1. When MTS went public and initially sold its stock to ...



MMultiple Choice Questions: 20 questions worth 2.5 marks per question = 50 marks. each. (The exam has a total of 100 marks.) Answer on the computer response sheet provided.

Choose the best answer.

1) Who has unlimited liability?

a) aA general partner.

b) aA shareholder.

c) aA limited partner.

d) aA sole proprietor.

e) aAll of the above.

f) a, b and c

g) a, b and d

h) a and d

2) In the corporate principal-agent problem, the principal is the ____________ and the agent is the _________.

a) management; bondholders

b) bondholders; shareholders

c) bondholders; management

d) shareholders; management

e) shareholders; bondholders

f) management; shareholders;

3) Which business forms require tax to be paid at the business level that is separate from the personal level?

a) tThe sole proprietorship.

b) tThe partnership.

c) tThe corporation.

d) aAll of the above.

e) b and c

f) a and b

g) a and c

4) Corporations and governments are able to raise money by issuing securities in:

a) primary markets.

b) secondary markets.

c) stock markets.

d) fund markets.

e) forward markets.

f) raising-capital markets.

5) The value of Multitech's current assets is $100 million while its long-term asset value is $200 million. If the value of Multitech's current liabilities is $50 million and the value of its long-term liabilities is $100 million, then the value of its equity is ________.

a) $450 million

b) $400 million

c) $300 million

d) $200 million

e) $150 million

f) $50 million

g) $0

6) Primus Corp. promises to pay $10 million at the end of the year to the Toronto Dominion Bank in order to extinguish its debt (i.e., pay off its loan). If Primus Corp.’s assets will be worth $16 million just before the debt is repaid, then the payoff to Primus debtholders will be _____________ and the value left for Primus equityholders will be _____________.

a) $6 million; $10 million

b) $10 million; $6 million

c) $16 million; $10 million

d) $16 million; $6 million

e) $10 million; $16 million

f) $6 million; $4 million

7) Financial markets are important because:

a) they allow individuals to consume amounts different from their current income level.

b) they allow corporations to adjust their patterns of investment over time.

c) they allow the transfer of funds from savers to borrowers.

d) all of the above.

e) a and b

f) b and c

8) The equilibrium interest rate in a perfectly competitive market is:

a) is the rate that equates the amount of borrowing to the amount of lending.

b) is the single rate of interest that prevents arbitrage from continuingoccurring.

c) is the cost of borrowing money.

d) is the rate that clears the market.

e) all of the above.

f) a, b and c

g) b, c and d

h) c and d

9) The market rate of interest is 15%. Bill will have income of $50,000 now (t=0) and $40,000 next year (t=1). He could consume $50,000 now and $40,000 next year, but he prefers to forgo some consumption now, invest, and consume more next year. For every $1000 in consumption that Bill gives up and instead invests, how much consumption (in addition to $40,000) can he expect to obtain one year later (t=1)?

a) $1,000.00

b) $1,000.15

c) $1,100.00

d) $1,150.00

e) $1,500.00

10) Given Marys income this year and next year and the availability of financial markets, Mary has determined that if she saves everything this year, she can spend $200,000 next year. If she borrows against all of next years income and spends everything now, she can spend at most $180,000 now. What is the market rate of interest?

a) 10.0%

b) 11.1%

c) 18.8%

d) 20.0%

e) nNone of the above are within 1% of the correct answer.

11) Phong has employment income of $60,000 this year and $70,000 next year. The market rate of interest is 10% and Phong has the opportunity to purchase some property for $50,000 (payable this year) that he can sell for $60,000 next year. What should Phong do if he wants to consume $100,000 this year?

a) bBorrow $40,000.

b) bBorrow $50,000 and invest in the property.

c) bBorrow $90,000 and invest in the property.

d) bBorrow $100,000 and invest in the property.

e) nNone of the above, Phong doesn’t have enough money to spend $100,000 this year.

