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1) Exhibit 6.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Rit= return for stock i during period t
Rmt= return for the aggregate market during period t
Refer to Exhibit 6.4. What is the abnormal rate of return for Stock A during period t
using only the aggregate market return (ignore differential systematic risk)?
a.3.34
b.1.75
c.-1.75
d.-3.70
e.-1.70
2) Exhibit 23.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A company buys an interest rate cap that pays the difference between LIBOR and 8% if
LIBOR exceeds 8%. Current LIBOR is 7%. The amount of the option is $2,500,000,
and the settlement is every 6 months. Assume a 360 day year.
Find the payoff if LIBOR closes at 8.2%.
a. $0.00
b. $25,000.00
c. $50,000.00
d. -$25,000.00
e. -$50,000.00
3) The Efficient Frontier refers to a set of portfolios that
a. Have the highest expected return for a given level of risk.
b. Have the lowest risk for a given level of return.
c. Are dominant to all other portfolios.
d. a, b, and c above are correct.
e. None of the answers above are correct.
4) A vertical spread involves buying and selling call options in the same stock with
a. The same time period and price.
b. The same time period but different price.
c. A different time period but same price.
d. A different time period and different price.
e. Options in different markets.
5) Which of the following factors would be an indication of high quality earnings?
a. Earnings are close to cash.
b. Earnings are the result of repeat business.
c. Revenue recognition is based on the installment principle.
d. All of the above.
e. None of the above.
6) Based on the daily closings for the Dow Jones Industrial Average given in the table
below, calculate a four-day moving average for Day 4.
a. 10,500
b. 10,210
c. 10,215
d. 10,000
e. 11,000
7) Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
What is Star's traditional cash flow?
a. 81
b. 72
c. 51
d. 102
e. 131
8) An interest rate ____ is a combination of a cap and a floor.
a. Swap
b. FRA
c. LIBOR
d. Collar
e. None of the above
9) The major difference between valuing futures versus forward contracts stems from
the fact that future contracts are
a. Traded on exchange.
b. Backed by a clearinghouse.
c. Marked-to-market daily.
d. Less risky.
e. Relatively inflexible.
10) At what point would an investor be indifferent between a Trifton corporate bond
yielding 12.0 percent and a tax-free municipal bond of equal financial strength if the
investor's marginal tax rate is 25 percent?
a. 6.00%
b. 7.10%
c. 9.00%
d. 9.15%
e. 14.00%
11) Assume that you have just sold a stock for a loss at a price of $75, for tax purposes.
You still wish to maintain exposure to the sold stock. Suppose that you sell a put with a
strike price of $80 and a price of $7.25. Calculate the effective price paid to repurchase
the stock if the price after 35 days is $70.
a. $77.75
b. $87.25
c. $82.25
d. $72.75
e. None of the above
12) Exhibit 13.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Furniture Manufacturing Industry had free cash flow to equity (FCFE) of $63 for
the most recent year ending reported yesterday. The industry is in the mature stage and
anticipates a growth rate of 4% indefinitely. The required rate of return is 11% for this
industry.
Suppose unexpected inflation suddenly increases by 2 percent and there are no other
changes in expectations. What will be the new intrinsic value of the Furniture
Manufacturing Industry today?
a. $700
b. $728
c. $989
d. $1,260
e. $1,310
