1) Which of the following statements is not true?
a. During a specific time period, rates of return across industry do not vary
substantially.
b. The rates of return for individual industries do vary substantially over time.
c. During a specific time period, rates of return within industries do vary substantially.
d. Risk measures for individual industries remain relatively constant over time.
e. None of the above (that is, all are true statements)
2) Exhibit 8.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Refer to Exhibit 8.5. Calculate the risk premium per unit of risk for the three portfolios
above assuming the risk-free rate is 4.0%.
A B C
a. 0.068 0.027 0.072
b. 0.414 0.276 0.389
c. 0.700 0.680 0.605
d. 0.300 0.280 0.205
e. 0.650 0.580 0.480
3) Which ratio is considered an internal liquidity ratio?
a. Total asset turnover
b. Net fixed asset turnover
c. Receivables turnover
d. Equity turnover
e. Inventory turnover
4) Exhibit 23.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Chimichango Industries has decided to borrow $50,000,000.00 for six months in two
three-month issues. As the Treasurer, you are concerned that interest rates will rise over
the next three months and the rate upon which the second payment will be based will be
undesirable. (The amount of Chimichango’s first payment will be known at origination.)
To reduce the company’s interest rate exposure, you decide to purchase a 3 – 6 FRA
whereby you pay the dealer’s quoted fixed rate of 5.91% in exchange for receiving
3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys
LIBOR from Megabuks Industries at its bid rate of 5.85%. (Assume a notional principal
of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
Assuming that 3-month LIBOR is 5.6% on the rate determination day, and the contract
specified settlement in advance, describe the transaction that occurs between the dealer
and Chimichango.
a. The dealer is obligated to pay Chimichango $38,215.00
b. The dealer is obligated to pay Chimichango $30,818.54.
c. Chimichango is obligated to pay the dealer $31,818.54.
d. Chimichango is obligated to pay the dealer $38,215.00
e. None of the above.
5) Studies by Reilly and Wright (1994, 2001) and Fabozzi (2005) suggest analysis of
high-yield bonds should be expanded to include all of the following except
a. The firm’s competitive position with respect to cost and pricing
b. The firm’s cash flow relative to interest expense, research expenses, and growth
needs
c. The firm’s market share and growth in sales
d. The quality of the total management team
e. All of the above were suggested as important areas of expanded analysis by these
studies
6) Exhibit 14.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
At the end of the year 2010 the CKL Corporation had operating free cash flow (OFCF)
of $300,000 and shares outstanding of 100,000. Total debt is currently $10,000,000.
The company projects the following annual growth rates in OFCF
From year 2019 onward growth in OFCF is expected to remain constant at 5% per year.
The stock has a beta of 1.1 and the current market price is $80. Currently the yield on
10-year Treasury notes is 5% and the equity risk premium is 4%. The firm can raise
debt at a pre-tax cost of 9%. The tax rate is 25%. The proportion of equity is 55% and
the proportion of debt is 45%.
Calculate the present value now (Year 2010) of OFCF during the period of constant
growth (that is for years 2019 onwards).
a. $19,644,612
b. $15,558,546
c. $17,377,494
d. $20,779,025
e. $10,779,025
7) The market portfolio consists of all
a. New York Stock Exchange stocks.
b. High grade stocks and bonds.
c. Stocks and bonds.
d. U.S. and non-U.S. stocks and bonds.
e. Risky assets.
8) Exhibit 21.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The S&P 500 stock index is at 1100. The annualized interest rate is 3.5% and the
annualized dividend is 2%.
Calculate the price of the futures contract now.
a. 1108.59
b. 1102.75
c. 1139.79
d. 1123.19
e. None of the above
9) XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay
dividends annually at a constant 6% annual growth rate indefinitely. If the required rate
of return on this investment is 12%, what is the current value of this common stock?
a. $1.50
b. $12.50
c. $13.25
d. $25.00
e. $26.50
10) Which of the following economic series are included in the NBER coincident
indicator group?
a. Employees on nonagricultural payrolls.
b. Change in consumer price index for services.
c. Index of consumer expectations.
d. Spread of 10-year Treasury yield less fed funds.
e. Index of stock prices.
11) Financial futures have become an increasingly attractive investment alternative
since the Chicago Board of Trade (CBOT) began trading them in 1977, and their
hedging function partly accounts for the growth in trading. Which of the following
statements concerning financial futures is true?
a. Financial futures protect the investment portfolio against inflation in the economy.
b. Investors seek protection against the increasing volatility of interest rates.
c. Unlike commodity futures, factors that influence price shifts are not supply and
demand of the commodity but buyer psychology.
d. A reason for their popularity is that trading is restricted to government obligations,
which reduces risks.
e. All of the above are true statements
12) If the real return for corporate bonds was 4% and the inflation rate was 2%, what is
the nominal return for corporate bonds?
a.1.96%
b.2.00%
c.4.00%
d.6.08%
e.6.42%
13) Once it becomes clear the economy is recovering,
a. Financial stocks rise on expectations of increases in loan demand, housing
constructions and security offerings.
b. Consumer durable stocks rise on expectations of rising consumer confidence and
personal income.
c. Capital goods stocks rise on expectation of increases in business capital spending.
d. Basic materials stocks rise on expectation of rising profit margins.
e. Consumer staple stocks rise on expectations that consumers will continue to spend on
necessities.
14) In a ladder strategy, funds are invested equally among a wide range of maturities.
15) The delta in the Black-Scholes model is simply the slope of a line tangent to the call
option price curve.
16) The longer the time to maturity, the greater the percentage change in a bond’s price.
17) Forward rate agreements usually require substantial collateral.
18) The Standard & Poor’s International Index consists of 3 international, 19 national,
and 38 international industry indexes.
19) Initial public offerings (IPOs) involve selling of bonds to the public for the first
time.
20) An increase in the retention ratio will cause a decrease in the growth rate.
21) The pure expectations hypothesis suggests futures prices serve as unbiased forecasts
of future spot prices.
22) Bond-market indicator series have been around much longer than stock-market
indicator series.
23) It is very important when diversifying that the correlation between rates of return
for various countries be high and very stable over time.