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Suppose the 1-year risk-free rate of return in the U.S. is 4% and the 1-year risk-free rate
of return in Britain is 6%. The current exchange rate is 1 pound = U.S. $1.67. A 1-year
future exchange rate of __________ for the pound would make a U.S. investor
indifferent between investing in the U.S. security and investing in the British security.
A. 1.6385
B. 2.0411
C. 1.7500
D. 2.3369
__________ is a true statement.
A. During periods of inflation, LIFO makes the balance sheet less representative of the
actual inventory values than if FIFO were used
B. During periods of inflation, FIFO makes the balance sheet less representative of
actual inventory values than if LIFO were used
C. After inflation ends, distortion due to LIFO will disappear as inventory is sold
D. During periods of inflation, LIFO overstates earnings relative to FIFO
Low Fly Airline is expected to pay a dividend of $7 in the coming year. Dividends are
expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the
expected return on the market portfolio is 14%. The stock of Low Fly Airline has a beta
of 3.00. The intrinsic value of the stock is
A. $46.67.
B. $50.00.
C. $56.00.
D. $62.50.
Think Tank Company has an expected ROE of 26%. The dividend growth rate will be
_______ if the firm follows a policy of plowing back 90% of earnings.
A. 2.6%
B. 10%
C. 23.4%
D. 90%
The "real," or inflation-adjusted, exchange rate is
A. the balance of trade.
B. the budget deficit.
C.-the purchasing-power ratio.
D. unimportant to the U.S. economy.
E. None of the options are correct.
A common strategy for passive management is
A. creating an index fund.
B. creating a small firm fund.
C. creating an investment club.
D. creating an index fund and creating an investment club.
E. creating a small firm fund and creating an investment club.
If stock prices follow a random walk,
A. it implies that investors are irrational.
B. it means that the market cannot be efficient.
C. price levels are not random.
D. price changes are random.
E. price movements are predictable.
The market-capitalization rate on the stock of Fast Growing Company is 20%. The
expected ROE is 22%, and the expected EPS are $6.10. If the firm's plowback ratio is
90%, the P/E ratio will be
A. 7.69.
B. 8.33.
C. 9.09.
D. 11.11.
E. 50.
Which of the following are characteristics of preferred stock?
I) It pays its holder a fixed amount of income each year at the discretion of its
managers.
II) It gives its holder voting power in the firm.
III) Its dividends are usually cumulative.
IV) Failure to pay dividends may result in bankruptcy proceedings.
A. I, III, and IV
B. I, II, and III
C. I and III
D. I, II, and IV
E. I, II, III, and IV Only I and III are true.
A fixed-income security pays
A. a fixed level of income for the life of the owner.
B. a fixed stream of income or a stream of income that is determined according to a
specified formula for the life of the security.
C. a variable level of income for owners on a fixed income.
D. a fixed or variable income stream at the option of the owner.
Which of the following bonds has the longest duration?
A. A 15-year maturity, 0% coupon bond.
B. A 15-year maturity, 9% coupon bond.
C. A 20-year maturity, 9% coupon bond.
D. A 20-year maturity, 0% coupon bond.
E. Cannot tell from the information given
The expected return/beta relationship is used
A. by regulatory commissions in determining the costs of capital for regulated firms.
B. in court rulings to determine discount rates to evaluate claims of lost future incomes.
C. to advise clients as to the composition of their portfolios.
D. All of the options are correct.
E. None of the options are correct.
A convertible bond has a par value of $1,000 and a current market price of $850. The
current price of the issuing firm's stock is $29, and the conversion ratio is 30 shares.
The bond's market conversion value is
A. $729.
B. $810.
C. $870.
D. $1,000.
E. None of the options are correct.
The average duration of unemployment and changes in the consumer price index for
services are
A. leading economic indicators.
B. coincidental economic indicators.
C.-lagging economic indicators.
D. composite economic indicators.
An investor purchases one municipal and one corporate bond that pay rates of return of
7.2% and 9.1%, respectively. If the investor is in the 15% marginal tax bracket, his or
her after-tax rates of return on the municipal and corporate bonds would be ________
and ______, respectively.
A. 7.2%; 9.1%
B. 7.2%; 7.735%
C. 6.12%; 7.735%
D. 8.471%; 9.1%
_________ below which it is difficult for the market to fall.
A. An intrinsic value is a value
B. A resistance level is a value
C. A support level is a value
D. An intrinsic value and a resistance level are values
E. A resistance level and a support level are values
The most recently issued Treasury securities are called
A. on the run.
B. off the run.
C. on the market.
D. off the market.
E. None of the options are correct.
According to Michael Porter, there are five determinants of competition. An example of
_____ is when the availability limits the prices that can be charged to customers.
A. threat of entry
B. rivalry between existing competitors
C.-pressure from substitute products
D. bargaining power of buyers
E. bargaining power of suppliers
Nonsystematic risk is also referred to as
A. market risk or diversifiable risk.
B. firm-specific risk or market risk.
C. diversifiable risk or market risk.
D. diversifiable risk or unique risk.
__________ provides a snapshot of the financial condition of the firm at a particular
time.
