CFA Level One (search sections)

Interest rates have fallen over the seven years since a $1,000 par, 10-year bond was issued with a coupon of 7%. What is the present value of this bond if the required rate of return is currently four and one-half percent? (For simplicity, assume annual payments.)

$1,068.72 The present value can also be determined with a financial calculator. N = 3, I = 4.5%, PMT = $1,000 × 7%, FV = $1,000. Solve for PV = $1,068.724.

Alter Inc. determines that it has $35,000 of accounts receivable outstanding at the end of 20X8. Based on past experience, it recognizes an allowance for bad debt equal to 10% of its credit sales. The tax base of Alter's accounts receivable at the end of 20X8 is closest to: A) $31,500. B) $35,000. C) $3,500.

$35,000. For tax purposes, bad debt expense cannot be deducted until the receivables are deemed worthless. Therefore, the tax base is $35,000 since no bad debt expense has been deducted on the tax return. Note that the carrying value would be $31,500 since bad debt expense is reflected on the income statement.

At the beginning of 2004, Osami Corporation had 1.4 million shares of common stock outstanding and no preferred stock. At the end of August 2004, Osami issued 1.2 million new shares of common stock. If Osami reported net income equal to $7.2 million, what were its earnings per share (EPS) for 2004? A) $3.33. B) $4.00. C) $2.77.

$4.00 The new shares were only outstanding 4 months of the year. Thus, the weighted average number of shares outstanding is [1.4 + (4/12)(1.2)] million = 1.8 million shares. So basic EPS = $7.2 million / 1.8 million = $4.00.

A 2-year option-free bond (par value of $10,000) has an annual coupon of 15%. An investor determines that the spot rate of year 1 is 16% and the year 2 spot rate is 17%. Using the arbitrage-free valuation approach, the bond price is closest to:

$9,694. Price = [1,500/(1.16)] + [11,500/(1.17)2] = $9,694. or N=1, I/Y=16.0, PMT=0, FV=1,500, CPT PV=1,293 N=2, I/Y=17.0, PMT=0, FV=11,500, CPT PV=8,401 Price = 1,293 + 8,401 = $9,694.

An investor gathered the following information about an option-free U.S. corporate bond: Par Value of $10 million Convexity of 90 Duration of 7 If interest rates increase 2% (200 basis points), the bond's percentage price change is closest to:

-12.2%. Recall that the percentage change in prices = Duration effect + Convexity effect = [-duration × (change in yields)] + [(½)convexity × (change in yields)2] = [(-7)(0.02) + (½)(90)(0.02)2] = -0.12 = -12.2%. Remember that you must use the decimal representation of the change in interest rates when computing the duration and convexity adjustments.

A bond is priced at 95.80. Using a pricing model, an analyst estimates that a 25 bp parallel upward shift in the yield curve would decrease the bond's price to 94.75, while a 25 bp parallel downward shift in the yield curve would increase its price to 96.75. The bond's effective convexity is closest to:

-167 Approximate effective convexity is calculated as [ V- + V+ - 2V0 ] / [ (V0)(change in curve)2 ]. [ 96.75 + 94.75 - 2(95.80) ] / [ (95.80)(0.0025)2 ] = -167.01.

he Widget Company had net income of $1 million for the period. There were 1 million shares of widget common stock outstanding for the entire period. If there are 100,000 options outstanding with an exercise price of $40, what is the diluted earnings per share for Widget common stock if the average price per share over the period was $50? A) $0.98. B) $1.00. C) $0.99.

0.98 Use the Treasury stock method Proceeds = 100,000 ($40) = $4,000,000 Shares assumed purchased with proceeds= $4,000,000/$50 = 80,000 shares Potential dilution = 100,000 - 80,000 = 20,000 shares Basic EPS = $1/share Diluted EPS = $1,000,000 / 1,020,000 = $0.98/share

Enduring Corp. operates in a country where net income from sales of goods are taxed at 40%, net gains from sales of investments are taxed at 20%, and net gains from sales of used equipment are exempt from tax. Installment sale revenues are taxed upon receipt. For the year ended December 31, 2004, Enduring recorded the following before taxes were considered: Net income from the sale of goods was $2,000,000, half was received in 2004 and half will be received in 2005. Net gains from the sale of investments were $4,000,000, of which 25% was received in 2004 and the balance will be received in the 3 following years. Net gains from the sale of equipment were $1,000,000, of which 50% was received in 2004 and 50% in 2005. On its financial statements for the year ended December 31, 2004, Enduring should apply an effective tax rate of:

22.86% and increase its deferred tax liability by $1,000,000. Total taxes eventually due on 2004 activities were (($2,000,000 × 0.40) + ($4,000,000 × 0.20) =) $1,600,000. Permanent differences are adjusted in the effective tax rate, which is ($1,600,000 / $7,000,000 =) 22.86%. Of the $1,600,000 taxes due, (($2,000,000 × 0.50 × 0.40) + ($4,000,000 × 0.25 × 0.20) =) $600,000 were paid in 2004 and $1,000,000 ($1,600,000 − $600,000) is added to deferred tax liability.

For a given bond, the duration is 8 and the convexity is 100. For a 60 basis point decrease in yield, what is the approximate percentage price change of the bond?

4.98% The estimated price change is -(duration)(∆YTM) + (½)(convexity) × (∆YTM)2 = -8 × (-0.006) + (½)(100) × (-0.0062) = +0.0498 or 4.98%.

A firm has $3 million in outstanding 10-year bonds, with a fixed rate of 8% (assume annual payments). The bonds trade at a price of $92 per $100 par in the open market. The firm's marginal tax rate is 35%. What is the after-tax component cost of debt to be used in the weighted average cost of capital (WACC) calculations?

6.02%. If the bonds are trading at $92 per $100 par, the required yield is 9.26% (N = 10; PV = -92; FV = 100; PMT = 8; CPT I/Y = 9.26). The equivalent after-tax cost of this financing is: 9.26% (1 - 0.35) = 6.02%.

Calculate the effective duration for a 7-year bond with the following characteristics: - Current price of $660 - A price of $639 when the yield curve shifts up 50 basis points - A price of $684 when the yield curve shifts down by 50 basis points

6.8. 684 - 6392 / 2(660)(0.005) = 6.8

A 6-year annual interest coupon bond was purchased one year ago. The coupon rate is 10% and par value is $1,000. At the time the bond was bought, the yield to maturity (YTM) was 8%. If the bond is sold after receiving the first interest payment and the bond's yield to maturity had changed to 7%, the annual total rate of return on holding the bond for that year would have been:

8.00%. Price 1 year ago N = 6, PMT = 100, FV = 1,000, I = 8, Compute PV = 1,092 Price now N = 5, PMT = 100, FV = 1,000, I = 7, Compute PV = 1,123 % Return = (1,123.00 + 100 - 1,092.46)/1,092.46 × 100 = 11.95%

