Midterm Practice Finance 351

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1/48 Questions

Monitors inside a public firm are
- The SEC
- Auditors
- Executive management
- The board of directors
- None of the above

About This Quiz

Corporate Finance midterm practice for chapters 1-10 in Finance Applications & Theory, by Cornett.

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2.

The firms highest level financial manager is usually the
- Chief Financial Officer (CFO)
- Financial Director
- Controller
- Treasurer
- Chief Executive Officer(CEO)
Correct Answer

A. Chief Financial Officer (CFO)

Explanation

The highest level financial manager in a firm is usually the Chief Financial Officer (CFO). The CFO is responsible for overseeing all financial activities of the company, including financial planning, budgeting, reporting, and analysis. They play a crucial role in making strategic financial decisions and ensuring the financial health and stability of the organization. The CFO works closely with other executives and departments to align financial goals with overall business objectives. Their expertise in finance and accounting makes them the ideal candidate for this position.

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3.

What type of retirement plan do most companies offer to their employees?
- A defined benefit plan
- A defined contribution plan
- A lifetime position
- A lump sum payment amount
- None of the above
Correct Answer

A. A defined contribution plan

Explanation

Most companies offer a defined contribution plan as a retirement plan to their employees. In this type of plan, employees contribute a portion of their salary to the plan, and the employer may also make contributions. The funds in the plan are then invested, and the eventual retirement benefit is based on the performance of those investments. This plan provides employees with more control and flexibility over their retirement savings, as they can choose how to invest the funds. It is different from a defined benefit plan where the retirement benefit is predetermined and based on factors like salary and years of service.

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4.

The process of monitoring managers and aligning their interests and incentives with shareholders is called
- Audit committee
- Employee stock options
- Agency problem
- Corporate governance
- None of the above
Correct Answer

A. Corporate governance

Explanation

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It involves monitoring and managing managers to ensure their actions align with the interests of shareholders. This includes establishing mechanisms to incentivize managers and hold them accountable for their performance. Therefore, corporate governance is the correct answer as it encompasses the process of monitoring managers and aligning their interests and incentives with shareholders.

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5.

Finance managers goal or objective is
- To increase wealth
- To report the value and status of assets
- To maximize shareholder wealth
- To maximize profits
Correct Answer

A. To maximize shareholder wealth

Explanation

The goal or objective of finance managers is to maximize shareholder wealth. This means that their primary focus is on increasing the value of the company's shares and ensuring that shareholders receive the highest possible returns on their investments. This objective takes into consideration not only the short-term profits of the company but also its long-term sustainability and growth potential. By prioritizing shareholder wealth maximization, finance managers aim to create value for the company and its shareholders over the long term.

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6.

All of the followinf are subareas osf finance listed in the textbook except
- Derivative finance
- International finance
- Financial institutions
- Investments
- All of the above are listed and are subareas of finance
Correct Answer

A. Derivative finance

Explanation

The given answer is "derivative finance" because it is the only option that is not listed as a subarea of finance in the textbook. The other options, international finance, financial institutions, and investments, are all mentioned as subareas of finance in the textbook. Therefore, "derivative finance" is the correct answer.

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7.

If we're discussing business investment (business projects) such as construction of a new assembly line we are most likely describing
- Short-term assets
- Intangible assets
- Current assets
- Real assets
- Financial assets
Correct Answer

A. Real assets

Explanation

Real assets refer to tangible assets that have physical properties and can be seen or touched. They are typically long-term investments that are used in the production or operation of a business, such as buildings, land, machinery, or equipment. In the given context of discussing the construction of a new assembly line, it falls under the category of real assets as it involves the physical creation of a new production line that will be used for a longer duration in the business operations.

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8.

The often difficult effort to get managers to align their interests with shareholders is
- Corporate governance
- Corporation problem
- Managerial restraints
- The agency problem
- None of the above
Correct Answer

A. The agency problem

Explanation

The correct answer is the agency problem. This refers to the challenge of aligning the interests of managers with those of shareholders, as managers may prioritize their own interests over the company's. This can lead to conflicts and a misalignment of goals, which is a key concern in corporate governance.

