Chapter No. 2 the Business, Tax, and the Financial environment Q# 1. In finance e refer to the mar!

et for short"term #overnment and corporate de$t securities as the %%%%%%%%%% mar!et. a. money $. capital c. primar& d. secondar& Q# 2. 'hich of the follo in# ould #enerall& have unlimited lia$ilit&( ). ) limited partner in a partnership. B. ) shareholder in a corporation. C. The owner of a sole proprietorship. *. ) mem$er in a limited lia$ilit& compan& +,,C-. Q# .. The Chance *ice Corporation had taxa$le income +excludin# capital #ains- of /10 million. 1nder the 2evenue 2econciliation )ct of 133., the firm4s /15,555 of reali6ed capital #ains ill $e taxed at %%%%%%%%%%. ). .3 percent B. 35 percent C. .7 percent *. the avera#e tax rate of the firm Q# 7. ) corporation in the 1.8. estimates and pa&s it taxes %%%%%%%%%%. ). monthl& B. quarterly C. semi"annuall& *. annuall& Q# 9. The avera#e tax rate is e:ual to the %%%%%%%%%%. A. total tax liability divided by taxable income B. rate that ill $e paid on the next dollar of taxa$le income C. median mar#inal tax rate *. percenta#e increase in taxa$le income from the previous period Q# 0. )ccountin#.com has purchased ."&ear class e:uipment for /155,555. It uses the ;)C28 method of depreciation. 'hat is tax depreciation for the fourth &ear( ). /5 B. $ !"#$ C. /29,555 *. /..,... Q# <. In finance e refer to the mar!et here existin# securities are $ou#ht and sold as the %%%%%%%%%% mar!et. ). mone& B. capital C. primar& %. secondary Q# =. 'hich of the follo in# is not an example of a financial intermediar&( ). 'isconsin 8>,, a savin#s and loan association. B. 8tron# Capital )ppreciation, a mutual fund. C. &icrosoft Corporation! a software firm. *. Colle#e Credit, a credit union. Q# 3. ?o are funds allocated efficientl& in a mar!et econom&( ). The economic unit that considers itself most in need of funds receives funds first follo ed $& those ho are less in need. B. 2eceipt of funds is rotated over time so that each economic unit can receive them in turn. C. The lar#est economic units receive the funds first follo ed $& smaller firms if sufficient funds are availa$le. *. The economic unit that is willin' to pay the hi'hest expected return for a 'iven ris( level receives the funds. Q# 15. 'hat mechanism ensures that lar#e firms ho $enefit from tax la s pa& some minimum amount of tax( ). )nnual minimum tax. B. Alternative minimum tax. C. ;inimum tax la . *. Corpulent minimum tax. Q# 11. ) profita$le firm ould prefer to use hich of the follo in# methods of depreciation "" for tax purpose "" for a #iven deprecia$le asset, all else e:ual( ). 8trai#ht"line. B. *ou$le"declinin#"$alance. C. &odified accelerated cost recovery system. *. )ll of the a$ove techni:ues are e:uall& useful for a profita$le firm $ecause the& provide the same tax deductions over the life of the asset. Q# 12. ) ma@or disadvanta#e of the corporate form of or#ani6ation is the %%%%%%%%%%. A. double taxation of dividends B. ina$ilit& of the firm to raise lar#e sums of additional capital