Degen Company is considering a project in the commercial printing business. Its debt currently has a yield of 12%. Degen has a debt-to-equity ratio of 1.3 and a marginal tax rate of 30%. Hodgkins Inc., a publicly traded firm that operates only in the commercial printing business, has a marginal tax rate of 25%, a debt-to-equity ratio of 2.0, and an equity beta of 1.3. If the risk-free rate is 3% and the expected return on the market portfolio is 9%, the appropriate WACC to use in evaluating Degen's project is closest to:

8.6%. Hodgkins' asset (unlevered) beta: βASSET=1.3[11+(1−0.25)(2.0)]=0.52 We are given Degen's leverage ratio (assets-to-equity) as equal to 2.3. If we assign the value of 1 to equity (A/E = 2.3/1), then debt (and the debt-to-equity ratio) must be 2.3 − 1 = 1.3. Equity beta for the project: βPROJECT = 0.52[1 + (1 − 0.3)(1.3)] = 0.9932 Project cost of equity = 3% + 0.9932(9% − 3%) = 8.96% Degen's capital structure weight for debt is 1.3/2.3 = 56.5%, and its weight for equity is 1/2.3 = 43.5%. The appropriate WACC for the project is therefore: 0.565(12%)(1 − 0.3) + 0.435(8.96%) = 8.64%.

The effective annual yield for an investment is 10%. What is the yield for this investment on a bond-equivalent basis?.

9.76% First, the annual yield must be converted to a semiannual yield. The result is then doubled to obtain the bond-equivalent yield. Semiannual yield = 1.1^0.5 - 1 = 0.0488088. The bond-equivalent yield = 2 × 0.0488088 = 0.097618.

The following data pertains to a common stock: It will pay no dividends for two years. The dividend three years from now is expected to be $1. Dividends are expected to grow at a 7% rate from that point onward. If an investor requires a 17% return on this stock, what will they be willing to pay for this stock now? A) $ 7.30. B) $ 6.24. C) $10.00.

A) $ 7.30. time line = $0 now; $0 in yr 1; $0 in yr 2; $1 in yr 3. P2 = D3/(k - g) = 1/(.17 - .07) = $10 Note the math. The price is always one year before the dividend date. Solve for the PV of $10 to be received in two years. FV = 10; n = 2; i = 17; compute PV = $7.30

Neuman Company has bonds outstanding with five years to maturity that trade at a spread of +240 basis points above the five-year government bond yield. Neuman also has five-year bonds outstanding that are identical in all respects except that they are convertible into 30 shares of Neuman common stock. At which of the following spreads are the convertible bonds most likely to trade? A) +210 basis points. B) +270 basis points. C) +330 basis points.

A) +210 basis points. Because a conversion option is favorable for the bondholder, the convertible bonds should trade at a lower spread than otherwise identical non-convertible bonds.

A trader pays $100 per share to buy 500 shares of a non-dividend-paying firm. The purchase is done on margin, and the leverage ratio at purchase is 3.0X. Three months later, the trader sells the shares for $90 per share. Ignoring transaction costs and interest paid on the margin loan, the trader's 3-month return was closest to: A) -30%. B) -40%. C) -10%.

A) -30% With a leverage ratio of 3 and a 10% decrease in share value, the investor's return is 3 × -10% = -30%

Given P(X = 2) = 0.3, P(X = 3) = 0.4, P(X = 4) = 0.3. What is the variance of X? A) 0.6. B) 3.0. C) 0.3.

A) 0.6 The variance is the sum of the squared deviations from the expected value weighted by the probability of each outcome. The expected value is E(X) = 0.3 × 2 + 0.4 × 3 + 0.3 × 4 = 3. The variance is 0.3 × (2 - 3)² + 0.4 × (3 - 3)² + 0.3 × (4 - 3)² = 0.6.

The spot exchange rate is 0.6243 USD/GBP and the 1-year forward rate is quoted as 3.016%. The 1-year forward exchange rate for USD/GBP is closest to:

A) 0.6431. he one year forward rate is 0.6243 × (1 + 0.03016) = 0.6431.

The current price of XYZ, Inc., is $40 per share with 1,000 shares of equity outstanding. Sales are $4,000 and the book value of the firm is $10,000. What is the price/sales ratio of XYZ, Inc.? A) 10.000. B) 4.000. C) 0.010.

A) 10.000 The price/sales ratio is (price per share)/(sales per share) = (40)/(4,000/1,000) = 10.0. Alternatively, the price/sales ratio may be thought of as the market value of the company divided by its sales, or (40 × 1,000)/4,000, or 10.0 again.

A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon rate of $100, and a yield to maturity of 12%. The current yield on this bond is: A) 10.65%. B) 9.50%. C) 11.25%.

A) 10.65%. FV = 1,000; N = 4; PMT = 100; I = 12; CPT → PV = 939.25. Current yield = coupon / current price 100 / 939.25 × 100 = 10.65

Stock A has a standard deviation of 4.1% and Stock B has a standard deviation of 5.8%. If the stocks are perfectly positively correlated, which portfolio weights minimize the portfolio's standard deviation? Stock A Stock B A) 100% 0% B) 63% 37% C) 0% 100%

A) 100% 0% Because there is a perfectly positive correlation, there is no benefit to diversification. Therefore, the investor should put all his money into Stock A (with the lowest standard deviation) to minimize the risk (standard deviation) of the portfolio.

What is the market-cap weighted index of the following three stocks assuming the beginning index value is 100 and a base value of $150,000? Company, Stock Price, Shares Outstanding X $1 5,000 Y $20 2,500 Z $60 1,000

A) 77. The market-cap weighted index = [(($1)(5,000) + ($20)(2,500) + ($60)(1,000))/$150,000](100) = ($115,000/$150,000)(100) = (0.767)(100) = 76.67 or 77

Which of the following coupon payment structures represents a leveraged inverse floater? A) 8% - 1.5 times 90-day Libor. B) 10% - 0.75 times 180-day Libor. C) 6% - 30-day Libor.

A) 8% - 1.5 times 90-day Libor. A leveraged inverse floater has a coupon that increases or decreases by more than the change in its reference rate. A deleveraged inverse floater has a coupon that increases or decreases by less than the change in its reference rate.

Which one of the following is most likely to experience loss of wealth from an increase in the inflation rate? A) A commercial bank that has a large quantity of fixed-rate mortgages in its loan portfolio. B) An individual investor who recently purchased a substantial amount of variable rate bonds. C) An individual investor who financed the purchase of a home with a 30-year fixed rate mortgage.

A) A commercial bank that has a large quantity of fixed-rate mortgages in its loan portfolio If an economy experiences inflation, the losers are those who hold long-term contracts in which they are to receive fixed payments. A bank that has a large quantity of fixed-rate mortgages in its loan portfolio (i.e., they are investments for the bank) is receiving fixed-rate payments. Both remaining choices are investors who are either making fixed rate payments (the homeowner) or receiving floating-rate payments (the investor in variable rate bonds).

Which of the following statements about indexes is CORRECT? A) A price-weighted index assumes an equal number of shares (one of each stock) represented in the index. B) A market weighted series must adjust the denominator to reflect stock splits in the sample over time. C) An equal weighted index assumes a proportionate market value investment in each company in the index.

