1) Which of the following is not a technique for valuing a firm’s common stock?
a. Present value of free cash flow to equity
b. Present value of dividends
c. Price-earnings ratio
d. Price-book value ratios
e. Price-cost of goods sold ratio
2) Which of the following is not a use of financial ratios?
a. Stock valuation
b. Assigning credit quality ratings on bonds
c. Predicting insolvency
d. Identification of internal corporate variables that affect a stock’s systematic risk
e. None of the above (that is, all are uses of financial ratios)
3) 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
Calculate the firm’s estimated share price.
a. 57.5
b. 37.5
c. 45
d. 32.75
e. 75
4) A calendar spread requires the purchase and sale of two calls or two puts in the same
stock with
a. The same expiration date but different exercise prices.
b. The same exercise price but different expiration dates.
c. Different exercise prices and different expiration dates.
d. The same exercise price and the same expiration month.
e. Traded in different markets.
5) Exhibit 13.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Home Appliance Industry had free cash flow to equity (FCFE) of $87 for the most
recent year ending reported yesterday. The industry anticipates a growth rate of 8% for
the next three years due to favorable economic conditions. However, the growth rate is
expected to decline to 4% after three years and remain at that level indefinitely. The
required rate of return is 12% for this industry.
Calculate the intrinsic value of the Home Appliance Industry today.
a. $605.03
b. $1,014.09
c. $1,256.88
d. $1,424.73
e. $1,729.76
6) You purchased 75 shares of Basket Company for $42 a share. One share of the stock
is currently trading between $52 and $53 and you placed a stop loss order at $47. If the
stock price drops to $40 a share, what is your return on this investment?
a.8.7%
b.9.2%
c.10.3%
d.11.9%
e.12.8%
7) Which of the following are not cyclical indicators?
a. Selected series
b. Coincident indicators
c. Diffusion indicators
d. Leading indicators
e. Lagging indicators
8) In your portfolio you have $1 million of 20 year, 8 5/8 percent bonds which are
selling at 83.15 (or 83 15/32) against this position. Because you feel interest rates will
rise you sell 10 bond futures at 81.15 (or 81 15/32) against this position. Two months
later you decide to close your position. The bonds have fallen to 78 and the futures
contracts are at 75.16 (75 16/32). Disregarding margin and transaction costs, what is
your gain or loss?
a. $5,000 loss
b. $500 loss
c. Breakeven
d. $500 gain
e. $5,000 gain
9) In returns-based style analysis a coefficient of determination of 95% would suggest
that
a. The portfolio manager outperformed 95% of his peers.
b. The portfolio manager was outperformed by 95% of his peers.
c. 95% of the portfolio return variability could be attributed to portfolio style.
d. 95% of the portfolio return variability could be attributed to stock selection skills.
e. 5% of the portfolio return variability could be attributed to portfolio style.
10) All of the following are considered fixed income investments except
a.Corporate bonds.
b.Preferred stock.
c.Treasury bills, notes, and bonds.
d.Money market mutual funds.
e.Certificates of deposit (CDs).
11) The derivative based strategy known as portfolio insurance involves
a. The sale of a put option on the underlying security position.
b. The purchase of a put on the underlying security position.
c. The sale of a call on the underlying security position.
d. The purchase of a call on the underlying security position.
e. b and d.
12) Exhibit 19.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold
a 25 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate
you are considering a 25 year, Aa 8 percent coupon bond priced to yield 10.50 percent.
Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year
workout period.
The dollar investment in the candidate bond is
a. $780.34
b. $1483.25
c. $1361.54
d. $1413.95
e. $1000.00
13) The Chicago Board of Trade (CBT) uses conversion factors to correct for
differences in deliverable bonds.
14) Dividend growth is positively related to the return on equity.
15) Open-end investment companies continue to sell and repurchase shares after their
initial public offering.
16) An option to sell an asset is referred to as a call, whereas an option to buy an asset
is called a put.
17) The planning period for the CAPM is the same length of time for every investor.