1) Which of the following would be inconsistent with an efficient market?
a.Information arrives randomly and independently.
b.Stock prices adjust rapidly to new information.
c.Price changes are independent.
d.Price changes are random.
e.Price adjustments are biased.
2) Exhibit 8.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10
percent. You also have the following information about three stocks.
Refer to Exhibit 8.7. What are the required rates of return for the three stocks (in the
order A, B, C)?
a. 13.0%, 10.6%, 8.8%
b. 15.0%, 11.1%, 2.9%
c. 18.7%, 11.1%, 8.8%
d. 21.7%, 10.0%, 6.9%
e. 25.0%, 11.1%, 7.1%
3) Investment companies or mutual funds that continue to sell and repurchase shares
after their initial public offerings are referred to as
a. Closed-end
b. Open-end
c. No-load
d. Load
e. None of the above
4)
Refer to Exhibit 7.4. What is the standard deviation of this portfolio?
a. 5.02%
b. 3.88%
c. 6.21%
d. 4.04%
e. 4.34%
5) In a multifactor model, confidence risk represents
a. Unanticipated changes in the level of overall business activity.
b. Unanticipated changes in investors’ desired time to receive payouts.
c. Unanticipated changes in short term and long term inflation rates.
d. Unanticipated changes in the willingness of investors to take on investment risk.
e. None of the above.
6) In the two state option pricing model, which of the following does not influence the
option price?
a. Past stock price
b. Up and down factors u and d
c. The risk free rate
d. The exercise price
e. Current stock price
7) When using the Present Value of Operating Free Cash Flow model, the firm’s
operating free cash flow to the firm is discounted by the firm’s:
a. Cost of equity
b. Cost of debt
c. Required rate of return
d. Weighted Average Cost of Capital
e. Beta-adjusted cost of equity
8) Exhibit 19.6
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 10 percent coupon bond priced to yield 12 percent. As a swap candidate
you are considering a 25 year, Aa 10 percent coupon bond priced to yield 13 percent.
Assume a reinvestment rate of 12 percent, semiannual compounding, and a one-year
workout period.
The dollar investment in the candidate bond is
a. $1515.36
b. $853.50
c. $780.46
d. $779.13
e. $877.53
9) The dividend payout ratio, the required rate of return on common equity, and the
expected growth rate of stock dividends are the major variables that affect
a. The profit margin for the S&P Industrials Index.
b. The earnings multiplier for common stock.
c. Aggregate tax revenues.
d. Capital gains tax revenues.
e. Aggregate GDP.
10) Dividend growth is a function of
a. Return on equity.
b. The retention rate.
c. The payout ratio.
d. All of the above.
e. None of the above.
11) Analysts should identify and monitor
a. The current and emerging trends and patterns affecting an industry.
b. The indicators of trends and patterns in structural factors.
c. The momentum toward change in trends and patterns in structural factors.
d. Choices a and b
e. All of the above
12) Your broker has advised you that he believes that the stock of Brat Inc. is going to
rise from $20 to $22.15 per share over the next year. You know that the annual return on
the S&P 500 has been 11.25% and the 90-day T-bill rate has been yielding 4.75% per
year over the past 10 years. If beta for Brat is 1.25, will you purchase the stock?
a. Yes, because it is overvalued
b. No, because it is overvalued
c. No, because it is undervalued
d. Yes, because it is undervalued
e. Yes, because the expected return equals the estimated return
13) You purchase a 10 3/8s February $10,000 par Treasury Note at 103:11 and hold it
for exactly one year at which time you sell it. What is your rate of return if your selling
price is 101:13?
a. 8.14%
b. 8.16%
c. 8.22%
d. 8.32%
e. 8.47%
14) Exhibit 10.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Zeco Company has the following financial statements for year ending 12/31/2008.
The Zeco Company’s industry averages are as follows:
Net Profit Margin = 4.5%; Total Asset Turnover = 0.8; Total Assets/Equity = 1.5
Calculate Zeco Company’s Total Asset Turnover.
a. 0.59
b. 0.78
c. 1.28
d. 1.70
e. 1.97
15) Exhibit 11.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A major retailer is reevaluating its bonds since it is planning to issue a new bond in the
current market. The firm’s outstanding bond issue has 8 years remaining until maturity.
The bonds were issued with a 6.5 percent coupon rate (paid quarterly) and a par value
of $1,000. The required rate of return is 4.25 percent.
What is the current value of these securities?
a. $1149.94
b. $433.15
c. $1151.92
d. $860.50
e. $863.35
16) Exhibit 23.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Exclusive Industries has debentures outstanding (par value $1,000.00) convertible into
exclusive’s common stock at $30. The coupon rate is 11% payable semiannually and
they mature in 10 years.
Calculate the conversion value if the stock price is $24.00 per share.
a. $600.00
b. $700.00
c. $800.00
d. $900.00
e. $1,000.00
17) Consider a stock that is currently trading at $20. Calculate the intrinsic value for a
put option that has an exercise price of $35.
a. $15
b. $55
c. $35
d. -$15
e. $0
18) A straddle is the simultaneous purchase (or sale) of a put and call option with the
same underlying asset,
a. Same exercise price, and expiration date.
b. Same exercise price but different expiration date.
c. Same expiration date but different exercise price.
d. Either choices b or c.
e. None of the above.
19) You purchase a 10 1/4s February $10,000 par Treasury Note at 102:15 and hold it
for exactly one year at which time you sell it. What is your rate of return if your selling
price is 104:14?
a. 11.92%
b. 8.16%
c. 8.55%
d. 8.61%
e. 10.25%
20) An appropriate investment objective for a typical 25-year-old investor is a low-risk
strategy, such as capital preservation or current income.
21) Investors want their portfolio managers to completely diversify their portfolio, that
is, eliminate all systematic risk.
22) The DuPont equation breaks down a firm’s return on equity into three components,
which are profit margin, total asset turnover, and financial leverage.
23) Investors should purchase market index put options if they anticipate an increase in
the index value.
24) Results of initial public offering (IPOs) studies tend to support the semi-strong
EMH, because it appears that prices adjusted rapidly after initial underpricing.
25) An increase in debit balances in brokerage accounts is viewed by technicians as a
bullish sign.
26) It is important to analyze the economies and security markets before analyzing
alternative industries or companies.