A) A price-weighted index assumes an equal number of shares (one of each stock) represented in the index. The descriptions of value weighted and unweighted indexes are switched. The denominator of a price-weighted index must be adjusted to reflect stock splits and changes in the sample over time. A market value-weighted series assumes you make a proportionate market value investment in each company in the index.

Which of the following events will reduce a company's weighted average cost of capital (WACC)? A) A reduction in the market risk premium. B) A reduction in the company's bond rating. C) An increase in expected inflation.

A) A reduction in the market risk premium. An increase in either the company's beta or the market risk premium will cause the WACC to increase using the CAPM approach. A reduction in the market risk premium will reduce the cost of equity for WACC.

Bradley works a 14-hour-per-week job as a bartender at McQuigley's Pub. Maddeline left her position at a commercial bank to raise her two-year old daughter. How would these individuals be classified from the viewpoint of employment statistics? Bradley Maddeline A) Employed Not in labor force B) Not in labor force Not in labor force C) Employed Employed

A) Employed ; Not in labor force The labor force includes all people who are either employed or actively seeking employment. As such, Bradley is considered employed from the viewpoint of employment statistics whereas Maddeline is not counted in the labor force.

Which of the following fiscal and monetary policy scenarios is most likely to increase the size of the public sector relative to the private sector? A) Expansionary fiscal policy and contractionary monetary policy. B) Expansionary monetary policy and contractionary fiscal policy. C) Contractionary fiscal and monetary policy.

A) Expansionary fiscal policy and contractionary monetary policy. Expansionary fiscal policy tends to expand the public sector. Contractionary monetary policy tends to contract the private sector.

Comet Corporation is a capital intensive, growing firm. Comet operates in an inflationary environment and its inventory quantities are stable. Which of the following accounting methods will cause Comet to report a lower price-to-book ratio, all else equal? Inventory method Depreciation method A) First-in, First-out Straight-line B) First-in, First-out Accelerated C) Last-in, First-out Accelerated

A) First-in, First-out Straight-line FIFO results in higher assets and higher equity in an inflationary environment as compared to LIFO. Equity is higher because COGS is lower (and inventory higher) under FIFO. Straight-line depreciation will result in greater assets and equity compared to accelerated depreciation for a stable or growing firm. Equity is greater because depreciation expense is less with straight-line depreciation. Greater equity will result in greater book value per common share, the denominator of the price-to-book ratio. Greater book value per share will result in a lower price-to-book ratio.

Which of the following conditions is most likely necessary for capital to be allocated to its most valuable uses? A) Investors are well informed about the risk and return of various investments. B) There are no barriers to the flow of complete information to the financial markets. C) Financial markets are frictionless (i.e., free of taxes or transactions costs

A) Investors are well informed about the risk and return of various investments. Capital will flow to its most valuable uses if markets function well and investors are well informed about the risk and return characteristics of various investments. Allocation of capital to its most valuable uses does not require that all investors have complete information or that financial markets are frictionless.

The tendency for currency depreciation to increase a country's trade deficit in the short run is known as the: A) J-curve effect. B) absorption effect. C) Marshall-Lerner effect.

A) J-curve effect The J-curve refers to a graph of the effect of currency depreciation on the trade balance over time. In the short run, a trade deficit may increase because current import and export contracts may be fixed in foreign currency units over the near term, and only reflect the exchange rate change over time. In the long run, currency depreciation should decrease a trade deficit.

Under perfect competition, a firm will experience zero long term economic profit when: A) MC = ATC = MR = price. B) MC is less than ATC. C) price is less than average total cost.

A) MC = ATC = MR = price. Under perfect competition, a firm will experience zero long term profits when P = MC = MR = ATC. It recovers all costs including opportunity costs and earns zero economic profit

Which of the following is least likely a characteristic of an oligopoly? A) Relatively small economies of scale. B) There are few sellers. C) Products can either be similar or differentiated.

A) Relatively small economies of scale Oligopolies have large economies of scale and interdependence among competitors.

Which of the following statements about municipal bonds is least accurate? A) Revenue bonds have lower yields than general obligation bonds because there are more revenue bands and they have higher liquidity. B) A municipal bond guarantee is a form of insurance provided by a third party other than the issuer. C) Bonds with municipal bond guarantees are more liquid in the secondary market and generally have lower required yields.

A) Revenue bonds have lower yields than general obligation bonds because there are more revenue bands and they have higher liquidity. General obligation bonds are backed by the full faith, credit, and taxing power of the issuer and thus tend to have lower yields than revenue bonds.

Which of the following is least likely a source of bias in CPI data? A) Sample selection B) Quality changes C) Substitution

A) Sample selection The three sources of bias associated with CPI data are: new goods, quality changes, and substitution.

Which of the following statements about testing a hypothesis using a Z-test is least accurate? A) The calculated Z-statistic determines the appropriate significance level to use. B) The confidence interval for a two-tailed test of a population mean at the 5% level of significance is that the sample mean falls between ±1.96 σ/√n of the null hypothesis value. C) If the calculated Z-statistic lies outside the critical Z-statistic range, the null hypothesis can be rejected.

A) The calculated Z-statistic determines the appropriate significance level to use. The significance level is chosen before the test so the calculated Z-statistic can be compared to an appropriate critical value.

Which of the following is a limitation to fully efficient markets? A) The gains to be earned by information trading can be less than the transaction costs the trading would entail. B) There are no limitations to fully efficient markets because the trading actions of fundamental and technical analysts are continuously keeping prices at their intrinsic value. C) Information is always quickly disseminated and fully embedded in a security's prices.

A) The gains to be earned by information trading can be less than the transaction costs the trading would entail. Market prices that are not precisely efficient can persist if the gains to be made by information trading are less than the transaction costs such trading would entail.

Which of the following statements about book value of equity is most accurate? A) The primary goal of firm management is to increase the book value of the firm's equity. B) Book value of equity reflects the market's perception of the firm's prospects. C) Increases in retained earnings decrease book value.

A) The primary goal of firm management is to increase the book value of the firm's equity. Increasing book value is the primary goal of firm management. Increases in retained earnings increase book value. The market value of equity reflects investor perception of the firm's future value.

The most likely reason for deflation to persist despite expansionary monetary policy is: A) a liquidity trap. B) bond market vigilantes. C) inelastic demand for money.

A) a liquidity trap Deflation is often associated with liquidity trap conditions. A liquidity trap is a situation in which demand for money becomes highly elastic. Expanding the money supply has little effect on economic activity under these conditions because individuals and firms choose to hold the additional money in cash. "Bond market vigilantes" is an expression referring to the fact that expansionary monetary policy may cause long-term interest rates to increase, instead of decreasing as intended, if bond market participants expect the expansionary policy to increase future inflation rates.

With regard to stock market indexes, it is least likely that: A) a market-cap weighted index must be adjusted for stock splits but not for dividends. B) the use of price weighting versus market value weighting produces a downward bias on the index. C) buying 100 shares of each stock in a price-weighted index will result in a portfolio that tracks the index quite well.

