1. The reserves of commercial banks must be held against
A. losses.
B. the bank as equity.
C. commercial loans.
D. savings deposits.
2. When investing in securities, an investor may place a limit order that
A. specifies when the stock will be purchased.
B. establishes the exchange on which the security is to be bought or sold.
C. states a price at which the investor seeks to buy or sell the stock.
D. limits the amount of commissions.
3. What is a nation’s cash inflow or outflow on its current account given the following information?
Imports $145
Direct investments abroad $72
Foreign purchase of domestic securities $86
Net income from foreign investments $37
Exports $211
Foreign investments in country $143
Purchase of foreign securities $29
Government spending abroad $22
A. Outflow of $81
B. Inflow of $128
C. Outflow of $128
D. Inflow of $81
4. Which of the following best explains a potential disadvantage of leaving securities in street name?
A. Securities held in street name become the property of the custodian and the customer is only beneficiary of the securities.
B. Securities held in street name can’t be quickly purchased or sold.
C. Correspondence sent by securities issuers may not be forwarded to brokerage clients who own securities held in street name.
D. In the event of class action suits against securities issuers, the custodian, not the beneficial owner (customer), is the only party that may benefit from court orders.
5. Entering an order to sell stock at $17 when the bid is $18 to $19 is an example of a
A. market order.
B. short sale.
C. margin payment.
D. limit order. 6. If an individual buys stock on margin and its price rises, the investor
A. may take delivery of the stock.
B. must put up additional collateral.
C. must pay tax on the unrealized gain.
D. must pay interest on the borrowed funds.
7. The International Monetary Fund
A. buys foreign securities.
B. can lend a country currencies to meet a surplus in its merchandise trade balance.
C. holds a pool of currencies.
D. developed to help the Federal Reserve control U.S. investments abroad.
8. A firm should make an investment if the present value of the cash inflows on the investment is
A. less than zero.
B. greater than the cost of the investment.
C. greater than zero.
D. less than the cost of the investment.
9. The lower the debt ratio, the
A. higher are the firm’s total assets.
B. higher is the use of financial leverage.
C. lower is the use of financial leverage.
D. lower are the firm’s total assets. 10. A firm has two investment opportunities. Each investment costs $2,000, and the firm’s cost of capital is 8 percent. The cash flows of each investment are as follows:
Cash Flow of Investment A
Year 1: $1800
Year 2: $600
Year 3: $500
Year 4: $400
Cash Flow of Investment B
Year 1: $900
Year 2: $900
Year 3: $900
Year 4: $900
Based on the information, if the investments are independent, the firm should select
A. all investments with an IRR that’s less than 8 percent.
B. the higher IRR investment.
C. only one investment if the IRR is greater than 8 percent.
D. all investments with an IRR that’s greater than 8 percent. 11.
Coupon rate = 7 percent
Average tax rate = 32%
Price of common stock = $80
Price of preferred stock = $50
Bond yield risk premium = 7%
Return of the market = 12%
Marginal tax rate = 35%
Common stock dividend (Do) = $6
Preferred stock dividend (Do) = $4
Growth rate of common stock dividend = 6%
Risk-free rate of return = 6%
Beta = 1.2
According to the information given, what is the cost of debt?
A. 4.55 percent
B. 6.25 percent
C. 2.45 percent
D. 7.0 percent
12. NPV may be preferred to IRR because
A. IRR excludes salvage value.
B. NPV makes more conservative assumptions concerning reinvesting.
C. IRR makes more conservative assumptions concerning reinvesting.
D. NPV excludes salvage value. 13. A firm has two investment opportunities. Each investment costs $2,000, and the firm’s cost of capital is 8 percent. The cash flows of each investment are as follows:
Cash Flow of Investment A
Year 1: $1800
Year 2: $600
Year 3: $500
Year 4: $400
Cash Flow of Investment B
Year 1: $900
Year 2: $900
Year 3: $900
Year 4: $900
According to the information, the NPV for Investment B is
A. $1,600.
B. $3,600
C. $2,980.
D. $980. 14. A firm has two investment opportunities. Each investment costs $2,000, and the firm’s cost of capital is 8 percent. The cash flows of each investment are as follows:
Cash Flow of Investment A
Year 1: $1800
Year 2: $600
Year 3: $500
Year 4: $400
Cash Flow of Investment B
Year 1: $900
Year 2: $900
Year 3: $900
Year 4: $900
Based on the information, if the investments are mutually exclusive, the firm should select
A. both investments.
B. neither investment.
C. the higher-payback investment.
D. the higher-NPV investment.