C. limited lia$ilit& of shareholders

*. limited life of the corporate form

Q# 1.. 'hich of the follo in# examples ould $e deducti$le as an expense on the corporation4s income statement( A. )nterest paid on outstandin' bonds. B. Cash dividends paid on outstandin# common stoc!. C. Cash dividends paid on outstandin# preferred stoc!. *. )ll of the a$ove. Q# 17. ) corporation that receives /1,555 in dividends from another corporation, of hich the& have o ned 15A for one full &ear, ill $e taxed on ho much of those dividends( ). )ll /1,555 of the dividends. B. None of the dividends since it is from another corporation. C. /155 +15A of /1,555- since the& o ned a 15A position for at least 0 months. %. $3$$ *3$+ of $#!$$$, since $+ of dividends is tax exempt. Q# 19. In finance e refer to the mar!et here ne securities are $ou#ht and sold for the first time as the %%%%%%%%%% mar!et. ). mone& B. capital C. primary *. secondar& Q# 10. ,imited lia$ilit& companies +,,Cs- #enerall& possess no more than t o of the follo in# four +desira$lecharacteristicsB +1- limited lia$ilit&, +2- centrali6ed mana#ement, +.- unlimited life, and +7- the a$ilit& to transfer o nership interest ithout prior consent of the other o ners. The t o characteristics most li!el& to $e a$sent in ,,Cs are %%%%%%%%%%. ). limited lia$ilit& and centrali6ed mana#ement B. centrali6ed mana#ement and unlimited life C. centrali6ed mana#ement and the a$ilit& to transfer o nership interest ithout prior consent of the other o ners *. unlimited life and the ability to transfer ownership interest without prior consent of the other owners Q# 1<. 'hich of the follo in# is an advanta#e of a corporation that is not an advanta#e as a limited partner in a partnership( ). ,imited lia$ilit&. B. -asy transfer of ownership position. C. *ou$le taxation. *. )ll of the a$ove are advanta#es that the corporation has over the limited partner. Q# 1=. 'hich of the follo in# statements is correct for a sole proprietorship( ). The sole proprietor has limited lia$ilit&. B. The sole proprietor can easil& dispose of their o nership position relative to a shareholder in a corporation. C. The sole proprietorship can be created more quic(ly than a corporation. *. The o ner of a sole proprietorship faces dou$le taxation unli!e the partners in a partnership. Q# 13. 'hat is potentiall& the $i##est advanta#e of a small partnership over a sole proprietorship( ). 1nlimited lia$ilit&. B. 8in#le tax filin#. C. *ifficult o nership resale. %. .aisin' capital. Q# 25. In finance e refer to the mar!et for relativel& lon#"term financial instruments as the %%%%%%%%%% mar!et. ). mone& B. capital C. primar& *. secondar& Q# 21. ,imited lia$ilit& companies +,,Cs- #enerall& possess no more than t o of the follo in# four +desira$lecharacteristicsB +1- limited lia$ilit&, +2- centrali6ed mana#ement, +.- unlimited life, and +7- the a$ilit& to transfer o nership interest ithout prior consent of the other o ners. 'hich of the follo in# forms of $usiness or#ani6ation in the 1.8. #enerall& possesses all four of these characteristics( ). Ceneral partnership. B. ,imited partnership. C. Corporation. *. None of the a$ove. T21D E F),8D 1. In a sole proprietorship, the o ner is personall& responsi$le for all financial o$li#ations of the firm. +T2. ) mort#a#e $an!er is a financial institution that under rites ne securities for resale. +F-

