1- Currently, the Dow Jones Industrial Average is computed by _________.
A. adding the prices of 30 large “blue-chip” stocks and dividing by 30
B. calculating the total market value of the 30 firms in the index and dividing by 30
C. measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day
D. adding the prices of 30 large “blue-chip” stocks and dividing by a divisor adjusted for stock splits and large stock dividend
2- Which of the following is not a true statement regarding municipal bonds?
A. A municipal bond is a debt obligation issued by state or local governments.
B. A municipal bond is a debt obligation issued by the federal government.
C. The interest income from a municipal bond is exempt from federal income taxation.
D. The interest income from a municipal bond is exempt from state and local taxation in the issuing state
3- _____________ is a promise of future payment issued by a firm and guaranteed by a bank that is used to finance international trade with typical maturities ranging from one to six months.
A.A negotiable certificate of deposit (NCD)
B.A repurchase agreement
C.Commercial paper
D.A banker’s acceptance
E.none of the above
4- A (n) ________________ is an extra dividend declared by the firm over and above its regular dividend payout.
A. Special dividend
B. Supplemental dividend
C. Extra-large dividend
D. Treasury dividend
E. None of the above
5-Under firm-commitment underwriting, the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price.
A. Red herring
B. Issuing company
C. Initial stockholder
D. Underwriter
6- Which of the following is NOT a financial intermediary?
A. New York Stock Exchange
B. Washington Savings and Loan
C. First National City Bank
D. Merchants Savings Bank
7- What are financial markets, where debt securities with maturities of one year or less are issued and traded, called?
A. Money markets
B. Capital markets
C. Primary markets
D. Secondary markets
8-Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are clear indication that the bonds can accurately be defined as being issued:
A. at par.
B. in registered form.
C. in street form.
D. as debentures.
E. as callable.
9-A sinking fund is managed by a trustee for which one of the following purposes?
A. Paying interest payments
B. Early bond redemption
C. Converting bonds into equity securities
D. Paying preferred dividends
E. Reducing coupon rates
10- Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
A. Market interest rates rise sharply.
B. Market interest rates decline sharply.
C. The company’s financial situation deteriorates significantly.
D. Inflation increases significantly.
E. The company’s bonds are downgraded.
11- The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is
A. the Federal Reserve System.
B. the United States Treasury.
C. the U.S. Gold Commission.
D. the House of Representatives.
E. none of the above.
12- You have savings accounts at two separately FDIC insured banks. At one of the banks your account has a balance of $150,000 and at the other bank the account balance is $60,000. If both banks fail, you will receive:
13-Complete the following statement. Interest rates on Greek Sovereign Bonds are higher than on German Sovereign Bonds. One possible explanation may be that:
A. There is a higher demand for Greek Sovereign Bonds than there is for German Sovereign Bonds.
B. Greek Sovereign Bonds are more liquid than German Sovereign Bonds.
C. Greek Sovereign Bonds are more risky than German Sovereign Bonds.
D. There is a lower demand for German Sovereign Bonds than there is for Greek Sovereign Bonds.
14- The relationship between interest rates and the time to maturity for debt instruments of comparable quality is called which of the following?
A. Default risk premium
B. Liquidity premium
C. Term structure of interest rates
D. Term structure of nonmarketable government securities
15- Debt instruments subject their owners to risk from
1. loss of purchasing power
2. higher credit ratings
3. default
A.
1 and 2
B.
1 and 3
C.
2 and 3
D.
1, 2, and 3
16-Which of the following dates is used to determine the names of shareholders who will receive a dividend payment?
A. Ex-Rights date
B. Ex-Dividend date
C. Date of record
D. Date of payment
E. Declaration date
17- If the reserve requirement for demand deposits is 10 percent, what is the maximum change in the money supply that the banking system can create if IBM borrows $1,000,000 from an insurance company?
A. $10,000,000
B. $1,000,000
C. $9,000,000
D. None of the above
18- Why are the interest rates of U.S Treasury notes less than the interest rates of equivalent corporate bonds?
A. The U.S. government has a high credit spread.
B. There is significant risk that the U.S. government will default.
C. U.S. Treasury securities are widely regarded to be risk-free.
D. U.S. Treasury securities are generally used to determine interest rates
19-A government bond was quoted yesterday at 102:16 while today’s quote is 102:50. What is the change in the value of the bond that has a face value of $1000?
