FINA 4011 Midterm

1. Which one of the following is not a money market instrument? A. Treasury bill B. Negotiable certificate of deposit C. Commercial paper D. Treasury bond E. Eurodollar account

D. Treasury bond

8. Low Fly Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Low Fly Airline has a beta of 3.00. The intrinsic value of the stock is A. $46.67. B. $50.00. C. $56.00. D. $62.50.

A. $46.67.

2. Security selection refers to A. choosing which securities to hold based on their valuation. B. investing only in "safe" securities. C. the allocation of assets into broad asset classes. D. top-down analysis.

A. choosing which securities to hold based on their valuation.

7. A firm in an industry that is very sensitive to the business cycle will likely have a stock beta A. greater than 1.0. B. equal to 1.0. C. less than 1.0 but greater than 0.0. D. equal to or less than 0.0. E. There is no relationship between beta and sensitivity to the business cycle.

A. greater than 1.0.

2. High P/E ratios tend to indicate that a company will _______, ceteris paribus. A. grow quickly B. grow at the same speed as the average company C. grow slowly D. not grow E. None of the options are correct.

A. grow quickly

6. If the economy is shrinking, firms with high operating leverage will experience A. larger decreases in profits than firms with low operating leverage. B. similar decreases in profits as firms with low operating leverage. C. smaller decreases in profits than firms with low operating leverage. D. no change in profits.

A. larger decreases in profits than firms with low operating leverage.

5. New issues of securities are sold in the ________ market(s). A. primary B. secondary C. over-the-counter D. primary and secondary

A. primary

1. An example of a highly cyclical industry is A. the automobile industry. B. the tobacco industry. C. the food industry. D. the automobile industry and the tobacco industry. E. the tobacco industry and the food industry.

A. the automobile industry.

4. Consider the following three stocks: Stock Price Shares Stock A $40 200 Stock B $70 500 Stock C $10 600 The price-weighted index constructed with the three stocks is A. 30. B. 40. C. 50. D. 60. E. 70.

B. 40.

3. Which of the following portfolio construction methods starts with security analysis? A. Top-down B. Bottom-up C. Middle-out D. Buy and hold E. Asset allocation

B. Bottom-up

10. Which of the following are not examples of defensive industries? A. Food producers B. Durable goods producers C. Pharmaceutical firms D. Public utilities

B. Durable goods producers

3. Which of the following indices is(are) market-value weighted? I) The New York Stock Exchange Composite Index II) The Standard and Poor's 500 Stock Index III) The Dow Jones Industrial Average A. I only B. I and II only C. I and III only D. I, II, and III E. II and III only

B. I and II only

7. Which of the following is true about mortgage-backed securities? I) They aggregate individual home mortgages into homogeneous pools.II) The purchaser receives monthly interest and principal payments received from payments made on the pool.III) The banks that originated the mortgages maintain ownership of them.IV) The banks that originated the mortgages may continue to service them. A. II, III, and IV B. I, II, and IV C. II and IV D. I, III, and IV E. I, II, III, and IV

B. I, II, and IV

4. _______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders. A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q

B. Liquidation value per share

13. The most appropriate discount rate to use when applying a FCFF valuation model is the A. required rate of return on equity. B. WACC. C. risk-free rate. D. required rate of return on equity or risk-free rate, depending on the debt level of the firm. E. None of the options are correct.

B. WACC

5. A trough is A. a transition from an expansion in the business cycle to the start of a contraction. B. a transition from a contraction in the business cycle to the start of an expansion. C. a depression that lasts more than three years. D. only something used by farmers to feed pigs and not an investment term.

B. a transition from a contraction in the business cycle to the start of an expansion

3. The _______ is defined as the present value of all cash proceeds to the investor in the stock. A. dividend-payout ratio B. intrinsic value C. market-capitalization rate D. plowback ratio

B. intrinsic value

6. Investors trade previously issued securities in the ________ market(s). A. primary B. secondary C. primary and secondary D. derivatives

B. secondary

12. Investors want high plowback ratios A. for all firms. B. whenever ROE > k. C. whenever k > ROE. D. only when they are in low tax brackets. E. whenever bank interest rates are high.

B. whenever ROE > k

10. JCPenney Company is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today. A. $33.00 B. $40.67 C. $71.80 D. $66.00 E. None of the options are correct.

C. $71.80

5. Consider the following three stocks: Stock Price Shares Stock A $40 200 Stock B $70 500 Stock C $10 600 The value-weighted index constructed with the three stocks using a divisor of 100 is A. 1.2. B. 1200. C. 490. D. 4900. E. 49.

