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1. You just won the lottery.

You and your heirs will receive $40,000 per year forever,
beginning one year from now. What is the present value of your winnings at an 10%
discount rate?
A) $ 44,000
B) $300,000
C) $387,500
D) $400,000
E) $437,500

2. When you were born, your dear old Aunt Minnie promised to deposit $500 into a
savings account bearing a 5% compounded annual rate on each birthday, beginning with
your first. You have just turned 21 and want the dough. However, it turns out that dear
old (forgetful) Aunt Minnie made no deposits on your fifth and eleventh birthdays. How
much is in the account right now?
A) $10,500.00
B) $15,953.74
C) $16,768.19
D) $17,859.63
E) $21,000.00

You and your spouse have found your dream home. The selling price is $220,000; you will put
$50,000 down and obtain a 30-year fixed-rate mortgage at 7.5% APR for the balance.

3. Assume that monthly payments begin in one month. What will each payment be?
A) $ 901.52
B) $1,188.66
C) $1,359.74
D) $1,563.01
E) $1,722.80

4. How much interest will you pay (in dollars) over the lifetime of the loan? (Assume you
make each of the required 360 payments on time.)
A) $235,101
B) $245,583
C) $257,919
D) $290,457
E) $370,457

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5. The long-term bonds issued by state and local governments in the United States are
A) Treasury bonds.
B) Municipal bonds.
C) Floating rate bonds.
D) Junk bonds.
E) Zero coupon bonds.

6. Your broker offers you the opportunity to purchase a bond with coupon payments of $90
per year and a face value of $1000. If the yield to maturity on similar bonds is 8%, this
bond should:
A) Sell for the same price as the similar bond regardless of their respective maturities.
B) Sell at a premium.
C) Sell at a discount.
D) Sell for either a premium or a discount but it's impossible to tell which.
E) Sell for par value.

7. You earn a 3% real return. If the inflation rate is 5%, what is your nominal return?
A) 6.20%
B) 7.65%
C) 8.00%
D) 8.15%
E) 9.20%

8. Suppose you purchase a zero coupon bond with face value $1,000, maturing in 25 years,
for $180. If the yield to maturity on the bond remains unchanged, what will the price of
the bond be 5 years from now?
A) $253.64
B) $287.52
C) $310.91
D) $380.58
E) $500.00

9. The bonds of Microhard, Inc. carry a 12% annual coupon, have a $1,000 face value, and
mature in 5 years. Bonds of equivalent risk yield 9%. What is the market value of
Microhard's bonds?
A) $1,011.20
B) $1,087.25
C) $1,095.66
D) $1,116.69
E) $1,160.25

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10. The voting procedure where shareholders may cast all of their votes for one member of
the board is:
A) Democratic voting.
B) Cumulative voting.
C) Straight voting.
D) Deferred voting.
E) Proxy voting.

11. Payments made by a corporation to its shareholders, in the form of either cash, stock, or
payments in kind, are called:
A) Retained earnings.
B) Net income.
C) Dividends.
D) Redistributions.
E) Infused equity.

12. Which of the following is a right of an owner of a share of common stock?

A) The right to directly choose the auditing firm the company uses.
B) The right to sue the company in bankruptcy proceedings if common dividends are not
C) The right to vote for directors.
D) The right to participate in any new debt offerings the company sells to the public.
E) Preference over preferred shareholders in the payment of dividends.

13. Llano's stock is currently selling for $40.00. The expected dividend one year from now
is $2 and the required return is 13%. What is this firm's dividend growth rate assuming
the constant dividend growth model is appropriate?
A) 8%
B) 9%
C) 10%
D) 11%

14. Suppose the Pale Hose Corp. is expected to pay a dividend next year of $2.25 per share.
Both sales and profits for Pale Hose are expected to grow at a rate of 20% for the
following 2 years and then at 5% per year thereafter indefinitely. Dividend growth is
expected to match sales growth. If the required return is 15%, what is the value of a
share of Pale Hose?
A) $22.75
B) $26.00
C) $28.50

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D) $32.40
E) $39.25

15. The discount rate that makes the net present value of investment exactly equal to zero is
A) Payback period.
B) Internal rate of return.
C) Average accounting return.
D) Profitability index.
E) Discounted payback period.

16. For a project with conventional cash flows, if PI is greater than 1, then:
A) The IRR is equal to the firm's required rate of return.
B) The project does not pay back on a discounted payback basis.
C) The NPV is greater than zero.
D) The payback period is faster than the firm's required cutoff point.
E) The AAR exceeds the IRR.

17. You own some manufacturing equipment that must be replaced. Two different suppliers
present a purchase and installation plan for your consideration. This is an example of a
business decision involving _______ projects.
A) mutually exclusive
B) independent
C) working capital
D) positive NPV
E) crossover

18. Suppose a project costs $2,500 and produces cash flows of $400 over each of the
following 8 years. What is the IRR of the project?
A) There is not enough information; a discount rate is required
B) 3.27%
C) 5.84%
D) 9.61%
E) 12.06%

19. What is the NPV of the following set of cash flows if the required return is 15%?
Year 0 1 2 3 4
C a s h F lo w $ 1 0 ,0 0 0 $ 1 ,0 0 0 $ 1 0 ,0 0 0 $ 1 0 ,0 0 0 $ 5 ,0 0 0

A) The NPV is negative

B) $ 408.27

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C) $ 950.44
D) $1,247.90
E) $4,656.12

20. What is the payback period of a $15,000 investment with the following cash flows?
Year 1 2 3 4 5
C a s h F lo w $ 3 ,0 0 0 $ 4 ,0 0 0 $ 5 ,0 0 0 $ 6 ,0 0 0 $ 7 ,0 0 0

A) 2.75 years
B) 3.50 years
C) 3.75 years
D) 4.50 years
E) 4.75 years

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Answer Key

1. D
2. B
3. B
4. C
5. B
6. B
7. D
8. A
9. D
10. B
11. C
12. C
13. A
14. C
15. B
16. C
17. A
18. C
19. B
20. B

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