20- Suppose Twin Corporation is planning to pay a $2 per share dividend to its common stockholders. If the common stock price after the ex-dividend date is $50, what was the stock price before the ex-dividend date?
21- Bonds which are unsecured obligations of a company are called:
A. Indentures
B. Debentures
C. Mortgage bonds
D. Bearer bonds
22- George owned 100 shares of GIA stock which was selling for $1.50 per share when the company declared a 1 for 10 reverse split. After the split, George owned:
A.10,000 shares worth approximately $1.50 per share
B.10 shares worth $15 per share
C.10,000 shares worth app. $0.15 per share
D.100 shares worth app. $1.50 per share
23-Tio’s Flowers has accounts receivable of $4,511, inventory of $1,810, sales of $138,609, and cost of goods sold of $64,003. How many days does it take the firm to sell its inventory and collect the payment on the sale assuming that all sales are on credit?
A. 11.88 days
B. 22.20 days
C. 16.23 days
D. 14.50 days
E. 18.67 days
24-An important and carefully regulated piece of information that details the issuer’s finances and must be provided to each buyer of the security is _______________.
A. the IPO
B. the due diligence
C. the prospectus
D. the index
25- If the price of the European euro is $1.25, how many euros are necessary to purchase $1.00?
26- The Federal Reserve may contract the money supply by
1. selling securities
2. buying securities
3. raising reserve requirements
4. lowering reserve requirements
A.
1 and 3
B.
1 and 4
C.
2 and 3
D.
2 and 4
27-The Fed shares its depository examining functions with:
A. the Federal Savings and Loan Insurance Corporation
B. the FDIC, Comptroller of the Currency, and state agencies
C. Only the Comptroller of the Currency
D. National Credit Union administration and the FDIC
28-A bond that is an unsecured obligation of the issuer-in other words, there are no specific assets pledged as collateral in case the issuer cannot repay the bondholders, is called
A. An equipment trust certificate.
B. An indenture.
C. A first mortgage bond.
D. A debenture
E. None of the above
29-This type of bond can be exchanged for a stated number of shares of the issuer’s common stock.
A. Extendable bond
B. Convertible bond
C. Callable bond
D. Puttable bond
30- A firm that is already public wants to issue additional shares of common stock. It can use this process to issue the new shares:
A. Rights offering
B. Shelf registration
C. Either a rights offering or shelf registration
D. Dutch auction
PART II SHORT ESSAY QUESTIONS: (15 POINTS)
Each question is worth 1.5 point.
1-What are the differences between monetary policy and fiscal policy. Briefly explain.
2- Briefly explain the differences between preferred and common stock.
3-Briefly describe the types of risk faced by investors in domestic bonds. Indicate the additional risks associated with nondomestic bonds.
4- “The Fed is guided by a dual mandate.” What does that sentence mean? Briefly discuss.
5- What is Quantitative Easing? How does it work and what are the consequences of implementing it? How many countries have been implementing it and have they been successful? Please briefly discuss.
6-What is meant by ‘default risk” and how do investors respond to it?
7-Briefly discuss how many monetary policy tools that Federal Reserve has under their disposal and how they use them.
8-Knowing what we know so far about bonds, common stock, and preferred stock, which characteristics do you like about each? Which type of security would you want to invest in today?
9- Let’s assume energy prices are forecast to go higher. How would this affect your decision to purchase each of these stocks?
a. ExxonMobil
b. American Airlines
c. Ford Motor Company
d. Archer Daniels Midland, a food processor
10- If the income tax exemption on municipal bonds were abolished, what would happen to the interest rates on these bonds? What effect would the change have on interest rates on U.S. Treasury securities?
PART III. PROBLEMS: (60 POINTS)
Each question is worth the same points.
1-You purchase a high-yield, junk bond for $1,000 that pays $140 annually. After buying the bond, yields decline and you are able to reinvest the interest at only 9 percent. You reinvest all the interest payments. How much will you have when the bond is retired after twelve years? What was the annual return you earned on this investment?