A. The balance sheet
B. The income statement
C. The statement of cash flows
D. All of the options are correct.
E. None of the options are correct.
The financial statements of Snapit Company are given below.
Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company. The firm's leverage ratio for 2009
is
A. 2.25.
B. 3.53.
C. 2.61.
D. 3.06.
E. None of the options are correct.
The financial statements of Snapit Company are given below.
Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements for Snapit Company. The firm's current ratio for 2009
is
A. 1.98.
B. 2.47.
C. 0.65.
D. 1.53.
E. None of the options are correct.
What is the yield to maturity of a 3-year zero-coupon bond?
Suppose that all investors expect that interest rates for the 4 years will be as follows:
A. 7.00%
B. 9.00%
C. 6.99%
D. 4.00%
E. None of the options are correct.
The straightforward generalization of the simple CAPM to international stocks is
problematic because
A. inflation-risk perceptions by different investors in different countries will differ as
consumption baskets differ.
B. investors in different countries view exchange-rate risk from the perspective of
different domestic currencies.
C. taxes, transaction costs, and capital barriers across countries make it difficult for
investors to hold a world-index portfolio.
D. All of the options are correct. E. None of the options are correct.
All of the factors make a broad generalization of the CAPM to international stocks
problematic.
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You
were instructed to
use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free
rate is 4%, and
the expected market rate of return is 11%. Your company has a beta of 0.75, and the
project that you are
evaluating is considered to have risk equal to the average project that the company has
accepted in the past.
According to CAPM, the appropriate hurdle rate would be
A. 4%.
B. 9.25%.
C. 15%.
D. 11%.
E. 0.75%.
Suppose that the average P/E multiple in the oil industry is 22. Exxon is expected to
have an EPS of $1.50 in the coming year. The intrinsic value of Exxon stock should be
A. $33.00.
B. $35.55.
C. $63.00.
D. $72.00.
E. None of the options are correct.
Rodney holds a portfolio of risky assets that represents his entire risky investment. To
evaluate the performance of Rodney's portfolio, in which order would you complete the
steps listed?
I) Compare the Sharpe measure of Rodney's portfolio to the Sharpe measure of the best
portfolio.
II) State your conclusions.
III) Assume that past security performance is representative of expected performance.
IV) Determine the benchmark portfolio that Rodney would have held if he had chosen a
passive strategy.
A. I, III, IV, II
B. III, IV, I, II
C. IV, III, I, II
D. III, II, I, IV
E. III, I, IV, II
Supply-side economists wishing to stimulate the economy are most likely to
recommend
A. a decrease in the money supply.
B. a decrease in production output.
C. an increase in the real interest rate.
D. a decrease in the tax rate.
E.-an increase in mortgage rates.
The current market price of a share of Boeing stock is $75. If a call option on this stock
has a strike price of $70, the call
A. is out of the money.
B. is in the money.
C. sells for a higher price than if the market price of Boeing stock is $70.
D. is out of the money and sells for a higher price than if the market price of Boeing
stock is $70.
E.is in the money and sells for a higher price than if the market price of Boeing stock is
$70.
You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard
deviation of 0.21 and a
T-bill with a rate of return of 0.045.
The slope of the capital allocation line formed with the risky asset and the risk-free
asset is equal to
A. 0.4667.
B. 0.8000.
C. 0.3095.
D. 0.41667.
E. Cannot be determined.
You purchased one oil future contract at $70 per barrel. What would be your profit
(loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the
contract size is 1,000 barrels and there are no transactions costs.
A. $3.12 profit
B. $31.20 profit
C. $3.12 loss
D. $31.20 loss
E. None of the options are correct.
With regard to futures contracts, what does the word "margin" mean?
A. It is the amount of the money borrowed from the broker when you buy the contract.
B. It is the maximum percentage that the price of the contract can change before it is
marked to market.
C. It is the maximum percentage that the price of the underlying asset can change
before it is marked to market.
D. It is a good-faith deposit made at the time of the contract's purchase or sale.
E. It is the amount by which the contract is marked to market.
The duration of a 15-year zero-coupon bond is
A. smaller than 15.
B. larger than 15.
C. equal to 15.
D. equal to that of a 15-year 10% coupon bond.
E. None of the options are correct.
