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Asset Valuation - 28 Questions - 42 minutes
Question: 81 - 28562
Which one of the following statements is TRUE? The optimal capital structure:
A)
maximizes expected EPS, maximizes the price per share of common stock.
B)
maximizes the stock price, minimizes the weighted average cost of capital.
C)
minimizes the interest rate on debt, maximizes the expected EPS.
D)
minimizes the required rate on equity, maximizes the stock price.
Question: 82 - 28563
Use the following information about a firm:
• They expect to have net income of $100,000 next year
• The current capital structure is 50 percent debt and 50 percent equity
• The optimal capital budget for next year is expected to be $150,000
If the company uses the residual dividend model to determine next year's dividend
payout, how much will they pay out in dividends next year?
A)
$50,000.
B)
$0.
C) $10,000.
D)
$25,000.
Question: 83 - 13879
Which of the following sets of indexes are price-weighted?
A)
Dow Jones World Stock Index and Russell Index.
B)
S&P 500 Index and Dow Jones Industrial Average.
C)
Morgan Stanley Capital International Index and S&P 500 Index.
D)
Dow Jones Industrial Average and Nikkei Dow Jones Stock Market Average.
Question: 84 - 28547
Which of the following statements are FALSE?
A)
A national market system is expected to provide centralized reporting of all
transactions, a centralized quotation system, and competition among all qualified
market makers.
B)
Primary capital markets represent the major national markets providing investors
with liquidity and continuous price information.
C)
Underwriters provide issuers with origination, risk bearing, and distribution.
D)
Good capital markets provide information, liquidity, low transactions costs, and
rapid price adjustments to new information.
Question: 85 - 28548
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Which of the following statements relating to indexes is TRUE?
A)
The Financial Times/Standard & Poor Actuaries World indexes are all market value
weighted.
B)
The Nikkei-Dow Jones average is a price-weighted index of 225 stocks from the
first tier of the Tokyo Stock Exchange.
C)
The three principle weighting schemes used in the construction of an index are:
price weighting, value weighting, and equal weighting.
D)
All of these choices are correct.
Question: 86 - 28560
Which of the following is NOT a perceived advantage of technical analysis?
A)
Technicians do not rely on getting information first.
B)
Technical trading techniques are difficult to mimic.
C)
Technical investors are only invested once price movement has begun.
D)
Technical investors do not depend on accounting information, which can be
manipulated.
Question: 87 - 28561
Which of the following statements is TRUE?
A)
All of these choices are correct.
B)
Firms with low price/book value (P/BV) ratios tend to outperform high P/BV ratio
firms on a risk-adjusted basis.
C)
Cash flow figures are typically more stable than earnings figures.
D)
P/BV and price/cash flow (P/CF) ratios should be used in conjunction with
price/earnings (P/E) ratios in fundamental analysis.
Question: 88 - 29374
Billie Blake is interested in a stock that has an expected dividend one year from today
of $1.50, i.e., D
1
= $1.50, D
2
= $1.75 and D
3
= 2.05. She expects to sell the stock for
$47.50 at the end of year 3. What is Billie willing to pay one year from today if
investor’s require a 12 percent return on the stock.
A)
$38.01.
B)
$41.06.
C)
$33.45.
D)
$52.30.
Question: 89 - 29375
A firm has an expected dividend payout ratio of 50 percent, a required rate of return of
12 percent and a dividend growth rate of 6 percent. If you expect next year’s earnings
to be $4.00, what is the value of the stock today?
A)
$35.33.
B)
$66.67.
C)
$33.33.
D) $16.67.
Question: 90 - 29376
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Sam Seymour is interested in using the free cash-flow to equity (FCFE) method to
value Jojaba, Inc. The required rate of return is 14 percent. Jojaba has 10 million
shares of stock outstanding. Sam thinks the stock will sell at a multiple of 25 times
predicted FCFE in 3 years. What will Sam pay per share for Jojaba? The FCFE for the
next 3 years are as follows: Year 1 $15 million, Year 2 $20 million and Year 3 $25
million.
A)
$46.73.
B)
$41.55.
C)
$68.50.
D) $52.50.
Question: 91 - 13567
Which of the following statements about the call feature is FALSE?
A)
The call feature exposes investors to additional reinvestment rate risk.
B)
The cash flow pattern of callable bonds cannot be known with certainty.
C)
The call feature reduces the bond's capital appreciation potential.
D)
The call feature lengthens the bond's duration, increasing price risk.
Question: 92 - 28546
Which of the following statements are TRUE?
A)
A Yen denominated bond issued by a Japanese company in Japan is an example
of a domestic bond.
B)
A Yen denominated bond issued by a German company in Luxembourg is an
example of a foreign bond.
