1) Exhibit 12.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 45 percent when the rate on long term
government bonds falls to 9 percent. Since investors are becoming more risk averse, the
equity risk premium will rise to 7 percent and investors will require a 16 percent return.
The return on equity will be 14 percent.
What is the expected sustainable growth rate?
a. 4.95
b. 7.2
c. 8.8
d. 6.3
e. 7.7
2) Exhibit 4.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You decide to sell 100 shares of Topgun Enterprises Inc. short when it is selling at its
yearly high of $42.25. Your broker tells you that your margin requirement is 60 percent
and that the commission on the sale is $20. While you are short, Topgun pays a $0.85
per share dividend. At the end of one year you buy your Topgun shares (cover your
short sale) at $44 and are charged a commission of $20 and a 5 percent interest rate.
Refer to Exhibit 4.5. What is your rate of return on the investment?
a.10.48%
b.12.87%
c.-13.98%
d.-24.49%
e.-15.05%
3) How much would you expect to pay for a $10,000 Treasury note quoted at 96:27?
a. $9,627.00
b. $10,000.00
c. $968.44
d. $9,684.38
e. None of the above
4) In late January 2011, Starlight Corporation is considering the sale of $50 million in
10-year debentures rated AAA. The issue will most likely be registered and sold some
time in April. Therefore, Starlight Corporation desires to hedge the pending issue using
Treasury bond futures contracts each representing $100,000. Explain how you would go
about hedging the bond issue?
a. Sell 500 contracts
b. Buy 500 contracts
c. Sell 50 contracts
d. Buy 50 contracts
e. None of the above
5) Assume that you manage an equity portfolio. The portfolio beta is 1.15. You
anticipate a rise in equity values and wish to increase equity exposure on $500 million
of the portfolio. Calculate the number of contracts you would need to hedge your
position and indicate whether you would go short or long. Assume that the price of the
S&P 500 futures contract is 1105 and the multiplier is 250.
a. 2500 contracts short
b. 1810 contracts short
c. 1810 contracts long
d. 2081 contracts short
e. 2081 contracts long
6) Exhibit 20.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the
following put and call option prices that expire 6 months from today. The risk-free rate
of return is 5% and the expected return on the market is 11%.
What should the price be of a call option that expires 6 month from today with an
exercise price of $55?
a. $1.33
b. $3.08
c. $4.58
d. $6.07
e. $6.33
7) Consider a pension fund manager that wishes to convert $10 million from notes
paying LIBOR to stocks, using an equity swap. The equity swap should be structured so
that
a. Pension fund receives LIBOR and pays an equity return based on notional principal
of $5 million.
b. Pension fund pays LIBOR and receives an equity return based on notional principal
of $5 million.
c. Pension fund receives LIBOR and pays an equity return based on notional principal
of $10 million.
d. Pension fund pays LIBOR and receives an equity return based on notional principal
of $10 million.
e. None of the above.
8) Net asset value (NAV) is determined by
a. The total market value of all its assets multiplied by the number of fund shares
outstanding.
b. The total market value of all its assets divided by the number of fund shares
outstanding.
c. The total market value of all its assets divided by the number of shareholders.
d. Supply and demand for the investment company stock in the secondary market.
e. Supply and demand for the investment company stock in the primary market.
9) The main difference between a closed-end fund and an open-end fund is
a. The way each is traded after the initial public offering.
b. There is no significant difference.
c. The minimum initial investment.
d. The type of allowable investments.
e. The way in which each is regulated by the SEC.
10) Exhibit 19.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay annual interest. Bond C has a coupon of 6% per year,
maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond
D has a coupon of 8% per year, maturity of 15 years, yield to maturity of 6% per year,
and a face value of $1000.
Calculate the modified duration for Bond D.
a. 9.5
b. 9.8
c. 9.2
d. 15
e. None of the above
11) Exhibit 4.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You sell 100 shares short of AMF Corporation when it is selling at $45 per share. Your
margin requirement is 60% and the commission on the sale is $50 and the broker
charges 10% annual interest. AMF Corporation paid a $0.50 per share dividend while
you were short the stock. After one year you cover your short sale at $35 per share with
a $50 commission for the purchase.
Refer to Exhibit 4.8. What is your total dollar return on this investment?
a.$1,000
b.$900
c.$850
d.$670
e.$520
12) Exhibit 21.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you observe the following prices in the T-Bill and Eurodollar futures
markets
Assume that a month later the price of the September T-Bill future is 93 and the price of
the Eurodollar future is 90.25. Calculate the profit on the T-Bill futures position.
a. 25 basis points.
b. 110 basis points.
c. -25 basis points.
d. -110 basis points.
e. 50 basis points.
13) Under the performance attribution analysis method, the ____ measures the
manager’s decision to over- or underweight a particular market segment in terms of that
segment’s return performance relative to the overall return to the benchmark.
a. Selection effect
b. Allocation effect
c. Distribution effect
d. Diversification effect
e. Attribution effect
14) Exhibit 14.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
What is the Left-Aid Corporation’s return on equity (ROE)?
a. 25.5%
b. 27.4%
c. 29.7%
d. 35.6%
e. 39.5%
15) Exhibit 21.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume you are the Treasurer for the Johnson Pharmaceutical Company and in late July
2004, the company is considering the sale of $500 million in 20-year debentures that
will most likely be rated the same as the firm’s other debt issues. The firm would like to
proceed at the current rate of 8.5%, but you know that it will probably take until
November to bring the issue to market. Therefore, you suggest that the firm hedge the
pending issue using Treasury bond futures contracts which each represent $100,000.
What is the dollar gain or loss assuming that future conditions described in Case 1
actually occur? (Ignore commissions and margin costs, and assume a naive hedge ratio.)
a. $47,316,683.00 gain
b. $36,566,683.00 loss
c. $10,750,000.00 gain
d. $10,750,000.00 loss
e. None of the above
16) According to the weak-form efficient market hypothesis, which of the following
types of information are fully reflected in stock prices?
a.Rates of return, trading volume, and news about the economy.
b.Dividend and earnings announcements.
c.Rates of return, trading volume, and block trades.
d.Earnings announcements and rates of return.
e.All of the above.
17) The realized yield measures the expected rate of return of a bond that you expect to
sell prior to its maturity.
18) Tobin’s separation theory states that the market is a separate investment from the
risk-free security.
19) Funds with low levels of diversification tend to “beat the market.”
20) Under the CAPM framework, the introduction of lending and borrowing at
differential rates leads to a non-linear capital market line.
21) Forward and future contracts, as well as options, are types of derivative securities.
22) Leading indicators of the business cycle include economic series that reach peaks or
troughs before the peaks and troughs of the overall economy.
23) The issuance of convertibles will ultimately lead to greater dilution than an initial
issue of stock.
24) The standard deviation for the risk-free security is equal to zero.
25) A continuous market that has price continuity requires depth of buyers and sellers.