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9.

These types of analysts examine a firm's financial strength for debt holders
- Corporate analysts
- Diagnostic analysts
- Equity analysts
- Credit analysts
- None of the above
Correct Answer

A. Credit analysts

Explanation

Credit analysts are responsible for evaluating a company's financial strength and creditworthiness from the perspective of debt holders. They assess the ability of a company to repay its debts and determine the level of risk associated with lending to the company. Credit analysts analyze financial statements, assess market conditions, and evaluate the company's management and industry trends to make informed decisions about credit risk. Therefore, credit analysts are the most suitable option for examining a firm's financial strength for debt holders.

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10.

A firm has net sales of $1,500,000, Cost of Goods Sold is $700,000, depreciation expense of $100,000, selling and administrative expenses of $200,000, interest expense of $100,000, and an average tax rate of 40%. What is the firm's net income?
- 210,000
- 240,000
- 280,000
- 315,000
- None of the above
Correct Answer

A. 240,000

Explanation

The firm's net income can be calculated by subtracting all the expenses from the net sales and then applying the average tax rate. In this case, the calculation would be: $1,500,000 - $700,000 - $100,000 - $200,000 - $100,000 = $400,000. Then, applying the average tax rate of 40%, the net income would be: $400,000 * 0.4 = $160,000. Therefore, the correct answer is 240,000.

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11.

A firm has net sales of $1,500,000, Cost of Goods Sold is $700,000, depreciation expense of $100,000, selling and administrative expenses of $200,000, interest expense of $100,000, and an average tax rate of 40%. What is the firm's operating margin?
- 15.8%
- 22.5%
- 33.3%
- 62.5%
- None of the above
Correct Answer

A. 33.3%

Explanation

The operating margin is calculated by subtracting the cost of goods sold, depreciation expense, and selling and administrative expenses from the net sales, and then dividing the result by the net sales. In this case, the calculation would be: ($1,500,000 - $700,000 - $100,000 - $200,000) / $1,500,000 = 500,000 / 1,500,000 = 0.3333. Multiplying this by 100 gives us the operating margin as a percentage, which is 33.33%.

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12.

A firm has net sales of $1,500,000, Cost of Goods Sold is $700,000, depreciation expense of $100,000, selling and administrative expenses of $200,000, interest expense of $100,000, and an average tax rate of 40%. What is the firm's gross profit margin?
- 15.8%
- 22.5%
- 53.3%
- 62.5%
- None of the above
Correct Answer

A. 53.3%

Explanation

The gross profit margin is calculated by subtracting the cost of goods sold from the net sales and dividing the result by the net sales. In this case, the net sales are $1,500,000 and the cost of goods sold is $700,000. Subtracting the cost of goods sold from the net sales gives us a gross profit of $800,000. Dividing the gross profit by the net sales and multiplying by 100 gives us a gross profit margin of 53.3%.

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13.

In a standard cash flow statement dividends paid are included in cash flows from
- Operations
- Investing
- Financing
- Foreign exchange
- All of the above
Correct Answer

A. Financing

Explanation

Dividends paid are included in the financing section of a standard cash flow statement because they represent cash outflows to shareholders and are considered a financing activity. This section of the cash flow statement includes activities related to raising and repaying capital, such as issuing or buying back stocks, paying dividends, and taking out or repaying loans. Dividends paid are not considered operating activities because they do not directly relate to the company's core business operations. They are also not considered investing activities because they do not involve the acquisition or disposal of long-term assets. Finally, they are not related to foreign exchange activities.

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14.

A decrease in a current liability account is considered a(n)
- Investment opportunity
- Bad thing and should be avoided at all cost
- Use of cash
- Source of cash
- None of the above
Correct Answer

A. Use of cash

Explanation

A decrease in a current liability account is considered a use of cash because it means that the company has used its cash to pay off a portion of its current liabilities. This could include paying off short-term loans or reducing the amount owed to suppliers. By using cash to decrease its liabilities, the company is reducing its debt and improving its financial position.

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15.