A) a market-cap weighted index must be adjusted for stock splits but not for dividends. A price-weighted index needs to be adjusted for stock splits, but a market-cap weighted index does not. Neither type of index considers dividend income unless it is designed as a total return index. Price weighting produces a downward bias compared to market weighting because firms that split their stocks (which tend to be the more successful firms) decrease in weight within a price-weighted index. The returns on a price-weighted index can be matched by purchasing a portfolio with an equal number of shares of each stock in the index.

The short-run supply curve for a price taker firm is the portion of the marginal cost (MC) curve: A) above the average variable cost (AVC) curve. B) below the average variable cost (AVC) curve. C) above the average total cost (ATC) curve

A) above the average variable cost (AVC) curve. The short-run supply curve for a firm is its MC curve above the AVC curve. Price takers will produce where price (P) equals MC. At prices below the AVC curve the firm will not be able to remain in operation. Above the ATC curve the firm is making economic profits and will continue to expand production along the MC curve.

The most appropriate benchmark for measuring the relative performance of an investment manager is: A) an index that closely matches the manager's investment approach. B) a broad market index. C) the risk-adjusted return on the market portfolio

A) an index that closely matches the manager's investment approach. An index chosen as a benchmark for an investment manager's performance should include securities in the manager's investment universe. For example, the performance of an emerging market bond fund manager should be measured relative to the performance of an emerging market bond index.

The current yield on a bond is equal to: A) annual interest divided by the current market price. B) the yield to maturity. C) the internal rate of return

A) annual interest divided by the current market price. The formula for current yield is the annual cash coupon payment divided by the bond price.

Private equity securities most likely: A) are illiquid and do not have quoted prices. B) trade in over-the-counter dealer markets. C) are issued to individual investors.

A) are illiquid and do not have quoted prices. Private equity securities are illiquid and do not trade in public securities markets. Holders of private equity must negotiate with other investors to sell the securities. Private equity securities are typically issued to qualified institutional investors.

Time-weighted returns are used by the investment management industry because they: A) are not affected by the timing of cash flows. B) result in higher returns versus the money-weighted return calculation. C) take all cash inflows and outflows into account using the internal rate of return.

A) are not affected by the timing of cash flows. Time-weighted returns are not affected by the timing of cash flows. Money-weighted returns, by contrast, will be higher when funds are added at a favorable investment period or will be lower when funds are added during an unfavorable period. Thus, time-weighted returns offer a better performance measure because they are not affected by the timing of flows into and out of the account.

When analyzing an industry characterized by increasing book values of equity, return on equity for a period is most appropriately calculated based on: A) average book value. B) beginning book value. C) ending book value.

A) average book value. When book values are not stable, analysts should calculate ROE based on the average book value for the period. When book values are more stable, beginning book value is appropriate.

An indenture is most likely to specify a bond's: A) covenants. B) credit rating. C) underwriter.

A) covenants. Covenants are provisions of a bond indenture. Credit ratings are assigned by independent rating agencies. The underwriter, if any, of a bond issue is not identified in the indenture but would be identified in the offering documents.

One of the basic principles of capital budgeting is that: A) decisions are based on cash flows, not accounting income. B) cash flows should be analyzed on a pre-tax basis. C) opportunity costs should be excluded from the analysis of a project.

A) decisions are based on cash flows, not accounting income.

If the price elasticity of demand is -1.5 and the price of the product increases 2%, the quantity demanded will: A) decrease approximately 3%. B) decrease approximately 0.75%. C) decrease approximately 1.5%.

A) decrease approximately 3%.

When interest rates increase, the modified duration of a 30-year bond selling at a discount: A) decreases. B) increases. C) does not change.

A) decreases. The higher the yield on a bond the lower the price volatility (duration) will be. When interest rates increase the price of the bond will decrease and the yield will increase because the current yield = (annual cash coupon payment) / (bond price). As the bond price decreases the yield increases and the price volatility (duration) will decrease.

Which of the following statements about kurtosis is least accurate? Kurtosis: A) describes the degree to which a distribution is not symmetric about its mean. B) is used to reflect the probability of extreme outcomes for a return distribution. C) measures the peakedness of a distribution reflecting a greater or lesser concentration of returns around the mean.

A) describes the degree to which a distribution is not symmetric about its mean. The degree to which a distribution is not symmetric about its mean is measured by skewness. Excess kurtosis which is measured relative to a normal distribution, indicates the peakedness of a distribution, and also reflects the probability of extreme outcomes.

The after-tax cost of preferred stock is always: A) equal to the before-tax cost of preferred stock. B) less than the before-tax cost of preferred stock. C) higher than the cost of common shares.

A) equal to the before-tax cost of preferred stock. The after-tax cost of preferred stock is equal to the before-tax cost of preferred stock, because preferred stock dividends are not tax deductible. The cost of preferred shares is usually higher than the cost of debt, but less than the cost of common shares.

In a frequency distribution histogram, the frequency of an interval is given by the: A) height of the corresponding bar. B) height multiplied by the width of the corresponding bar. C) width of the corresponding bar.

A) height of the corresponding bar. In a histogram, intervals are placed on the horizontal axis, and frequencies are placed on the vertical axis. The frequency of a particular interval is given by the value on the vertical axis, or the height of the corresponding bar.

A portfolio's monthly returns follow a distribution with a kurtosis measure of 4.2. Relative to a portfolio with normally distributed returns, this portfolio has a: A) higher chance of extreme upside returns and higher chance of extreme downside returns. B) higher chance of extreme upside returns and lower chance of extreme downside returns. C) lower chance of extreme upside returns and higher chance of extreme downside returns.

A) higher chance of extreme upside returns and higher chance of extreme downside returns. A leptokurtic distribution (a distribution with kurtosis measure greater than 3) is more peaked in the middle (data more clustered around the mean) and has fatter tails at the extremes (greater chance of outliers).

Which of the following statements about an embedded call feature in a bond is least accurate? The call feature: A) increases the bond's duration, increasing price risk. B) reduces the bond's capital appreciation potential. C) exposes investors to additional reinvestment rate risk.

A) increases the bond's duration, increasing price risk. A call provision decreases the bond's duration because a call provision introduces prepayment risk that should be factored in the calculation. For the investor, one of the most significant risks of callable (or prepayable) bonds is that they can be called/retired prematurely. Because bonds are nearly always called for prepayment after interest rates have decreased significantly, the investor will find it nearly impossible to find comparable investment vehicles. Thus, investors have to replace their high-yielding bonds with much lower-yielding issues. From the bondholder's perspective, a called bond means not only a disruption in cash flow but also a sharply reduced rate of return.

One advantage of using price-to-book value (PBV) multiples for stock valuation is that: A) it is a stable and simple benchmark for comparison to the market price. B) most of the time it is close to the market value. C) book value of a firm can never be negative.

A) it is a stable and simple benchmark for comparison to the market price. Book value provides a relatively stable measure of value that can be compared to the market price. For investors who mistrust the discounted cash flow estimates of value, it provides a much simpler benchmark for comparison. Book value may or may not be closer to the market value. A firm may have negative book value if it shows accounting losses consistently.

