Finance Practice Questions for Exam Preparation

The DuPont identity can be used to help a financial manager determine the:
I. degree of financial leverage used by a firm.
II. operating efficiency of a firm.
III. utilization rate of a firm's assets.
IV. rate of return on a firm's assets.
Financial leverage:
A. is the ratio of a firm's revenues to its fixed expenses.
B. is inversely related to the level of debt.
C. is equal to the market value of a firm divided by the firm's book value.
D. increases the potential return to the shareholders.
Chris has $16,000 that she wants to invest for 1 year. She can invest it in Bank X and earn 5.50 percent
simple interest. Or, she can open an account at Bank Y and earn 5.39 percent interest, compounded
monthly. If Chris decides to invest at Bank X, she will:
A. earn $17.60 more than if she had invested with Bank Y.
B. have a total balance of $16,800 in her account after 1
year.
C. earn the same amount as if she had invested with Bank Y.
D. earn $4.03 less than if she had invested with Bank Y.
Suppose you have $600 today and you need $1,300 to buy a new laptop. How long will you have to wait
to buy the laptop if she earns 8 percent compounded annually on her money?
A. 9.86 years
B. 9.74 years
C. 9.93 years
D. 10.05 years
Your grandfather started his own business 65 years ago. He opened a savings account at the end of his
sixth month of business and contributed $x. Every six months since then he faithfully saved another $x.
A. I and III only
B. I, II, III, and IV
C. II, III, and IV only
D. II and III only

His savings account has paid an average interest rate of 5 percent. Today, his account is valued at
$304,384.88. How much did your grandfather save every six months?
A. $400
B. $250
C. $480
D. $320
You plan to receive annual payments of $4,000 at the end of each year for ten years, at the end of each
year. The first payment will be received in year 3. What is the present value of these payments if the
discount rate is 9 percent?
A. $19,882.44
B. $21,606.46
C. $23,551.04
D. $25,670.63
7) Which one of the following terms refers to a bond's rate of return that is required by the
marketplace?
A. Dirty yield
B. Yield to maturity
C. Coupon rate
D. Call yield
8) Company X has a 7 percent semiannual coupon bonds that sells for $976, has a face value of $1,000,
and has a yield to maturity of 8.079 percent. How many years will it be until this bond matures?
A. 5.00 years
B. 3.15 years
C. 2.50 years
D. 7.85 years
9) A 7.5 percent coupon bond issued by Company Y has a face value of $1,000, pays interest semi-
annually, has 8 years to maturity, and sells for $996.34. What is the yield-to-maturity?

A. 9.03 percent
B. 7.27 percent
C. 7.56 percent
D. 7.78 percent
10) Company A has issued 15-year coupon bonds with a face value of $1,000 and a 6.75 percent coupon
rate. The bonds pay annually. How much would you pay for one of these bonds if you require a 7.5
percent yield to maturity?
A. $1,066.20
B. $1,072.60
C. $927.40
D. $933.80
11) If a bond's yield to maturity is larger than the bond's coupon rate, then the bond’s price...
A. has reached its maturity
date.
B. is selling at a premium.
C. is selling at a discount.
D. is priced at par.
12) Which of the following combinations is ensured to decrease the interest rate sensitivity of a bond?
A. Decrease in both the time to maturity and the coupon rate
B. Increase in both the time to maturity and the coupon rate
C. Increase in the time to maturity and a decrease in the coupon rate
D. Decrease in the time to maturity and an increase in the coupon rate

13) A bond yielded a real rate of return of 3.87 percent for a time period when the inflation rate was
3.75 percent. What was the actual nominal rate of return?
A. 87.58 percent
B. 8.28 percent
C. 7.77 percent
D. 7.62 percent
14) Stock X will pay an annual dividend of $2.15 next month. The company just announced that future
dividends will increase by 1.5 percent annually. How much would you pay for one share of this stock if
your required return is 14 percent?
A. $16.13
B. $15.36
C. $17.20
D. $18.06
15) Company A does not expect to pay any dividends for the next three years. Four years from now, the
firm hopes to pay $.60 a share and double that amount each year for the following three years. After
that, the dividend is expected to increase in value by 3 percent annually. What is the price of this stock
today if the required return is 12 percent?
A. $30.38
B. $31.76
C. $29.30
D. $27.13
16) Shares that are sold to the public for the first time are sold:
A. on the NYSE.
B. at the bid price.
C. on NASDAQ.
D. in the primary market.