1) In Berkshire Hathoway annual reports Warren Buffet highlights financial tenets that
he believes are important. Which of the following is not a financial tenet of Warren
Buffet?
a. Focus on return on equity (ROE) not earnings per share (EPS).
b. Calculate owner earnings similar to free cash flow after capital expenditures.
c. High profit margins relative to the industry.
d. Company should create at least one dollar of market value for every dollar retained.
e. All of the above are financial tenets of Warren Buffet.
2) The inclusion of the following in the cost of carry model will increase the futures
price
a. Dividends
b. Storage costs
c. Interest rate
d. a and b
e. None of the above
3) Cyclical companies are firms where
a. Sales, earnings and cash flows are extremely uncertain and not necessarily related to
the economy.
b. Sales, earnings and cash flows are likely to withstand changes caused by the
economic environment.
c. Sales, earnings and cash flows are heavily influenced by aggregate business activity.
d. Sales, earnings and cash flows are growing exponentially.
e. None of the above.
4) The market is considered to be overbought and subject to a negative correction when
more than
a. 60% of the stocks are selling above their 90 day average.
b. 70% of the stocks are selling above their 100 day average.
c. 80% of the stocks are selling above their 200 day average.
d. 70% of the stocks are selling above their 150 day average.
e. 90% of the stocks are selling above their 150 day average.
5) An example of a commodity-linked fixed income security is a
a. Cap and floor note.
b. Cash and debit.
c. Commodity debenture.
d. Bull and bear note.
e. Derivative commodity note.
6) An example of a value weighted stock market indicator series is the
a.Dow Jones Industrial Average.
b.Nikkei Dow Jones Average.
c.S & P 500 Index.
d.Value Line Index.
e.Shearson Lehman Hutton Index.
7) Abnormal returns associated with rankings by a major advisory service are
associated with
a.The PIE effect.
b.The Value-Line Enigma.
c.The Value-Line Effect.
d.The Standard and Poor’s Anomaly.
e.The rankings anomaly.
8) Exhibit 20.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The current stock price of Zanco Corporation is $50. Zanco Corporation has the
following put and call option prices with exercise prices at $45 and $50.
The time premium for the put option with a $45 exercise price is
a. $0.00
b. $1.50
c. $2.75
d. $5.25
e. $6.50
9) A call option differs from a put option in that
a. a call option obliges the investor to purchase a given number of shares in a specific
common stock at a set price; a put obliges the investor to sell a certain number of shares
in a common stock at a set price.
b. both give the investor the opportunity to participate in stock market dealings without
the risk of actual stock ownership.
c. a call option gives the investor the right to purchase a given number of shares of a
specified stock at a set price; a put option gives the investor the right to sell a given
number of shares of a stock at a set price.
d. a put option has risk, since leverage is not as great as with a call.
e. none of the above
10) A portfolio’s gross selectivity is made up of
a. Manager’s risk.
b. Net selectivity.
c. Diversification.
d. a and b.
e. b and c.
11) Compute the current earnings multiple if the dividend payout ratio for the aggregate
market is 60 percent, the required rate of return is 11%, and the dividend growth rate is
8%.
a. 15
b. 20
c. 25
d. 30
e. 35
12) Exhibit 23.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two
three-month issues. The corporation is concerned that interest rates will rise over the
next three months. Thus, the corporation purchases a 3 – 6 FRA whereby the
corporation pays the dealer’s quoted fixed rate of 3.5% in exchange for receiving
3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys
LIBOR from Newport Inc. at its bid rate of 3%. The notional principal is $50,000,000
and that there are 60 days between month 3 and month 6.
Suppose that 3-month LIBOR is 4.0% on the rate determination day, and the contract
specified settlement in arrears at month 6, describe the transaction that occurs between
the dealer and TexMex.
a. The dealer is obligated to pay TexMex $61,881.
b. The dealer is obligated to pay TexMex $61,500.
c. TexMex is obligated to pay the dealer $247,524.
d. TexMex is obligated to pay the dealer $246,000.
e. None of the above
13) The franchise P/E is a function of
a. Relative rate of return on new business opportunities
b. Size of superior return opportunities.
c. Duration of earnings growth.
d. a and b
e. a, b and c
14) The portfolio mixes of institutional investors around the world are approximately
the same.
15) Studies of industries indicate that their past performance can be useful in predicting
future performance.
16) The rates of returns for firms within an industry vary which indicates that company
analysis is necessary after industry analysis.
17) A preferred stock is a perpetuity.
18) The Goldman Sach analysis recommends an allocation of equity investments
among countries in comparison to the country’s normal weighting based on its relative
market value.
19) The growth rate of dividends and profit margin are the main determinants of the P/E
ratio.
20) The portfolio performance measure that can be most affected by a benchmark error
is the Sharpe measure.