1) Which of the following is not an example of an alternative asset class?
a. Hedge funds
b. Private equity
c. Real estate
d. Commodities
e. All of the above are examples of alternative asset classes.
2) Exhibit 19.1
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 10 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate
you are considering a 10 year, 8 percent coupon bond priced to yield 9 percent. Assume
a reinvestment at 9 percent, semiannual compounding, and a one-year workout period.
The value of the swap is ____ basis points in one year.
a. 32.3
b. 48.7
c. 75.8
d. 98.2
e. 104.3
3) Exhibit 12.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information that you propose to use to obtain an estimate of
year 2004 EPS for the MacLog Company.
In addition a regression analysis indicates the following relationship between growth in
sales per share for MacLog and GDP growth is
Estimate the firm’s sales per share for the year 2004.
a. $833.04
b. $900.08
c. $885.03
d. $925.56
e. $850.75
4) Senior secured bonds are
a.The most senior bonds in a firm’s capital structure.
b.Bonds with the lowest risk of default.
c.Bonds that are not backed by specific assets.
d.a and b.
e.a and c.
5) Exhibit 12.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
An analyst wishes to estimate the share price for Ashley Corporation. The following
information is made available:
Estimated profit margin = 15%
Total asset turnover = 2
Financial leverage = 1.2
Estimated dividend payout ratio = 75%
Required rate of return = 14%
Estimated EPS = $2.50
The firm’s sustainable growth rate is
a. 15%
b. 10%
c. 9%
d. 8%
e. 7%
6) Consider a stock that is currently trading at $10. Calculate the intrinsic value for a
call option that has an exercise price of $15.
a. $25
b. -$5
c. $0
d. $20
e. $5
7) What is the offering price for a mutual fund with a NAV of $22.50 and a load of 5
percent?
a. $21.38
b. $21.79
c. $22.50
d. $23.63
e. $27.50
8) Exhibit 23.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Darden Industries has decided to borrow $25,000,000.00 for six months in two
three-month issues. As the Treasurer, you are concerned that interest rates will rise over
the next three months and the rate upon which the second payment will be based will be
undesirable. (The amount of Darden’s first payment will be known at origination.) To
reduce the company’s interest rate exposure, you decide to purchase a 3 – 6 FRA
whereby you pay the dealer’s quoted fixed rate of 4.5% in exchange for receiving
3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys
LIBOR from McIntire Industries at its bid rate of 4%. (Assume a notional principal of
$25,000,000.00 and that there are 60 days between month 3 and month 6.)
Refer to Exhibit 23.2. How much compensation does the dealer receive for transaction
costs, credit risk and other costs associated with matching the FRA’s?
a. $31,250
b. $21,350
c. $41,000
d. $48,150
e. None of the above
9) Which of the following is a characteristic of hedge funds?
a. They are generally less restricted in how and where they can make investments.
b. They are more liquid than mutual fund shares.
c. They have no limitations on when and how often investment capital can be
contributed or removed.
d. All of the above.
e. None of the above.
10) The asset allocation decision must involve a consideration of
a.Cultural differences.
b.The objectives stated in the investor’s policy statement.
c.The types of assets that are appropriate for the investor.
d.The risk associated with different investments.
e.All of the above.
11) Exhibit 22.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
GE Corporation has a put option selling for $2.90 and a call option selling for $1.95,
both with a strike price of $29.00.
What would the net value of a long strap position be if the stock price at expiration is
$35?
a. -$1.15
b. -$2.30
c. $1.15
d. $2.30
e. $5.20
12) The dividend payout ratio for the aggregate market is 65 percent, the required rate
of return is 12 percent, and the expected growth rate for dividends is 6 percent.
Compute the current earnings multiple.
a. 5.41
b. 16.25
c. 6.25
d. 10.83
e. None of the above
13) Technicians believe, when the relative strength index is stable or ____, during a
____ market, the stock should do well during a ____ market.
a. Decreases, bull, bear.
b. Increases, bear, bull.
c. Decreases, bear, bull.
d. Increases, bull, bear.
e. None of the above.
14) Analysts following what the smart, sophisticated investor is doing would examine
a. Mutual fund cash positions.
b. Debit balances in brokerage houses.
c. Investment advisory opinions.
d. Breadth of market.
e. Stocks above their 200 day moving average.
15) In a negotiated bid, the underwriter carries out the following service(s)
a.Origination, risk-bearing, and distribution.
b.Origination and risk-bearing.
c.Risk-bearing and distribution.
d.Origination and distribution.
e.Risk-bearing and distribution.
16) Exhibit 14.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Modular Industries currently has a 16% annual growth rate while the market average is
6 percent. The market multiple is 10.
Determine the P/E ratio for Modular Industries assuming Modular can maintain its
superior growth rate for the next 8 years.
a. 6.4
b. 20.5
c. 16.5
d. 23.8
e. 29.5
17) Rank the following four investments in increasing order of historical risk.
a.Art, T-bills, corporate bonds, and common stock
b.T-bills, common stock, corporate bonds, art
c.Corporate bonds, T-bills, common stock, art
d.Common stock, corporate bonds, T-bills, art
e.T-bills, corporate bonds, common stock, art
18) The authors of the text prefer forward valuation ratios as opposed to historical
valuation variables in relative valuation methods.
19) The returns received by the average individual investor on funds managed by
investment companies will probably be superior to the average results for a specific
U.S. or international market.
20) The option premium is the price the call buyer will pay to the option seller if the
option is exercised.
21) Insured asset allocation is a strategy to limit investment losses by shifting funds
between an existing equity portfolio and a risk-free security.
22) For technical trading rules to consistently generate superior returns, the market
would have to be inefficient.
23) Switching industry groups over the course of a business cycle is known as a cyclical
strategy.
24) An investor in a pure yield pickup swap is most concerned about changes in interest
rates.