Paper Express Company has a balance sheet which lists $85 million in assets, $40
million in liabilities, and $45 million in common shareholders’equity. It has 1,400,000
common shares outstanding. The replacement cost of the assets is $115 million. The
market share price is $90.
What is Paper Express’s book value per share?
A. $1.68
B. $2.60
C. $32.14
D. $60.71
E. None of the options are correct.
What should the purchase price of a 3-year zero-coupon bond be if it is purchased today
and has face value of $1,000?
A. $887.42
B. $871.12
C. $879.54
D. $856.02
E. $866.32
Strongest evidence in support of the CAPM has come from demonstrating that
A. the market beta is equal to 1.0.
B. nonsystematic risk has significant explanatory power in estimating security returns.
C. the average return beta relationship is highly significant.
D. the intercept in tests of the excess returns beta relationship is exactly zero.
E. professional investors do not generally outperform market indexes, demonstrating
that the market is efficient.
Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has
total fixed costs of $500,000 and variable costs of 50 per widget. Firm B has total fixed
costs of $240,000 and variable costs of 75 per widget. The corporate tax rate is 40%. If
the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a
recession, each firm will sell 1,100,000 widgets. Calculate firm A’s degree of operating
leverage.
A.-11.0
B. 2.86
C. 9.09
D. 1.00
A hedge ratio for a call option is ________, and a hedge ratio for a put option is
______.
A. negative; positive
B. negative; negative
C. positive; negative
D. positive; positive
E. zero; zero
The financial statements of Midwest Tours are given below.
Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours. The firm’s current ratio for 2009 is
A. 1.82.
B. 1.03.
C. 1.30.
D. 1.65.
E. None of the options are correct.
The riskiness of individual assets
A. should be considered for the asset in isolation.
B. should be considered in the context of the effect on overall portfolio volatility.
C. should be combined with the riskiness of other individual assets in the proportions
these assets constitute
the entire portfolio.
D. should be considered in the context of the effect on overall portfolio volatility and
should be combined with the
riskiness of other individual assets in the proportions these assets constitute the entire
portfolio.
Consider the multifactor APT. There are two independent economic factors, F1 and F2.
The risk-free rate of return is 6%. The following information is available about two
well-diversified portfolios:
Assuming no arbitrage opportunities exist, the risk premium on the factor F2 portfolio
should be
A. 3%.
B. 4%.
C. 5%.
D. 6%.
Asset allocation refers to
A. choosing which securities to hold based on their valuation.
B. investing only in “safe” securities.
C. the allocation of assets into broad asset classes.
D. bottom-up analysis.
The index model has been estimated for stocks A and B with the following results:
RA = 0.01 + 0.8RM + eA.
RB = 0.02 + 1.1RM + eB.
σM = 0.30 σ(eA) = 0.20 σ(eB) = 0.10.
The covariance between the returns on stocks A and B is
A. 0.0384.
B. 0.0406.
C. 0.1920.
D. 0.0050.
E. 0.0792.
You purchased 100 shares of common stock on margin at $45 per share. Assume the
initial margin is 50%, and the stock pays no dividend. What would the maintenance
margin be if a margin call is made at a stock price of $30? Ignore interest on margin.
A. 0.33
B. 0.55
C. 0.43
D. 0.23
E. 0.25
Financial futures contracts are actively traded on which of the following indices?
A. The S&P 500 Index
B. The New York Stock Exchange Index
C. The Nikkei Index
D. The Dow Jones Industrial Index
E. All of the options are correct.
Which of the following statements about money market mutual funds is true?
A. They invest in commercial paper, CDs, and repurchase agreements.
B. They usually offer check-writing privileges.
C. They are highly leveraged and risky.
D. They invest in commercial paper, CDs, and repurchase agreements, and they usually
offer check-writing privileges.
E. All of the options are true.
Which of the following factors affect the price of a stock option?
A. The risk-free rate
B. The riskiness of the stock
C. The time to expiration
D. The expected rate of return on the stock
E.The risk-free rate, riskiness of the stock, and time to expiration
Assume the U.S. government was to decide to increase the budget field. Holding all
else constant, this will cause ______ to decrease.
