Correct Answer: B

Correct Answer: B

In a univariate regression, the correlation coefficient between the dependent and the independent variables equals the square root of R-square. However, you should also be careful about the sign, which is not given by the R-square. Rather, you have to look at the sign of the slope coefficient. In this case, the slope coefficient is positive, implying that the dependent and the independent variables are positively correlated. The R-square equals 79% so the correlation coefficient equals +sqrt(0.79) = 0.89.

Correct Answer: B

On the BAII Plus, press 10 divide 12 = I/Y, 1000 PV, 40 +/- PMT, 0 FV, CPT N. On the HP12C, press 10 ENTER 12 divide i, 1000 PV, 40 CHS PMT, 0 FV, n. Note that the HP12C will display 29 as the answer. Make sure the BAII Plus has the value of P/Y set to 1.

Correct Answer: D

Percent spread = [(1.4428 - 1.4419)/1.4428] x 100 = 0.062%

Correct Answer: B

In order to minimize credit risk, most banks will transact large amounts only with blue chip customers.

Correct Answer: D

Since a high yield on investments will attract capital, the nation will run a capital account surplus which must be offset by a current account deficit.

Correct Answer: B

X = after-tax cash flow.

Y = before-tax cash flow.

X = Y(1 - T).

$10,000 = X(PVIFA(15%,10))

$10,000 = X(5.0188)

X = $1,992.51.

$1,992.51 = Y(1 - 0.40)

Y = $3,320.85 = $3,321.

Correct Answer: E

The residual dividend model is a model in which the dividend paid is set equal to the actual earnings minus the amount of retained earnings necessary to finance the firm's optimal capital budget. A firm follows 4 steps when using this model:

1.

The optimal capital budget is determined.

2.

The amount of equity needed to finance that budget, given its target capital structure, is determined.

3.

Retained earnings are used to meet equity requirements to the extent possible.

4.

Dividends are paid only if more earnings are available than are needed to support the optimal capital budget. As long as the firm finances with the optimal mix of debt and equity, and provided it uses only internally generated equity (retained earnings), then the marginal cost of each new dollar of capital will be minimized. Internally generated equity is available for financing some new investment, but beyond that amount, the firm must finance through more expensive common stock. At this point where new stock must be sold, the cost of equity and the marginal cost of capital, increases.

Correct Answer: C

C is wrong because it does not specify the fact that risk must also be considered.

Correct Answer: D

The infinite period Dividend Discount Model postulates that the current value of a common stock is equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is the growth rate of dividends. Next period's dividend is equal to this period's dividend multiplied by the dividend growth rate. In this question, next period's dividend is 3 x 1.04 = 3.12. The common stock is worth 3.12 / (0.16 - 0.04) = $26.