2- A financial analyst recommends purchasing CSZ at $32.49. The stock pays a $1.50 dividend that is expected to grow annually at 4%. If you want to earn 10 percent on your funds, is this a good buy based on the dividend-growth model?
3-Michael Cool’s employer offers its workers an optional two-month unpaid vacation after 7 years of service to the firm, who just started working for the firm, plans to spend his vacation touring Europe at an estimated cost of $24,000. To finance his trip, Robert plans to make an annual deposit of $2,500 into a savings account at the end of the next seven years (first deposit will occur one year from today. The account pays 8% annual interest rate,
a. Will Michael’s account balance in seven years be enough to pay for his trip?
b. Suppose Michael increases his annual deposit to $2,700. How large will his account balance be in seven years?
4- The Robinson Company has the following current assets and current liabilities for these two years:
20192020
Cash and marketable securities$50,000$50,000
Accounts receivable300,000350,000
Inventories350,000500,000
Total current assets$700,000$900,000
Accounts payable$200,000$250,000
Bank loan0$150,000
Accruals$150,000$200,000
Total current liabilities$350,000$600,000
a. Compare the current ratios between the two years.
b. Compare the acid test ratios between 2019 and 2020. Comment on your findings.
5- You purchased 200 shares of ABC stock on July 15th. On July 20th, you purchased another 100 shares and then on July 22st you purchased your final 200 shares of ABC stock. The company declared a dividend of $1.10 a share on July 5th to holders of record on Friday, July 23rd. The dividend is payable on July 31st. How much dividend income will you receive on July 31st from ABC?
6-Dyson Manufacturing Company had the following financial statement results for last year. Net sales were $1.2 million with net income of $90,000. Total assets at year-end amounted to $900,000.
a. Calculate Dyson’s asset turnover ratio and its profit margin.
b. What is Dyson’s rate of return on assets.
7- EZ Marketing Inc., has two bond issues outstanding, each with a par value of $1,000. Information about each is listed below. Suppose market interest rise 2 percentage point across the yield curve. What will be the change in price for each of the bonds? Does this tell us anything about the relationship between time to maturity and interest rate risk? (Bonds make annual coupon payments)
Bond A: 5 years to maturity, 8 % coupon, market interest rate is 9 percent.
Bond B: 12 years to maturity, 8% coupon, market interest rate is 9 percent
8-An investor with a required return of 10 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows:
MCDKFCW
Current Earnings$2.00$3.00$6.50
Current Dividend$1.20$2.80$7.00
Expected annual growth rate in dividends 5%3%-2%
and earnings
Current share prices$25$48$75
a. What is the maximum price that the investor should pay for each stock based on the dividend-growth model?
b. If the investor does buy stock MCD, what is the implied percentage return?
c. If the appropriate P/E ratio is 12, what is the maximum price the investor should pay for each stock? Would your answers be different if the appropriate P/E were 7?
9-JKM Inc., has a market value equal to its book value. Currently, the firm has excess cash of $9000, other assets of $30,000 and equity of $15,000. The firm has 1,200 shares outstanding and net income of $1000.JKM Inc., has decided to spend one-third of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?
10- The zero-coupon bonds of D&L Movers have a market price of $320, a face value of $1,000, and a yield to maturity of 9 percent. How many years is it until these bonds mature? (Nearest whole year)
11- A $1,000 face value bond issued by the Purdue Company currently pays total annual interest of $80 per year and has a 15-year life.
a-What is the present value, or worth, of this bond if investors are willing to accept a 10 percent annual rate of return on bonds of similar quality bond?
b. How would your answer change is the bond makes semi-annual payments?
c-How would your answer in (a) change if, one year from now, investors only required a 6 percent annual rate of return on bond investments similar in quality to the Purdue bond?
d-Suppose the original bond can be purchased for $925. What is the bond’s yield to maturity?
12- Jeff bought 100 shares of stock for $30.00 per share on 70% margin. Assume Jeff holds the stock for one year and that his interest costs will be $45 over the holding period. Jeff also received dividends amounting to $0.30 per share. Ignoring commissions, what is his percentage return on invested capital if he sells the stock for $34 a share?