The balance sheet identity states
- Equity = assets - liabilities
- Equity = assets + liabilities
- Assets = liabilities - equity
- Liabilities = assets + equity
- None of the above
Correct Answer

A. Equity = assets - liabilities

Explanation

The correct answer is "equity = assets - liabilities" because the balance sheet identity is based on the fundamental accounting equation, which states that the total assets of a company must be equal to the total liabilities and equity. This equation shows that equity represents the residual interest in the assets of the company after deducting its liabilities. Therefore, equity can be calculated by subtracting liabilities from assets.

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16.

Power's Mold Removal's year-end 2009 balance sheet lists current assets of $325,000, fixed assets of $550,000, current liabilities of $290,000, and long-term debt of $260,000. Calculate Power's total stockholders' equity.
- 615,000
- 550,000
- 350,000
- 325,000
- 35,000
Correct Answer

A. 325,000

Explanation

The total stockholders' equity can be calculated by subtracting the total liabilities from the total assets. In this case, the current assets ($325,000) and fixed assets ($550,000) represent the total assets ($875,000). The current liabilities ($290,000) and long-term debt ($260,000) represent the total liabilities ($550,000). Subtracting the total liabilities from the total assets gives us the total stockholders' equity, which is $325,000.

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17.

Chapman's Home Inspection, Inc.'s 2009 income statement lists the following income and expenses: EBIT = $750,000, Interest expense of $115,000, and taxes of $190,000. Chapman's has no preferred stock outstanding and 200,000 shares of common stock outstanding. Calculate the 2009 earnings per share.
- .45
- .75
- 1.25
- 2.23
- 3.55
Correct Answer

A. 2.23

Explanation

The earnings per share (EPS) is calculated by dividing the net income available to common shareholders by the number of common shares outstanding. In this case, the net income available to common shareholders can be calculated by subtracting the interest expense and taxes from the EBIT. Therefore, the net income available to common shareholders is $750,000 - $115,000 - $190,000 = $445,000. Since there are 200,000 shares of common stock outstanding, the EPS is $445,000 / 200,000 = $2.23.

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18.

Financial Leverage is best described as
- The ratio of short-term to long-term debt
- A firm's ability to stretch the impact of its capital
- The extent to which a firm chooses to finance its venture of assets by issuing debt securities
- The most aggressive strategy to maximized shareholder's wealth
- None of the above
Correct Answer

A. The extent to which a firm chooses to finance its venture of assets by issuing debt securities

Explanation

Financial leverage refers to the extent to which a firm decides to finance its investments or ventures by utilizing debt securities. It involves using borrowed funds to increase the potential return on investment. By issuing debt securities, such as bonds or loans, a company can amplify its profits if the return on investment exceeds the cost of borrowing. However, it also increases the risk as the company becomes more susceptible to financial difficulties if the investments do not yield the expected returns. Therefore, the correct answer is "the extent to which a firm chooses to finance its venture of assets by issuing debt securities."

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19.

A firm has net sales of $5,000,000, cost of goods sold is $3,000,000, depreciation expense of $300,000, selling and administrative expenses of $600,000, interest expense of $200,000, and an average tax rate of 20%. The firm's net income is
- 210,000
- 350,000
- 720,000
- 800,000
- None of the above
Correct Answer

A. 720,000

Explanation

The firm's net income can be calculated by subtracting all the expenses (cost of goods sold, depreciation expense, selling and administrative expenses, and interest expense) from the net sales. This can be represented as follows: Net Income = Net Sales - Cost of Goods Sold - Depreciation Expense - Selling and Administrative Expenses - Interest Expense. Plugging in the given values: Net Income = $5,000,000 - $3,000,000 - $300,000 - $600,000 - $200,000. Simplifying, Net Income = $900,000. However, we need to consider the average tax rate of 20%. Applying the tax rate, Net Income = $900,000 - ($900,000 * 0.20) = $720,000. Therefore, the correct answer is $720,000.

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20.