The kinked demand model assumes that below the current price, the demand curve becomes: A) less elastic because competitors will decrease their prices. B) more elastic because competitors will decrease their prices. C) less elastic because competitors will not decrease their prices.

A) less elastic because competitors will decrease their prices. The kinked demand model of oligopoly behavior assumes that a firm's competitors will not match a price increase, but will match the price of a competitor that offers a lower price. The result is a demand curve that is more elastic above the current price, but less elastic below it.

Factors that increase competition in an industry most likely include: A) low barriers to entry, low concentration, and high unused capacity. B) low barriers to entry, high concentration, and high unused capacity. C) high barriers to entry, low concentration, and low unused capacity.

A) low barriers to entry, low concentration, and high unused capacity. Low barriers to entry increase competition as more firms can enter the business. Industries that are fragmented and have unused capacity tend to be highly competitive as they fight for market share and attempt to utilize excess manufacturing resources.

As compared to an equivalent nonputable bond, a putable bond's yield should be: A) lower. B) the same. C) higher.

A) lower. A putable bond favors the buyer (investor). Hence, a premium will be paid for the option, which means the yield will be lower.

Monopolistic competition differs from pure monopoly in that: A) monopolistic competitors have low barriers to entry and monopolists do not. B) monopolists maximize profits and monopolistic competitors do not. C) monopolistic competitors are price takers and monopolists are not.

A) monopolistic competitors have low barriers to entry and monopolists do not. Another name for monopolistic competition is a competitive price searcher market. Monopolistic competition refers to a large number of independent sellers, each produces a differentiated product, each market has a low barrier to entry, and each producer faces a downward sloping demand curve.

Stop loss sell orders are: A) placed to protect the gains on a long position. B) placed to protect a short position. C) executed on an uptick only.

A) placed to protect the gains on a long position. Stop loss sell orders are limit sell orders that are placed below market price. When the share price drops to the designated price, a sell order is executed protecting the investor from further declines.

Recovery rates are greatest for classes of debt with the highest: A) priority of claims. B) default rates. C) loss severity.

A) priority of claims. High default rates and loss severity are indicators of potential lower recovery rates. The highest priority of claims has the lowest credit risk.

In the market model, beta measures the sensitivity of an asset's rate of return to the market's: A) rate of return. B) excess return. C) risk-adjusted return.

A) rate of return. The market model is expressed as: Ri = αi + βiRm + εi. In this model, beta (βi) measures the sensitivity of the rate of return on an asset (Ri) to the market rate of return (Rm).

An equity analyst needs to select a representative sample of manufacturing stocks. Starting with the population of all publicly traded manufacturing stocks, she classifies each stock into one of the 20 industry groups that form the Index of Industrial Production for the manufacturing industry. She then selects four stocks from each industry. The sampling method the analyst is using is best characterized as: A) stratified random sampling. B) random sampling. C) nonrandom sampling.

A) stratified random sampling. In stratified random sampling, a researcher classifies a population into smaller groups based on one or more characteristics, takes a simple random sample from each subgroup, and pools the results.

Contreras Fund is a mutual fund that invests in value stocks. The most appropriate type of equity index to use as a benchmark of manager performance for Contreras Fund is a: A) style index. B) sector index. C) broad market index.

A) style index The index selected as a benchmark for manager performance should represent the investment universe from which the manager actually selects stocks. If the manager only invests in value stocks, then the most appropriate index is a style index that seeks to represent the returns from a value strategy. A sector index is appropriate for managers who invest in specific sectors (e.g., technology stocks, emerging market bonds).

A peak in the business cycle is most likely associated with: A) the highest level of economic output during the cycle. B) payroll employment turning from positive to negative. C) decreasing inflation pressure.

A) the highest level of economic output during the cycle. The peak phase of a business cycle represents the highest level of economic output (real GDP) reached during that cycle. Inflation pressure that built during the expansion may continue into the early part of the contraction that follows the peak. Employment typically does not begin to decline until sometime after the peak.

When computing the yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the: A) yield to maturity at the time of the investment. B) prevailing yield to maturity at the time interest payments are received. C) coupon rate.

A) yield to maturity at the time of the investment. The reinvestment assumption states that reinvestment must occur at the YTM in order for an investor to earn the YTM. The assumption also states that payments are received in a prompt and timely fashion resulting in immediate reinvestment of those funds.

Which of the following statements with regard to floating rate notes that have caps and floors is most accurate? A)A cap is a disadvantage to the bondholder while a floor is a disadvantage to the issuer. B)A cap is an advantage to the bondholder while a floor is an advantage to the issuer. C)A floor is a disadvantage to both the issuer and the bondholder while a cap is an advantage to both the issuer and the bondholder.

A)A cap is a disadvantage to the bondholder while a floor is a disadvantage to the issuer. A cap limits the upside potential of the coupon rate paid on the floating rate bond and is therefore a disadvantage to the bondholder. A floor limits the downside potential of the coupon rate and is therefore a disadvantage to the bond issuer.

Bonds issued by the International Monetary Fund (IMF) are most accurately described as: A)supranational bonds. B)non-sovereign government bonds. C)quasi-government bond

A)supranational bonds. Supranational bonds are issued by multilateral organizations such as the IMF. Quasi-government bonds are issued by agencies created by a national government. Non-sovereign government bonds are issued by state, provincial, and local governments or municipal entities.

Which of the following bonds has the highest interest rate sensitivity? A: A)ten year, option-free 4% coupon bond. B)five year, 5% coupon bond callable in one year. C)ten year, option-free 6% coupon bond.

A)ten year, option-free 4% coupon bond. If two bonds are identical in all respects except their term to maturity, the longer term bond will be more sensitive to changes in interest rates. All else the same, if a bond has a lower coupon rate when compared with another, it will have greater interest rate risk. Therefore, for the option-free bonds, the 10 year 4% coupon is the longest term and has the lowest coupon rate. The call feature does not make a bond more sensitive to changes in interest rates, because it places a ceiling on the maximum price investors will be willing to pay. If interest rates decrease enough the bonds will be called.

The XX Company paid a $1 dividend in the most recent period. The company is expecting dividends to grow at a 6% rate into the future. What is the value of this stock if an investor requires a 15% rate of return on stocks of this risk class? A) $11.11. B) $11.78. C) $10.60.

B) $11.78. Using the constant growth model, $1(1.06) / (0.15 - 0.06) = $11.78.

n investor will receive an annuity of $5,000 a year for seven years. The first payment is to be received 5 years from today. If the annual interest rate is 11.5%, what is the present value of the annuity? A) $13,453.00 B) $15,000.00 C) $23,185.00

B) $15,000.00 With PMT = 5,000; N = 7; I/Y = 11.5; value (at t = 4) = 23,185.175. Therefore, PV (at t = 0) = 23,185.175 / (1.115)⁴ = $15,000.68.

An investor wants to receive $1,000 at the beginning of each of the next ten years with the first payment starting today. If the investor can earn 10 percent interest, what must the investor put into the account today in order to receive this $1,000 cash flow stream? A) $7,145. B) $6,759. C) $6,145.