.. Incorrect The purpose of financial mar!ets is to facilitate savers depositin# funds ith financial intermediaries. False 7. The Ne For! 8toc! Dxchan#e +NF8D- is part of the secondar& mar!et for lon#"term securities. True 9. 1.8. Treasur& securities are usuall& re#arded as default free. True C/A0T-. 31 T/- T)&- 2A34- 56 &57-8 Q# 1. The 8hort?older $an! pa&s 9.05A, compounded dail& +$ased on .05 da&s-, on a 3"month certificate of deposit. If &ou deposit /25,555 &ou ould expect to earn around %%%%%%%%%% in interest. ). /=75 B. $959 C. /1,5.2 *. /1,121 Q# 2. 'ith continuous compoundin# at = percent for 25 &ears, hat is the approximate future value of a /25,555 initial investment( ). /92,555 B. /3.,213 C. $::!$;# *. /319,275 Q# .. In 2 &ears &ou are to receive /15,555. If the interest rate ere to suddenl& decrease, the present value of that future amount to &ou ould %%%%%%%%%%. ). fall B. rise C. remain unchan#ed *. The correct cannot $e determined ithout more information. Q# 7. )ssume that the interest rate is #reater than 6ero. 'hich of the follo in# cash"inflo streams totalin# /1,955 ould &ou prefer( The cash flo s are listed in order for Fear 1, Fear 2, and Fear . respectivel&. A. $ $$ $5$$ $3$$ B. /.55 /955 /<55 C. /955 /955 /955 *. )n& of the a$ove, since the& each sum to /1,955. Q# 9. Fou are considerin# investin# in a 6ero"coupon $ond that sells for /955. )t maturit& in = &ears, it ill $e redeemed for /1,555. *urin# the life of the $ond NG interest coupons ill $e paid. 1sin# the 2ule of <2, hat approximate annual rate of #ro th does this represent( ). = percent. B. : percent. C. 12 percent. *. 29 percent. Q# 0. To increase a #iven future value, the discount rate should $e ad@usted %%%%%%%%%%. A. upward B. do n ard C. first up ard and then do n ard *. None of the a$ove s are correctH &ou should use IJIF. Q# <. For /1,555 &ou can purchase a 9"&ear ordinar& annuit& hich ill pa& &ou a &earl& pa&ment of /20..=5 for 9 &ears. 'hat is the annual interest rate implicit in this investment to the nearest hole percenta#e point( ). = percent. B. 3 percent. C. #$ percent. *. 11 percent. Q# =. Fou are considerin# $orro in# /155,555 for .5 &ears at a compound annual interest rate of 3 percent. The loan a#reement calls for .5 e:ual annual pa&ments, to $e paid at the end of each of the next .5 &ears. +Ia&ments include $oth principal and interest.- 'hat is the annual pa&ment that ill full& amorti6e the loan( ). /.,...... B. /0,755..5 C. $:! 33.;3 *. /12,...... Q# 3. Interest paid +earned- on onl& the ori#inal principal $orro ed +lent- is often referred to as %%%%%%%%%%. ). present value B. simple interest C. future value *. compound interest Q# 15. Interest paid +earned- on $oth the ori#inal principal $orro ed +lent- and previous interest earned is often referred to as %%%%%%%%%%. ). present value B. simple interest C. future value %. compound interest Q# 11. Fou are #oin# to place /12,955 into a certificate of deposit +C*- at a 0A annual rate +compounded annuall&- ith a maturit& of .5 months. ?o much mone& ill &ou receive hen the C* matures( A. $#"!";$ B. /17,731 C. . /17,91= *. Necessar& information is not availa$le to solve the pro$lem.

