Description
Multiple Choice
Identify the choice
that best completes the statement or answers the question.
1) Ken Williams Ventures’ recently issued bonds that mature in 15
years. They have a par value of $1,000 and an annual coupon of 6%. If the
current market interest rate is 8%, at what price should the bonds sell?
A. 
$801.80 
B. 
$814.74 
C. 
$828.81 
D. 
$830.53 
E. 
$847.86 
2) Brown Enterprises’ bonds currently sell for $1,025. They have a
9year maturity, an annual coupon of $80, and a par value of $1,000. What is
their yield to maturity?
A. 
6.87% 
B. 
7.03% 
C. 
7.21% 
D. 
7.45% 
E. 
7.61% 
3) Kholdy Inc’s bonds currently sell for $1,275. They pay a $120
annual coupon and have a 20year maturity, but they can be called in 5 years at
$1,120. Assume that no costs other than the call premium would be incurred to
call and refund the bonds, and also assume that the yield curve is horizontal,
with rates expected to remain at current levels on into the future. What is the
difference between the bond’s YTM and its YTC?
A. 
1.48% 
B. 
1.54% 
C. 
1.68% 
D. 
1.82% 
E. 
1.91% 
4) A 20year, $1,000 par value bond has a 9% annual coupon. The bond
currently sells for $925. If the yield to maturity remains at its current rate,
what will the price be 5 years from now?
A. 
$933.09 
B. 
$941.86 
C. 
$951.87 
D. 
$965.84 
E. 
$978.40 
5) Which of the following statements is CORRECT?
A. 
The shorter the time to maturity, the 
B. 
The longer the time to maturity, the 
C. 
The time to maturity does not affect 
D. 
You hold a 10year, zero coupon, bond 
E. 
You hold a 10year, zero coupon, bond 
6) Which of the following events would make it more likely that a
company would choose to call its outstanding callable bonds?
A. 
Market interest rates decline sharply. 
B. 
The company’s bonds are downgraded. 
C. 
Market interest rates rise sharply. 
D. 
Inflation increases significantly. 
E. 
The company’s financial situation 
7) Which of the following would be most likely to increase the
coupon rate that is required to enable a bond to be issued at par?
A. 
Adding a call provision. 
B. 
Adding additional restrictive 
C. 
Adding a sinking fund. 
D. 
The rating agencies change the bond’s 
E. 
Making the bond a first mortgage bond 
8) A 12year bond has an annual coupon rate of 9%. The coupon rate
will remain fixed until the bond matures. The bond has a yield to maturity of
7%. Which of the following statements is CORRECT?
A. 
The bond is currently selling at a 
B. 
If market interest rates decline, the 
C. 
If market interest rates remain 
D. 
If market interest rates remain 
E. 
The bond should currently be selling 
9) Which of the following statements is CORRECT?
A. 
All else equal, if a bond’s yield to 
B. 
All else equal, if a bond’s yield to 
C. 
If a bond’s yield to maturity exceeds 
D. 
If a bond’s yield to maturity exceeds 
E. 
If a bond’s required rate of return 
10) A bond that matures in 12 years has a 9% semiannual coupon and a
face value of $1,000. The bond has a nominal yield to maturity of 8%. What is
the price of the bond today?
A. 
$ 
B. 
$ 
C. 
$1,073.99 
D. 
$1,075.36 
E. 
$1,076.23 
11) Niendorf Corporation’s stock has a required return of 13.00%, the
riskfree rate is 7.00%, and the market risk premium is 4.00%. Now suppose
there is a shift in investor risk aversion, and the market risk premium
increases by 2.00%. What is Niendorf’s new required return?
A. 
14.00% 
B. 
15.00% 
C. 
16.00% 
D. 
17.00% 
E. 
18.00% 
12) Assume that you are the portfolio manager of the Delaware Fund, a
$4 million mutual fund that contains the following stocks:

Stock 
Amount 
Beta 

A 
$ 400,000 
1.50 

B 
$ 600,000 
0.50 

C 
$1,000,000 
1.25 

D 
$2,000,000 
0.75 
The required rate of return in the market is 14.00% and the
riskfree rate is 6.00%. What rate of return should investors expect (and
require) on their investment in this fund?
A. 
10.90% 
B. 
11.50% 
C. 
12.10% 
D. 
12.70% 
E. 
13.30% 
13) Which of the following statements is CORRECT? (Assume that the
riskfree rate is a constant.)
A. 
If the market risk premium increases 
B. 
If the market risk premium increases 
C. 
If the market risk premium increases 
D. 
The effect of a change in the market 
E. 
The effect of a change in the market 
14) Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of
the following statements must be true about these securities? (Assume
the market is in equilibrium.)
A. 
When held in isolation, Stock A has 
B. 
Stock B would be a more desirable 
C. 
Stock A would be a more desirable 
D. 
In equilibrium, the expected return on 
E. 
In equilibrium, the expected return on 
15) Which of the following statements best describes what would be
expected to happen as you randomly select stocks and add them to your
portfolio?
A. 
Adding more such stocks will reduce 
B. 
Adding more such stocks will reduce 
C. 
Adding more such stocks will increase 
D. 
Adding more such stocks will reduce 
E. 
Adding more such stocks will have no 
16) Bob has a $50,000 stock portfolio with a beta of 1.2, an expected
return of 10.8%, and a standard deviation of 25%. Becky has a $50,000 portfolio
with a beta of 0.8, an expected return of 9.2%, and her standard deviation is
also 25%. The correlation coefficient, r, between Bob’s and Becky’s portfolios
is zero. Bob and Becky are engaged to be married. Which of the following best
describes their combined $100,000 portfolio?
A. 
The combined portfolio’s expected 
B. 
The combined portfolio’s expected return 
C. 
The combined portfolio’s beta will be equal 
D. 
The combined portfolio’s standard 
E. 
The combined portfolio’s standard 
17) The riskfree rate is 5%. Stock A has a beta= 1.0 and Stock B has
a beta= 1.4. Stock A has a required return of 11%. What is Stock B’s
required return?
A. 
12.4% 
B. 
13.4% 
C. 
14.4% 
D. 
15.4% 
E. 
16.4% 
18) Ripken Iron Works faces the following probability distribution:



Stock’s 

State of 
Probability of 
Return if 

the Economy 
State Occurring 
State 

Boom 
0.25 
25% 

Normal 
0.50 
15 

Recession 
0.25 
5 
What is the coefficient of variation on the company’s stock?
A. 
0.06 
B. 
0.47 
C. 
0.54 
D. 
0.67 
E. 
0.71 
19) A stock just paid a dividend of $1. The required rate of
return is r_{s}= 11%, and the constant growth rate is 5%. What is the current
stock price?
A. 
$15.00 
B. 
$17.50 
C. 
$20.00 
D. 
$22.50 
E. 
$25.00 
20) The Lashgari Company is expected to pay a dividend of $1
per share at the end of the year, and that dividend is expected to grow at a
constant rate of 5% per year in the future. The company’s beta is 1.2, the
market risk premium is 5%, and the riskfree rate is 3%. What is the company’s
current stock price?
A. 
$15.00 
B. 
$20.00 
C. 
$25.00 
D. 
$30.00 
E. 
$35.00 
21) You must estimate the intrinsic value of Gallovits Technologies’
stock. Gallovits’s endofyear free cash flow (FCF) is expected to be $25
million, and it is expected to grow at a constant rate of 8.5% a year
thereafter. The company’s WACC is 11%. Gallovits has $200 million of longterm
debt plus preferred stock, and there are 30 million shares of common stock
outstanding. What is Gallovits’ estimated intrinsic value per share of common
stock?
A. 
$22.67 
B. 
$24.00 
C. 
$25.33 
D. 
$26.67 
E. 
$28.00 
22) The P. Born Company’s last dividend was $1.50. The dividend growth
rate is expected to be constant at 20% for 3 years, after which dividends are
expected to grow at a rate of 6% forever. If Born’s required return (r_{s})
is 13%, what is the company’s current stock price?
A. 
$25.16 
B. 
$27.89 
C. 
$28.26 
D. 
$30.34 
E. 
$32.28 
23) If a stock’s expected return exceeds its required return, this
suggests that
A. 
The stock is experiencing supernormal 
B. 
The stock should be sold. 
C. 
The company is probably not trying to 
D. 
The stock is probably a good buy. 
E. 
Dividends are not being declared. 
24) Stock A has a beta of 1.1 and Stock B has a beta of 0.9. The
market risk premium is 6%, and the riskfree rate is 6.3%. Both stocks have a
constant dividend growth rate of 7% a year. If the market is in equilibrium,
which of the following statements is CORRECT?
A. 
Stock A must have a higher dividend 
B. 
Stock A must have a higher stock price 
C. 
Stock B’s dividend yield equals its 
D. 
Stock B must have the higher required 
E. 
Stock B could have the higher expected 
25) Cartwright Brothers’ stock is currently selling for $40 a share.
The stock is expected to pay a $2 dividend at the end of the year. The dividend
growth rate is expected to be a constant 7% per year, forever. The riskfree
rate and market risk premium are each 6%. What is the stock’s beta?
A. 
1.06 
B. 
1.00 
C. 
2.00 
D. 
0.83 
E. 
1.08 
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