C. 490

2. Which of the following is not a component of the money market? A. Repurchase agreements B. Eurodollars C. Real estate investment trusts D. Money market mutual funds E. Commercial paper

C. Real estate investment trusts

13. Sector rotation A. should always be carried out. B. is never worthwhile. C. is shifting the portfolio more heavily toward an industry or sector that is expected to perform well in the future. D. can be implemented without cost.

C. is shifting the portfolio more heavily toward an industry or sector that is expected to perform well in the future.

3. The most widely used monetary tool is A. altering the discount rate. B. altering the reserve requirements. C. open-market operations. D. altering marginal tax rates. E. None of the options are correct.

C. open-market operations.

1. Asset allocation refers to A. choosing which securities to hold based on their valuation. B. investing only in "safe" securities. C. the allocation of assets into broad asset classes. D. bottom-up analysis.

C. the allocation of assets into broad asset classes.

11. If a firm has a required rate of return equal to the ROE, A. the firm can increase market price and P/E by retaining more earnings. B. the firm can increase market price and P/E by increasing the growth rate. C. the amount of earnings retained by the firm does not affect market price or the P/E. D. the firm can increase market price and P/E by retaining more earnings and increasing the growth rate. E. None of the options are correct.

C. the amount of earnings retained by the firm does not affect market price or the P/E

5. You wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A A. will be greater than the intrinsic value of stock B. B. will be the same as the intrinsic value of stock B. C. will be less than the intrinsic value of stock B. D. will be the same or greater than the intrinsic value of stock B. E. None of the options are correct.

C. will be less than the intrinsic value of stock B.

14. SGA Consulting had a FCFE of $3.2M last year and has 3.2M shares outstanding. SGA's required return on equity is 13%, and WACC is 11.5%. If FCFE is expected to grow at 8.5% forever, the intrinsic value of SGA's shares is A. $21.60. B. $26.56. C. $244.42. D. $24.11.

D. $24.11

11. The industry life cycle is described by which of the following stage(s)? A. Start-up B. Consolidation C. Absolute decline D. Start-up and consolidation E. All of the options are correct.

D. Start-up and consolidation

1. ________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities). A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. None of the options are correct. Book value per share is assets minus liabilities divided by number of shares. Liquidation value per share is the amount a shareholder would receive in the event of bankruptcy. Market value per share is the market price of the stock.

D. Tobin's Q

4. The "normal" range of price-earnings ratios for the S&P 500 Index is A. between 2 and 10. B. between 5 and 15. C. less than 8. D. between 12 and 25. E. greater than 20.

D. between 12 and 25.

9. Assume the U.S. government was to decide to increase the budget field. Holding all else constant, this will cause ______ to decrease. A. interest rates B. government borrowing C. unemployment D. interest rates and government borrowing E. None of the options are correct.

D. interest rates and government borrowing

9. The market-capitalization rate on the stock of Fast Growing Company is 20%. The expected ROE is 22%, and the expected EPS are $6.10. If the firm's plowback ratio is 90%, the P/E ratio will be A. 7.69. B. 8.33. C. 9.09. D. 11.11. E. 50.

E. 50.

7. Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. The beta of Sure Tool Company's stock is 1.25. If Sure's intrinsic value is $21.00 today, what must be its growth rate? A. 0.0% B. 10% C. 4% D. 6% E. 7%

E. 7%

4. _______ are examples of financial intermediaries. A. Commercial banks B. Insurance companies C. Investment companies D. Credit unions E. All of the options

E. All of the options

2. Demand-side economics is concerned with A. government spending and tax levels. B. monetary policy. C. fiscal policy. D. government spending, tax levels, and monetary policy. E. All of the options are correct.

E. All of the options are correct.

6. You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $3.50 in dividends and $42 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return. A. $23.91 B. $24.11 C. $26.52 D. $27.50 E. None of the options are correct.

E. None of the options are correct.

8. A firm in the early stages of the industry life cycle will likely have A. high market penetration. B. high risk. C. rapid growth. D. high market penetration and rapid growth. E. high risk and rapid growth.

E. high risk and rapid growth.

12. In the maturity stage of the industry life cycle, A. the product has reached full potential. B. profit margins are narrower. C. producers are forced to compete on price to a greater extent. D. the product has reached full potential and profit margins are narrower. E. the product has reached full potential, profit margins are narrower, and producers are forced to compete on price to a greater extent.

E. the product has reached full potential, profit margins are narrower, and producers are forced to compete on price to a greater extent.