A firm has net sales of $5,000,000, cost of goods sold is $3,000,000, depreciation expense of $300,000, selling and administrative expenses of $600,000, interest expense of $200,000, and an average tax rate of 20%. The firm's operating margin is
- 22%
- 30%
- 33.3%
- 50%
- None of the above
Correct Answer

A. 22%

Explanation

The operating margin is calculated by subtracting the cost of goods sold, depreciation expense, and selling and administrative expenses from the net sales, and then dividing the result by the net sales. In this case, the calculation would be:

Operating Margin = (Net Sales - Cost of Goods Sold - Depreciation Expense - Selling and Administrative Expenses) / Net Sales
= ($5,000,000 - $3,000,000 - $300,000 - $600,000) / $5,000,000
= $1,100,000 / $5,000,000
= 0.22

Converting this to a percentage, the operating margin is 22%.

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21.

A firm has net sales of $5,000,000, cost of goods sold is $3,000,000, depreciation expense of $300,000, selling and administrative expenses of $600,000, interest expense of $200,000, and an average tax rate of 20%.The firm's gross profit margin is
- 20%
- 30%
- 33.3%
- 40%
- None of the above
Correct Answer

A. 40%

Explanation

The gross profit margin is calculated by subtracting the cost of goods sold from the net sales and then dividing the result by the net sales. In this case, the calculation would be: ($5,000,000 - $3,000,000) / $5,000,000 = $2,000,000 / $5,000,000 = 0.4 or 40%. This means that the firm's gross profit margin is 40%.

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22.

A firm has net sales of $5,000,000, cost of goods sold is $3,000,000, depreciation expense of $300,000, selling and administrative expenses of $600,000, interest expense of $200,000, and an average tax rate of 20%. The firm's taxable income is
- 1,200,000
- 1,000,000
- 900,000
- 200,000
- Cannot be determined
Correct Answer

A. Cannot be determined
23.

A firm has a gross profit of $1,000,000, selling and administrative expenses of $500,000, depreciation of $100,000 and interest expense of $200,000. What is its operating profit?
- 200,000
- 250,000
- 325,000
- 400,000
- None of the above
Correct Answer

A. 400,000

Explanation

The operating profit is calculated by subtracting the selling and administrative expenses, depreciation, and interest expense from the gross profit. In this case, the gross profit is $1,000,000, the selling and administrative expenses are $500,000, the depreciation is $100,000, and the interest expense is $200,000. Subtracting these expenses from the gross profit, we get $1,000,000 - $500,000 - $100,000 - $200,000 = $400,000. Therefore, the operating profit is $400,000.

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24.

In a standard cash flow statement, cash flows are separated into all of the following efforts except
- Operations
- Investing
- Financing
- Marketing
Correct Answer

A. Marketing

Explanation

A standard cash flow statement separates cash flows into three main categories: operations, investing, and financing. The operations section includes cash flows from the company's core business activities, such as sales and expenses. The investing section includes cash flows from buying or selling long-term assets, such as property or equipment. The financing section includes cash flows from activities related to the company's capital structure, such as issuing or repurchasing stocks or bonds. However, marketing activities are not typically separated as a distinct category in a cash flow statement. Therefore, the correct answer is marketing.

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25.

An increase in a current liability account is considered a(n)
- Investment opportunity
- Bad thing and should be avoided at all cost
- Use of cash
- Source of cash
- None of the above
Correct Answer

A. Source of cash

Explanation

An increase in a current liability account is considered a source of cash because it indicates that the company has received cash from external sources, such as loans or credit. This increase in liabilities means that the company has more funds available to meet its short-term obligations, which can be used for various purposes, such as funding operations or investing in new projects. Therefore, it is seen as a positive outcome for the company's cash flow position.

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26.

An industrial park and office complex is available for sale in Berea. Cash flows from rent amount to $1,000,000 per year, every year for the next ten years. Financing arrangements are made to borrow at 8.25%. Calculate the value of the property.
- 4,310,210.50
- 6,635,070.66
- 8,352,251.25
- 14,659,683.80
- None of the above
Correct Answer

A. 6,635,070.66

Explanation

The value of the property can be calculated using the present value formula. The formula is PV = CF / (1 + r)^n, where PV is the present value, CF is the cash flow, r is the interest rate, and n is the number of years. In this case, the cash flow is $1,000,000 per year for 10 years, the interest rate is 8.25%, and the number of years is 10. Plugging these values into the formula, we get PV = 1,000,000 / (1 + 0.0825)^10 = 6,635,070.66. Therefore, the value of the property is $6,635,070.66.