13- An investor purchased on margin BMI computer for $30 a share. The stock’s price subsequently increased to $50 a share at which time the investor sold the stock. If the margin requirement is 60 percent and the interest rate on borrowed funds was 7 percent, what would be the percentage earned on the investor’s fund (excluding commissions)? What would have been return if the investor had not bought the stock on margin?
14- You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $400,000 today or receive payments of $16,000 a year for 15 years. You can earn 6 percent on your money. Which option should you take and why?
15- Experts say that the baby boom generation (born 1946-1960) cannot count on a company pension or Social Security benefits to provide a comfortable retirement. It is recommended that they start to save regularly and early. Michael, a baby boomer, has decided to deposit $3000 every year in an account that pays 12% compounded semiannually for 15 years.
a) How much money will be in the account at the end of the 15 years?
b) Suppose Michael has determined he needs to accumulate $250,000 from this annuity. What rate would achieve this goal?
c) If he cannot get the higher rate, what amount would his payments need to be in order to achieve the goal?
16-What is the nation’s trade balance on its current account and capital account given the following information? Is the nation experiencing a cash (outflow) in its current account and capital account? Was there a net currency inflow or outflow? Please prepare a table for both current account and capital account.
Imports:$206
Exports:250
Direct investment abroad:34
Foreign investments in the country:16
Foreign purchases of domestic securities:33
Purchases foreign securities;87
Net income from foreign investments;71
Government spending abroad:33
17-Two stocks each pay a $1 dividend that is growing annually at 4 percent. Stock A’s beta = 1.3; stock B’s beta = 0.8.
a. Which stock is more volatile?
b. If Treasury bills yield 2 percent and you expect the market to rise by 8 percent, what is your risk-adjusted required return for each stock?
c. Using the dividend-growth model, what is the maximum price you would be willing to pay for each stock?
d. Why are their valuations different?
18-Mercier Corporation’s stock is selling for $95. It has just paid a dividend of $5 a share. The expected growth rate in dividends is 8 percent.
a. What is the required rate of return on this stock?
b. Using your answer to (a), suppose Mercier announces developments that should lead to dividend increases of 10 percent annually. What will be the new value of Mercier’s stock?
c. Again using your answer to (a), suppose developments occur that leave investors expecting that dividends will not change from their current levels in the foreseeable future. Now what will be the value of Mercier stock?
19-A company whose stock is selling for $45 has the following balance sheet:
Assets $32,000 Liabilities $10,000
Common stock 6,000
($6 par; 1,000 shares issued)
Additional paid-in capital 2,000
Retained earnings 14,000
a. Construct a new balance sheet showing a 3 for 1 stock split. What is the new price for the stock?
b. What would be the balance sheet if the firm paid a 10 percent stock dividend (instead of the stock split)?
20- A firm has the following preferred stocks outstanding:
PFD A: $40 annual dividend, $1,000 par value, no maturity
PFD B: $95 annual dividend, $1,000 par value, maturity after twenty-five years
If comparable yields are 9 percent, what should be the price of each preferred stock?
21- What is the value of a common stock if:
a. the firm’s earnings and dividends are growing annually at 4 percent, the current dividend is $1.32, and investors require 8 percent return on investments in common stock?
b. What is the value of this stock if you add risk to the analysis and the firm’s beta coefficient is 0.8, the risk-free rate is 1.5 percent, and the return on the market is 8.5 percent?
c. If the price of the stock is $35, what is the rate of return offered by the stock? Should the investor acquire this stock?
22- An investor buys a $1,000, 20-year 7 percent (interest paid annually) bond at par. After five years have passed, interest rates are 10 percent. How much did the investor lose on the purchase of the bond?
23- You are considering purchasing the preferred stock of a firm but are concerned about its capacity to pay the dividend. To help allay that fear, you compute the times-preferred-dividend-earned ratio for the past three years from the following data taken from the firm’s financial statement:
Year201820192020
Operating Income$12,000,000$ 15,000,000$ 17,000,000
Interest $3,000,000 5,900,000 11,000,000
Taxes 4,000,000 5,400,000 4,000,000
Preferred dividends 1,000,000 1,000,000 1,500,000
Common dividends 3,000,000 2,000,000-
What does your analysis indicate about the firm’s capacity to pay preferred stock dividends for these 3 years?