Q# 12. Fou have @ust #raduated and have decided to purchase a $rand ne sports car to en@o& &our ne found freedom. Four local credit union ill provide financin# for 05 months at a 3 percent annual rate, compounded monthl&. Fou ill #ive 19 percent of the /20,555 purchase price in cash to the dealer. The credit union ill $e used to finance the remainin# =9 percent of the purchase price ith the first pa&ment due 1 month from toda&. 'hat ill $e &our monthl& pa&ment( ). /9.3.<1 B. $"59. ; C. /7..... *. /.0=... Q# 1.. Fou have @ust a#reed to a ne loan and have purchased a /.,555 computer toda&. The loan has a 13.0A annual interest rate, compounded monthl&. The minimum monthl& pa&ment is /9= and &ou do not expect to ever pa& more than the minimum pa&ment. )ssumin# no additional char#es or costs ill occur ith this loan, approximatel& hat ill &ou o e on the loan at the end of . &ears +.0 months- hen &ou expect to need another ne computer( ). /2,0<0 B. $<!5;" C. /2,.57 *. /2,5== Q# 17. 'hat is the present value of a /1,555 ordinar& annuit& that earns =A annuall& for an infinite num$er of periods( ). /=5 B. /=55 C. /1,555 %. $#<!5$$ Q# 19. Fou ant to have /1,555,555 hen &ou retire in .5 &ears. Fou expect to earn 12A compounded monthl& over the entire .5"&ear period. ?o much extra mone& per month must &ou deposit if &ou choose to fund usin# an ordinar& annuit& techni:ue rather than an annuit& due techni:ue( A. $<.9" B. /.<.55 C. /2=0.1. *. /77..3< Q# 10. Fou expect to deposit the follo in# cash flo s at the end of &ears 1 throu#h 9, /1,555H /7,555H /3,555H /9,555H and /2,555 respectivel&. 'hat is the future account value at the end of &ear 0 if &ou can earn 15A compounded annuall&( ). /19,0...02 B. /21,555.55 C. /29,1<=.15 %. $< !;:5.:# Q# 1<. 'hich of the follo in# investment alternatives ould provide the #reatest endin# ealth for &our investment( ). 15A compounded dail& +.05 da&s-. B. 15.9A compounded annuall&. C. #$.<5+ compounded quarterly. *. There is not sufficient information to determine the $est alternative from the a$ove information. Q# 1=. Fou on a contest at a local $usiness that has paid &ou a sin#le /9,555. )t 22, &ou have decided to invest these funds for 79 &ears until &ou retire. *urin# this time &our account ill earn 1.A, compounded annuall&, ever& &ear. )s soon as &ou retire +exactl& 79 &ears from toda&- &ou ill start ithdra in# retirement funds ever& &ear for an additional .. &ears, $ut &ou are investin# more conservativel& at =A compounded annuall&. ?o much can &ou ithdra each &ear in retirement( ). /2.,.50 B. $#$;!<3 C. /2=2,251 *. /1,22.,25< Q# 13. 'hich of the follo in# ill decrease the present value of the mixed cash flo s for &ears 1 throu#h 9 of /1,555H /7,555H /3,555H /9,555H and /2,555 respectivel& #iven a 15A discount rate( ). *ecrease the discount rate $& 2A. B. 8 itch cash flo s for &ears 1 and 9 so that &ear 1 is /2,555 and &ear 9 is /1,555. C. 8 itch cash flo s for &ears 2 and 7 so that &ear 2 is /9,555 and &ear 7 is /7,555. *. =witch cash flows for years < and 5 so that year < is $<!$$$ and year 5 is $"!$$$. Q# 25. 'hich of the follo in# statements is most correct( A. The future value of an annuity due is 'reater than an otherwise identical ordinary annuity. B. ) reduction in the discount rate ill increase the future value of an other ise identical cash flo stream. C. Continuous compoundin# ill result in a hi#her present value relative to an other ise identical investment that is compounded monthl& at the same nominal rate. *. The FJIF) +iA, N periods- e:uals the sum of the IJIF+iA, n- for nK1 to N periods.

Q# 21. Fou expect to deposit the follo in# cash flo s at the end of &ears 1 throu#h 9, /1,555H /7,555H /3,555H /9,555H and /2,555 respectivel&. )lternativel&, &ou could deposit a sin#le amount toda& at the $e#innin# of &ear 1 +end of &ear 5-. ?o lar#e does the sin#le deposit need to $e toda& if &ou can earn 15A compounded annuall&( ?intB the present value toda& +tK5- is identical to the sin#le cash flo amount. A. $#5!;33.;< B. /21,555.55 C. /29,1<=.15 *. /2<,039.31

