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1. Which of the following is true?

A random walk for stock price changes is inconsistent with observed patterns in price changes.

If the stock market follows a random walk, price changes should be highly correlated.

If the stock market is weak form efficient, then stock prices follow a random walk.

All of these.

Both If the stock market follows a random walk, price changes should be highly correlated; and If the stock market is weak form efficient, then stock prices follow a random walk.

2. You are planning a trip to Australia. Your hotel will cost you A$150 per night for five nights. You expect to spend another A$2,000 for meals, tours, souvenirs, and so forth. How much will this trip cost you in U.S. dollars given the following exchange rates?

$1,926

$2,007

$2,782

$2,856

$3,926

[(A$150´5) + A$2,000]´($1¸A$1.4278) = $1,926

3. A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What is the change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?

11.11% decrease

12.38% decrease

12.38% increase

14.13% decrease

14.13% increase

A -$129.43 or -12.38% change occurs in the price of this bond when themarket yield rises to 6% from a current yield of 4.5%

Bond price at 4.5%:

Bond Value = $50[{1-(1/1.045^12)}/.045] + ($1000/1.045^12)

BV = $50(9.12) + $589.66

BV = $455.93 + $589.66 = $1045.59

Bond price at 6%:

Bond Value = $50[{1-(1/1.06^12)}/.06] + ($1000/1.06^12)

BV = $50(8.38) + $496.97

BV = $419.19 + $496.97 = $916.16

Change in bond price = $1045.59 – $916.16 = $129.43 or 12.38%

4. Kali’s Ski Resort, Inc. stock is quite cyclical. In a boom economy, the stock is expected to return. Kali’s Ski Resort, Inc. stock is quite cyclical. In a boom economy, the stock is expected to return 30% in comparison to 12% in a normal economy and a negative 20% in a recessionary period. The probability of a recession is 15%. There is a 30% chance of a boom economy. The remainder of the time, the economy will be at normal levels. What is the standard deviation of the returns on Kali’s Ski Resort, Inc. stock?

10.05%

12.60%

15.83%

17.46%

25.04%

E(r) = (.30×.30) + (.55×.12) + (.15×-.20) = .09 + .066 – .03 = .126

Var = .30×(.30 – .126)2+ .55×(.12 – .126)2+ .15×(-.20 – .126)2= .0090828 + .0000198+ .0159414 = .025044

Std dev =√.025044 = .15825 = 15.83%

5. The Lemon Company made a credit sale of $20,000. The invoice was sent today with the terms, 3/10 net 30. This customer normally pays at the net date. If your opportunity cost of funds is 10% the expected payment is worth how much today?

$15,000

$15,657

$19,843

$20,000

None of these.

$20,000/(1.10)30/365= $19,843

6. A firm has an inventory turnover rate of 16, a receivables turnover rate of 21 and a payables turnover rate of 11. How long is the operating cycle?

37.00 days

40.19 days

42.87 days

63.08 days

73.37 days

Inventory period = 365¸16 = 22.81 days; Accounts receivable period = 365¸21 = 17.38days; Operating cycle = 22.81 + 17.38 days = 40.19 days

7. The Timberline firm expects a total cash need of $12,500 over the next 3 months. They have a beginning cash balance of $1,500, and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month.

Based on the firm’s current practice, what is the average daily cash balance (a month has 30 days)?

$50.00

$69.44

$94.44

$138.89

None of these.

Average daily cash balance = [(($12,500/3) + $1,500)/2]/30 = $94.44

8. Thornton will receive an inheritance of $500,000 three years from now. Thorton’s discount rate is 10% compounded semiannually. Which of the following values is closest to the amount that Thornton should accept today for the right to his inheritance?

$373,108.

$375,657.

$665,500.

$670,048.

None of these is within $10 of the correct answer.

EAR = (1 + r/m)m -1 = [1 + (0.1/2)]2-1 = 0.1025

PV = $500,000/(1 + 0.1025)3= $373,107.70

9. Frank’s Formals rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $400. Frank’s wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $15 on each of the 1,000 customers. The opportunity cost is 2.0% for the credit period. Should they pursue the credit check?

No, because the $15,000 cost is too high.

No, because a $400 loss is minor.

Yes, because the net gain is $30,000.

Yes, because the net gain is $45,000.

Yes, because the net gain is $60,000.

