# California Coast BAM 313 Unit 2, 3, And 4

Unit 2 Multiple Choice Questions (Enter your answers on the enclosed answer sheet)

1. What is the present value of an annuity of \$120 received at the end of each year for 11 years? Assume a discount rate of 7%. The rst payment will be received one year from today (round to nearest \$1).

a. \$570 b. \$250 c. \$400 d. \$900

1. You bought a racehorse that has had a winning streak for six years, bringing in \$250,000 at the end of each year before dying of a heart attack. If you paid \$1,155,720 for the horse 4 years ago, what was your annual return over this 4-year period?

a. 12% b. 8% c. 18% d. 33%

1. How much money do I need to place into a bank account that pays a 1.08% rate in order to have \$500 at the end of 7 years?

a. \$751.81 b. \$463.78 c. \$629.51 d. \$332.54

1. Your daughter is born today and you want her to be a millionaire by the time she is 40 years old. You open an investment account that promises to pay 11.5% per year. How much money must you deposit today so your daughter will have \$1,000,000 by her 35th birthday?

a. \$20,100 b. \$18,940 c. \$28,575 d. \$22,150

1. If you want to have \$3,575 in 29 months, how much money must you put in a savings account today? Assume that the savings account pays 12% and it is compounded monthly (round to nearest \$1).

a. \$2,438 b. \$2,679 c. \$3,147 d. \$3,008

Unit 2 Examination

BAM 313 Introduction to Financial Management

1. U.S. Savings Bonds are sold at a discount. The face value of the bond represents its value on its future maturity date. Therefore:
1. The current price of a \$50 face value bond that matures in 10 years will be greater than the current price of a \$50 face value bond that matures in 5 years.
2. The current prices of all \$50 face value bonds will be the same, regardless of their maturity dates because they will all be worth \$50 in the future.
3. The current price of a \$50 face value bond will be higher if interest rates increase.
4. The current price of a \$50 face value bond that matures in 10 years will be less than the

current price of a \$50 face value bond that matures on 5 years.

1. Stock A has the following returns for various states of the economy:

State of the Economy

Recession Below Average Average
Above Average Boom

Probability Stock A’s Return 9% -72% 16% -15%

51% 16% 14% 35% 10% 85%

Unit 2 Examination

97

Stock A’s expected return is

a. 9.9%. b. 13.8% c. 12.7%. d. 16.5%.

8. Beginning with an investment in one company’s securities, as we add securities of other companies to our portfolio, which type of risk declines?

1. unsystematic risk
2. market risk
3. systematic risk
4. non-diversi able risk

BAM 313 Introduction to Financial Management

Unit 2 Examination

 Project 1 Probability Return Standard Deviation Beta 50% chance 22% 12% 1.1 50% chance – 4%

 Project 2 Probability Return Standard Deviation Beta 30% chance 36% 19.5% 0.8 40% chance 10.5% 30% chance – 20%

 Project 3 Probability Return Standard Deviation Beta 10% chance 28% 12% 2.0 70% chance 18% 20% chance – 8%

98

1. Assume the risk-free rate of return is 2% and the market risk premium is 8%. If you are a risk averse investor, which project should you choose?
1. Project 3
2. Project 2
3. Project 1
4. Either Project 2 or Project 3 because the higher expected return on project 3 offsets its

higher risk.

1. Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the risk-free rate of return increases and the market risk premium remains constant, then:
1. the required returns on stocks A and B will not change
2. the required returns on stocks A and B will both increase by the same amount
3. the required return on stock A will increase more than the required return on stock B
4. the required return on stock B will increase more than the required return on stock A

BAM 313 Introduction to Financial Management

99

1. Suppose interest rates have been at historically low levels the past two years. A reasonable strategy for bond investors during this time period would be to:
1. buy only junk bonds which have higher interest rates
2. invest in long-term bonds to reduce interest rate risk
3. invest in short-term bonds to reduce interest rate risk
4. invest in long-term bonds to lock in a bond position for when interest rates increase in the

future

1. Fred and Ethel are both considering buying a corporate bond with a coupon rate of 8%, a face value of \$1,000, and a maturity date of January 1, 2025. Which of the following statements is MOST correct?
1. Fred and Ethel will only buy the bonds if the bonds are rated BBB or above.
2. Because both Fred and Ethel will receive the same cash ows if they each buy a bond,

they both must assign the same value to the bond.

1. If Fred decides to buy the bond, then Ethel will also decide to buy the bond if markets are

ef cient.

1. Fred may determine a different value for a bond than Ethel because each investor may

have a different level of risk aversion, and hence a different required return.

