Question 1

Christy purchased 100 shares of Good Idea stock for $48 last year. Yesterday she sold the stock for $45. If she received $4 in dividends during the time she held the security, what is her holding period return (round % to 2 decimals)?

Accepted Answer

The holding period return (HPR) is calculated as [(Ending Value - Beginning Value + Dividends) / Beginning Value] * 100. Here, the beginning value is $48 per share for 100 shares ($4800), the ending value is $45 per share for 100 shares ($4500), and the dividends received are $4. So, HPR = [($4500 - $4800 + $4) / $4800] * 100 = [(-$296) / $4800] * 100 = -6.17%, which when rounded is -6.17%. However, the correct calculation should include the total dividends received, which is $4 * 100 shares = $400, not $4. Thus, the corrected HPR calculation is [($4500 - $4800 + $400) / $4800] * 100 = [($100) / $4800] * 100 = 2.08%.

Question 2

What is the holding period return to an investor who bought 100 shares of Oil Slick stock nine months ago for $36 per share, received two $50 dividend checks, and sold the stock today at $38 a share (round % to 2 decimals)?

Accepted Answer

First, let's calculate the total amount of dividends received: 
$50 per dividend x 2 dividends = $100

Now, let's calculate the total proceeds from selling the stock: 
100 shares x $38 per share = $3,800

The initial investment was: 
100 shares x $36 per share = $3,600

The total return is: 
($3,800 + $100 - $3,600) / $3,600 = 0.0833 or 8.33%

Therefore, the holding period return is 8.33%, which is closest to option B.

Question 3

Maher purchased 100 shares of Chill Pill Pharmaceuticals at $30 per share last spring and sold them in six months for $36 per share. The stock paid no dividend. What was Maher's holding period return?

Accepted Answer

Holding period return = ((ending price - beginning price) + dividends) / beginning price
Since the stock paid no dividend, the formula simplifies to:
Holding period return = (ending price - beginning price) / beginning price
In this case, Maher purchased the stock at $30 per share and sold it for $36 per share, which gives an increase of $6 per share. The holding period return is then:
(36 - 30) / 30 = 0.20
Multiplying by 100 to express the result as a percentage:
0.20 * 100 = 20%
Therefore, Maher's holding period return was 20%. The correct answer is B.

Question 4

Which of the following is correct regarding the forms of market efficiency? 
I. In an efficient capital market stock prices provide an unbiased estimate of the true value of an enterprise.
II. In an efficient capital market, stock prices reflect a present value of the firm's expected cash flows.

Accepted Answer

Both statements I and II are correct regarding the forms of market efficiency. In an efficient capital market, stock prices provide an unbiased estimate of the true value of an enterprise and reflect a present value of the firm's expected cash flows. This means that the market is able to incorporate all available information in a timely manner, making it difficult for investors to outperform the market consistently.

Question 5

Two years ago you bought 100 shares of Big Bubba convertible preferred stock at $25 per share. The preferred stock had an annual dividend of $2.125 per share, and a total of $3.19 in dividends per share have been paid so far. Today the company announced that the stock is redeemable for $26.70 plus accrued and unpaid dividends, for a total of $27.76. Alternatively, holders may convert their shares of preferred stock at a conversion rate of 1.6393 shares of Big Bubba common stock for each share of preferred stock. If the closing price of Big Bubba common stock is $27.50, what is your holding period return on the conversion option (round % to 2 decimals)?

Accepted Answer

The conversion option gives you 1.6393 shares of common stock per preferred share. At $27.50 per common share, this equals $45.08 per preferred share. The initial investment was $25 per share, so the holding period return is (($45.08 - $25) / $25) * 100% = 80.32%.

Question 6

You bought 100 shares of Risky Venture stock six months ago for $14 per share and sold it yesterday for $12. The company paid a total of $0.24 per share in dividends to you during the time you held the stock. What was your holding period return (round % to 2 decimals)?

Accepted Answer

The holding period return (HPR) is calculated as [(Ending value - Beginning value + Dividends) / Beginning value] * 100. Here, it is [($12 - $14 + $0.24) / $14] * 100 = [-$1.76 / $14] * 100 = -12.57%.

Question 7

For a company with positive pre-tax earnings and a 35 percent income tax rate, a new debt issue that increases interest by $500,000 would cost the company ____.

