I. MULTIPLE CHOICE (35 questions, 2 points each). Choose the one alternative that best completes the statement or answers the question.

1) In five years your oldest child will be in 8th grade, at which point you and your family plan to vacation in Europe. You

estimate that you will need $20,000 for the trip. How much do you need to set aside today if you can place your money in

an investment vehicle earning an average of 4.50% per year? 1) _______

A) $15,073 B) $16,058 C) $14,961 D) $16,049

2) Simpson Construction had sales seven years ago of $2,150,000. This year their sales hit $4,600,000. What has been

Simpson’s average annual rate of growth of sales? 2) _______

A) 11.48% B) 30.56%

C) $350,000 per year D) None of the above

3) Your friend John started college at the age of 18 with $63,450 already saved, because 18 years ago when he was born his

parents placed money into a special college savings account earning 7.25% per year. How much money did John’s parents

place into his college account? 3) _______

A) $18,000 B) $17,262 C) $5,824 D) $3,525

4) Gasoline cost $.10 per gallon in 1930. Over the next 60 years, the price rose at an average rate of 4.42% per year. Based

on this information, what was the average price of a gallon of gas in 1990? 4) _______

A) $1.34 per gallon B) $2.75 per gallon C) $2.65 per gallon D) $1.53 per gallon

5) Given the following cash flows, what is the future value at year ten when compounded at an interest rate of 12.0%?

Year 0 1 5 10

Cash Flow $4,000 $3,000 $2,000 $1,000

5) _______

A) $31,864.17 B) $10,000.00 C) $11,948.32 D) $25,267.31

6) You have saved $47,000 for college and wish to use $15,000 per year. If you use the money as an ordinary annuity and

earn 6.15% on your investment, how many years will your annuity last? Use a calculator to determine your answer.

6) _______

A) 4.27 years B) 3.59 years C) 3.13 years D) 3.36 years

7) What is the present value of a lottery paid as an annuity due for twenty years if the cash flows are $250,000 per year

and the appropriate discount rate is 7.50%? 7) _______

A) $2,739,769.55 B) $2,548,622.84 C) $5,000,000.00 D) $3,186,045.39

8) You just won a lottery – CONGRATULATIONS! Your parents have always told you to plan for the future, so since you

already have a well-paying job you decide to invest rather than spend your lottery winnings. The payment schedule from

the lottery commission is $100,000 after taxes at end of year one and 19 more payments of exactly $100,000 after taxes in

equal annual end-of-the-year deposits (i.e., the first of the next 20 deposits is one year from today) into your account

paying 7% compounded annually. How much money will be in your account after the last deposit is made? 8)


A) $2,000,000.00 B) $4,486,517.68 C) $3,637,896.48 D) $4,099,549.23

9) What is the present value today of an ordinary annuity cash flow of $3,000 per year for forty years at an interest rate of

6.0% per year if the first cash flow is six years from today? 9) _______

A) $33,730.40 B) $45,138.89 C) $1,327,777.67 D) $120,000.00

10) Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 5.00%. What is your

investment worth in one year? 10) ______

A) $1,500.95 B) $1,050.95 C) $1,025.00 D) $1,025.27

11) Ten years ago Bacon Signs Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each. Since

then, interest rates in general have risen and the yield to maturity on the Bacon bonds is now 9%. Given this information,

what is the price today for a Bacon Signs bond? 11) ______

A) $901.77 B) $1.085.59 C) $919.39 D) $1,000

12) Benson Biometrics Inc., has outstanding $1,000 face value 8% coupon bonds that make semiannual payments, and

have 14 years remaining to maturity. If the current price for these bonds is $987.24, what is the annualized yield to

maturity? 12) ______

A) 8.00% B) 8.64% C) 8.15% D) 8.38%

13) RC Inc. just issued zero-coupon bonds with a par value of $1,000. If the bond has a maturity of 15 years and a yield to

maturity of 10% compounded semi-annually, what is the current price of the bond if it is priced in the conventional

manner? 13) ______

A) $239.39

B) $231.38

C) $1,000

D) This question cannot be answered because the coupon payment information is missing.

14) Endicott Enterprises Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual

coupon rate is 14% and the current yield to maturity is 15%, what is the firm’s current price per bond? 14) ______

A) $934.20 B) $934.34 C) $466.79 D) $1,000.00

15) The Belgium Bike Company just paid an annual dividend of $1.12. If you expect a constant growth rate of 4% and

have a required rate of return of 13%, what is the current stock price according to the constant growth dividend model?

15) ______

A) $12.94

B) $13.46

C) $12.44

D) There is not enough information to answer this question.

16) In a stream of past dividends, the initial dividend is $0.75 and the most recent dividend is $1.25. The number of years

between these two dividends (n) is 8 years. What is the average growth rate during this eight-year period? Use a

calculator to determine your answer. 16) ______

A) 6.72% B) 6.59% C) 6.69% D) 6.62%

17) Andre is considering an investment in Pollard’s Inc. and has gathered the following information. What is the expected

return for a share of the firm’s stock?

State of the Economy Probability of the State

Conditional Expected Return

Vandelay Inc.

Recession .20 -10%

Steady .50 10%

Boom .30 45%

17) ______

A) 16.50% B) 15.00% C) 45.00% D) 65.00%

18) Richard owns the following portfolio of securities. What is the beta for the portfolio?

Company Beta Percent of Portfolio

Apple 2.50 25%

Wells Fargo 0.65 50%

Ebay 1.70 25%

18) ______

A) 1.62 B) 0.65 C) 1.38 D) 1.00

19) Assume the following information about the market and JumpMasters’ stock. JumpMasters’ beta = 1.50, the risk-free

rate is 3.50%, the market risk premium is 10.0%. Using the SML, what is the expected return for JumpMasters’ stock?

19) ______

A) 13.50% B) 18.50% C) 7.50% D) 27.00%

20) Alice purchased Hampton Industries Inc. stock for $14.65 and sold it 6 months later for $17.38 after receiving a $0.25

dividend. What was Alice’s holding period return (HPR), Annual Percentage Rate (APR), and Effective Annual Rate

(EAR)? 20) ______

A) 20.34%, 40.68%, 44.82% B) 17.15%, 34.29%, 37.23%

C) 18.63%, 37.27%, 40.74% D) 20.34%, 40.68%, 9.70%

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