no connection between current market interest rates and the value of outstanding bonds. 10) Zorbaʹs is a small chain of restaurants whose stock is not publicly traded. The average P/E ratio for similar restaurant chains is 16.5; the P/E ratio for the S&P 500 Index is This yearʹs earnings were $1.21 per share and next yearʹs earnings are forecasted at $1.46 per share. A reasonable price for a share of Zorbaʹs stock is 10) A) $20. B) $16. C) $24. D) $18. 11) What is the yield to maturity of a nine year bond that pays a coupon rate of 20% per year, has a $1,000 par value, and is currently priced at $1,407? Assume annual coupon payments. 11) A) 6.14% B) 11.43% C) 21.81% D) 12.28% 12) Evidence that agency costs exists 12) A) because they are shown in footnotes to the financial statements. B) because stock prices increase when an underperforming CEO is unexpectedly replaced. C) because management often pursues risky but profitable opportunities rather than safer, less profitable opportunities. D) because underperforming CEOʹs are frequently voted out by shareholders. 13) P. Noel Companyʹs common stock has just paid a $2.00 dividend. If investors believe that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate of 5% per year for the foreseeable future, what is the value of a share of P. Noel stock? 13) A) $23.33 B) $15.00 C) $40.00 D) $ ) Madison was hired to design and decorate the offices of a large pharmaceutical company. She accidentally read a report indicating that a new drug had just been approved by the Food and Drug administration. She immediately bought the companyʹs stock which doubled in price over the following week. This outcome is inconsistent with 14) A) the weak form efficient market hypothesis. B) the strong form efficient market hypothesis. Her action was probably illegal. C) the semi strong form efficient market hypothesis. D) all of the above. 15) Jayden spends a lot of time studying charts of stocks past performance, but his investment return are only average. This outcome supports 15) A) the strong form efficient market hypothesis. B) the weak form efficient market hypothesis. C) the semi strong form efficient market hypothesis. D) all of the above.

3 16) Fris B. Corporation stock is currently selling for $ It is expected to pay a dividend of $3.00 at the end of the year. Dividends are expected to grow at a constant rate of 3% indefinitely. Compute the required rate of return on FBC stock. 16) A) 33% B) 10% C) 4.3% D) 7% 17) Which of the following features allows a borrower to redeem or repurchase a bond issue before its maturity date? 17) A) floating rate B) the priority of claims C) the call provision D) convertibility 18) MI has a $1,000 par value, 30 year bond outstanding that was issued 20 years ago at an annual coupon rate of 10%, paid semiannually. Market interest rates on similar bonds are 7%. Calculate the bondʹs price. 18) A) $1, B) $ C) $1, D) $1, ) Banks often index interest rates on short term operating loans to 19) A) the inflation rate. B) the S&P 500. C) the 6 month Treasury Bill. D) LIBOR. 20) You are considering investing in a firm that has the following possible outcomes: Economic boom: probability of 25%; return of 25% Economic growth: probability of 60%; return of 15% Economic decline: probability of 15%; return of 5% What is the expected rate of return on the investment? 20) A) 14.5% B) 11.7% C) 15.0% D) 25.0% 21) The expected return on VZ next year is 12% with a standard deviation of 20%. The expected return on ANT next year is 24% with a standard deviation of 30%. The correlation between the two stocks is.6. If Emily makes equal investments in VZ and ANT, what is the standard deviation of her portfolio? 21) A) 5.05% B) 15.00% C) 22.47% D) 25.00% 22) If you hold a portfolio made up of the following stocks: Investment Value Beta Stock A $2, Stock B $5, Stock C $3,000.8 What is the beta of the portfolio? 22) A) 1.14 B) 1.17 C) 1.32 D) Canʹt be determined from information given

4 23) What is the expected dollar return on a portfolio which consists of $9,000 invested in an S&P 500 Index fund, $32,500 in a technology fund, and $8,500 in Treasury Bills. The expected rate of return is 11% on the S&P Index fund, 14% on the technology fund and 2% on the Treasury Bills. 23) A) $571 B) $4,500 C) $5,710 D) $13,640 24) The capital asset pricing model 24) A) provides a risk return trade off in which risk is measured in terms of beta. B) provides a risk return trade off in which risk is measured in terms of the market returns. C) measures risk as the correlation coefficient between a security and market rates of return. D) depicts the total risk of a security. 25) A $1,000 par value bonds has a 12% coupon rate (paid annually). It has 10 years remaining to maturity. If bonds of similar risk and maturity currently yield 8%, what should this bond s price be? A) $1,000 B) $ C) $ D) $1, ) Which of the following statements is most correct? A)Investors are able to eliminate virtually all market risk if they hold a large diversified portfolio of stocks. B) Investors are able to eliminate virtually all company specific (unique or diversifiable) risk if they hold a large diversified portfolio of stocks. C) Holding a large diversified portfolio of stocks will not impact investors risk D) Holding a large portfolio of similar stocks from the same industry will reduce risk more than a diversified portfolio of stocks. 27) Which of the following causes common stock prices to increase? A) A lower required rate of return. B) A lower dividend growth rate. C) A higher required rate of return D) A smaller current dividend 28) Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? A) A reduction in market interest rates. B) The company s bonds are downgraded. C) An increase in the default risk premium. C) An increase in the inflation rate 29) Refer to the data in the table. Which asset possesses the greatest amount of non diversifiable risk? Standard Asset Return Beta Deviation A 10% % B 12% % C 14% % A) A B) B C) C D) Both A and C

5 1) C 2) D 3) D 4) D 5) B 6) D 7) B 8) B 9) B 10) C 11) D 12) B 13) A 14) B 15) D 16) B 17) C 18) D 19) D 20) A 21) C 22) A 23) A C 24) A 25) B D 26) B 27) A 28) A 29) C

Principals of Managerial Finance Fall 2017

FIN 301 Prof. Thistle Principals of Managerial Finance Fall 2017 EXAM 2 VERSION C PUT YOUR NAME, SECTION NUMBER AND TEST VERSION ON THE SANTRON FORM MULTIPLE CHOICE. Choose the one alternative that best