B) $6,759. This is an annuity due problem. There are several ways to solve this problem. Method 1: PV of first $1,000 = $1,000 PV of next 9 payments at 10% = 5,759.02 Sum of payments = $6,759.02 Method 2: Put calculator in BGN mode. N = 10; I = 10; PMT = -1,000; CPT → PV = 6,759.02 Note: make PMT negative to get a positive PV. Don't forget to take your calculator out of BGN mode. Method 3: You can also find the present value of the ordinary annuity $6,144.57 and multiply by 1 + k to add one year of interest to each cash flow. $6,144.57 × 1.1 = $6,759.02.

An investor gathers the following information about a 2-year, annual-pay bond: Par value of $1,000 Coupon of 4% 1-year spot interest rate is 2% 2-year spot interest rate is 5% Using the above spot rates, the current price of the bond is closest to: A) $1,010. B) $983. C) $1,000.

B) $983. The value of the bond is simply the present value of discounted future cash flows, using the appropriate spot rate as the discount rate for each cash flow. The coupon payment of the bond is $40 (0.04 × 1,000). The bond price = 40/(1.02) + 1,040/(1.05)2 = $982.53.

Firm A can fall short, meet, or exceed its earnings forecast. Each of these events is equally likely. Whether firm A increases its dividend will depend upon these outcomes. Respectively, the probabilities of a dividend increase conditional on the firm falling short, meeting or exceeding the forecast are 20%, 30%, and 50%. The unconditional probability of a dividend increase is:

B) 0.333. The unconditional probability is the weighted average of the conditional probabilities where the weights are the probabilities of the conditions. In this problem the three conditions fall short, meet, or exceed its earnings forecast are all equally likely. Therefore, the unconditional probability is the simple average of the three conditional probabilities: (0.2 + 0.3 + 0.5) ÷ 3.

Jessica Fassler, options trader, recently wrote two put options on two different underlying stocks (AlphaDog Software and OmegaWolf Publishing), both with a strike price of $11.50. The probabilities that the prices of AlphaDog and OmegaWolf stock will decline below the strike price are 65% and 47%, respectively, and these probabilities are independent. The probability that at least one of the put options will fall below the strike price is approximately: A) 1.00. B) 0.81. C) 0.31.

B) 0.81 We calculate the probability that at least one of the options will fall below the strike price using the addition rule for probabilities (A represents AlphaDog, O represents OmegaWolf): P(A or O) = P(A) + P(O) - P(A and O), where P(A and O) = P(A) × P(O) P(A or O) = 0.65 + 0.47 - (0.65 × 0.47) = approximately 0.81

The sample mean return of Bartlett Co. is 3% and the standard deviation is 6% based on 30 monthly returns. What is the confidence interval of a two tailed z-test of the population mean with a 5% level of significance? A) 1.90 to 4.10. B) 0.85 to 5.15. C) 2.61 to 3.39.

B) 0.85 to 5.15 The standard error of the sample is the standard deviation divided by the square root of n, the sample size. 6% / 30^1/2 = 1.0954%. The confidence interval = point estimate +/- (reliability factor × standard error) confidence interval = 3 +/- (1.96 × 1.0954) = 0.85 to 5.15

According to the quantity theory of money, if nominal GDP is $7 trillion, the price index is 150, and the money supply is $1 trillion, then the velocity of the money supply is closest to: A) 4.7. B) 7.0. C) 10.5.

B) 7.0. The equation of exchange is MV = PY. Nominal GDP = PY, so that MV = nominal GDP. Therefore, ($1.0 trillion)(V) = $7.0 trillion. V = $7.0 trillion / $1.0 trillion. V = 7.0.

An investor purchases a 5-year, A-rated, 7.95% coupon, semiannual-pay corporate bond at a yield to maturity of 8.20%. The bond is callable at 102 in three years. The bond's yield to call is closest to: A) 8.6%. B) 8.9%. C) 8.3%.

B) 8.9%. First determine the price paid for the bond:> N = 5 × 2 = 10; I/Y = 8.20 / 2 = 4.10; PMT = 7.95 / 2 = 3.975; FV = 100; CPT PV = -98.99 Then use this value and the call price and date to determine the yield to call: N = 3 × 2 = 6; PMT = 7.95 / 2 = 3.975; PV = -98.99; FV = 102; CPT I/Y = 4.4686 × 2 = 8.937%

Which of the following statements regarding diminishing marginal returns is most accurate? A) The total cost curve arches downward. B) As the quantity produced rises, costs begin to rise at an increasing rate. C) As the quantity produced rises, costs begin to rise at a decreasing rate.

B) As the quantity produced rises, costs begin to rise at an increasing rate. At production levels that are consistent with decreasing marginal returns, costs will increase at an increasing rate as production rises.

If the momentum effect persists over time, it would provide evidence against which of the following forms of market efficiency? A) Weak form only. B) Both weak form and semistrong form. C) Semistrong form only.

B) Both weak form and semistrong form. The momentum effect suggests it is possible to earn abnormal returns using market data. All three forms of market efficiency (weak form, semistrong form, and strong form) assume that market prices fully reflect market data.

Under the absorption approach, which of the following is least likely required to move the balance of payments towards surplus? A) Increased savings relative to domestic investment. B) Decreased domestic expenditure relative to income. C) Sufficient elasticities of export and import demand.

B) Decreased domestic expenditure relative to income. Under the elasticities approach the elasticities of demand for exports and imports are the key to moving a country's balance of payments towards surplus. The absorption approach considers capital flows as well as goods flows. Under this approach, domestic expenditure relative to income must decrease to move the balance of trade towards surplus. Decreasing domestic expenditure relative to income is equivalent to increasing domestic savings, and an increase in savings relative to the current level of domestic investment will also move the balance of payments towards surplus under the absorption approach.

Which of the following is most likely to cause an increase in aggregate demand? A) Relative appreciation in the country's currency. B) High capacity utilization rates. C) An increase in the general price level.

B) High capacity utilization rates. As capacity utilization rates increase to high levels (typically 80% to 85%), business investment in plant and equipment increases, shifting the AD curve to the right. A change in the price level represents a movement along the demand curve, not a shift in it. Appreciation of the country's currency increases the cost of exports and reduces the cost of imports, which shifts the aggregate demand curve to the left (net exports decrease).

In an increasing price environment, what effect does a LIFO liquidation have on a firm's gross profit? A) Decrease. B) Increase. C) No effect.

B) Increase. In an increasing price environment, a LIFO liquidation increases gross profit because COGS includes older inventory layers of units at a cost lower than their current (replacement) cost. This increase is unsustainable because a firm can only sell from inventory until it is exhausted.

Which of the following statements regarding margin accounts is most accurate? A) The total equity in the margin account cannot fall below the initial margin requirement. B) Margin accounts can be used to purchase securities by borrowing part of the purchase price. C) Maintenance margin refers to the amount of funds the investor can borrow.

B) Margin accounts can be used to purchase securities by borrowing part of the purchase price. Margin accounts are brokerage accounts that allow investors to borrow part of the purchase price from the broker.

