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Kindly
ensure that you number your answers correctly. Show computations for questions 37 to 45.
Send the answers via email to both rbramos@unionbankh.com and
robert_rol_ramos@dlsu.edu.ph.
1) Which of the basic financial statements is best used to answer the question, "How profitable
is the business?"
A) Balance sheet
B) Statement of shareholder's equity
C) Income statement
D) Accounts receivable aging schedule
2) Who owns the retained earnings of a public firm?
A) The IRS
B) Common stockholders
C) Bondholders
D) Preferred stockholders
3) Which of the following represents an attempt to measure the earnings of the firm's
operations over a given time period?
A) Balance sheet
B) Cash flow statement
C) Income statement
D) None of the above
4) Stock that is repurchased by the issuing company is called
A) paid in capital.
B) treasury stock.
C) retained capital.
D) par value stock.
5) Which of the basic financial statements is best used to answer the questions "Where did the
company's money come from and how was it spent over the preceding year?"
A) Balance sheet
B) Statement of shareholder's equity
C) Income statement
D) Cash flow statement
6) Which of the following parties would be interested in an analysis of the firm's financial
statements?
A) Investors
B) Creditors
C) The firm's managers
D) all of the above
7) Common size financial statements represent all figures on the financial statements
A) in inflation adjusted dollars from a base year.
B) as if all companies being compared had the same total revenue.
C) as if all companies being compared had the same total assets.

D) as a percentage of either sales or total assets.

8) The debt ratio is a measure of a firm's
A) leverage.
B) profitability.
C) liquidity.
D) efficiency.
9) Which of the following transactions does NOT affect the quick ratio?
A) Land held for investment is sold for cash.
B) Equipment is purchased and is financed by a long-term debt issue.
C) Inventories are sold for cash.
D) Inventories are sold on a credit basis.
10) Which of the following statements is FALSE?
A) A dollar received one year from now will be worth more than a dollar received today.
B) On monthly compounding loans, the annual percentage yield will be less than the nominal
or quoted rate of interest.
C) Compounding essentially means earning interest on interest on an initial balance.
D) Perpetuities pay an equal payment forever.
11)
Her cash flow at time period 0 is
A) $1,000
B) -$1,000
C) $-990
D) $1,010
12) An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years
plus $1,000 at the end of the 10th year. Her cash at time period 10 is
A) $10
B) $1,000
C) $-990
D) $1,010
13) Which of the following is the formula for compound value?
A) FVn = P(1 + i)n
B) FVn = (1 + i)/P

C) FVn = P/(1 + i)n

D) FVn = P(1 + i)-n

14) What is the present value of $150 received at the beginning of each year for 16 years? The
first payment is received today. Use a discount rate of 9%, and round your answer to the
nearest $10.
A) $1,360
B) $1,480
C) $1,250
D) $1,210

15) You purchased the stock of Sargent Motors at a price of $75.75 one year ago today. If you
sell the stock today for $89.00, what is your rate of return?
A) 35.00%
B) 12.50%
C) 17.50%
D) 25.00%
16) You have invested in a project that has the following payoff schedule:

Payoff
$40
$50
$60
$70
$80

Probability of
Occurrence
.15
.20
.30
.30
.05

What is the expected value of the investment's payoff? (Round to the nearest $1.)
A) $60 ($59)
B) $65
C) $58
D) $70
17) If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a
40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the
expected rate of return?
A) 12%
B) 13%
C) 14%
D) 15%
18) You are considering investing in a project with the following possible outcomes:
Probability of
States
Occurrence
State 1: Economic boom
15%
State 2: Economic growth
45%
State 3: Economic decline
25%
State 4: Depression
15%

Investment
Returns
16%
12%
5%
-5%

Calculate the expected rate of return for this investment.

A) 9.8%
B) 7.0%
C) 8.3%
D) 6.3%

19) Which of the following sequences is arranged in the correct order, from highest long-term
returns to lowest?
A) Small stocks, government bonds, large stocks
B) Large stocks, treasury bills, small stocks
C) Small stocks, large stocks, treasury bills
D) Government bonds, large stocks, treasury bills
20) Investments that have earned the highest rates of return over time also have
A) the lowest risk.
B) the highest standard deviation of returns.
C) the largest market capitalization.
D) the least sensitivity to inflation.

21) The difference between returns on stocks and government bonds is known as
A) the equity risk premium.
B) the risk and return tradeoff.
C) the maturity premium.
D) the risk/reward paradox.
Roddy Richards invested $12014.88 in Wolverine Meat Distributors (W.M.D.) five years ago.
The investment had yearly arithmetic returns of -9.7%, -8.1%, 15%, 7.2%, and 15.4%.
22) What is the arithmetic average return of Roddy Richard's investment?
A) 2.42%
B) 3.96%
C) 5.18%
D) 15.1%
23) What is the geometric average return of Roddy's Richard's investment?
A) 3.38%
B) 4.63%
C) 6.96%
D) 8.78%
24) Which of the following portfolios is clearly preferred to the others?