1. The present value interest factor of an +ordinar&- annuit& +IJIF)- is the reciprocal of the future value interest factor of an +ordinar&- annuit& +FJIF)-. F)8,D Q# 2. If &ou ould li!e to dou$le &our mone& in 0 &ears, the approximate annual return &ou need is 12 percent +2ule of <2-. T21D Q# .. ) savin#s account at Ban! ) pa&s 0.2 percent interest, compounded annuall&. Ban! B4s savin#s account pa&s 0 percent compounded semiannuall&. Ban! B is pa&in# less total interest each &ear. T21D Q# 7. )ll other thin#s $ein# e:ual, I4d rather have /15,555 in 15 &ears than to receive /15,555 toda&. F),8D Q# 9. The rate of interest is used to express the time value of mone&. T21D C?I)TD2 7B T?D J),1)TIGN GF ,GNC TD2; 8DC12ITID8 1. 'hat is the mar!et value of a /1,555 face"value $ond ith a 15 percent coupon rate hen the mar!et4s rate of return is 3 percent( A. &ore than its face value. B. ,ess than its face value. C. /1,555 2. If the intrinsic value of a share of common stoc! is less than its mar!et value, hich of the follo in# is the most reasona$le conclusion( ). The stoc! has a lo level of ris!. B. The stoc! offers a hi#h dividend pa&out ratio. C. The mar!et is undervaluin# the stoc!. %. The mar(et is overvaluin' the stoc(. .. 'hen the mar!et4s re:uired rate of return for a particular $ond is less than its coupon rate, the $ond is referred to as a %%%%%%%%%%. A. premium bond B. discount $ond C. par $ond *. face $ond 7. If an investor ma& have to sell a $ond prior to maturit& and interest rates have risen since the $ond as purchased, the investor is exposed to %%%%%%%%%%. ). the coupon effect B. interest rate ris( C. a perpetuit& *. an indefinite maturit& 9. Beta Bud#et Brooms ill pa& a $i# /2 dividend next &ear on its common stoc!, hich is currentl& sellin# at /95 per share. 'hat is the mar!et4s re:uired return on this investment if the dividend is expected to #ro at 9A forever( ). 7A B. 9A C. <A %. :+ k = (D / P ) + g = ($2/$50) + 5% = 4% +5% = 9%.
1 0

0. If a coupon $ond sells at a lar#e discount from par, then hich of the follo in# relationships holds true( +I5 L represents the price of a $ond and FT; is the $ond4s &ield to maturit&.A. 0$ > par and 8T& ? the coupon rate. B. I5 L par and FT; L the coupon rate. C. I5 L par and FT; M the coupon rate. *. I5 M par and FT; M the coupon rate. <. ;ar!et interest rates and the prices of $onds in the secondar& mar!etB A. 'enerally move in opposite directions. B. #enerall& move in the same direction. C. sometimes move in the same direction, sometimes in opposite directions. *. have no relationship ith each other +i.e., the& are independent-.

For example, as market !terest rates r se, !"estor re#$ re% ret$r!s also !&rease. '($s, as market !terest rates r se, )o!% "al$es (pr &es) * ll +all.