Accepted Answer

Since the company has positive pre-tax earnings and a 35% income tax rate, the interest expense on the new debt issue would be tax-deductible. Thus, the after-tax cost of the debt would equal the interest expense minus the tax savings. The tax savings will be equal to 35% of the interest expense since the company can deduct the interest expense from its taxable income. Therefore, the after-tax cost of the debt issue would be $500,000 - (0.35 x $500,000) = $325,000.

Question 8

If the spot rate for the Japanese yen is $0.009204 and the 90-day forward rate is $0.009227, what is the approximate annualized forward premium (discount)?

Accepted Answer

The annualized forward premium can be calculated using the formula: [(Forward Rate - Spot Rate) / Spot Rate] * (360 / Number of days). Plugging in the given values: [(0.009227 - 0.009204) / 0.009204] * (360 / 90) = 0.01 or 1.00%, indicating a premium of 1.00%.

Question 9

Lear purchased 100 shares of Quitcha Twitchin Anti-inch Cream stock at $30 per share last year and sold them eleven months later for $24 per share. The shares split 2 for 1 shortly after Lear purchased the stock. If the stock paid $0.25 per share in dividends last year, what is Lear's holding period return (round to 2 decimals)?

Accepted Answer

The answer of Lear purchased 100 shares of Quitcha Twitchin...

Question 10

If an investor purchased 100 shares of Biggee stock for $30 per share six months ago, and then sold the stock today for $33 per share, what was the investor's holding period return if a total of $1 per share in dividends was received over the six-month period (round % to 1 decimal)?

Accepted Answer

The answer of If an investor purchased 100 shares of...

Question 11

For the financial manager, taxes have important implications for ____.

Accepted Answer

Taxes have important implications for all of the mentioned financial decisions. Capital expenditure decisions can have tax implications such as depreciation deductions. Leasing decisions can involve tax implications such as the deductibility of lease payments. Capital structure policy can affect tax liabilities through interest expense deductions. Therefore, taxes play a significant role in financial decision making.

Question 12

If the spot rate for the British pound is $1.5077 and the 180-day forward rate is $1.4934, what is the approximate annualized forward premium (discount)?

Accepted Answer

First, we need to calculate the forward premium (or discount) by taking the difference between the forward rate and the spot rate:

Forward premium (or discount) = (180-day forward rate - spot rate) / spot rate

= ($1.4934 - $1.5077) / $1.5077

= -0.0094 or (-)0.94%

Then, we need to annualize this rate by multiplying it by the number of days in a year (365) divided by the number of days in the forward contract (180):

Annualized forward premium (or discount) = (-0.0094) x (365/180)

= (-)0.019 or discount of (-)1.90%

Therefore, the correct answer is C, discount of (-)1.90%.

Question 13

In an efficient capital market ____.

Accepted Answer

In an efficient capital market, prices of securities fully reflect all available information at any point in time, meaning that the expected returns from investing in securities are equal to the required returns based on their risk levels. This does not imply that investors cannot earn profits, but rather that they cannot systematically earn excess returns without assuming additional risk.

Question 14

In an efficient capital market, all security investments will have a(n) ____.

Accepted Answer

In an efficient capital market, all security investments will have a NPV of zero. This means that the expected return on the investment will be exactly equal to the required rate of return, taking into account the associated risk. Any security with a positive NPV would be considered undervalued and would be quickly bought up, driving the price up and lowering the expected return. Likewise, any security with a negative NPV would be considered overvalued and would be quickly sold off, driving the price down and increasing the expected return. Therefore, in an efficient capital market, securities will be priced such that their NPV is zero, with the required rate of return equal to the cost of capital.

Question 15

If a treasury bond can be purchased for $9,450 today and the bond holder will receive $850 in interest and the face value at maturity is $10,000, what is the holding period return (round % to 1 decimal)?

Accepted Answer

The holding period return is calculated as [(Interest + (Face Value - Purchase Price)) / Purchase Price] * 100. Here, it is [(850 + (10,000 - 9,450)) / 9,450] * 100 = 14.8%.

Question 16

The barriers to the free flow of capital among the major world capital markets include all of the following EXCEPT ____.

Accepted Answer

Low transaction costs actually facilitate the free flow of capital among the major world capital markets, so it is not a barrier. However, taxation policies, foreign exchange risks, and legal restrictions can all hinder the free flow of capital.

