Question

13. A stock had returns of 16.70% (1 year ago), 21.60% (2 years ago), X (3 years ago),
and -31.20% (4 years ago) in each of the past 4 years. Over the past 4 years, the geometric average annual return for the stock was 3.34%. Three years ago, inflation was 4.35% and the risk-free rate was 5.63%. What was the real return for the stock 3 years ago?

A. 11.94% (plus or minus 0.03 percentage points)
B. 21.89% (plus or minus 0.03 percentage points)
C. 10.58% (plus or minus 0.03 percentage points)
D. 1.83% (plus or minus 0.03 percentage points)
E. None of the above is within 0.03 percentage points of the correct answer

7. Which one of the assertions about statement 1 and statement 2 is most likely to be true? Statement 1: Yesterday, the amount of trading activity on the stock market involving common stock was greater than the amount of trading activity on the stock market involving preferred stock.

Statement 2: If Cherry’s Blossoms has issued preferred stock, common stock, and bonds, then the preferred stock of Cherry’s Blossoms is most likely to be the riskiest of the securities issued by the company.

A. Statement 1 is true and statement 2 is true

B. Statement 1 is false and statement 2 is true

C. Statement 1 is false and statement 2 is false

D. Statement 1 is true and statement 2 is false

New England Singers is considering buying a new, high efficiency sound system. The new system would be purchased today for $86,000. It would be depreciated straight-line to $24,000 over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be $27,000. The system is expected to reduce costs by $23,000 in year 1 and by $73,000 in year 2. If the tax rate is 50% and the cost of capital is 6.7%, what is the net present value of the new sound system project?

A. $7,377 (plus or minus $100)
B. $8,695 (plus or minus $100)
C. -$15,021 (plus or minus $100)
D. $19,588 (plus or minus $100)
E. None of the above is within $10 of the correct answer

9. The managers of New England Singers have evaluated five potential projects. Each project has conventional cash flows. Based on the information given in this paragraph and presented in the table, which one of the projects is the safest?

Project	Cost of capital (in %)	Net present value (in $ millions)	Payback period (in years)	Discounted payback period (in years)	Internal rate of return (in %)
A	9.5	12.6	2.1	4.3	11.5
B	5.3	2.1	7.2	9.1	6.2
C	7.6	-4.7	1.7	?	7.2
D	6.2	25.8	5.0	9.8	13.4
E	4.9	8.4	5.2	9.4	12.8

A. Project A

B. Project B

C. Project C

D. Project D

E. Project E

Answer 1

Question 13

((1.1670)*(1.2160)*(1+x)*(1-0.3120))^(1/4) = 1.0334

1.16770*1.2160*0.688*(1+X) = 1.0334^4 = 1.1404

(1+x) = 1.1681

Nominal Stock return = 16.81%

Real return of stock = (Nominal - inflation)/(1+inflation) = (0.1681-0.0435)/(1+0.0435) = 0.1194 = 11.94%

Real return of stock = 11.94% (Option A)

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