On December 31 the balance in the Prepaid Insurance account was $4,000 (A+)

On December 31 the balance in the Prepaid Insurance account was $4,000. This is the remaining balance of a twelve-month policy purchased on October 31 in the current year. How much did this policy originally cost?

a) $4,000

b) $4,364

c) $3,333

d) $4,800

e) $5,333

2.

On April 1, 2009 a company paid the $1,350 premium on a three-year insurance policy with benefits beginning on that date. What will be the insurance expense on the annual income statement for the year ended December 31, 2009?

a) $450.00.

b) $337.50.

c) $37.50.

d) $1350.00.

e) $387.50.

3.

A company had revenue of $270,000, rent expense of $12,000, utility expense of $5,500, salary expense of $20,500, depreciation expense of $11,000, advertising expense of $6,500, dividends in the amount of $20,000, and a beginning balance in retained earnings of $19,900. What is the amount in the income summary account before it is closed for the period?

a) $55,500

b) $270,000

c) $234,400

d) $250,100

e) $214,500

4.

MOP Co. leased a portion of its store to another company for eight months beginning on October 1, 2009 at a monthly rate of $1,000. This other company paid the entire $8,000 cash on October 1, which MOP Co. recorded as unearned revenue. The journal entry made by MOP Co. at year- end on December 31, 2009 would include:

a) A debit to Cash for $8,000.

b) A debit to Unearned Rent for $5,000.

c) A debit to Rent Earned for $3,000.

d) A credit to Rent Earned for $3,000.

e) A credit to Unearned Rent for $3,000.

5.

Failure to record depreciation expense will overstate the asset and understate the expense.

a) True

b) False

6.

A company earned $2,000 in net income for October. Its net sales for October were $10,000. Its profit margin is:

a) 2%

b) 200%

c) $8,000

d) 20%

e) 500%

7.

Adjusting entries are made after the preparation of financial statements.

a) True

b) False

8.

Adjusting entries are used to record the effects of internal economic (financial) transactions and events.

a) True

b) False

9.

The matching principle requires that expenses get recorded in the same accounting period as the revenues that are earned as a result of the expenses, not when cash is paid.

a) True

b) False

10.

These transactions were completed by the art gallery opened by Thomas Buckner.

(1.) Started the gallery, Artery, by investing $38,000 cash and equipment valued at $10,000 in exchange for common stock.

(2.) Purchased $60 of office supplies on credit.

(3.) Paid $2,300 cash for the receptionist’s salary.

(4.) Sold a painting for an artist and collected a $4,700 cash commission on the sale.

(5.) Completed an art appraisal and billed the client $400.

What was the balance of the cash account after these transactions were posted?

a) $43,100.

b) $42,760.

c) $40,400.

d) $40,360.

e) $45,460.

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The management of Revco Products is exploring four different investment opportunities (A+)

The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows:

Project Number 1 2 3 4

Investment required $(486,000) $(351,000) $(267,000) $(445,000)

(Present value of Cash inflows at

a 10% discount rate.) 558,900 428,220 333,750 498,400

Net present value $72,900 $77,220 $66,750 $53,400

Life of the project 6 years 3 years 12 years 6 years

Internal rate of return 11% 8% 18% 19%

The company’s required rate of return is 10%; thus, a 10% discount rate has been used in the present value computations above. Limited funds are available for investment, so the company can’t accept all of the available projects.

Requirement 1:

Compute the project profitability index for each investment project.

Requirement 2:

Rank the four projects according to preference, in terms of net present value, project profitability index and internal rate of return.

Net Present Value Project

Profitability Index Internal Rate of

Return

First preference

Second preference

Third preference

Fourth preference

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Suppose you are the money manager of a $4.13 million investment fund (A+)

Suppose you are the money manager of a $4.13 million investment fund. The fund consists of 4 stocks with the following investments and betas:

STOCK INVESTMENT BETA

A $460,000 1.50

B 420,000 – 0.50

C 900,000 1.25

D 2,350,000 0.75

If the market’s required rate of return is 10% and the risk-free rate is 7%, what is the fund’s required rate of return?

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Assume that the risk-free rate is 4.0% and the expected return on the market is 10% (A+)

Assume that the risk-free rate is 4.0% and the expected return on the market is 10%. What is the required rate of return on a stock with a beta of 1.0?

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A mutual fund manager has a $20,000,000 portfolio with a beta of 0.95 (A+)

A mutual fund manager has a $20,000,000 portfolio with a beta of 0.95. The risk-free rate is 4.50% and the market risk premium is 5.5%. The manager expects to receive an additional $5,000,000 which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund’s required return to be 19%. What should be the average beta of the new stocks added to the portfolio?

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A stock’s returns have the following distribution (A+)

A stock’s returns have the following distribution:

DEMAND FOR THE COMPANY’S PRODUCTS

PROBABILITY OF THIS DEMAND OCCURRING

RATE OF RETURN IF THIS DEMAND OCCURS

Weak

0.1

-28%

Below average

0.4

-14

Average

0.3

15

Above average

0.1

25

Strong

0.1

47

Requirements:

a. Calculate the stock’s expected return.

b. Calculate the standard deviation.

c. Calculate the coefficient of variation.

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Stock R has a beta of 1.0, Stock S has a beta of 0.75 (A+)

Stock R has a beta of 1.0, Stock S has a beta of 0.75, the expected rate of return on an average stock is 10%, and the risk-free rate of return is 6%. By how much does the required return on the riskier stock exceed the required return on the less risky stock?

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A stock has a required return of 9%; the risk-free rate is 4.0%; and the market risk premium is 4% (A+)

A stock has a required return of 9%; the risk-free rate is 4.0%; and the market risk premium is 4%.

Requirements:

a. What is the stock’s beta?

b. If the market risk premium increased to 9%, what would happen to the stock’s required rate of return? Assume the risk-free rate and the beta remain unchanged.

I. If the stock’s beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium.

II. If the stock’s beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

III. If the stock’s beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium.

IV. If the stock’s beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

V. If the stock’s beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

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Calculate the required rate of return for Manning Enterprises (A+)

Calculate the required rate of return for Manning Enterprises, assuming that investors expect a 4.5% rate of inflation in the future. The real risk-free rate is 1.00% and the market risk premium is 6.0%. Manning has a beta of 1.5, and its realized rate of return has averaged 11.0% over the last 5 years.

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Stock X has a 10.0% expected return, a beta coefficient of 0.9, and a 40% standard deviation of expected returns (A+)

Stock X has a 10.0% expected return, a beta coefficient of 0.9, and a 40% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3, and a 25.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

Calculate each stock’s coefficient of variation. Round your answers to two decimal places.

Requirements:

a. CVx =

b. CVy =

c. Which stock is riskier for a diversified investor?

I. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X.

II. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is more risky. Stock Y has the higher beta so it is more risky than Stock X.

III. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is more risky. Stock X has the higher standard deviation so it is more risky than Stock Y.

IV. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is more risky. Stock X has the lower beta so it is more risky than Stock Y.

V. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is more risky. Stock Y has the lower standard deviation so it is more risky than Stock X.

Calculate each stock’s required rate of return.

d. rx =

e. ry =

f. On the basis of the two stocks’ expected and required returns, which stock would be more attractive to a diversified investor?

Calculate the required return of a portfolio that has $3,000 invested in Stock X and $9,500 invested in Stock Y. Round your answer to two decimal places.

g. rp =

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