C)
A Yen denominated bond issued by a German company in Japan is an example of
a Eurobond.
D)
All of these choices are correct.
Question: 93 - 29377
All of the following are examples of embedded options that favor the bondholder
EXCEPT:
A)
conversion provisions.
B)
accelerated sinking fund provision.
C)
floor placed under the floating coupon rate bond.
D)
a put option.
Question: 94 - 29378
Non-callable bond prices go up faster than they go down. This is referred to as:
A)
inverse features.
B)
negative convexity.
C)
embedded benefits.
D)
positive convexity.
Question: 95 - 28544
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A 7 percent coupon bond with semi-annual coupons has a convexity in years of 80.
The bond is currently priced at a yield to maturity (YTM) of 8.5 percent. If the YTM
decreases to 8 percent, the predicted contribution to the percentage change in price
due to convexity would be:
A)
rise 20 basis points.
B)
rise 40 basis points.
C)
rise 1%.
D)
fall 50 basis points.
Question: 96 - 28545
You have a 1-year, 7 percent semi-annual coupon bond with a price of $985. If the 6-
month T-bill rate is 5 percent, what is the one-year annualized theoretical spot rate?
A)
6.5%.
B) 7.4%.
C)
8.6%.
D)
8.0%.
Question: 97 - 29373
Jane Peebles purchased a T-bill that matures in 200 days for $97,500. The face value of
the bill is $100,000. What is the money market yield on the bill?
A)
4.500%.
B)
4.756%.
C)
5.000%.
D)
4.615%.
Question: 98 - 29379
What is the present value of a 7 percent semi-annual pay bond with a $1000 face value
and 20 years to maturity if similar bonds are now yielding 6.375 percent?
A)
$1000.00.
B)
$1121.23.
C)
$1070.09.
D)
$912.34.
Question: 99 - 29380
What is the yield to call on a bond that has an 8 percent coupon paid annually, $1000
face value, 10 years to maturity and is first callable in 6 years? The current market
price is $1100. The call price is the face value plus 1-year’s interest.
A) 6.00%.
B)
7.14%.
C)
9.06%.
D)
7.02%.
Question: 100 - 13940
Derivatives are important because:
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A)
they enable arbitrage.
B) all of these choices are correct.
C)
they enable traders to speculate.
D)
they enable firms to manage their risk by hedging.
Question: 101 - 28549
Which of the following statements about forward contracts is FALSE?
A)
Forwards are unique contracts.
B)
Forwards are private contracts.
C)
Forwards require no up front cash.
D)
Forwards are default risk free.
Question: 102 - 28550
Which of the following statements is FALSE?
A)
Hedging is the prime social rationale for futures trading.
B)
The clearinghouse protects futures traders from the risk of default on contracts.
C)
Initial margin can only be posted in cash.
D)
The futures markets allow market participants to discover the market's expectation
of future cash market prices.
Question: 103 - 28551
Which of the following statements about options is TRUE?
A)
Standardization of options contracts promotes liquidity.
B)
Most options throughout the world are European options.
C)
A put writer who deposits shares of the underlying stock has written a covered put.
D)
An open call position can be closed before expiration by buying put options on the
underlying stocks.
Question: 104 - 28552
Which one of the following statements about swaps is FALSE?
A)
In an interest rate swap, only the net interest payments are swapped.
B)
In a currency swap, only net interest payments are made.
C)
In a currency swap, the notational principal is actually swapped twice, once at the
beginning of the swap and again at the termination of the swap.
D)
Swaps are a zero sum game.
Question: 105 - 28553
Which of the following statements about puts and calls is TRUE?
A)
The most the writer of a call can lose is the stock's price less the premium.
B)
A put holder will exercise the put if the price of the stock is equal to or less than
the strike price.
C)
The most the buyer of a call can lose is the premium.
D)
The potential loss to the writer of a put is unlimited.
Question: 106 - 28554
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Which is the most common method of closing a futures contract?
A)
Reversing or offsetting trade.
B)
Physical delivery.
C)
Exchange of physicals.
D)
Clearinghouse adjustment.
Question: 107 - 10788
Which of the following statements about REITs is FALSE?
A)
Equity REITs invest in properties such as apartments, office buildings, shopping
centers, and hotels.
B)
REITs have historically yielded 1 to 2 percent above money market funds and
about the same as high-grade corporate bond funds.
C)
REITs must pay out 95 percent of earnings as dividends.
D)
REITs must have all of their assets invested in real estate.
Question: 108 - 28527
Which of the following statements about investment companies is FALSE?
A)
Generally the investment advisory firm initiating the fund will also act as the fund's
investment management company.