Brandee Shoffield is the public relations manager for Night Train Express, a local sports team. Shoffield is trying to sell advertising spots and wants to know if she can say with 90% confidence that average home game attendance is greater than 3,000. Attendance is approximately normally distributed. A sample of the attendance at 15 home games results in a mean of 3,150 and a standard deviation of 450. Which of the following statements is most accurate? A) With an unknown population variance and a small sample size, no statistic is available to test Shoffield's hypothesis. B) The calculated test statistic is 1.291. C) Shoffield should use a two-tailed Z-test.

B) The calculated test statistic is 1.291. Here, we have a normally distributed population with an unknown variance (we are given only the sample standard deviation) and a small sample size (less than 30.) Thus, we will use the t-statistic. The test statistic = t = (3,150 - 3,000) / (450 / √ 15) = 1.291

In calculating the weighted average cost of capital (WACC), which of the following statements is least accurate? A) Different methods for estimating the cost of common equity might produce different results. B) The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. C) The cost of preferred equity capital is the preferred dividend divided by the price of preferred shares.

B) The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. After-tax cost of debt = bond yield − tax savings = kd − kdt = kd(1 − t)

Which of the following is least accurate with regard to advertising for firms operating under monopolistic competition? A) Advertising may decrease average total cost. B) The increase to average total costs associated with advertising increases as output increases. C) Advertising expenses are high relative to perfect competition and monopoly.

B) The increase to average total costs associated with advertising increases as output increases. Advertising expenses are high for firms in monopolistic competition. Not only because firms need to inform consumers about the unique features of a firm's products, but also to create or increase a perception of differences between products that are actually quite similar. Advertising costs increase average total costs, but the increase to average total cost attributable to advertising decreases as output increases because more fixed advertising dollars are being averaged over a larger quantity. If advertising increases output (sales) significantly, it can actually decrease a firm's average total cost if there are economies of scale.

Which of the following statements about the efficient frontier is NOT correct? A) The efficient frontier line bends backwards due to less than perfect correlation between assets. B) The slope of the efficient frontier increases steadily as one moves up the curve. C) A portfolio to the left of the efficient frontier is not attainable, while a portfolio to the right of the efficient frontier is inefficient.

B) The slope of the efficient frontier increases steadily as one moves up the curve. This statement should read, "The slope of the efficient frontier decreases steadily as one moves up the curve." The other statements are true.

Tapley Acquisition, Inc., is considering the purchase of Tangent Company. The acquisition would require an initial investment of $190,000, but Tapley's after-tax net cash flows would increase by $30,000 per year and remain at this new level forever. Assume a cost of capital of 15%. Should Tapley buy Tangent? A) Yes, because the NPV = $30,000. B) Yes, because the NPV = $10,000. C) No, because k > IRR.

B) Yes, because the NPV = $10,000. This is a perpetuity. PV = PMT / I = 30,000 / 0.15 = 200,000 200,000 - 190,000 = 10,000

A bond-equivalent yield for a money market instrument is a(n): A) discount yield based on a 365-day year. B) add-on yield based on a 365-day year. C) discount yield based on a 360-day year.

B) add-on yield based on a 365-day year.

A bond whose periodic payments are all equal is said to have a(n): A) balloon structure. B) amortizing structure. C) bullet structure.

B) amortizing structure. Only a fully amortizing structure features payments that are all equal. A bullet structure pays a series of equal coupons but the final coupon is paid at the same time as the bond's principal. A final payment that includes a lump sum in addition to the last interest payment is referred to as a balloon payment.

Point and figure charts are most likely to illustrate: A) the length of time over which trends persist. B) changes of direction in price trends. C) significant increases or decreases in volume.

B) changes of direction in price trends A point-and-figure chart includes only significant price changes, regardless of their timing or volume. The technician determines what price interval to record as significiant (the box size) and when to note changes of direction in prices (the reversal size). Point and figure charts do not show volume and are not scaled to even time periods.

For purposes of financial analysis, an analyst should: A) always consider deferred tax liabilities as stockholder's equity. B) determine the treatment of deferred tax liabilities on a case-by-case basis. C) always consider deferred tax liabilities as a liability.

B) determine the treatment of deferred tax liabilities on a case-by-case basis. For financial analysis, an analyst must decide on the appropriate treatment of deferred taxes on a case-by-case basis. These can be classified as liabilities or stockholder's equity, depending on various factors. Sometimes, deferred taxes are just ignored altogether.

A country's gross domestic product is: A) greater than the country's aggregate income. B) equal to the country's aggregate income. C) less than the country's aggregate income.

B) equal to the country's aggregate income. Aggregate income and aggregate output (gross domestic product) must be equal for an economy as a whole.

According to Keynesian school theory, business cycles are caused by: A) inappropriate variations in the growth of the money supply. B) excessive optimism or pessimism among business managers. C) changes in technology over time.

B) excessive optimism or pessimism among business managers. In Keynesian business cycle theory, business cycles are caused primarily by changes in expectations about economic growth. Business managers overinvest when they are excessively optimistic and underinvest when they are excessively pessimistic.

According to the earnings multiplier model, a stock's P/E ratio (P0/E1) is affected by all of the following EXCEPT the: A) expected dividend payout ratio. B) expected stock price in one year. C) required return on equity.

B) expected stock price in one year. According to the earnings multiplier model, the P/E ratio is equal to P0/E1 = (D1/E1)/(ke - g). Thus, the P/E ratio is determined by: The expected dividend payout ratio (D1/E1). The required rate of return on the stock (ke). The expected growth rate of dividends (g).

Policies that can be used as tools for redistribution of wealth and income include: A) monetary policy only. B) fiscal policy only. C) both fiscal policy and monetary policy.

B) fiscal policy only. Fiscal policy can be used as a tool for redistribution of income and wealth, through a variety of taxation and spending policies.

Commodity price indexes are based on the prices of: A) commodities. B) futures contracts. C) real assets such as grains, oil, and precious metals.

B) futures contracts. The constituent securities of commodity price indexes are commodity futures contracts. As a result, the return on a commodity index can be different than the returns from holding the constituent commodities themselves.

A $1,000 par value, 10% annual coupon bond with 15 years to maturity is priced at $951. The bond's yield to maturity is: A) less than its current yield. B) greater than its current yield. C) equal to its current yield.

B) greater than its current yield. The bond's YTM is: N = 15; PMT = 100; PV = -951; FV = 1,000; CPT I/Y = 10.67% Current Yield = annual coupon payment / bond price CY = 100 / $951 = 0.1051 or 10.51%

A mortgage is most attractive to a lender if the loan: A) is non-recourse. B) has a prepayment penalty. C) is convertible from fixed-rate to adjustable-rate.

B) has a prepayment penalty. Prepayment penalties are attractive to a lender because borrowers are most likely to prepay when interest rates have decreased (i.e., when the lender will earn a lower return by reinvesting prepaid principal). Recourse loans are more favorable to the lender than non-recourse loans because with a non-recourse loan the lender can only reclaim the collateral in the event of default, while recourse gives the lender a claim against the borrower's other assets. The conversion option in a convertible mortgage is held by the borrower and is therefore attractive to a borrower rather than a lender.

