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Midterm Exam 1. A(n) _______________ has a _______________ distribution and is best characterized by its_______________ and its average. A. abnormal distribution, bell pepper frequency, standard deviation B. normal distribution, bell shaped frequency, irregular deviation C. normal distribution, bell pepper frequency, standard deviation D. abnormal distribution, bell shaped frequency, standard deviation E. normal distribution, bell shaped frequency, standard deviation 2. Which of the following best describes a return earned in an average year over a multiyear period? A. positive square root of the average compound return B. total return divided by N - 1, where N equals the number of individual returns C. arithmetic average D. total compound return divided by the number of individual returns E. average compound return earned per year over a multiyear period 3. _______________ is the excess return an investor requires in addition to the risk-free rate. A. Risk premium B. Average return C. Real return D. Inflation premium E. Required return 4. One year ago, you purchased 100 shares of a stock. This morning you sold those shares and realized a total return of 8.2 percent. Given this information, you know for sure the: A. stock price increased by 8.2 percent over the last year B. stock increased in value over the past year C. stock paid a dividend D. dividend yield is greater than zero E. sum of the dividend yield and the capital gains yield is 8.2 percent 5. On February 26, 2015, on its Form10-K, filed with the Security and Exchange Commission, Tesla Motors Inc. reported to the public (Link to Filing at SEC.gov), which of the following: A. accounts payable increased $1,532,246,000 as a result of 51,248 Tesla electric cars catching fire in 2013 B. total liabilities in the amount of $4,879,345 at December 31, 2014 C. gross profit of $61,283 thousand and $394,283 thousand for the years ended December 31, 2013 and December 31, 2012, respectively—a decrease of 84% D. a net loss in the amount of $294,040,000 for the year ended December 31, 2013 E. a change in net working capital of $500,712,000 from the year ended December 31, 2013 to the year ended December 31, 2014 http://www.sec.gov/Archives/edgar/data/1318605/000156459015001031/tsla-10k_20141231.htm#Item_8 http://www.sec.gov/Archives/edgar/data/1318605/000156459015001031/tsla-10k_20141231.htm#Item_8 Financial Management – Final Exam 2 6. In accordance with your textbook and reports by Ibbotson and Sinquefield, large company stocks’ historical returns are based on the: A. largest 20 percent of the stocks traded on the NYSE B. stocks of the 500 companies included in the S&P 500 index C. returns of all of the stocks listed on the NYSE D. stock returns for the largest 10 percent of the publicly traded firms in the U.S. E. returns of the 100 largest firms in the U.S. 7. Which of the following is true when comparing the dollar return and the percentage return on a stock investment? A. the percentage return is not indicative of the size of the investment while the dollar return is B. the percentage return does not consider the time value of money while the dollar return does C. the percentage return is less accurate than the dollar return because the percentage return does not include dividend income while the dollar return does D. percentage returns can be negative, zero, or positive while dollar returns must either be zero or a positive value E. percentage returns are based on the total rate of return while dollar returns are based on capital gains 8. According to the text book, which of the following is used as the risk-free rate? A. long-term corporate bonds B. large company stocks C. long-term government bonds D. inflation, as measured by the Consumer Price Index E. U.S. Treasury bill 9. Over the period of 1926-2014, which one of the following investment classes had the highest volatility of returns? A. small-company stocks B. U.S. Treasury bills C. large-company stocks D. long-term government bonds E. long-term corporate bonds Use the following article excerpt to answer the next two questions S.