Question 1

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.

Accepted Answer

Solution:
($38 + $1 - $36)/ $36= 0.0833 or 8.33%

Question 2

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

Accepted Answer

Solution:
Premium = [(0.00717 - 0.00703)/0.00703](12/6) = 0.0398

Question 3

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 major world capital markets. The other options listed (taxation policies, foreign exchange risks, and legal restrictions) are all legitimate barriers to the free flow of capital.

Question 4

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

Solution:
HPR = (3600 - 3000)/3000 * 100% = 20%

Question 5

For the financial manager, taxes have important implications for

Accepted Answer

Taxes have implications for dividend policy, financial restructurings, and capital structure policy. For dividend policy, taxes affect the amount of after-tax income available for distribution to shareholders. They also influence financial restructurings, such as mergers and acquisitions, by affecting the tax consequences for each company involved. In terms of capital structure policy, taxes affect the optimal mix of debt and equity financing for a company, as debt interest is tax-deductible while dividends paid to shareholders are not.

Question 6

In an efficient capital market

Accepted Answer

In an efficient capital market, required returns equal expected returns. This means that investors will not be able to earn excess returns by choosing undervalued or overvalued securities. The market price of securities will reflect all available information, and investors will earn a return that is commensurate with the level of risk they take on. Therefore, Choice A) is the correct answer. Choices B), C), and D) are all incorrect.

Question 7

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?

Accepted Answer

Solution:
HPR = [2400 - 1500 + .25(100)]/1500 * 100% = 61.67%

Question 8

If an investor purchased 100 shares of Biggee stock for $30 per share, 6 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 6 month period?

Accepted Answer

Solution:
HPR = ($33 - $30 + $1) / $30 = 13.3%

Question 9

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 the present value of the firm's expected cash flows.

Accepted Answer

Both 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 the present value of the firm's expected cash flows.

Question 10

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?

Accepted Answer

Solution:
($45 - $48 + $4) / $48 = 0.0208 or 2.08%

Question 11

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

Accepted Answer

Solution:
($10,000 - $9,450 + $850)/$9,450 = 0.148 or 14.8%

Question 12

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 the asset will take longer to reach zero value and therefore the tax deductions will occur over a longer period of time. This decreases the present value of investment cash flows, making the investment less desirable.

Question 13

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

Accepted Answer

Solution:
[($1.4934 - $1.5077) / ($1.5077)](12/6)(100%) = -1.897%

Question 14

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?

Accepted Answer

Solution:
Ending price = $27.50(1.6393) = $45.08
HPR = ($45.08 - $25 + $3.19)/$25 = 0.9308 or 93.08%

Question 15

All of the following are financial intermediaries EXCEPT:

Accepted Answer

Loan sharks are not considered legitimate financial intermediaries as they often engage in predatory lending practices with exorbitant interest rates and fees, often targeting individuals with poor credit or financial difficulties.

Question 16

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?

Accepted Answer

Solution:
HPR = ($12 - $14 + $0.24)/$14 = -0.1257 or -12.57%

Question 17

In an efficient capital market, corporate diversification is ____.

Accepted Answer

In an efficient capital market, investors can easily diversify their own portfolios without relying on corporate diversification, making it unnecessary for corporations to diversify themselves.

Question 18

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

Accepted Answer

Solution:
[(.009227 - .009204)/(.009204)](12/3)(100%) = 0.9996%

Question 19

In an efficient capital market, all security investments will have:

Accepted Answer

In an efficient capital market, all security investments will have a fair price that reflects all available information. Therefore, the NPV of all securities will be zero, since the market's expectations are already factored into the price. Choices A, B, and C are incorrect because they suggest that securities will have a positive rate of return or value, which is not necessarily true in an efficient market.

Question 20

All of the following reflect the implications of income taxes for financial managers EXCEPT:

Accepted Answer

This statement is incorrect as interest payments on debt made by the firm are tax deductible, which reduces the taxable income of the firm.

The given options B, C, and D reflect the implications of income taxes for financial managers. Preferred stock and common stock dividends are not tax deductible, which increases the taxable income. Dividends are taxed on both the corporate level and the stockholders' tax return, which reduces the after-tax income of the stockholders. Depreciation provides a tax deduction for the corporation, which also reduces the taxable income.

Quiz 2: The Domestic and International Financial Marketplace