1) A stock currently trades for $25. January call options with a strike price of $30 sell
for $6. The appropriate risk free bond has a price of $30. Calculate the price of the
January put option.
a. $11
b. $24
c. $19
d. $30
e. $25
2) Exhibit 10.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
What was Star’s interest coverage for 2004?
a. 4.99
b. 2.58
c. 3.48
d. 5.16
e. 6.02
3) The ____ of an industry is a function of retention rate and return on equity.
a. Expected return
b. Expected business risk
c. Expected financial risk
d. Expected growth rate
e. Expected sales volatility
4) Collateralized mortgage obligations (CMOs) offset some of the problems associated
with traditional mortgage pass-throughs because
a. They are overcollateralized.
b. They have variable rates.
c. Collateralized by auto-loans.
d. They are deep discount instruments.
e. Collateralized by credit card debt.
5) If the price before yields changed was $950, what is the resulting price?
a. $922.64
b. $918.66
c. $1000.00
d. $968.50
e. $1012.45
6) All of the following are industries with a strong, consistent industry component
except
a. Gold.
b. Steel.
c. Railroads.
d. Tobacco.
e. Paper.
7) The conversion price parity for a convertible bond is defined as:
a. Market Price of Convertible Bond/Conversion Ration.
b. Market Price of Convertible Bond – Conversion Ration.
c. Market Price of Convertible Bond – Conversion Ration.
d. Market Price of Convertible Bond + Conversion Ration.
e. None of the above.
8) Exhibit 12.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As an economist for a research firm you are forecasting the market P/E ratio using the
dividend discount model. Because the economy has been slow for 5 years, you expect
the dividend-payout ratio to be 55%. Long-term government bond rates are at 6% and
the equity risk premium is estimated to be 3%. Return on equity (ROE) is estimated to
be 11%.
What is the expected growth rate?
a. 3.00%
b. 3.92%
c. 4.95%
d. 5.27%
e. 6.05%
9) An investment management company is
a. A corporation that handles the administrative functions for a fund.
b. A corporation that has its major assets in a portfolio of securities.
c. A corporation that invests in financial services firms.
d. a and b.
e. a and c.
10) Tests of the efficient market hypothesis (EMH) are sometimes based on examining
its abnormal rate of return. The abnormal rate of return is calculated by:
a.Subtracting the expected rate of return from the actual return, where the expected
return is based on the stock’s beta and the CAPM.
b.Subtracting the actual rate of return from the expected return, where the expected
return is based on the stock’s beta and the CAPM.
c.Subtracting the expected rate of return from the actual return, where the expected
return is based on the stock’s projected dividend yields.
d.Subtracting the expected rate of return from the actual return, where the expected
return is based on the stock’s projected dividend yields.
e.None of the above
11) Exhibit 12.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information that you propose to use to obtain an estimate of
year 2004 EPS for the MacLog Company.
In addition a regression analysis indicates the following relationship between growth in
sales per share for MacLog and GDP growth is
Obtain an estimate of the per share depreciation charge for the year 2004.
a. $58.31
b. $102.35
c. $53.68
d. $75.93
e. $65.78
12) The intrinsic value of a warrant is calculated as:
a. (Market price of common stock + Warrant exercise price) – Number of shares
specified by warrant.
b. (Market price of common stock – Warrant exercise price) – Number of shares
specified by warrant.
c. (Market price of common stock + Warrant exercise price)/Number of shares specified
by warrant.
d. (Market price of common stock – Warrant exercise price)/Number of shares specified
by warrant.
e. None of the above.
13) Exhibit 4.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You decide to sell short 200 shares of XCorp stock at a price of $75. Your margin
deposit is 65 percent. Commission on the sale is 1.25%. While you are short, the stock
pays a $1.75 per share dividend. Interest on margin debt is 5.25% per year.
Refer to Exhibit 4.6. At the end of one year you close out your short position by
purchasing share of XCorp at $45 per share. The commission is 1.25%. What is your
rate of return on the investment?
a.-55.92%
b.10.31%
c.51.06%
d.23.1%
e.-33.05%
14) Foreign equities can be acquired by purchasing all of the following except
a.American Depository Receipts (ADRs)
b.American shares
c.Foreign shares listed on a U.S. or foreign stock exchange
d.Global Exchange-Traded Funds (GETFs)
e.All of the above are ways to purchase foreign equities.
15) Based on the information provided, calculate the intrinsic value in 2010 of a share
of INV Corp. using the Present Value of Earnings Model (infinite holding period). For
2010 net income was $250,000, total debt was $50,000, and there were 206,263 shares
outstanding. The required rate of return is 12% and the estimated growth rate in
earnings is 5.5%.
a. $19.43
b. $23.98
c. $28.52
d. $22.73
e. $15.50
16) What is the current price of a zero coupon bond with a 6% yield to maturity that
matures in 15 years?
a. $4.17
b. $41.27
c. $417.27
d. $4,172.00
e. None of the above
17) A firm has a current price of $40 a share, an expected growth rate of 11 percent and
expected dividend per share (D1) of $2. Given its risk you have a required rate of return
for it of 12 percent. Your expected rate of return and investment decision is as follows:
a. 10% – do not buy
b. 12% – do not buy
c. 14% – buy
d. 16% – buy
e. 18% – buy
18) As the market’s return on equity increases so will the P/E ratio.
19) While LIBOR is usually used with forward rate agreements it is rarely used with
other interest rate agreements.
20) Switching from one industry group to another over the course of a business cycle is
known as a rotation strategy.
21) The primary market is where issues are traded between current and potential
owners.
22) The importance of an industry’s performance on an individual stock’s performance
varies across industries.
23) Return is the only important consideration when establishing investment objectives.
24) Equity allocations of pension funds in Japan and Germany are similar to those in
the United States.
25) Two approaches to defining factors for multifactor models are to use
macroeconomic variables or individual characteristics of the securities.
26) The ranking differences between the Sharpe, Treynor and Jensen performance
measures occur because of the differences in diversification.