NPV of the defaulting customers = 0 – [(400)(.15)(1000)] = $-60,000

Net Gain = gain from not granting – cost of credit check = $60,000 – $15(1000) = $45,000

10. On an average day, a company writes checks totaling $1,500. These checks take 7 days to clear. The company receives checks totaling $1,800. These checks take 4 days to clear. The cost of debt is 9%. If the average daily float is $3,300, what is the net present value per day?

$-0.81

$-79.41

$-282.48

$-297.00

None of these.

NPV = $3,300/(1 + .09/365) – $3,300 = $3,299.19 – $3,300 = $-0.81

11. Winslow, Inc. is considering the purchase of a $225,000 piece of equipment. The equipment is classified as 5-year MACRS property. The company expects to sell the equipment after four years at a price of $50,000. What is the after-tax cash flow from this sale if the tax rate is 35%?

$37,036

$38,880

$46,108

$47,770

$53,892

Book value at the end of year 4 = $225,000 x (1 – .2 – .32 – .192 – .1152) = $38,880

Tax on sale = ($50,000 – $38,880) x .35 = $3,892

After-tax cash flow = $50,000 – $3,892 = $46,108

12. You are considering two independent projects both of which have been assigned a discount rate of 8%. Based on the profitability index, what is your recommendation concerning these projects?

You should accept both projects since both of their PIs are positive.

You should accept project A since it has the higher PI.

You should accept both projects since both of their PIs are greater than 1.

You should only accept project B since it has the largest PI and the PI exceeds 1.

Neither project is acceptable.

13. What is the expected return on a portfolio which is invested 20% in stock A, 50% in stock B, and 30% in stock C?

7.40%

8.25%

8.33%

9.45%

9.50%

E(r)Boom= (.20×.18) + (.50×.09) + (.30×.06) = .036 + .045 + .018 = .099

E(r)Normal= (.20×.11) + (.50×.07) + (.30×.09) = .022 + .035 + .027 = .084

E(r)Bust= (.20×-.10) + (.50×.04) + (.30×.13) = -.020 + .020 + .039 = .039

E(r)Portfolio= (.20×.099) + (.70×.084) + (.10×.039) = .02376 + .0588 + .0039 = .0825 =8.25%

14. The divident yield on Alpha’s common stock is 4.8%. The company just paid a $2.10 dividend. The rumor is that the dividend will be $2.205 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha’s stock?

10.04%

16.07%

21.88%

43.75%

45.94%

15. Given the following information, calculate the present value break-even point.

Initial investment: $2,000

Fixed costs: $2,000 per year

Variable costs: $6 per unit

Depreciation: $250 per year

Price: $20 per unit

Discount rate: 10%

Project life: 4 years

Tax rate: 34%

100 units per year

143 units per year

202 units per year

286 units per year

None of these

16. D & F, Inc. expects sales of $620, $650, $730 and $780 for the months of April through July, respectively. The firm collects 20% of sales in the month of sale, 50% in the month following the month of sale and 28% in the second month following the month of sale. The remaining 2% of sales is never collected. How much money does the firm expect to collect in the month of July?

$645

$703

$711

$742

$755 .

July collection = (.20x$780) + (.50x$730)+ (.28x$650) = $703

17. The following time period(s) is/are consistent with the bubble theory:

the stock market crash of 1929.

the stock market crash of 1972.

the stock market crash of 1987.

the stock market crash of 1929 and the stock market crash of 1987.

the stock market crash of 1929; the stock market crash of 1972; and the stock market crash of 1987.

18. The Timberline firm expects a total cash need of $12,500 over the next 3 months. They have a beginning cash balance of $1,500, and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month.

Based on the firm’s current practice, how many times during the next 3 months will the cash balance be replenished?

3.33 times

4.42 times

8.33 times

13.35 times

None of these.

Replenish Times = Cash Needs/Cash Balance = $12,500/$1,500 = 8.33 times

19. In the spot market, $1 is currently equal to £.55. The expected inflation rate in the U.K. is 4 percent and in the U.S. 3 percent. What is the expected exchange rate two years from now if relative purchasing power parity exists?

£.5391

£.5445

£.5555

£.5611

£.5667

E(S2) = £.55´[1 + (.04 – .03)]2= £.5611

20. The Bell W**e**ather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year. The company just paid its annual dividend in the amount of $1.00 per share. What is the current value of one share if the required rate of return is 9.25%?

$35.63

$38.19

$41.05

$43.19

$45.81

P4= P4 = $51.2301

P0 = + + + +

P0 = $41.05