1. Which of the following statements is true?
1. Short-term bonds have greater interest rate risk than do long-term bonds.
2. Long-term bonds have greater interest rate risk than do short-term bonds.
3. Interest rate risk is highest during periods of high interest rates.
4. All bonds have equal interest rate risk.
2. Crandle’s common stock is currently selling for \$79.00. It just paid a dividend of \$4.60 and dividends are expected to grow at a rate of 5% inde nitely. What is the required rate of return on Crandle’s stock?

a. 11.76% b. 11.11% c. 12.2% d. 14.21%

1. An example of the growth factor in common stock is:
1. retaining pro ts in order to reinvest into the rm
2. two strong companies merging together to increase their economies of scale
3. acquiring a loan to fund an investment in Asia
4. issuing new stock to provide capital for future growth

Unit 2 Examination

BAM 313 Introduction to Financial Management

100

1. Waterfront Solutions, Inc. paid a dividend of \$5.00 per share on its common stock yesterday. Dividends are expected to grow at a constant rate of 4% for the next two years, at which point the stock is expected to sell for \$56.00. If investors require a rate of return on Waterfront’s common stock of 18%, what should the stock sell for today?

a. \$40.22 b. \$50.22 c. \$44.76 d. \$48.51

1. Andre’s parents established a college savings plan for him when he was born. They deposited \$50 into the account on the last day of each month. The account has earned 10.9% compounded monthly, tax-free. How much can they withdraw on his 18th birthday to spend on his education?

a. \$33,307 b. \$30,028 c. \$43,730 d. \$27,560

1. Charlie wants to retire in 15 years, and he wants to have an annuity of \$50,000 a year for
20 years after retirement. Charlie wants to receive the rst annuity payment the day he retires. Using an interest rate of 8%, how much must Charlie invest today in order to have his retirement annuity (round to nearest \$10).

a. \$167,130 b. \$315,240 c. \$256,890 d. \$200,450

An investor currently holds the following portfolio:

4,000 shares of Stock H 7,500 shares of Stock I 12,500 shares of Stock J

19. The beta for the portfolio is:

a. 1.45 b. 1.27 c. 1.99 d. 1.77

Amount
Invested
\$8,000 Beta = 1.3 \$24,000 Beta = 1.8 \$48,000 Beta = 2.2

Unit 2 Examination

BAM 313 Introduction to Financial Management

101

1. Which of the following will cause the value of a bond to increase, if other things held the same?
1. interest rates decrease
2. the company’s debt rating drops from AAA to BBB
3. investors’ required rate of return increases
4. the bond is callable
2. A small biotechnology research corporation has been experiencing losses for the rst three years of its existence, and thus has a negative balance in retained earnings. The corporation’s stock price, however, is \$1 per share. Which of the following statements is MOST correct?
1. The required return on the stock will be small because the company has very few assets.
2. Investors believe the stock is worth \$1 per share because future earnings (and cash ows)

are expected to be positive.

1. The corporation’s accountants must have made a mistake because retained earnings may

not be negative.

1. Investors are irrational to pay \$1 per share when earnings per share have been negative for

three years.

1. How much money must be put into a bank account yielding 6.42% (compounded annually) in order to have \$1,671 at the end of 11 years? (round to nearest \$1)

a. \$798 b. \$886 c. \$921 d. \$843

1. Wendy purchased 800 shares of Robotics Stock at \$3 per share on 1/1/09. Wendy sold the shares on 12/31/09 for \$3.45. Genetics stock has a beta of 1.3, the risk-free rate of return is 3%, and the market risk premium is 8%. The required return on Genetics Stock is:

a. 21.1% b. 13.4% c. 16.5% d. 17.6%

Unit 2 Examination

BAM 313 Introduction to Financial Management

102

1. Bart’s Moving Company bonds have a 11% coupon rate. Interest is paid semiannually. The bonds have a par value of \$1,000 and will mature 8 years from now. Compute the value of Bart’s Moving Company bonds if investors’ required rate of return is 9.5%.

a. \$1,133.05 b. \$1,098.99 c. \$1,082.75 d. \$1,197.27

1. Jackson Corp. common stock paid \$2.50 in dividends last year (D0). Dividends are expected to grow at a 12-percent annual rate forever. If Jackson’s current market price is \$40.00, what is the stock’s expected rate of return? (nearest .01 percent)

a. 18.25% b. 5.50% c. 11.00% d. 19.00%

Unit 3: Multiple Choice Questions (Enter your answers on the enclosed answer sheet)

1. The DEF Company is planning a \$64 million expansion. The expansion is to be nanced by selling \$25.6 million in new debt and \$38.4 million in new common stock. The before-tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent….

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