Sample Questions for Test #2

Sample Questions for Test #2

Finance 450

Fall 2001

1. An investment in a coupon bond will provide the investor with a return equal to the bond's yield to maturity at the time of purchase if:

a. the reinvestment rate is the same as the bond's yield to maturity

b. the bond is not called for redemption at a price that exceeds its par value

c. all sinking fund payments are made in a timely fashion over the life of the issue

d. the inflation rate is the same over the life of the issue

e. the issuing corporation does not default on the bond

2. An investment in a coupon bond will provide the investor with a return equal to the bond's yield to maturity at the time of purchase if:

a. the reinvestment rate is the same as the bond's yield to maturity

b. the bond is not called for redemption at a price that exceeds its par value

c. all sinking fund payments are made in a timely fashion over the life of the issue

d. the inflation rate is the same over the life of the issue

e. the issuing corporation does not default on the bond

3. Merck is currently paying a dividend of $2. Its high dividend growth rate of 12% next year will drop to 7% for the foreseeable future. The discount rate of Merck is 13%. What is the stock price of Merck?

a. $37.33

b. $38.15

c. $33.33

d. $40.25

e. $42.68

4. According to the constant growth model:

a. the value of a stock depends on the holding period of an investor

b. the higher the discount rate, the higher the stock price

c. the value of a stock is a function of its expected growth rate in dividends

d. the larger the holding period, the higher the stock price

e. the growth rate should be larger than the discount factor

5. Significant criteria for identifying stock market winners include:

a. price earnings ratio

b. price-to-book ratio

c. beta

d. standard deviation

e. both a and c

6. Tellabs is not expected to pay dividends until three years from now. The dividend is then expected to be $2 per share, the dividend payout ratio is expected to be 40%, and the return on equity is expected to be 15%. If the required rate of return is 12%, the value of Tellabs stock today is approximately:

a. $53

b. $59

c. $64

d. $47

e. $39

7. Suppose the U.S. government imposes a new national sales tax of three cents from each dollar of purchase. The total taxes raised are $1.5 billion, and consumers reduce their spending by $9 billion. The government increases spending by $16 billion on various activities. The net change in GDP is:

a. +$10 billion

b. -$9 billion

c. +$15 billion

d. -$1 billion

e. -$10 billion

8. If the Federal Reserve wanted to reduce the supply of money as part of an anti-inflation policy, it might:

a. increase the reserve requirements

b. buy U.S. securities on the open market

c. lower the discount rate

d. buy U.S. securities directly from the Treasury

e. decrease the reserve requirement

9. Which of the following is not true about LIFO?

a. The goal of the LIFO method is to better align the revenues with current costs during inflation.

b. The LIFO method bases the cost of goods sold on the most recent costs incurred.

c. The LIFO method overstates earnings in periods of high inflation.

d. The LIFO method produces the lowest taxable profits.

e. All of the above statements are true.

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Scenario 21-1

Cash payments for interest $(12)

Retirement for common stock $(32)

Cash payments to merchandise suppliers $(85)

Purchase of land $ (8)

Sale of equipment $ 30

Payments of dividends $(37)

Cash payment for salaries $(35)

Cash collection from customers $260

Purchase of equipment $(40)

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10. According to the statement of cash flows and using the data of Scenario 21-1, cash flows from investing activities are:

a. -$67

b. -$48

c. $28

d. -$10

e. -$18

Answer Key

Sample Questions for Test #2

Finance 450

Fall 2001

> a

Levy16 Ch 16 #26 (MC #11) REF: CFA related DIF: 4

> a

Levy16 Ch 16 #26 (MC #11) REF: CFA related DIF: 4

> a

Levy18 Ch 18 #32 (MC #17) DIF: 4

> c

Levy18 Ch 18 #16 (MC #1) DIF: 3

> b

Levy19 Ch 19 #16 (MC #1) DIF: 4

> a

Levy19 Ch 19 #33 (MC #18) REF: CFA related DIF: 4

> e

Levy20 Ch 20 #26 (MC #11) DIF: 3

> a

Levy20 Ch 20 #32 (MC #17) REF: CFA related DIF: 3

> c

Levy21 Ch 21 #18 (MC #3) DIF: 4

10.

> e

Levy21 Ch 21 #33 (MC #18) REF: CFA related DIF: 4