=. In the formula !e LK +*1EI5- N #, hat does +*1EI5- represent( ). The expected capital #ains &ield from a common stoc!. B. The expected dividend yield from a common stoc!. C. The dividend &ield from a preferred stoc!. *. The interest pa&ment from a $ond. 3. 'hich of the follo in# $est descri$es #oin#"concern value( ). The price a securit& Oou#ht to haveO $ased on all factors $earin# on valuation. B. The amount a firm could be sold for as a continuin' operatin' business. C. The amount of mone& that could $e reali6ed if an asset or a #roup of assets is sold separatel& from its operatin# or#ani6ation. *. The mar!et price at hich an asset trades. 15. 'hich of the follo in# $est descri$es li:uidation value( ). The price a securit& Oou#ht to haveO $ased on all factors $earin# on valuation. B. The amount a firm could $e sold for as a continuin# operatin# $usiness. C. The amount of money that could be reali@ed if an asset or a 'roup of assets is sold separately from its operatin' or'ani@ation. *. The mar!et price at hich an asset trades. 11. 'hich of the follo in# $est descri$es intrinsic value( A. The price a security Aou'ht to haveA based on all factors bearin' on valuation. B. The amount a firm could $e sold for as a continuin# operatin# $usiness. C. The amount of mone& that could $e reali6ed if an asset or a #roup of assets is sold separatel& from its operatin# or#ani6ation. *. The mar!et price at hich an asset trades. 12. 'hat is the intrinsic value of a /1,555 face value, 6ero"coupon $ond that matures in 25 &ears if an investor4s re:uired rate of return for the $ond is =A( +)ssume annual discountin#.). /1,.<..=< B. /<59.70 C. /.<0.=3 %. $<#".55 1.. 'hat is the intrinsic value of a /1,555 face value, =A coupon pa&in# perpetual $ond if an investor4s re:uired rate of return is 0A( +)ssume annual interest pa&ments and discountin#.A. $#!333.33 B. /1,555.55 C. /<95.55 *. Impossi$le to value this $ond since no final maturit& date is provided. 17. ) /295 face value share of preferred stoc!, pa&s a /25 annual dividend and investors re:uire a <A return on this investment. If the securit& is currentl& sellin# for /2<0, hat is the difference +overvaluation- $et een its intrinsic and mar!et value +rounded to the nearest hole dollar-( ). )pproximatel& /20. B. Approximately $#$. C. )pproximatel& /0. *. )pproximatel& /1. 19. 'ee'i##l& 'oodcarvers +'''- common stoc! is currentl& expected to maintain its current earnin#s level indefinitel& +earnin#s ill sta& at the current /7.55 per share-. Investors in ''' expect to earn 15A on this investment since the firm anticipates retainin# onl& 15A of earnin#s. 'hat is the intrinsic value of a share of '''( ). /7 B. $3; C. /75 *. It is not possi$le to calculate the intrinsic value since there is important information missin# from the pro$lem. 10. Fou have $een as!ed to determine the intrinsic value of a share of Quic! Quilters, Inc. +QQ- common stoc!. The stoc! most recentl& paid a /2.55 annual dividend +*5-. Fou expect dividends to #ro at a supernormal rate of 19A for the next three &ears. Fou then expect that dividends ill #ro at a normal 9A rate thereafter +indefinitel&-. )s a potential investor, &ou ould expect to earn 15A on this investment. 'hat is the intrinsic value of a share of QQ(

). /21.55

B. /92.51

C. $5;.$3 *. /0..==

1<. 'hat is the earnin#s multiplier for a firm that is expected to #ro annuall& at 19A, retain 25A of earnin#s, and re:uire a 25A rate of return for investors( A. #; B. 7 C. 9... *. 1... 1=. 'hat is the approximate &ield to maturit& +FT;- of a $ond that is currentl& sellin# for /1,195 in the mar!et place( The annual $ond has 25 &ears remainin# until maturit& and pa&s a 17A coupon. +)ssume annual interest pa&ments and discountin#.). 17A B. #<+ C. <A *. 0A 13. 'hat is the &ield on a share of preferred stoc!, hich has a /155 par value and is currentl& sellin# for /175 in the mar!et place( The share of preferred stoc! pa&s a 17A annual dividend. ). 13.0A B. 17A C. #$+ *. 9.0A 25. 'hich of the follo in# accuratel& descri$es the $ehavior of $ond prices( ). For a #iven chan#e in mar!et re:uired rate of return, the price of a $ond ill chan#e $& proportionall& less, the lo er the coupon. B. For a #iven chan#e in the mar!et re:uired rate of return, the price of a $ond ill chan#e $& a smaller amount, the lon#er its maturit&. C. )f interest rates rise so that the mar(et required rate of return increases! the bondBs price will fall. *. 'hen the mar!et re:uired rate of return e:uals the stated coupon rate, the price of the $ond $e #reater than its face value. +)ssume annual interest pa&ments and discountin#.True E false 1. The mar!et value of a firm is e:ual to the common stoc! e:uit& account on its $alance sheet. False a. The $alance sheet represents an accountin# $oo! value, not the actual mar!et value of the e:uit&. 2. If e are valuin# a securit&, e onl& need to !no hat the appropriate ris!"ad@usted re:uired return ill $e. False a. 'e also need to !no hat the appropriate cash flo s ould $e. .. ,on#"term de$t securities are issued $& private firms and pu$lic firms issue $onds. False a. Both of these are e:uivalent terms and are not distin#uished $& the method of raisin# funds. 7. There is less uncertaint& associated ith future returns of common stoc!s than ith returns of $onds and preferred stoc!. False 9. The mar!et price of a particular $ond is much #reater toda& than it as &esterda&. The calculated &ield to maturit& +FT;- $ased on toda&4s mar!et price ould, therefore, $e #reater than the calculated FT; $ased on &esterda&4s mar!et price. False a. ;ar!et prices and &ields have an inverse relationship +move opposite- all else e:ual. C?)ITD2 9B 2I8P )N* 2DT12N 1. The firm of 8un and ;oon purchased a share of )cme.com common stoc! exactl& one &ear a#o for /79. *urin# the past &ear the common stoc! paid an annual dividend of /2.75. The firm sold the securit& toda& for /=9. 'hat is the rate of return the firm has earned( ). 9..A B. 137.2A C. ==.3A %. :".<+ 2eturn is over the t o"&ear period and includes $oth dividends and capital #ains. 2eturn K Q+/2.75N +/=9 " /79-R E /79 K 37.2A 2. ) set of possi$le values that a random varia$le can assume and their associated pro$a$ilities of occurrence are referred to as %%%%%%%%%%. A. probability distribution B. the expected return C. the standard deviation *. coefficient of variation .. ) statistical measure of the varia$ilit& of a distri$ution around its mean is referred to as %%%%%%%%%%. ). a pro$a$ilit& distri$ution B. the expected return C. the standard deviation *. coefficient of variation