A
B
C

Expected
Return
14%
22%
18%

Standard
Deviation
12%
20%
16%

A) Investment A
B) Investment B
C) Investment C
D) Cannot be determined

25) An investor will get maximum risk reduction by combining assets that are
A) negatively correlated.
B) positively correlated.
C) uncorrelated.
D) perfectly, positively correlated.
26) A negative coefficient of correlation implies that
A) on average, returns to such assets are negative.
B) asset returns tend to move in opposite directions.
C) asset return tend to move in opposite directions.
D) None of the above because the coefficient of correlation cannot be negative.
27) The appropriate measure for risk according to the capital asset pricing model is
A) the standard deviation of a firm's cash flows.
B) alpha.
C) beta.
D) probability of correlation.
28) On any given day, a bond can be issued at
A) a discount.
B) a premium.
C) par.
D) all of the above.
29) The XYZ Company, whose common stock is currently selling for $40 per share, is expected
to pay a $2.00 dividend in the coming year. If investors believe that the expected rate of return
on XYZ is 14%, what growth rate in dividends must be expected?
A) 5%
B) 14%
C) 9%
D) 6%
30) Green Company's common stock is currently selling at $24.00 per share. The company
recently paid dividends of $1.92 per share and projects growth at a rate of 4%. At this rate,
what is the stock's expected rate of return?
A) 4.08%
B) 8.00%
C) 12.00%
D) 8.80%
31) Which of the following are typical consequences of good capital budgeting decisions?
A) The firm increases in value.
B) The firm gains knowledge and experience that may be useful in future decisions.
C) Good capital budgeting decisions help a company define its core competencies.
D) All of the above.

32) Errors in capital budgeting decisions

A) tend to average out over time.
B) decrease the firm's value.
C) are diminished because the time value of money makes future cash flows less important.
D) are easily reversed.
33) Which of the following factors is least important to capital budgeting decisions?
A) The time value of money
B) The risk-return tradeoff
C) Net income based on accrual accounting principles
D) Cash flows directly resulting from the decision
34) Which of the following is the correct equation to solve for the NPV of the project that has
an initial outlay of $30,000, followed by three years of $20,000 in incremental cash inflow?
Assume a discount rate of 10%.
A) NPV = -30,000 + (3 20,000)/(1.10)3
B) NPV = -$30,000 + $20,000/(1.10)1 + $20,000/(1.10)2 + $20,000/(1.10)3
C) NPV = -$30,000 + $20,000/(1.01).10 + $20,000/(1.02).10 + $20,000/(1.03).10
D) NPV = -$30,000 + $20,000/(1.1).10 + $20,000(1.2).10 + $20,000(1.3).10

35) If a project has a profitability index greater than 1

A) the npv will also be positive.
B) the irr will be higher than the required rate of return.
C) the present value of future cash flows will exceed the amount invested in the project.
D) all of the above.
36) Given the following annual net cash flows, determine the IRR to the nearest whole percent
of a project with an initial outlay of $1,800.
Year
1
2
3
A) 14%
B) 12%
C) 8%
D) 25%

Net Cash Flow

$1,000
$750
$500

37. Compute the expected rate of return for Intel common stock which has a 1.2 beta. The
risk free rate is 3.5% and the market portfolio (which is composed of the New York stock
exchange stocks) has an expected rate of return 16%

= + Beta
= 6 % + 1.2 (16% - 6%)
= 18%
38. Compute the expected rate of return for Acer common stock which has a 1.5 beta, the risk
free rate is 4.5% and the market portfolio which is composed of New York stock exchange

stocks has an expected rate of return of 10%.

39. Calculate the value of a bond that matures in 12 years and has a USD 1000 par value. The
coupon interest is 8% and the markets required yield to maturity on a comparable risk bond
is 12%
40. Calculate the value of a bond that matures in 10 years and has a USD 1000 part value. The
annual coupon interest rate is 9% and the markets required yield to maturity on a
comparable risk bond is 15%. What is the value of the bond if it paid interest semi-annually?

41. If Pepperdines return on equity is 16% and management plans to retain 60% of earnings
for investment purposes, what will be the firms growth rate?
g= ROE x pr
g= 16% x 0.60
g= 9.6%
42. If Stanford Corporations net income is USD 200 Mln, its common equity is USD 833 Mln,
and management plans to retain 70% of the firms earnings to finance new investments, what
will be the firms growth rate?
43. Header Motor Inc. paid SD 3.50 dividend last year. At a constant growth rate of 5%, what
is the value of the common stock if the investors require a 20% rate of return?
44. Gilliland Motor Inv paid a USD 3.75 dividend last year, If the companys return is 24%
and its retention is 25%, what is the value of the common stock if the investors require a 20%
rate of return?
45. The common stock of NCP paid USD 1.32 in dividends last year. Dividends are expected
to grow at an 8% annual rate for an indefinite number of years.
a. If your required rate of return is 10.5%, what is the value of the stock for you?

Investor's Value

=
= $1.32/(10.5%-8%)
= $1.32/0.025
= $52.8

b. Should you make the investment?

Yes. Because an annual growth of 8% would eventually