1) Which equation is valid?
a. g = Percent of earnings retained / Return on equity
b. g = Return on equity / Percent of earnings retained
c. g = Return on equity / Return on total assets
d. g = Percent of earnings retained x Return on equity
e. g = Total assets x Return on total assets
2) Exhibit 10.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
What is BMC’S operating profit margin?
a. 0.800
b. 0.054
c. 0.080
d. 0.540
e. 5.480
3) When a firm seeks to identify itself as unique in its industry in an area that is
important to buyers it is known as a
a. Defensive strategy
b. Differentiation strategy
c. Low-cost strategy
d. Focused strategy
e. Value strategy
4) The expected return for a stock, calculated using the CAPM, is 10.5%. The market
return is 9.5% and the beta of the stock is 1.50. Calculate the implied risk-free rate.
a. 7.50%
b. 13.91%
c. 17.50%
d. 21.88%
e. 14.38%
5) What is the value of a zero coupon bond with a yield to maturity of 9%, a par value
of $1,000, and 10 years to maturity? (Assume semi-annual compounding)
a. $208.29
b. $414.64
c. $422.41
d. $643.93
e. $910.00
6) Which of the following is not considered a basic competitive force?
a. Rivalry among existing competitors
b. Threat of new entrants
c. Threat of substitute products
d. Threat of government interference
e. Bargaining power of buyers and suppliers
7) You are trying to decide between a par value corporate bond carrying a coupon rate
of 6.25% per year and a par value municipal bond that pays an annual coupon rate of
4.75%. Assuming all other factors are the same and you are in the 28% tax bracket,
which bond should you choose and why?
a.Corporate bond because the after tax yield is 6.25%.
b.Corporate bond because the after tax yield is 4.5%.
c.Municipal bond because the equivalent taxable yield is 6.3%.
d.Municipal bond because the equivalent taxable yield is 6.6%.
e.You will be indifferent between the two because the after tax yields are the same.
8) Exhibit 17.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
What price would you pay in dollars to purchase this bond?
a. $62
b. $9.954
c. $48.08
d. $99.544
e. $995.44
9) Escalation bias refers to the situation where
a.Investors have a propensity to sell winners too soon and hang on to losers too long.
b.Investors ignore bad news and overemphasize good news.
c.Investors tend to follow the herd.
d.Investors put more money into a failure rather than into a success.
e.Investors are all noise traders.
10) The excess return form of the single-index market model is
a. Rit= α+ b(Rmt − Rit) + eit
b. RFRt= α+ b(Rmt − RFRt) + eit
c. Rit − RFRt= α + b(Rmt) + eit
d. Rit= α+ b(Rmt− RFRt) + eit
e. Rit− RFRt= + b(Rmt− RFRt) + eit
11) One method for estimating the parameters for the Capital Asset Pricing Model is to
estimate a portfolio’s characteristic line via regression techniques using the single-index
market model.
12) REITS are investment companies that invest in high-quality money market
instruments such as Treasury bills, high-grade commercial paper, and large CD’s.
13) Risk measures for different industries remain fairly constant over time, so the
historical risk analysis is useful for estimating future risk.
14) Prices in efficient capital markets fully reflect all available information and rapidly
adjust to new information.
15) Since futures contracts are “marked-to-market” daily, the gains and losses are
settled daily.
16) A major advantage of the Arbitrage Pricing Theory is the risk factors are clearly
universally identifiable.