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[answered] a. b. c. d. 1. Assume the most recent nominal GDP growth wa


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a.

 

b.

 

c.

 

d. 1. Assume the most recent nominal GDP growth was 3% (and up strongly from its prior

 

reading), the unemployment rate is at 4% (down from 6% in the prior period) and CPI is

 

growing at 5% (up from just 3% in the prior month). What do you think the Federal

 

Reserve is likely to do?

 

Lower rates to further increase GDP growth and further lower unemployment.

 

Lower rates to slow GDP growth and reduce inflation.

 

Raise rates to further increase GDP growth and further lower unemployment.

 

Raise rates to slow GDP growth and reduce inflation. 2. A federal budget deficit:

 

a. Generally slows economic growth due to higher interest rates.

 

b. Generally increases economic growth due to higher demand for goods and services.

 

3. The best way to maximize a firm?s value is to maximize its Earnings Per Share (EPS).

 

a. True

 

b. False

 

4. Suppose the US Treasury announces plans to issue $50 billion of new bonds. Assuming this

 

announcement was a surprise and all other things are held constant, what effect would this

 

announcement have on bond prices and interest rates?

 

a. Prices and interest rates would both rise.

 

b. Prices would rise and interest rates would decline.

 

c. Prices and interest rates would both decline

 

d. There would be no change in prices or interest rates.

 

e. Prices would decline and interest rates would rise. 5. Which of the following factors would be most likely to lead to an increase in interest rates in the

 

economy?

 

a. Households reduce their consumption and increase their savings

 

b. The Federal Reserve decides to try to stimulate the economy

 

c. There is a decrease in expected inflation

 

d. The economy falls into a recession.

 

e. Most businesses decide to modernize and expand their manufacturing capacity, and to install

 

new equipment to reduce labor costs.

 

6.

 

a.

 

b.

 

c.

 

d. To calculate taxes, a firm can deduct all of the following EXCEPT:

 

Owner?s salary

 

Interest

 

Dividends

 

None of the above 31.

 

a.

 

b.

 

c.

 

d. At its core, what is FCF?

 

The cash available for distribution to investors.

 

A driver of the fundamental value of the firm.

 

All of the above

 

None of the above 32.

 

a.

 

b.

 

c.

 

d. A financial metric used to determine if growth is adding value is

 

ROE

 

ROA

 

ROIC

 

NOPAT 33. An inverted yield curve doesn?t happen much. When it does, short-term bonds yield more than

 

long-term bonds, all else equal.

 

a. True

 

b. False

 

34. Market Value Added (MVA) = Market Value of the firm - Book value of the firm. This metric,

 

represents what?

 

a.

 

b.

 

c.

 

d. The value added by management since the inception of the firm.

 

The value added by management since last year.

 

The value added by management since last quarter.

 

None of the above. 35.

 

a.

 

b.

 

c.

 

d.

 

e. What affects an investment?s value?

 

The amount of expected cash flows

 

The timing of cash flows

 

The risk of cash flows

 

All of the above

 

None of the above 36.

 

a.

 

b.

 

c.

 

d.

 

e. The WACC is the weighted average cost of capital and is affected by what?

 

The capital structure of the firm

 

The current interest rate environment

 

The risk of the firm

 

All of the above

 

None of the above 37. A California Muni Bond yielding 5% or a corporate bond yielding 7%. Assuming all other factors

 

are equal, which bond should you prefer if your marginal tax rate is 30%?

 

a. The muni bond

 

b. The corporate bond c. Either. You would be indifferent to the two. 38. Dilbert Enterprises has issued $1 billion of bonds with a sinking fund provision. With 5 years left

 

until maturity, Dilbert Enterprises does not retire bonds as provided for in the sinking fund

 

provision. What is the consequence of this action on the company?

 

a. Nothing as long as it still pays interest on the bonds and pays them off at maturity.

 

b. The bonds are in default as a result of violating the sinking fund covenant.

 

c. It depends on the payment history of Dilbert Enterprises.

 

d. None of the above.

 

39. A bond that currently trades at a premium will see its price do what until maturity (assuming

 

nothing else changes except the passage of time)?

 

a. Rise to par

 

b. Fall to par

 

c. Remain the same since prevailing interest rates have not changed

 

d. None of the above

 

40. You put $2,000 in a CD paying 6% for 10 years. How much money do you have at the end of 10

 

years? 41. You put $10,000 in a company 401K each year. The company matches this investment. You

 

expect to earn 8% each year on this money and you work for the company for 25 years before

 

you retire. How much money do you have at retirement?

 

42. You have decided that you need $3 million to retire in 35 years. How much money should you

 

save each month if you can earn 9% on this money? 43. You purchase a rental house for $100,000 with 20% down. The rental income pays for all

 

expenses and the mortgage for the entire time you own it. You sell it 18 years after you

 

purchase it. Assuming real estate prices increase 3.5% per year, at what price did you sell this

 

rental house?

 

44. Assuming you owe $45,000 on this house when you sell it, what is your gain on the house

 

above? 45. What is your rate of return on your equity investment given this gain?

 


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