12) In chapter 3 of the text, a separation theorem in financial markets is presented. This theorem states that:

a) investorsInvestors’ borrowningborrowing/lending decisions are independent of consumption preferences.

b) investorsInvestors’ investment decisions are independent of consumption preferences.

c) investorsInvestors’ consumption amounts are independent of their income levels.

d) investorsInvestors’ consumption amounts are independent of their personal wealth.

e) investorsInvestors’ borrowing/lending decisions are independent of their investment decisions.

f) noneNone of the above.

13) Given a stated rate of 20% per year compounded quarterly, the equivalent effective rate per quarter compounded quarterly is:

a) 1.046635%

b) 1.050000%

c) 4.663514%

d) 5.000000%

e) none of the above

0.1daydailydaily(assume 365 days in a year):3650%

14) 36.537.78343678.34%:Given a stated rate of 48% per day compounded every hour, the equivalent stated rate per hour compounded every minute is:

a) greater than 3.9%

b) 3.8017179%

c) 2.0000000%

d) 1.9805896%

e) 1.6469234%

f) 1.6337311%

g) less than 1.63%

15)

16)

17)

a)

18)

19)

20) Which of the following are weaknesses of the basic payback rule?

a) Fails to account for the timing of cash flows within the payback period.

b) Fails to account for cash flows after the payback period.

c) Sets an arbitrary cutoff period.

d) All of the above.

e) a and b

f) b and c

g) a and c

21) Consider a two-period world (as in chapter 3). An investment should be made in period 0 if

a) desired consumption in period 0 is less than income.

b) desired consumption in period 1 is greater than income.

c) return on the investment is greater than the interest rate.

d) return on the investment is less than the interest rate.

e) a, b, and c.

22) Zero-coupon bonds

a) always sell at a premium (above face value).

b) have no face value.

c) have no maturity.

d) are perpetual

e) are pure discount bonds

f) b, c, and d

23) The Payback rule is inferior to the NPV rule; however, Payback is not so bad when the following condition(s) hold:

a) the investment is over a short time horizon

b) the rule must be used by employees not trained in finance

c) inflation and interest rates are high

d) all of the above

e) a and b

24) Given a rate of 16% per year compounded quarterly, the equivalent rate per quarter compounded quarterly is

a) 1.0378%

b) 1.04%

c) 3.78%

d) 4%

e) none of the above

25) Given a rate of 2% per month compounded monthly, the equivalent rate per year compounded monthly is

a) 8%

b) 8.24%

c) 20%

d) 24%

e) 26.82%

f) none of the above

26) Given a rate of 3.0301% per quarter compounded quarterly, the equivalent rate per year compounded monthly is

a) 11.98%

b) 12%

c) 12.682503%

d) 12.682505%

e) 12.12%

f) 12.1204%

g) none of the above

27) Given a rate of 10% per day compounded every 12 hours, the equivalent rate per week compounded hourly is

a) 68.4452796%

b) 168.4452796%

c) 133.9655592%

d) 70%

e) 94.8717100%

f) 97.9931599%

g) 34.1878538%

28) Bond A has a coupon rate of 205% and 20 years until maturity. Bond B has a coupon rate of 158% and 105 years until maturity. Bond C has a coupon rate of 1110% and 510 years until maturity. The yields to maturity for each of the bonds are is 15%. as follows: A, 9%; B, 8%; C, 7%. Which of the following statements is true?

a) A will sell at a discount.

b) C will sell at a discount.

c) A will sell at a premium.

d) C will sell at a premium.

e) aAll bonds will sell at par or face value.

f) aAll bonds will sell at a discount.

g) aAll bonds will sell at a premium.

h) a and d

i) b and c

29) What happens to the price (value) of a bond when interest rates drop?

a) tThe bond becomes less valuable because it pays less interest.

b) tThe bond becomes more valuable because its cash flows are worth more.

c) tThere is no effect because the bond’s cash flows don’t change.

d) the bond becomes less valuable because it pays less interest

e) Nnone of the above, bonds have no value.

30) Suppose you calculate the forward rate, f5=8.5%. If you believe in the Pure Expectations Theory then you must believe that ______________. If you believe in the Augmented Expectations Theory then you must believe that _______________.

a) E[4r5]=8.5%; E[4r5]>8.5%

b) E[4r5]=8.5%; E[4r5]8.5%; E[4r5]=8.5%

e) E[4r5] ................
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