A. interest rates
B. government borrowing
C. unemployment
D.-interest rates and government borrowing
E. None of the options are correct.
If a firm’s sales decrease by 15%, and profits decrease by 20% during a recession, the
firm’s operating leverage is
A.-1.33.
B. 0.75.
C. 5.
D. −5.
Monetary policy is determined by
A. government budget decisions.
B. presidential mandates.
C.-the Board of Governors of the Federal Reserve System.
D. congressional actions.
E. None of the options are correct.
Suppose that the risk-free rates in the United States and in the United Kingdom are 4%
and 6%, respectively. The spot exchange rate between the dollar and the pound is
$1.60/BP. What should the futures price of the pound for a one-year contract be to
prevent arbitrage opportunities, ignoring transactions costs?
A. $1.60/BP
B. $1.70/BP
C. $1.66/BP
D. $1.63/BP
E. $1.57/BP
If the economy is growing, firms with high operating leverage will experience
A.-higher increases in profits than firms with low operating leverage.
B. similar increases in profits as firms with low operating leverage.
C. smaller increases in profits than firms with low operating leverage.
D. no change in profits.
E. None of the options are correct.
Trading in stock index futures
A. now exceeds buying and selling of shares in most markets.
B. reduces transactions costs as compared to trading in stocks.
C. increases leverage as compared to trading in stocks.
D. generally results in faster execution than trading in stocks.
E. All of the options are correct.
In a “firm commitment,” the investment banker
A. buys the stock from the company and resells the issue to the public.
B. agrees to help the firm sell the stock at a favorable price.
C. finds the best marketing arrangement for the investment-banking firm.
D. agrees to help the firm sell the stock at a favorable price and finds the best marketing
arrangement for the investment-banking firm.
Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has
total fixed costs of $500,000 and variable costs of 50 per widget. Firm B has total fixed
costs of $240,000 and variable costs of 75 per widget. The corporate tax rate is 40%. If
the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a
recession, each firm will sell 1,100,000 widgets. If the economy is strong, the after-tax
profit of Firm A will be
A. $0.
B. $6,000.
C. $36,000.
D.-$60,000.
Of the following types of ETFs, an investor who wishes to invest in a diversified
portfolio that tracks the S&P 500 should choose
A. SPY.
B. DIA.
C. QQQ.
D. IWM.
E. VTI.
Paper Express Company has a balance sheet which lists $85 million in assets, $40
million in liabilities, and $45 million in common shareholders’equity. It has 1,400,000
common shares outstanding. The replacement cost of the assets is $115 million. The
market share price is $90.
What is Paper Express’s market value per share?
A. $1.68
B. $2.60
C. $32.14
D. $60.71
E. None of the options are correct.
Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year.
Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is
5%, and the expected return on the market portfolio is 13%. The stock of Torque
Corporation has a beta of 1.2.
What is the return you should require on Torque’s stock?
A. 12.0%
B. 14.6%
C. 15.6%
D. 20%
E. None of the options are correct.
Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri’s required
return on equity is 12%, and WACC is 9.8%. If FCFE is expected to grow at 9%
forever, the intrinsic value of Siri’s shares is
A. $68.13.
B. $18.17.
C. $26.35.
D. $14.76.
E. None of the options are correct.
A European put option can be exercised
A. any time in the future.
B.only on the expiration date.
C. if the price of the underlying asset declines below the exercise price.
D. immediately after dividends are paid.
Which of the following is true regarding equity mutual funds?
I) They invest primarily in stock.
II) They may hold fixed-income securities, as well as stock.
III) Most hold money market securities, as well as stock.
IV) Two types of equity funds are income funds and growth funds.
A. I and IV
B. I, III, and IV
C. I, II, and IV
D. I, II, and III
E. I, II, III, and IV
The weather report says that a devastating and unexpected freeze is expected to hit
Florida tonight during the peak of the citrus harvest. In an efficient market, one would
expect the price of Florida Orange’s stock to
A. drop immediately.
B. unable to determine.
C. increase immediately.
D. gradually decline for the next several weeks.
E. gradually increase for the next several weeks.
Sector rotation
A. should always be carried out.
B. is never worthwhile.
C.-is shifting the portfolio more heavily toward an industry or sector that is expected to
perform well in the future.
D. can be implemented without cost.