The risk-free rate of interest is 4% and the market risk premium is 9%. Howard Corporation has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of 27%. The required return on Howard Corporation stock is

FIN 3302 – Exam I Review Fall 2017

Chapter 1

 Goal of the firm

 Principles of finance

 Forms of organization

Chapter 5

 Simple vs. compound interest

 FV and PV of lump sum

 FV and PV of annuity

 Annuities due

 Non-annual periods

Chapter 6

 HPR

 Expected return/standard deviation

 Diversification

 Total risk vs. systematic vs. unsystematic risk

 Beta

 CAPM

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Sample Questions

1) Which of the following goals of the firm are synonymous (equivalent) to the maximization of

shareholder wealth?

A) profit maximization

B) risk minimization

C) maximization of the total market value of the firm’s common stock

D) none of the above

2) You inherit $300,000 from your parents and want to use the money to supplement your

retirement. You receive the money on your 65th birthday, the day you retire. You want to

withdraw equal amounts at the end of each of the next 20 years. What constant amount can you

withdraw each year and have nothing remaining at the end of 20 years if you are earning 7%

interest per year?

A) $15,000

B) $28,318

C) $33,574

D) $39,113

3) The risk-free rate of interest is 4% and the market risk premium is 9%. Howard Corporation

has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of

27%. The required return on Howard Corporation stock is

A) 36%.

B) 34%.

C) 26%.

D) 22%.

4) Today is your 21st birthday and your bank account balance is $25,000. Your account is

earning 6.5% interest compounded monthly. How much will be in the account on your 50th

birthday?

A) $159,795

B) $162,183

C) $163,823

D) $164,631

5) All of the following statements about agency problems are true except:

A) Agency problems interfere with the goal of maximizing shareholder value.

B) Agency costs are paid by the managers who do not act in the shareholders’ best

interest.

C) Agency problems result from the separation of management and the ownership of a

firm.

D) The root cause of agency problems is conflicts of interest.

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6) Which of the following conclusions would be true if you earn a higher rate of return on your

investments?

A) The greater the present value would be for any lump sum you would receive in the

future.

B) The lower the present value would be for any lump sum you would receive in the

future.

C) Your rate of return would not have any effect on the present value of any sum to be

received in the future.

D) The greater the present value would be for any annuity you would receive in the

future.

7) Investment A has an expected return of 14% with a standard deviation of 4%, while

investment B has an expected return of 20% with a standard deviation of 9%. Therefore,

A) a risk averse investor will definitely select investment A because the standard

deviation is lower.

B) a rational investor will pick investment B because the return adjusted for risk (20% –

9%) is higher than the return adjusted for risk for investment A ($14% – 4%).

C) it is irrational for a risk-averse investor to select investment B because its standard

deviation is more than twice as big as investment A’s, but the return is not twice as big.

D) rational investors could pick either A or B, depending on their level of risk aversion.

8) Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/15. He sold the shares on

12/31/15 for $3.45. Robotics stock has a beta of 1.9, the risk-free rate of return is 4%, and the

market risk premium is 9%. Joe’s holding period return is:

A) 15.0%.

B) 16.5%.

C) 17.6%.

D) 21.1%.

Key

1. C 2. B 3. D 4. C 5. B 6. B 7. D 8. A

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