mcq-acc

MultipleChoice: Choose the one alternative that best completes the statement or answers the question.

1. You are considering an investment in a AAA-rated U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bond is 3.5%. What rate of interest should the U.S. corporate pay?

A) 6.0% B)8.5% C)2.5% D)5.0%

2. Bill and Cathy will be retiring in fifteen years and would like to buy an Italian villa. The villa costs

$500,000

today, and the housing in Italy is expected to increase by 6% per year. Bill and Cathy want to make fifteen equal annual payments into an account, starting today, so there will be enough money to purchase the villa in fifteen years. If the account earns 10% per year, what is the amount of each deposit?

A) $72,623 B)$79,885 C)$34,286 D)32,947

3. Today is your 21st birthday and your bank account balance is

$2

5,000. Your account is earning 6.5% interest compounded quarterly. How much will be in the account on your 50th birthday?

A)$

16

2,183 B)$159,795 C)

$16

3,832 D)$164,631

4. You want $

20

,000 in 5 years to take your spouse on a second honeymoon. Your investment account earns 7% compounded semiannually. How much money must you put in the investment account today? (round to the nearest $1)

A)$15,985 B)$

12

,367 C)$14,178 D)$13,349

5. If you hold a portfolio made up of the following stocks:

Investment Value Beta

Stock A $8,000 1.5

Stock B

$10

,000 1.0

Stock C $2,000 .5

What is the beta of the portfolio?

A)1.00 B)1.24 C)1.15 D)1.33

6. PDQ Corp. has sales of $4,000,000; the firm’s cost of goods sold is $2,500,000; and its total expenses are $

60

0,000. The firm’s interest expense is $250,000, and the corporate tax rate is

40

%

. The firm paid dividends to preferred stockholders of

$40

,000

, and the firm distributed

$60,000

in dividend payments to common stockholders. What is PDQ’s “Addition to Retained Earnings?”

A)$290,000 B)$330,000 C)$650,000 D)$390,000

7. Use the following information to calculate the company’s accounting net income for the year.

$50,000

Credit Sales	$800,000
Cash Sales	$500,000
Operating Expenses on Credit	$200,000
Cash Operating Expenses	$700,000
Accounts Receivable (Beg of Year)		$50,000
Accounts Receivable (End of Year)	$80,000
Accounts Payable (Beg of Year)
Accounts Payable (End of Year)		$100 ,000
Corporate Tax Rate	40%

A) $240,000 B)$300,000 C)$125,000 D)$120,000

8. You want to travel to Europe to visit relatives when you graduate from college three years from now. The trip is expected to cost a total of $10,000 at that time. Your parents have deposited $5,000 for you in a CD paying 6% interest annually, maturing three years from now. Aunt Hilda has agreed to finance the balance. If are going to put Aunt Hilda’s gift in an investment earning 10% over the next three years, how much must she deposit now, so you can visit your relatives at the end of three years?

A)$3,757 B)$5,801 C)$3,039 D)$3,345

9. The return on the market portfolio is currently 12%. Mobile Phone Corporation stockholders require a rate of return of 30% and the stock beta of 3.2. Accoding to CAPM, determine the risk-free rate.

A) 4.64% B)9.80% C)3.82% D)6.50%

10. You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts?

Year End of Year Deposit

1 $350

2 $500

3 $725

4 $400

A)$1,622 B)$2,687 C)$2,384 D)$2,207

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

11. The expected return for the market portfolio is 15%, the expected return on U.S. Treasury Bills is 4% and the expected return on AAA-rated short-term corporate bonds is 8%. Calculate the required return for a stock with a beta equal to 1.4.

12. Use the following date:

Market risk premium= 8%

Risk free rate= 4%

Beta of XYZ stock= 1.5

Beta of PDQ stock= 2.0

Investment in XYZ stock= $50,000

Investment in PDQ stock= $100,000

You have no assets other than your investments in XYZ and PDQ stock.

What is the expected return of your portfolio? Show all work.

13. An investment promises to pay you the following amounts at the end of each of the next 10 years: (1) $1,000, (2) $2,000, (3) $3,000, (4) $4,000, (5) – (10) $5,000 per year. If you want to earn a return of 8% per year, how much will you be willing to pay for the investment today?

14. Given the information below, calculate the company’s cash balance at the end of the year.

$100,000

Cash Balance at the Beginning of Year	$80,000
Activity During the Year
Increase in Accounts Payable	$60,000
Decrease in Accounts Receivable	$40,000
Depreciation Expense	$500,000
Net Income	$2,000,000
Purchase of Fixed Assets	$800,000
Sales of Common Stock
Decrease in Notes Payable	$85,000
Dividends Paid	$15,000

Please refer to Table 4-7 for the following question.

Table 4-7

Hokie Corporation Comparative Balance Sheet

For the Years Ending December 31, 2009 and 2010

(Millions of Dollars)

60

10

40

22

$100

$108

Assets	2009	2010
Current Assets:
Cash	$2	$10
Accounts Receivable	16	12
Inventory		22	26
Total Current Assets	$40	$48
Gross Fixed Assets:	$120	$124
Less Accumulated Depreciation	(60)	(64)
Net fixed Assets		60
Total Assets		$100		$108
Liabilities and Owner’s Equity
Current Liabilities:
Accounts Payable	$16	$18
Notes Payable		10
Total Current Liabilities	$26	$28
Long-term Debt	20	18
Owner’s Equity
Common Stock		40
Retained Earnings	14
Total Liabilities and Owner’s Equity

Hokie had net income of $28 million for 2010 and paid total cash dividends of $20 million to their common stockholders.

15. Calculate the following 2010 financial ratios of Hokie Corporation using the information given in Table 4-7:

i. current ratio

Current Assets/Current Liabilities

48/28

1.71

ii. acid test ratio

Quick Assets/Current Liabilities

(Current Assets-Invenories)/Current Liabilities

(48-26)/28

22/28

.79

iii. debt ratio

Total Debt/Total Assets

(Total Assets-Owners Equity)/Total Assets

46/108

.43

iv. return on total assets

EBIT/Total Net Assets

(28/108)*100

25.92%

v. return on common equity

Net Income/Shareholders Equity

(28/62)*100

45.16%