Holding all other variables constant, an increase in the interest rate will cause ________ to decrease.

a. Future values

b. Annuity payments

c. Present values

d. Growth rates

Ques. 22) You have just calculated the present value of the expected cash flows of a potential investment. Management thinks your figures are too low. Which of the following actions would increase the present value of your cash flows?

a. assume a longer stream of cash flows of the same amount

b. decrease the discount rate

c. increase the discount rate

d. a and b

Ques. 23) Ed Sloan wants to withdraw $25,000 (including principal) from an investment fund at the end of each year for five years. How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually?

a. $25,000 times the future value of a 5-year, 10% ordinary annuity

of 1.

b. $25,000 divided by the future value of a 5-year, 10% ordinary

annuity of 1.

c. $25,000 times the present value of a 5-year, 10% ordinary annuity

of 1.

d. $25,000 divided by the present value of a 5-year,10% ordinary

annuity of 1.

Ques. 24) What amount will be in a bank account three years from now if $5,000 is invested each year for four years with the first investment to be made today?

a. ($5,000 x 1.260) + ($5,000 x 1.166) + ($5,000 x 1.080) + $5,000

b. $5,000 x 1.360 x 4

c. ($5,000 x 1.080) + ($5,000 x 1.166) +($5,000 x 1.260) +

d. ($5,000 x 1.360)

e. $5,000 x 1.080 x 4

Ques. 25) On January 1, 2004, Carly Company decided to begin accumulating a fund for asset replacement five years later. The company plans to make five annual deposits of $30,000 at 9% each January 1 beginning in 2004. What will be the balance in the fund, within $10, on January 1, 2009 ( one year after the last deposit)? The following 9% Interest factors may be used.

Present Value of Ordinary Annuity Future Value of Ordinary Annuity

4 periods 3.2397 4.5731

5 periods 3.8897 5.9847

6 periods 4.4859 7.5233

a. $195,699

b. $179,541

c. $163,500

d. $150,000

Ques. 26) Your uncle promises to give you $550 per quarter for the next five years starting today. How much is his promise worth right now if the interest rate is 8% compounded quarterly?

a. $9,173.14

b. $13,363.57

c. $13,630.84

d. $8,993.27

Ques. 27) Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

a. The periodic rate of interest is 1.5% and the effective rate of interest is 3%.

b. The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.

c. The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.

d. The periodic rate of interest is 3% and the effective rate of interest is 6%.

e. The periodic rate of interest is 6% and the effective rate of interest is also 6%.

Ques. 28) Suppose an ExxonMobil Corporation bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

a. $2,819.52

b. $2,967.92

c. $3,116.31

d. $3,272.13

e. $3,435.74

Ques. 29) You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

a. $18,369

b. $19,287

c. $20,251

d. $21,264

e. $22,327

Ques. 30) A portfolio with a level of systematic risk the same as that of the market has a beta that is:

a. equal to zero

b. equal to one

c. less than the beta of the risk-free asset

d. less than zero

Ques. 31) The expected return on KarolCo. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of KarolCo is 2.3, then what is the risk premium on the market assuming CAPM is true?

a. 2.5%

b. 5.0%

c. 7.5%

d. 10.0%

Ques. 32) Using the above information, what is the rate of return on the market?

a. 2.5%

b. 5.0%

c. 7.5%

d. 10.0%

Ques. 33) The expected return for Stock Z is 30 percent. If we know the following information about Stock Z:

Return Probability

Poor 0.2 0.25

Lukewarm ? 0.5

Dynamite! 0.4 0.25

What return will stock Z produce in the Lukewarm state of the world?

A) 20%

B) 30%

C) 40%

D) It is impossible to determine.

Ques. 34) The risks that diversification cannot eliminate are:

a. Interest rate risk.

b. risk due to a recession.

c. inflation risk.

d. systematic risk.

e. all of the above

Ques. 35) Kevin purchased a stock a year ago that pays a dividend. He has earned a 50%. The stock was purchased for $16 and is now worth $21. What is the amount of dividends received during the year?

a. $5

b. $4

c. $3

d. $2

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