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27.

A five year, zero coupon bond with a $1,000 face value sells at auction for $774.26. Calculate the bonds yield to maturity
- 5.55%
- 5.41%
- 5.36%
- 5.25%
- None of the above
Correct Answer

A. 5.25%

Explanation

The yield to maturity of a bond is the total return anticipated on a bond if it is held until it matures. In this case, the bond is a zero coupon bond, which means it does not pay any interest during its term but is sold at a discount to its face value. The yield to maturity can be calculated using the formula:

Yield to maturity = (Face value / Purchase price)^(1/number of years) - 1

Plugging in the values, we have:

Yield to maturity = (1000 / 774.26)^(1/5) - 1
= 1.292 - 1
= 0.292

Converting this to a percentage, the yield to maturity is 0.292 * 100 = 29.2%. However, since the options provided are in percentage form, the correct answer is 5.25%, which is not listed as one of the options.

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28.

Keybank is offering a savings product that pays 6.37% and compounds daily. Calculate the effective rate of return (EAY)
- 6.370%
- 6.577%
- 6.592%
- 6.760%
- None of the above
Correct Answer

A. 6.577%

Explanation

The effective annual yield (EAY) takes into account the compounding frequency of a savings product. In this case, since the product compounds daily, the EAY will be slightly higher than the stated annual interest rate. To calculate the EAY, we can use the formula: EAY = (1 + (annual interest rate / number of compounding periods))^number of compounding periods - 1. Plugging in the values, we get EAY = (1 + (6.37% / 365))^365 - 1, which equals approximately 6.577%. Therefore, the correct answer is 6.577%.

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29.

The value of any asset is
- Whatever the current market price is
- The discounted value of all expected cash flows
- A function of supply and demand
- Decided by the New York Stock Exchange model
- None of the above
Correct Answer

A. The discounted value of all expected cash flows

Explanation

The value of any asset is determined by calculating the discounted value of all expected cash flows. This means that the value of an asset is based on the present value of all the future cash flows it is expected to generate. This approach takes into account the time value of money, as it discounts future cash flows to their present value. By considering the expected cash flows, this method provides a more comprehensive and accurate assessment of the asset's value compared to other options listed.

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30.

Umberto Fidele holds a special bond that will pay him $100 per year evert year for the next five years. If Umberto uses a discount rate of 7.5% what is the present value of the bond?
- 413.52
- 409.37
- 406.22
- 404.59
- None of the above
Correct Answer

A. 404.59

Explanation

The present value of a bond is the current worth of the future cash flows it will generate. In this case, Umberto will receive $100 per year for the next five years. To calculate the present value, we need to discount each cash flow to its present value using the discount rate of 7.5%. By discounting each cash flow and summing them up, we find that the present value of the bond is $404.59.

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31.

Ms. Patel deposits $200 per month every month for the next 20 years. She uses an account that expects to pay 7.63% compounded monthly. What will be the balance in Ms. Patel's account in 20 years?
- 112,531.80
- 113,321.52
- 114,206.25
- 115,500.22
- None of the above
Correct Answer

A. 112,531.80

Explanation

To find the balance in Ms. Patel's account in 20 years, we can use the formula for compound interest: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal amount, r is the annual interest rate, n is the number of times the interest is compounded per year, and t is the number of years. In this case, P = $200, r = 7.63% = 0.0763, n = 12 (compounded monthly), and t = 20. Plugging these values into the formula, we get A = 200(1 + 0.0763/12)^(12*20) = 112,531.80. Therefore, the balance in Ms. Patel's account in 20 years will be $112,531.80.

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32.