& P. Downgrades Debt Rating of U.S. for the First Time By BINYAMIN APPELBAUM and ERIC DASH Financial Management – Final Exam 3 NYTimes.com Published: August 5, 2011 WASHINGTON — Standard & Poor’s removed the United States government from its list of risk-free borrowers for the first time on Friday night, a downgrade that is freighted with symbolic significance but carries few clear financial implications. The company, one of three major agencies that offer advice to investors in debt securities, said it was cutting its rating of long-term federal debt to AA+, one notch below the top grade of AAA. It described the decision as a judgment about the nation’s leaders, writing that “the gulf between the political parties” had reduced its confidence in the government’s ability to manage its finance. … “The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,” the company said in a statement. … The downgrade could lead investors to demand higher interest rates from the federal government and other borrowers, raising costs for governments, businesses and home buyers. But many analysts say the impact could be modest, in part because the other ratings agencies, Moody’s and Fitch, have decided not to downgrade the government at this time. … The credit rating agencies have been trying to restore their credibility after missteps leading to the financial crisis. A Congressional panel called them “essential cogs in the wheel of financial destruction” after their wildly optimistic models led them to give top-flight reviews to complex mortgage securities that later collapsed. A downgrade of federal debt is the kind of controversial decision that critics have sometimes said the agencies are unwilling to make. On the other hand, S. & P. is acting in the face of evidence that investors consider Treasuries among the safest investments in the world. Yields rose before the Congressional deal on fears of default and a possible downgrade. But after a deal was struck, yields sank as money poured into Treasuries as a safe haven from sharply falling stocks and the turmoil of the European debt markets. On Friday, the price of Treasuries fell sharply in heavy selling, and yields rose, reversing the moves of recent sessions. The 10-year Treasury note ended the day with a yield of 2.56 percent. The United States has maintained the highest credit rating for decades. S. & P. first designated it AAA in 1941, reflecting a steadfast belief that the richest nation in the world would not default on its debt payments. The rating was also bolstered by the role of the dollar as the world’s leading currency, ensuring that demand for American debt securities would remain strong in spite of burgeoning deficits. … The federal government makes about $250 billion in interest payments a year, so even a small increase in the rates demanded by investors in United States debt could add tens of billions of dollars to those payments. … (http://www.nytimes.com/2011/08/06/business/us-debt-downgraded...) 10. Using the excerpts of the article above, which of the following statements is true? A. the 2.56 percent cited in the article is the coupon rate B. S. & P. giving a different rating than Moody’s and Fitch is an example of a stock split C. if investors demand higher interest rates, the present value of the debt securities increases, making them more expensive for investors to purchase D. $250 billion in interest payments is the risk premium E. none of the above http://www.nytimes.com/2011/08/06/business/us-debt-downgraded-by-sp.html?scp=4&sq=standard%20&%20poor&st=cse http://www.nytimes.com/2011/08/06/business/us-debt-downgraded-by-sp.html?scp=4&sq=standard%20&%20poor&st=cse http://www.nytimes.com/2011/08/06/business/us-debt-downgraded-by-sp.html?scp=4&sq=standard%20&%20poor&st=cse http://www.nytimes.com/2011/08/06/business/us-debt-downgraded-by-sp.html?scp=4&sq=standard%20&%20poor&st=cse http://www.nytimes.com/2011/08/06/business/us-debt-downgraded-by-sp.html?scp=4&sq=standard%20&%20poor&st=cse http://www.nytimes.com/2011/08/06/business/us-debt-downgraded-by-sp.html?scp=4&sq=standard%20&%20poor&st=cse Financial Management – Final Exam 4 11. The reference to “raising costs for government” in the excerpts of the article above is a result of: A. the US government being delisted and its stock no longer trading on the NYSE B. the US government being delisted and its stock no longer trading on the NASDAQ C. investors demanding a higher yield to maturity due to the higher default risk D. investors demanding a lower yield to maturity due to the lower default risk E. triggering the debt covenants that lead to all debt becoming due 12. Mike recently celebrated his 65th birthday. In meeting with his stock broker, Mike is likely to hear which of the following terms related to the performance of his investments? I. ERR - external rate of rate II. ROI - return on investment III. AARP – annualized accumulated return percentage IV. GCI – gross commission income A. I only B. I and II only C. II only D. II and III only E. III only 13. What was the average annual risk premium on small-company stocks during the period of 19262014? A. 9.1 percent B. 5.4 percent C. 6.4 percent D. 16.2 percent E. 13.2 percent 14. Based on the period 1926-2014, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk? A. between 0 and 1 percent B. between 1 and 2 percent C. between 2 and 3