7. The ratio of the standard deviation of a distri$ution to the mean of that distri$ution is referred to as %%%%%%%%%%. ). a pro$a$ilit& distri$ution B. the expected return C. the standard deviation %. coefficient of variation 9. The ei#hted avera#e of possi$le returns, ith the ei#hts $ein# the pro$a$ilities of occurrence is referred to as %%%%%%%%%%. ). a pro$a$ilit& distri$ution B. the expected return C. the standard deviation *. coefficient of variation 0. Clive 2odne& ;e#a$uc!s offers &our friend, ;elanie, an interestin# #am$le involvin# #ivin# her the choice of the contents in one of t o sealed, identical"loo!in# $oxes. Gne $ox has /25,555 in cash and the second has nothin# inside. There is an e:ual pro$a$ilit& that the chosen $ox contains cash versus nothin#. ;elanie states that she ould not call off the #am$le if &ou offered her a certain /15,333 instead of her choice of $ox. ?o ever, she ould $e indifferent if /11,555 as offered in place of the ris!& #am$leH and she ould definitel& ta!e /11,551 to call off the #am$le. 'e ould descri$e ;elanie as %%%%%%%%%% in this instance. ). $ein# ris! averse B. $ein# ris! indifferent C. havin' a ris( preference <. Clive 2odne& ;e#a$uc!s offers &our friend, Fun&oun#, an interestin# #am$le involvin# #ivin# her the choice of the contents in one of t o sealed, identical"loo!in# $oxes. Gne $ox has /25,555 in cash and the second has nothin# inside. There is an e:ual pro$a$ilit& that the chosen $ox contains cash versus nothin#. Fun&oun# states that she ould not call off the #am$le if &ou offered her a certain /7,333 instead of her choice of $ox. ?o ever, she ould $e indifferent if /9,555 as offered in place of the ris!& #am$leH and she ould definitel& ta!e /9,551 to call off the #am$le. 'e ould descri$e Fun&oun# as %%%%%%%%%% in this instance. A. bein' ris( averse B. $ein# ris! indifferent C. havin# a ris! preference =. 'hich of the follo in# statements re#ardin# covariance is correct( ). Covariance al a&s lies in the ran#e "1 to N1. B. Covariance, $ecause it involves a s:uared value, must al a&s $e a positive num$er +or 6ero-. C. ,o covariances amon# returns for different securities leads to hi#h portfolio ris!. %. Covariances can ta(e on positive! ne'ative! or @ero values. 3. 'hich of the follo in# portfolio statistics statements is correct( A. A portfolioBs expected return is a simple wei'hted avera'e of expected returns of the individual securities comprisin' the portfolio. B. ) portfolio4s standard deviation of return is a simple ei#hted avera#e of individual securit& return standard deviations. C. The s:uare root of a portfolio4s standard deviation of return e:uals its variance. *. The s:uare root of a portfolio4s standard deviation of return e:uals its coefficient of variation. 15. Total portfolio ris! is %%%%%%%%%%. ). e:ual to s&stematic ris! plus nondiversifia$le ris! C. e:ual to s&stematic ris! plus unavoida$le ris! B. e:ual to avoida$le ris! plus diversifia$le ris! *. equal to systematic ris( plus diversifiable ris(