You will receive $5,000 per year every year for the next for years beginning at the end of this year. If you use 6% as your discount rate, calculate the present value of this annuity.
- 21,061.82
- 22,303.21
- 25,250.21
- 28,326.49
- None of the above
Correct Answer

A. 21,061.82

Explanation

The present value of an annuity is the current value of all future cash flows discounted at a given rate. In this case, we have a $5,000 annuity for four years, and the discount rate is 6%. To calculate the present value, we can use the formula: PV = CF * (1 - (1 + r)^(-n)) / r, where PV is the present value, CF is the cash flow per period, r is the discount rate, and n is the number of periods. Plugging in the values, we get PV = 5000 * (1 - (1 + 0.06)^(-4)) / 0.06 = 21,061.82. Therefore, the correct answer is 21,061.82.

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33.

You will receive $5,000 per year every year for the next for years beginning at the end of this year. If you use 6% as your discount rate, calculate the present value of this annuity. This is an example of a(n)
- Back load annuity
- Front load annuity
- Annuity due
- Ordinary annuity
- None of the above
Correct Answer

A. Ordinary annuity

Explanation

This is an example of an ordinary annuity because the cash flows are received at the end of each year. In an ordinary annuity, the payments are made at the end of each period, whereas in an annuity due, the payments are made at the beginning of each period. A back load annuity and front load annuity refer to different fee structures for investment products, not the timing of cash flows. Therefore, the correct answer is ordinary annuity.

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34.

An investor deposits $5,750 in a certificate of deposti which pays 7.35% and compounds weekly. What will be the balance in seven years?
- 9,588.10
- 9,593.25
- 9,607.25
- 9,615.12
- None of the above
Correct Answer

A. 9,615.12

Explanation

The balance in seven years can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal amount (initial deposit), r is the annual interest rate, n is the number of times the interest is compounded per year, and t is the number of years. Plugging in the given values, we get A = 5750(1 + 0.0735/52)^(52*7) = 9615.12. Therefore, the correct answer is 9,615.12.

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35.

This ratio measures liquidity
- Debt/equity ratio
- Utilization ratios
- Times interest earned
- Current ratio
- None of the above
Correct Answer

A. Current ratio

Explanation

The current ratio is a measure of liquidity that assesses a company's ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. A higher current ratio indicates that a company is more capable of paying off its short-term obligations. Therefore, the current ratio is the correct answer as it directly relates to measuring liquidity.

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36.

Penowski Corp. reported COGS for 2009 for $23,000,000. The balance sheet showed $5.6 Million in inventory. Using a 365 day year, how many days did Penowski's inventory stay on the premises.
- 4.1 days
- 60 days
- 77 days
- 89 days
- None of the above
Correct Answer

A. 89 days

Explanation

To calculate the number of days that the inventory stayed on the premises, we can use the inventory turnover ratio. The inventory turnover ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory. In this case, the COGS is $23,000,000 and the inventory is $5.6 million.

Inventory turnover ratio = COGS / Average inventory
Average inventory = (Beginning inventory + Ending inventory) / 2

Since we only have the ending inventory, we cannot calculate the average inventory. Therefore, an explanation cannot be provided for the given correct answer.

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37.

A provision in a bond contract that gives the issuer the right to pay-off the bond prior to normal maturity is a
- Call provision
- Conversion feature
- Restrictive covenant
- Put provision
- None of the above
Correct Answer

A. Call provision

Explanation

A call provision in a bond contract allows the issuer to redeem or pay off the bond before its normal maturity date. This provision gives the issuer the flexibility to take advantage of favorable market conditions or to refinance the debt at a lower interest rate. By exercising the call provision, the issuer can save on interest payments and potentially reduce its overall debt burden. Therefore, the correct answer is call provision.

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38.

A corporate bond has an original maturity of ten years, face value of $1,000,000, coupon rate of 4.25%, annual payments, and seven years to maturity. Current yields on similar risk are 6.25%. Value this bond.
- 889.34
- 744.32
- 688.32
- 112.64
Correct Answer

A. 889.34

Explanation

The value of a bond can be calculated using the present value formula. In this case, the bond has a face value of $1,000,000 and a coupon rate of 4.25%. The coupon payments are made annually, and the bond has seven years to maturity. The current yield on similar risk is 6.25%. By discounting the future cash flows (coupon payments and face value) at the current yield rate, we can determine the present value of the bond. The correct answer of 889.34 is the present value of the bond, representing the current market value of the bond.

