1) Which of the following statements concerning the competitive environment is true?
a. High fixed costs encourage firms to produce at a low level of capacity, in order to
minimize fixed cost per unit produced.
b. Low current prices relative to costs in an industry indicate low barriers to entry.
c. Substantial economies of scale do not give a current industry member an advantage
over a new firm.
d. The ability to substitute another product limits the industry’s profit potential.
e. Buyers and suppliers do not influence the profitability of an industry.
2) Exhibit 12.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 65 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.
What is your expectation of the market P/E ratio?
a. 8.33
b. 5.33
c. 9.03
d. 6.02
e. 3.24
3) 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 value weighted index for January 16th if the initial
index value is 100.
a.123.07
b.100.00
c.102.31
d.111.54
e.None of the above
4) Limitations on the use of ratios include
a. Accounting comparability.
b. Company homogeneity.
c. Consistent results.
d. A reasonable range within the industry.
e. All of the above
5) Under the performance attribution analysis method, the ____ measures the manager’s
ability to form specific market segment portfolios that generate superior returns relative
to the way in which the comparable market segment is defined in the benchmark
portfolio weighted by the manager’s actual market segment investment proportions.
a. Selection effect
b. Allocation effect
c. Distribution effect
d. Diversification effect
e. Attribution effect
6) Alternative institutions favor different sectors of the bond market based on
a. The level of interest rates.
b. The tax code applicable to the institution.
c. The nature of the institution’s asset structure
d. a and b.
e. b and c.
7) Exhibit 11.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Davenport Corporation’s last dividend was $2.70 and the directors expect to maintain
the historic 3 percent annual rate of growth. You plan to purchase the stock today
because you feel that the growth rate will increase to 5 percent for the next three years
and the stock will then reach $25 per share.
How much should you be willing to pay for the stock if you feel that the 5 percent
growth rate can be maintained indefinitely and you require a 17 percent return?
a. $22.16
b. $19.28
c. $21.32
d. $23.63
e. $25.46
8) An active portfolio manager sold $90 million of stocks in a year. If the portfolio had
an average value of $110 million in assets under management what is the portfolio
turnover ratio?
a. 22.2%
b. 81.8%
c. 90.0%
d. 110.0%
e. 122.2%
9) Which of the following are reasons that U.S. investors should consider foreign
markets when constructing global portfolios.
a.Ignoring foreign markets reduced their choices of investment opportunities.
b.Foreign markets have low correlations with U.S. markets.
c.Returns on non-U.S. stocks can substantially exceed returns for U.S securities.
d.All of the above.
e.None of the above.
10) Which of the following is not true about interest rate swaps?
a. Payments are based on a notional principal.
b. Floating rate payers profit if interest rates fall.
c. Payments can be quarterly as well as semi-annually.
d. Parities exchange debt obligations.
e. Default risk is a possibility in the swaps market.
11) 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 value of the swap is ____ basis points in one year.
a. 0.004921
b. 0.4921
c. 4.921
d. 49.21
e. 492.1
12) An increase in any of the following will cause the expected dividend growth rate to
increase for an industry except
a. Profit margin
b. Total asset turnover
c. Return on equity
d. Dividend payout ratio
e. Financial leverage
13) Assume that as a portfolio manager the beta of your portfolio is 1.4 and that your
performance is exactly on target with the SML data under condition 1. If the true SML
data is given by condition 2, how much does your performance differ from the true
SML?
a. 2.0% lower
b. 0.5% lower
c. 0.5% lower
d. 1.0% higher
e. 2.0% higher
14) The minimum price of a convertible bond is
a. Min (Bond Value, Conversion Value).
b. Max (Bond Value, Conversion Value).
c. Min (Stock Value, Conversion Value).
d. Max (Stock Value, Conversion Value).
e. None of the above.
15) Which of the following is not characteristic of the “growth” phase in the industry
life cycle?
a. Consumer will accept uneven quality
b. Products have technical and performance differentiation
c. High advertising costs
d. Low profits
e. Many competitors
16) Exhibit 14.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
What is Left-Aid Corporation’s expected sustainable growth rate?
a. 11.9%
b. 18.7%
c. 22.1%
d. 27.7%
e. 30.0%
17) Exhibit 13.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
At the end of the year 2004 the Office Equipment Industry had free cash flow to equity
(FCFE) of $2.50 per share. The following annual growth rates in FCFE are projected:
From year 2013 onward growth in FCFE is expected to remain constant at 5% per year.
The industry has a beta of 0.90 and the current industry price is $105. Currently the
yield on 10-year Treasury notes is 5% and the equity risk premium is 4%
Calculate the present value now (Year 2004) of FCFE during the period of constant
growth (that is for years 2013 onwards).
a. $116.15
b. $97.03
c. $155.58
d. $89.86
e. $67.89
18) Exhibit 14.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following information on Kayray Corporation. Your ultimate
objective is to calculate the EVA for the firm.
Calculate the dollar cost of capital.
a. 286.2
b. 207
c. 234.36
d. 238.44
e. 302.9