QUESTION 1

The College Board reports that the average cost of tuition and room for in-state public universities is $15,442 for the 2010-2011 school year. This annual education cost is projected to increase 6.6% annually. How much should you expect to pay for just the freshman year of college if your child begins in 12 years (2026-2027)?

a. $27,672.06

b. $32,780.47

c. $32,674.31

d. $33,249.87

QUESTION 2

You have just won the lottery and have the option of receiving $1 million today or $100,000 per year for 20 years. What is your recommendation assuming a 9% discount rate? What is your recommendation assuming a 7% discount rate?

a. Take the $1 million payout in either discount rate scenario

b. Take the annuity payout if 9% is the discount rate; take the $1 million payout if the discount rate is 7%

c. Take the $1 million payout if 9% is the discount rate; take the annuity payout if 7% is the discount rate

d. Take the $100,000 annuity payout in either discount rate scenario

QUESTION 3

Fairway Golf Corporation has a beta of 1.2. If the three-month Treasury bills currently yield 2.9 percent and the market risk premium is estimated to be 5.2 percent, what is Fairway’s cost of equity capital?

a. 5.66%

b. 8.68%

c. 9.14%

d. 8.10%

QUESTION 4

Your firm has two project options and projects the following for Project A: Net investment is $75,000 and the end-of-year cash flows are as follows:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

+20,000 -10,000 -25,000 +30,000 +40,000 +50,000 +80,000

If his required rate of return is 12%, based on the projected cash flows, which of the following valuation techniques should he rely on?

(1) Profitability Index

(2) NPV

(3) Payback

(4) EVA

a. 1 and 2

b. 1, 2 and 3

c. 1, 2 and 4

d. 2 only

QUESTION 5

Given a security with an expected return of 12.5% and a standard deviation of 18.6%, which of the following most closely describes the range of return you would expect 95% of the time?

a. 12.5% to 18.6%

b. -43.3% to 68.3%

c. -6.1% to 31.1%

d. -24.7% to 49.7%

QUESTION 6

The ABC Company, Inc. expects to pay a dividend of $1.50 at the end of the year. The dividend last period was $1.43, and the growth rate from this past year is expected to continue into the future. Given that the market rate of return is 10.2%, what is the approximate price that shares of ABC should be priced at by the market (based on the dividend discount model)?

a. $26.96

b. $29.54

c. $27.11

d. $28.28

QUESTION 7

What is the correlation coefficient if security A has a standard deviation of 15.5%, security B has a standard deviation of 26.6%, and the covariance is 1.4%?

a. 0.34

b. 0.29

c. 0.42

d. 0.06

QUESTION 8

You are considering an investment in a security with a beta of 1.4. Which of the following return on investments (ROIs) should your client earn?

a. ROI equal to 3-month Treasury Bill rate of return (i.e., risk-free rate).

b. ROI equal to the risk-free rate plus 60% of the overall market’s risk premium.

c. ROI equal to the risk-free rate plus the overall market’s risk premium.

d. ROI equal to the risk-free rate plus 140% of the overall market’s risk premium.

QUESTION 9

Financial intermediaries serve an important role in each of the following ways except for:

a. establish consumer protection laws

b. match savers and users of capital and promote funds transfer

c. introduce financial innovations that improve transfer of funds

d. reduce the amount of asymmetric information between savers and users of capital

QUESTION 10

Which of the following quantitative statistics is most appropriate for describing the total risk of a security or project in isolation (i.e., not in a portfolio context)?

a. beta

b. coefficient of variation

c. covariance

d. standard deviation

QUESTION 11

If your parents paid $180,000 for their residence 18 years ago and it is worth $420,000 today, what is the compounded annual yield on their home investment?

a. 5.56%

b. 4.82%

c. 7.65%

d. 13.33%

QUESTION 12

Radiant Company has issued a secondary offering and receives a net price of $26.50 per share. What is the implied cost of capital from the transaction given the fact that Radiant Company will pay a dividend of $2.10 per share at the end of the period, and dividends are expected to grow at a rate of 4.50% annually?

a. 8.09%

b. 10.08%

c. 12.42%

d. 3.43%

QUESTION 13

You have just paid $175,000 for an low risk investment with an expected compound annual return of 1.8%. How much will the investment be worth in 10 years?

a. $212,356

b. $175,000

c. $209,178

d. $207,900

QUESTION 14

Which of the following red flags would you find using the DuPont formula?

(1) Increased financial leverage

(2) Deteriorating profit margin

(3) Increasing Tax liabilities

(4) Deteriorating Turnover

a. 1 and 3 only

b. 1, 2, 3, and 4

c. 1, 2, and 4

d. 1 and 2 only

QUESTION 15

You have been taught that in order to expect higher returns, you need to accept increased risk. In describing this concept, what is the correct ranking of asset securities from probable “least market-price volatility, lowest expected return” to probable “highest market-price volatility, highest expected return:”

(1) Large Cap Value stock fund,

(2) Long-term Treasury/Sovereign Bonds

(3) Preferred Stock portfolio,

(4) Emerging-market mutual fund,

(5) Money market fund.

a. 3, 5, 2, 4, 1

b. 2, 3, 5, 4, 1

c. 5, 2, 3, 1, 4

d. 5, 3, 2, 1, 4

QUESTION 16

What is the return on investment (or Return on assets) for a firm that has a debt ratio of 0.65, a net profit margin of 6.5%, sales of $740,000, and a total asset turnover of 4?

a. 26%

b. 16.9%

c. 4.6%

d. 6.5%

QUESTION 17

Which of the following ratios would best be used to assess the performance of company management in increasing shareholder wealth?

a. Gross Profit Margin

b. Plowback Ratio

c. Dividend Yield

d. Return on Equity

QUESTION 18

Branjolena Corp has been growing 12% annually over the last 5 years, and the company’s dividends have reflected a 20% payout rate. However, the company is starting to mature, and its ROE is projected to drop from 15% to 12%. As a result, the company is planning to increase its payout to 30%. If the most recent EPS was $3.09, what is the projected EPS and Dividend?

a. $3.21; $.64

b. $3.50; $1.05

c. $3.35; $1.00

d. $3.46; $1.04

QUESTION 19

You are considering the purchase of some rental property. The cost of an apartment building is $700,000. The projected annual net cash flows at the end of years 1-4 are $50,000, $53,000, $56,000, and $60,000 respectively. At the end of year four you expect to sell the property for $740,000 after commissions. If the cost of capital is 10%, what is the NPV for this project?

a. -$68,210

b. $28,207

c. -$527,690

d. -$22,259

QUESTION 20

Which of the following is not consistent with the Certainty Equivalent Approach when dealing with project risk?

a. It uses the firm’s Cost of Capital (k) to discount the cash flows

b. It uses the Risk Free Rate (rf) to discount the cash flows

c. The cash flows are adjusted in the numerator

d. It is based on the guaranteed amount that an investor would accept as an alternative

**Subject Business Financial Accounting**