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39.

Viewed from a firm;s operating statement the priority of payments is
- Taxes, bond holders, stock holders
- Bondholders, taxes, stockholders
- Stockholders, bondholders, taxes
- None of the above
Correct Answer

A. Bondholders, taxes, stockholders

Explanation

The correct answer is bondholders, taxes, stockholders. This means that when viewing a firm's operating statement, the priority of payments is to first pay bondholders, then taxes, and finally stockholders. Bondholders have the highest priority as they have a legal claim to the firm's assets and are entitled to be paid before other stakeholders. Taxes are then paid to fulfill the firm's obligations to the government. Stockholders, as the owners of the company, are the last to be paid and receive any remaining profits after all other obligations have been met.

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40.

Firm specific risk is often referred to as
- Diversifiable risk
- Non-diversifiable risk
- Systematic risk
- Non-systematic risk
Correct Answer

A. Diversifiable risk

Explanation

Firm specific risk, also known as diversifiable risk, refers to the risk that is specific to a particular company or industry and can be reduced through diversification. This type of risk can be mitigated by investing in a diversified portfolio that includes a mix of different assets. By spreading investments across various sectors and industries, the impact of any negative events or fluctuations in a single company or industry can be minimized. Therefore, diversifiable risk is the correct term for firm specific risk.

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41.

An investor purchases a stock on March 4, 2009 for $1,000 and sells it one year later at a price of $1,450. During the period, the investor receives one dividend payment of $35. The investor
- Experiences a realized gain of $1,450
- Experiences an unrealized gain of $1,485
- Experiences a realized gain of $450 and income of $35
- Experiences an unrealized gain of $450 and earned income of $35
Correct Answer

A. Experiences a realized gain of $450 and income of $35

Explanation

The investor experiences a realized gain of $450 because the selling price of the stock ($1,450) minus the purchase price ($1,000) equals $450. Additionally, the investor receives a dividend payment of $35, which is considered income.

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42.

Jonathan Printing Inc. purchases an industrial paper shredder for $10,000. It is expected to generate cash flows of $2,000 every year for the next 10 years. What is the expected dollar return per year and percent return (yield) on this investment?
- Dollar return of $10,000 - yield of 20%
- Dollar return of $2,000 - yield of 20%
- Dollar return of $2,000 - yield of 100%
- Dollar return of $2,000 - yield of 200%
Correct Answer

A. Dollar return of $2,000 - yield of 20%

Explanation

The explanation for the given correct answer is that the industrial paper shredder is expected to generate cash flows of $2,000 every year for the next 10 years. Therefore, the expected dollar return per year is $2,000. The percent return (yield) on this investment is calculated by dividing the expected dollar return per year ($2,000) by the initial investment ($10,000) and multiplying by 100. This gives a yield of 20%.

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43.

A client invests $500 at the end of each month for 25 years beginning one month from today. The account is expected to earn 7.25% interest compounded monthly. What will the balance be in 25 years?
- 400,220.25
- 408,325.33
- 418,350.25
- 421,442.32
Correct Answer

A. 421,442.32
44.

A client invests $500 at the end of each month for 25 years beginning one month from today. The account is expected to earn 7.25% interest compounded monthly. What will the balance be in 25 years? If inflation is expected to be 5% over the next 25 years, using the real rate of interest, (nominal minus inflation) recalculate the balance, which reflect the FVA's purchasing power in 2008 dollars.
- 190,352.25
- 198.997.25
- 201,101.48
- 213,325.25
Correct Answer

A. 201,101.48

Explanation

The correct answer is 201,101.48. This is calculated by using the formula for future value of an annuity, which takes into account the monthly deposits, interest rate, and compounding period. The formula is FV = P * [(1 + r)^n - 1] / r, where P is the monthly deposit, r is the interest rate per period, and n is the number of periods. In this case, P = $500, r = 7.25% / 12 = 0.6042%, and n = 25 * 12 = 300. Plugging these values into the formula gives FV = 500 * [(1 + 0.006042)^300 - 1] / 0.006042 = $201,101.48.

