1) A positive covariance between two variables indicates that
a. the two variables move in different directions.
b. the two variables move in the same direction.
c. the two variables are low risk.
d. the two variables are high risk.
e. the two variables are risk free.
2) Exhibit 12.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 75 percent when the rate on long-term
government bonds falls to 8 percent. Since investors are becoming more risk averse, the
equity risk premium will rise to 7 percent and investors will require a 15 percent return.
The return on equity will be 12 percent.
To what price will the market rise if the earnings expectation is $32.00?
a. $384.00
b. $266.56
c. $213.44
d. $200.00
e. $125.44
3) Exhibit 14.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Rollerball Corporation’s industry averages are as follows:
Net Profit Margin = 7.5%; Total Asset Turnover = 2.2; Total Assets/Equity = 2.0
Rollerball Corporation has the following financial statements for year ending
12/31/2008. (000’s omitted)
Calculate Rollerball Corporation’s Total Asset Turnover.
a. 0.72
b. 0.85
c. 1.39
d. 1.65
e. 2.31
4) Exhibit 4.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You decide to sell 100 shares of Davis Industries short when it is selling at its yearly
high of $35. Your broker tells you that your margin requirement is 55 percent and that
the commission on the sale is $15. While you are short, Davis pays a $0.75 per share
dividend. At the end of one year you buy your Davis shares (cover your short sale) at
$30 and are charged a commission of $15 and a 6 percent interest rate.
Refer to Exhibit 4.4. What is your dollar return on the investment?
a.$130.50
b.$300.50
c.$100.00
d.$1,773.75
e.$3,500.00
5) An advantage of a forward contract over a futures contract is that
a. The terms of the contract are flexible
b. It is more liquid
c. It trades through a centralized market exchange
d. It is easier to unwind due to contract homogeneity
e. None of the above
6) 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 7.8%.
a. $0.00
b. $25,000.00
c. $50,000.00
d. -$25,000.00
e. -$50,000.00
7) According to the dividend growth model, if a company were to declare that it would
never pay dividends, its value would be
a. Based on earnings.
b. Based on expectations regarding.
c. Higher than similar firms since it could reinvest a greater amount in new projects.
d. Zero.
e. Based on the capital asset pricing model.
8) 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.
Calculate the intrinsic value of the Furniture Manufacturing Industry today.
a. $573
b. $596
c. $900
d. $936
e. $989
9) On January 2, 2003, you invest $10,000 in the Dog Mutual Fund, a load fund that
charges a fee of 7%. The fund’s returns were 12.8% in 2003, 13.9% in 2004, 7.9% in
2005. On December 31, 2005 you redeem all your shares. The dollar value is
a. $12,800.00
b. $12,892.50
c. $100,000.00
d. $128,925.00
e. $10,000.00
10) 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%.
If the futures contract was currently available for 1250, calculate the arbitrage profit.
a. $0
b. $133.41
c. -$133.41
d. $147.25
e. -$147.25
11) Consider the following list of risk factors:
Which of the following factors would you use to develop a microeconomic-based risk
factor model?
a. (1), (2), and (3).
b. (1), (3), and (5).
c. (2), (4), and (5).
d. (1), (3), and (6).
e. (4), (5), and (6).
12) Exhibit 14.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Rollerball Corporation’s industry averages are as follows:
Net Profit Margin = 7.5%; Total Asset Turnover = 2.2; Total Assets/Equity = 2.0
Rollerball Corporation has the following financial statements for year ending
12/31/2008. (000’s omitted)
Calculate Rollerball Corporation’s Net Profit Margin.
a. 3.9%
b. 8.4%
c. 14.6%
d. 40.4%
e. 41.8%
13) Consider X Bond Fund which consists of the 5 bonds shown below with no
liabilities.
If initially the value of the fund was $1,000,000 and the original shares were offered to
the public with a NAV of $25 per share, what is the current NAV of the fund?
a. $25.00
b. $27.68
c. $25.68
d. $28.76
e. $26.78
14) Exhibit 5.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
*2:1 Split on Stock Z after Close on Jan. 13, 2005
**3:1 Split on Stock X after Close on Jan. 15, 2005
The base date for index calculations is January 13, 2005
Refer to Exhibit 5.2. Calculate a price weighted average for January 16th.
a.30
b.32
c.34
d.36.13
e.None of the above
15) Exhibit 19.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently
hold a 20 year, Aa 2 percent coupon bond priced to yield 9.5 percent. As a swap
candidate you are considering a 20 year, Aa 14 percent coupon bond priced to yield
10.00. Assume a reinvestment rate of 11 percent, semiannual compounding, and a
one-year workout period.
The interest on one coupon for the candidate bond is
a. $70.00
b. $3.58
c. $3.85
d. $8.35
e. $5.38
16) Income distributions and capital gains distributions are the only source of returns
for mutual funds.
17) Present value of free cash flow to equity resembles the present value of earnings
concept except that it includes the capital expenditures required to maintain and grow
the firm and the change in working capital required for a growing firm.
18) The Capital Market Line (CML) can be thought of as the new Efficient Frontier.
19) The typical investor’s goals rarely change during his/her lifetime.
20) In evaluating bond performance, the Lehman Brothers Index is an appropriate risk
measure.
21) The binomial option pricing model approximates the price of an option obtained
using the Black-Scholes option pricing model as the number of subintervals increases.
22) Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata
claim on the capital gains and cash flows of securities held by financial institutions.
23) Based on the annual reports of Walgreens it has pursued both a low-cost strategy
and a differentiation strategy for different business segments.
24) The Nasdaq National Market System is an order driven market.