11. %%%%%%%%%% is the varia$ilit& of return on stoc!s or portfolios not explained $& #eneral mar!et movements. It is avoida$le throu#h diversification. ). 8&stematic ris! B. 8tandard deviation. C. 4nsystematic ris( *. Coefficient of variation. 12. %%%%%%%%%% is the varia$ilit& of return on stoc!s or portfolios associated ith chan#es in return on the mar!et as a hole. A. =ystematic ris( B. 8tandard deviation C. 1ns&stematic ris! *. Coefficient of variation

1.. 'hich of the follo in# indexes ould $e most the appropriate prox& to measure the return of the mar!et portfolio in the C)I;( ). *o Sones Industrial Index. B. =tandard C 0oorBs 5$$. C. 8olomon Brothers Bond Index. *. 'ilshire Cold Index. 17. The %%%%%%%%%% descri$es the linear relationship $et een expected rates of return for individual securities +or portfolios- and %%%%%%%%%%. ). characteristic lineH standard deviation B. characteristic lineH $eta C. securit& mar!et lineH standard deviation %. security mar(et lineD beta 19. The %%%%%%%%%% descri$es the relationship $et een an individual securit&4s returns and returns on the mar!et portfolio. The slope of this line is %%%%%%%%%%. ). securit& mar!et lineH $eta B. characteristic lineD beta C. securit& mar!et lineH e:ual to N1. *. characteristic lineH e:ual to N1 10. 'hich of the follo in# items descri$es an index measure of s&stematic ris!( A. Beta. B. 8tandard deviation. C. Coefficent of variation. *. Jariance. 1<. 'hich of the follo in# items is a model that descri$es the relationship $et een ris! and expected return +in this model the expected return is e:ual to the ris!"free return plus a premium $ased on the s&stematic ris! of the securit&-( ). Beta. B. Characteristic line. C. Capital asset pricin' model. *. Dfficient mar!ets model. 1=. 'hat is the $eta for an avera#e ris! securit&( 'hat is the $eta for a Treasur& $ill( A. #D $. B. 5H 1. C. Creater than 1H 1. *. 1H Creater than 1. 13. )ssume that a firm4s common stoc! can $e valued usin# the constant dividend #ro th model. )s an anal&st &ou expect that the return on the mar!et ill $e 19A and the ris!"free rate is <A. Fou have estimated that the dividend next period ill $e /1.95, the firm ill #ro at a constant 0A, and the firm $eta is 5.95. The common stoc! is currentl& sellin# for /.5.55 in the mar!et place. 'hich of the follo in# statements is correct( ). The firm4s stoc! is over priced. B. The firmBs stoc( is fairly priced. C. The firm4s stoc! is under priced. *. The firm4s stoc! cannot $e valued $ecause of missin# information. 25. 'hich form of mar!et efficienc& states that current securit& prices full& reflect all information, $oth pu$lic and private( ). 'ea!. B. 8emi"stron#. C. =tron'. 21. 'hich form of mar!et efficienc& states that current prices full& reflect the historical se:uence of prices( A. Eea(. B. 8emi"stron#. C. 8tron#. 22. 'hich form of mar!et efficienc& states that current prices full& reflect all pu$licl& availa$le information( ). 'ea!. B. =emiFstron'. C. 8tron#.