Question 17

If the spot rate (in U.S. dollars) for Japanese yen is 0.00703 and the 180-day forward rate is 0.00717, then the yen is trading at an annualized forward ____ (round % to 2 decimals).

Accepted Answer

To find the annualized forward premium or discount, we need to use the formula:

Forward Premium/Discount = [(Forward rate - Spot rate)/Spot rate] x (360/number of days in the forward contract)

Plugging in the given values, we get:

Forward Premium/Discount = [(0.00717 - 0.00703)/0.00703] x (360/180)
Forward Premium/Discount = (0.00198/0.00703) x 2
Forward Premium/Discount = 0.562 x 2
Forward Premium/Discount = 1.124

Therefore, the yen is trading at an annualized forward premium of 1.124 or 3.98% (rounded to 2 decimals).

The correct choice is B.

Question 18

Which of the following reflect(s) the implications of income taxes for financial managers? 
I. Interest payments on debt incurred by the firm are not tax deductible for the firm.
II. Preferred stock and common stock dividends are tax deductible for the firm and are used as often as possible to raise capital.

Accepted Answer

Interest payments on debt are tax deductible for the firm, which can lower the firm's taxable income and thus its taxes. Dividends paid on preferred or common stock are not tax deductible. This makes debt financing more attractive from a tax perspective compared to equity financing.

Question 19

In an efficient capital market, corporate diversification is ____.

Accepted Answer

In an efficient capital market, all relevant information about a company is reflected in its stock price. This means that investors can achieve their desired level of diversification by buying shares in a diversified portfolio of companies rather than relying on a single company's diversification efforts. Therefore, corporate diversification is unnecessary in an efficient capital market.

Question 20

Changes in the tax code that slow down depreciation ____ the present value of investment cash flows and therefore make the investment ____ desirable.

Accepted Answer

Slowing down depreciation means that it takes longer for investors to receive tax deductions on their investment, reducing the present value of investment cash flows. This decrease in present value makes the investment less desirable.

Quiz 2: The Domestic and International Financial Marketplace

Christy purchased 100 shares of Good Idea stock for $48 last year. Yesterday she sold the stock for $45. If she received $4 in dividends during the time she held the security, what is her holding period return (round % to 2 decimals) ?

What is the holding period return to an investor who bought 100 shares of Oil Slick stock nine months ago for $36 per share, received two $50 dividend checks, and sold the stock today at $38 a share (round % to 2 decimals) ?

Maher purchased 100 shares of Chill Pill Pharmaceuticals at $30 per share last spring and sold them in six months for $36 per share. The stock paid no dividend. What was Maher's holding period return?

Which of the following is correct regarding the forms of market efficiency? I. In an efficient capital market stock prices provide an unbiased estimate of the true value of an enterprise. II. In an efficient capital market, stock prices reflect a present value of the firm's expected cash flows.

You bought 100 shares of Risky Venture stock six months ago for $14 per share and sold it yesterday for $12. The company paid a total of $0.24 per share in dividends to you during the time you held the stock. What was your holding period return (round % to 2 decimals) ?

For a company with positive pre-tax earnings and a 35 percent income tax rate, a new debt issue that increases interest by $500,000 would cost the company ____.

If the spot rate for the Japanese yen is $0.009204 and the 90-day forward rate is $0.009227, what is the approximate annualized forward premium (discount) ?

If an investor purchased 100 shares of Biggee stock for $30 per share six months ago, and then sold the stock today for $33 per share, what was the investor's holding period return if a total of $1 per share in dividends was received over the six-month period (round % to 1 decimal) ?

For the financial manager, taxes have important implications for ____.

If the spot rate for the British pound is $1.5077 and the 180-day forward rate is $1.4934, what is the approximate annualized forward premium (discount) ?

In an efficient capital market ____.

In an efficient capital market, all security investments will have a(n) ____.

If a treasury bond can be purchased for $9,450 today and the bond holder will receive $850 in interest and the face value at maturity is $10,000, what is the holding period return (round % to 1 decimal) ?

The barriers to the free flow of capital among the major world capital markets include all of the following EXCEPT ____.

If the spot rate (in U.S. dollars) for Japanese yen is 0.00703 and the 180-day forward rate is 0.00717, then the yen is trading at an annualized forward ____ (round % to 2 decimals) .

In an efficient capital market, corporate diversification is ____.

Changes in the tax code that slow down depreciation the present value of investment cash flows and therefore make the investment desirable.