B)
The investment company's board of directors hires an investment management
company to select securities, manage the portfolio, and handle administrative
duties.
C)
The typical management fee is 1/4 to 1 percent of the fund's net asset value.
D)
Investment companies are generally wholly owned subsidiaries of the investment
advisory firm that creates them.
Portfolio Management - 12 Questions - 18 minutes
Question: 109 - 11168
If the real rate of interest was 3 percent and the inflation expectation was 4 percent
what is the nominal rate of interest?
A)
10.55%.
B)
11.00%.
C)
12.35%.
D)
7.12%.
Question: 110 - 28528
An analyst observes the following return behavior between stocks X and Y.
Time Period X's Return Y's return
1 7 5
2 9 8
3 10 11
4 10 8
What is the covariance of returns between stocks X and Y?
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A)
+ 2.75.
B) + 2.25.
C)
- 1.50.
D)
+ 1.50.
Question: 111 - 28529
Which one of the following portfolios does not lie on the efficient frontier?
Portfolio Expected Return Standard Deviation
A 7 5
B 9 12
C 11 10
D 15 15
A)
B.
B)
A.
C)
C.
D)
D.
Question: 112 - 28530
Using the following correlation matrix, which two stocks would make the best portfolio
(assume the stocks have equal risk and returns)?
Stock A B C
A + 1
B - 0.2 + 1
C + 0.6 - 0.1 + 1
A)
A and C.
B)
A and B.
C)
C and B.
D)
B alone.
Question: 113 - 28533
A stock has a beta of .9 and an expected return of 10 percent. The risk free rate is 7
percent and the market is expected to yield 11 percent. This stock is:
A)
overpriced.
B)
underpriced.
C)
properly priced.
D)
cannot be determined from the information given.
Question: 114 - 28534
Using the arbitrage pricing theory (APT) to determine the expected return on a stock
you determine that the risk free rate is 5 percent; B
1
is 2.5; B
2
is 2; risk factor F
1
is .02
and risk factor F
2
is .03. What return would you expect to receive on the stock?
A)
9.5.
B)
12.2.
C)
16.0.
D)
14.5.
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Question: 115 - 28535
If a stock has a beta of 1.0 and the risk free rate is 6 percent, what return would you
expect when the market return is 12 percent?
A)
13.2%.
B)
14.4%.
C) 12.0%.
D)
15.2%.
Question: 116 - 28536
Which of the following statements about the security market line (SML) is FALSE?
A)
Securities that fall above the SML are undervalued.
B)
The risk free rate defines where the SML intersects the Y-axis.
C)
The market portfolio consists of all the risky assets in the universe.
D)
Securities that fall on the SML have no intrinsic value to the investor.
Question: 117 - 28537
The portfolio management process involves:
A)
Developing and implementing strategies through the optimal combinations of
assets.
B)
Making portfolio adjustments.
C)
All of these choices are correct.
D)
Identifying the investor's objectives, preferences and constraints.
Question: 118 - 28538
An analyst is managing two portfolios. Portfolio A is income oriented, has a low risk
tolerance, and is taxable. Portfolio B has a total return objective and has an infinite life.
Portfolio A is:
A)
a pension fund's portfolio while B is a retiree's portfolio.
B)
an endowment fund's portfolio while B is an investment fund's portfolio.
C)
a retiree's portfolio while B is a pension fund's portfolio.
D)
an investment company's portfolio while B is an endowment fund's portfolio.
Question: 119 - 28543
A bond's nominal rate of interest is 12 percent, the risk free rate of interest is 4 percent,
and the expected inflation rate is 3 percent. What is the expected risk premium built
into the nominal yield of this bond?
A) 6%.
B)
7%.
C)
5%.
D)
4%.
Question: 120 - 29370
James Billings is investing in a two stock portfolio. He wants to know the risk,
measured by standard deviation, of the two-stock portfolio. The expected return of
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stock A is 20% with a standard deviation of 30% and the expected return of stock B is
15% with a standard deviation of 18%. Being more conservative, James intends to
invest 30% of his money in stock A, and 70% in stock B. The correlation coefficient
between the two stocks is 0.4. What is the standard deviation of the two stock
portfolio?
A)
Standard Deviation = 18.18%.
B)
Standard Deviation = 21.60%.
C)
Standard Deviation = 14.85%.
D)
Standard Deviation = 14.02%.
. similar bonds are now yielding 6 .37 5 percent?
A)
$10 00.00.
B)
$11 21. 23.
C)
$10 70.09.
D)
$ 912 .34 .
Question: 99 - 2 938 0
What is the yield to call. what is the value of the stock today?
A)
$35 .33 .
B)
$66.67.
C)
$33 .33 .
D) $16 .67.
Question: 90 - 2 937 6
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