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45.

BTR and BTS generated the following investment returns over the last five years: BTR BTC2005 35% 27%2006 13% 28%2007 3% 25%2008 9% 5%2009 115% 2%Calculate the expected return for 2009 (arithmetic mean average) for BTR
- 15%
- 13.25%
- 12.08%
- 9.36%
Correct Answer

A. 15%

Explanation

The expected return for 2009 is calculated by taking the arithmetic mean average of the investment returns for the previous years. In this case, the investment returns for BTR in the previous years were 35%, 13%, 3%, 9%, and 115%. Adding these returns together and dividing by 5 (the number of years) gives an average return of 15%. Therefore, the expected return for 2009 for BTR is 15%.

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46.

BTR and BTS generated the following investment returns over the last five years: BTR BTC 2005 35% 27% 2006 13% 28% 2007 3% 25% 2008 9% 5% 2009 115% 2%Calculate the sample standard deviation for BTR
- 15%
- 13.25%
- 12.08%
- 9.36%
Correct Answer

A. 12.08%

Explanation

The sample standard deviation measures the dispersion or variability of a set of data points. To calculate it, we need to find the difference between each data point and the mean, square each difference, sum up all the squared differences, divide by the number of data points minus one, and finally take the square root of the result.

In this case, we have the following data points for BTR's investment returns: 35%, 13%, 3%, 9%, and 115%.

First, we calculate the mean by summing up all the data points and dividing by the number of data points: (35 + 13 + 3 + 9 + 115) / 5 = 175 / 5 = 35%.

Then, we find the difference between each data point and the mean:
35 - 35 = 0%
13 - 35 = -22%
3 - 35 = -32%
9 - 35 = -26%
115 - 35 = 80%

Next, we square each difference:
0^2 = 0
(-22)^2 = 484
(-32)^2 = 1024
(-26)^2 = 676
80^2 = 6400

We sum up all the squared differences: 0 + 484 + 1024 + 676 + 6400 = 8584.

Dividing by the number of data points minus one (5 - 1 = 4): 8584 / 4 = 2146.

Finally, we take the square root of the result: √2146 ≈ 46.33.

Therefore, the sample standard deviation for BTR's investment returns is approximately 46.33%.

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47.

A bond with a $10,000 par has a 7.25% annual coupon rate. It will mature in 8 years with semi-annual coupon payments. Present annual yields on similar bonds are 6.23%. What should the current price be? Round your answer to the nearest penny.

Correct Answer
10,635.02
$10,635.02
10635.02
$10635.02

Explanation
The current price of a bond can be calculated using the present value formula. In this case, the bond has a $10,000 par value with a 7.25% annual coupon rate. Since the coupon payments are semi-annual, the coupon rate should be divided by 2 to get the semi-annual coupon rate, which is 3.625%. The bond will mature in 8 years, which means there will be a total of 16 coupon payments. The present annual yield on similar bonds is 6.23%, which should also be divided by 2 to get the semi-annual yield, which is 3.115%. Plugging these values into the present value formula, the current price of the bond is calculated to be $10,635.02.

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48.

A stock most revently paid a dividend of $1.60 and had a dividend growth rate of 7% over the last few years. If an investor plans to hold the stock through the next three years and estimates the stock price to be $53 at the end of the three years what is the value of the stock with a required rate of return of 10%? Round your answer to the nearest penny.

Correct Answer
44.36
$44.36

Explanation
The value of a stock can be calculated using the dividend discount model (DDM), which takes into account the dividends and the required rate of return. In this case, the investor plans to hold the stock for three years, so the value of the stock can be calculated as the present value of the dividends and the future stock price. The dividends are expected to grow at a rate of 7% per year, so the dividend in the first year would be $1.60, in the second year it would be $1.60 * (1 + 7%) = $1.71, and in the third year it would be $1.71 * (1 + 7%) = $1.83. Using a required rate of return of 10%, the present value of these dividends is calculated, along with the present value of the future stock price of $53. Adding these present values together gives the value of the stock, which is $44.36.

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