1) A company’s dividend last year was $3.00. Dividends are expected to grow
indefinitely at 7% and the required rate of return for the stock is 13%. What is the value
of the stock today?
a. $2.83
b. $23.08
c. $24.69
d. $50.00
e. $53.50
2) Exhibit 13.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you are an analyst for the U.S. Autoparts Industry. Consider the following
information that you propose to use to obtain an estimate of year 2002 EPS for the U.S.
Autoparts Industry:
In addition a regression analysis indicates the following relationship between growth in
industry sales per share and personal consumption expenditures (PCE) growth is
Obtain an estimate of the per share depreciation charge for the year 2004.
a. $15.81
b. $12.35
c. $23.68
d. $25.93
e. $35
3) Capital market instruments include all of the following except
a.U.S. Treasury notes and bonds.
b.U.S Treasury bills.
c.U.S. government agency securities.
d.Municipal bonds.
e.Corporate bonds.
4) Exhibit 17.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
What is the capital gains/loss yield on this bond?
a. -0.038%
b. 0.456%
c. 0.038%
d. -0.456%
e. None of the above
5) In the case of open-end investment companies, shares of the company
a. Trade on the secondary market.
b. Can be bought from or sold to the investment company at the NAV.
c. Are determined by supply and demand.
d. a and c.
e. b and c.
6)
Refer to Exhibit 7.13. Calculate the standard deviation for Magnum Oil.
a. 0%
b. 11%
c. 16%
d. 20%
e. 26%
7) Warrants differ from options in a number of ways. Which of the following statements
about warrants and options is false?
a. When originally issued, the life of a warrant is usually much longer than that of a call
option.
b. Warrants are usually issued by the company on whose stock the warrant is written.
c. Warrants are often used by companies as sweeteners to make new issues of debt or
equity more attractive.
d. Warrant holders have voting rights while option holders do not.
e. None of the above (that is, all statements are true)
8) A friend has some reliable information that the stock of Puddles Company is going to
rise from $43.00 to $00 per share over the next year. You know that the annual return on
the S&P 500 has been 11% and the 90-day T-bill rate has been yielding 5% per year
over the past 10 years. If beta for Puddles is 1.5, will you purchase the stock?
a. Yes, because it is overvalued.
b. Yes, because it is undervalued.
c. No, because it is undervalued.
d. No, because it is overvalued.
e. Yes, because the expected return equals the estimated return.
9) If the price before yields changed was $925, what is the resulting price?
a. $865.22
b. $918.66
c. $889.11
d. $1000.00
e. $1012.45
10) Exhibit 18.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with 5 years to maturity and a 6% coupon has a yield to
maturity of 8%. Interest is paid semiannually.
Calculate the Macaulay duration for the bond.
a. 4.19 years
b. 4.36 years
c. 8.72 years
d. 8.38 years
e. 9.52 years
11) What is the correlation coefficient for two assets with a covariance of .0032, if asset
1 has a standard deviation of 12 percent and asset 2 has a standard deviation of 9
percent?
a.0.2963
b.0.3456
c.0.8721
d.1.5980
12) Dhrymes, Friend, and Gultekin, in their study of the APT, found that
a. As the number of securities used to form portfolios increased the number of factors
that characterized the return generating process decreased.
b. As the number of securities used to form portfolios increased the number of factors
that characterized the return generating process increased.
c. As the number of securities used to form portfolios decreased the number of factors
that characterized the return generating process increased.
d. As the number of securities used to form portfolios increased the number of factors
that characterized the return generating process remained unchanged.
e. None of the above.
13) ____ are debt instruments that have their principal or coupon payments tied to some
other underlying variable.
a. Structured notes
b. Variable rate notes
c. Systematic notes
d. Embedded notes
e. PC bonds
14) Assume that you manage an equity portfolio. The portfolio beta is 1.15. You
anticipate a decline in equity values and wish to hedge $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
15) In convertible bonds, the value of the common stock price upon immediate
conversion is the
a. Put-call parity price.
b. Conversion parity price.
c. Cash equivalent price.
d. Convertible price.
e. Redemption price.
16) When applying the earnings multiplier model all of the following will cause the
required rate of return, k, to change except
a. Changes in the real risk free rate
b. Changes in the retention rate
c. Changes in the rate of inflation
d. Changes in the risk premium for common stock
e. All of the above changes will cause a change in the required rate of return
17) Which of the following is not considered an active management strategy?
a. Sector rotation
b. Use of factor models
c. Quantitative screens
d. Full replication
e. Linear programming
18) Exhibit 23.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Black Gold Industries (BGI) is an independent oil producer with production capacity of
500,000 barrels per month. Due to the cost structure of the business, BGI needs to
receive $56.50 per barrel in order to remain solvent. On the other side of this situation
is Petrochemicals Unlimited (PU) which uses an average of 500,000 barrels of West
Texas crude oil in its normal production operations. The nature of PU’s business is such
that they will financially suffer if they have to pay more than an average of $57.80 per
barrel for oil over the next six years. To hedge against their exposure to volatile oil
prices, BI and PU contact a swap dealer to arrange the six-year oil swap described
below:
Describe the transaction that occurs between PU and the swap dealer if the monthly
average oil futures settlement price is $58.45.
a. PU pays the swap dealer $725,000.
b. The swap dealer pays PU $725,000.
c. PU pays the swap dealer $475,000.
d. The swap dealer pays PU $475,000.
e. None of the above.