A contrarian technical analyst is most likely to be bullish based on a: A) low put-call ratio. B) high volatility index. C) low mutual fund cash position.

B) high volatility index. High levels of the VIX indicate that the outlook of investors is bearish. A contrarian interprets this as a bullish sign. Low mutual fund cash balances indicate that mutual fund managers are bullish, and, as a result, contrarians are bearish. A low put-call ratio indicates bullish investor sentiment, which a contrarian interprets as a bearish sign.

A company currently has a required return on equity of 14% and an ROE of 12%. All else equal, if there is an increase in a firm's dividend payout ratio, the stock's value will most likely: A) decrease. B) increase. C) either increase or decrease.

B) increase.

The pool of loans backing a commercial mortgage-backed security consists of: A) recourse loans only. B) nonrecourse loans only. C) both recourse and nonrecourse loans.

B) nonrecourse loans only. The commercial real estate loans in a CMBS pool are nonrecourse loans. Nonrecourse debt or a nonrecourse loan (sometimes hyphenated as non-recourse) is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable.

In the long-run, after all firms in a perfectly competitive industry have adopted new technology, the: A) individual firm supply will increase as demand decreases. B) price will equal minimum average total cost. C) price will be set where average variable cost is equal to marginal revenue.

B) price will equal minimum average total cost. After some firms in an industry adopt a technological change, the existing firms that use the old technology will experience losses and either adopt the technology or exit the industry. Long-run equilibrium with price equal to minimum average total cost for the new technology will be established.

A company's growth rate in dividends and earnings can be estimated as the: A) difference between the retention ratio and the return on equity. B) product of the retention ratio and the return on equity. C) product of the return on equity and the dividend payout ratio.

B) product of the retention ratio and the return on equity. growth rate (g) = RR x ROE

Two seats on a board of directors are to be elected. A voting system in which the owner of 100 shares may cast 100 votes in each of the board elections is a: A) cumulative voting system. B) statutory voting system. C) proportional voting system.

B) statutory voting system. In a statutory voting system, a shareholder can vote in each separate board election based on the number of shares she owns. Under cumulative voting, the shareholder may choose to cast her total number of votes (200 in this example) for a candidate in one of the elections.

An order placed to protect a short position is called a: A) stop loss sell. B) stop loss buy. C) protective call.

B) stop loss buy. A short position profits from declines in stock price and experiences losses as the price rises. A stop loss buy is a limit order that is placed above the market price. When the stock price reaches the stop price, the limit order is executed curtailing further loses.

the primary factors that influence the price elasticity of demand for a product are: A) the proportions of consumers' budgets spent on the product, the size of the shift in the demand curve for a product, and changes in consumers' price expectations. B) the availability of substitute goods, the time that has elapsed since the price of the good changed, and the proportions of consumers' budgets spent on the product. C) changes in consumers' incomes, the time since the price change occurred, and the availability of substitute goods.

B) the availability of substitute goods, the time that has elapsed since the price of the good changed, and the proportions of consumers' budgets spent on the product. The three primary factors influencing the price elasticity of demand for a good are the availability of substitute goods, the proportions of consumers' budgets spent on the good, and the time since the price change.

The particular portfolio on the efficient frontier that best suits an individual investor is determined by: A) the individual's asset allocation plan. B) the individual's utility curve. C) the current market risk-free rate as compared to the current market return rate.

B) the individual's utility curve. The optimal portfolio for each investor is the highest indifference curve that is tangent to the efficient frontier. The optimal portfolio is the portfolio that gives the investor the greatest possible utility.

When using duration and convexity to estimate the effect on a bond's value of changes in its credit spread, an analyst should most appropriately use: A) Macaulay duration rather than modified duration. B) the same method used when estimating the effect of changes in yield. C) a convexity measure that has been adjusted for the bond's credit risk.

B) the same method used when estimating the effect of changes in yield. We can use duration and convexity to estimate the price effect of changes in spread in the same way we use them to estimate the price effect of changes in yield: Percent change in bond value = -duration(change in yield or spread) + (1/2)(convexity)(squared change in yield or spread) No adjustment for credit risk is needed and an analyst should use modified or effective duration.

A trader pays $100 per share to buy 500 shares of a non-dividend-paying firm. The purchase is done on margin, and the leverage ratio at purchase is 3.0X. Three months later, the trader sells the shares for $90 per share. Ignoring transaction costs and interest paid on the margin loan, the trader's 3-month return was closest to: A) -10%. B) -40%. C) -30%.

C) -30% With a leverage ratio of 3 and a 10% decrease in share value, the investor's return is 3 × -10% = -30%

An investor begins with a $100,000 portfolio. At the end of the first period, it generates $5,000 of income, which he does not reinvest. At the end of the second period, he contributes $25,000 to the portfolio. At the end of the third period, the portfolio is valued at $123,000. The portfolio's money-weighted return per period is closest to: A) -0.50%. B) 1.20%. C) 0.94%.

C) 0.94% Using the financial calculator, the initial investment (CF0) is -100,000. The income is +5,000 (CF1), and the contribution is -25,000 (CF2). Finally, the ending value is +123,000 (CF3) available to the investor. Compute IRR = 0.94

Which of the following bonds has the shortest duration? A bond with a: A) 10-year maturity, 6% coupon rate. B) 20-year maturity, 6% coupon rate. C) 10-year maturity, 10% coupon rate.

C) 10-year maturity, 10% coupon rate. All else constant, a bond with a longer maturity will be more sensitive to changes in interest rates. All else constant, a bond with a lower coupon will have greater interest rate risk.

Find the respective mean and the mean absolute deviation (MAD) of a series of stock market returns. Year 1 14% Year 2 20% Year 3 24% Year 4 22%

C) 20%; 3%. (14 + 20 + 24 + 22) / 4 = 20 (mean) Take the absolute value of the differences and divide by n: MAD = [|14 - 20| + |20 - 20| + |24 - 20| + |22 - 20|] / 4 = 3%.

Cheryl Brower and Todd Sutter each own 100 shares of Hills Company stock. In a recent proxy vote, Brower had 100 votes but Sutter had 10 votes. The most likely reason for this difference in voting rights is that: A) Hills Company uses a statutory voting method. B) Brower is a director of Hills Company. C) Brower and Sutter own different classes of stock.

C) Brower and Sutter own different classes of stock. Companies may issue classes of stock (e.g., Class A and Class B shares) that differ in aspects such as voting rights, dividends, or priority of claims in liquidation.

Capital transfers and sales of non-financial assets are included in which of the balance of payments accounts? A) Current account. B) Financial account. C) Capital account.

C) Capital account. Capital transfers and sales of non-financial assets are sub-accounts of the capital account.

Statement 1: High-definition televisions are considerably more expensive than traditional models. This means consumers are spending more money per television unit, which represents a form of inflation. Statement 2: Employment contracts with automatic increases based on the Consumer Price Index fail to increase wages as much as the increase in the cost of living because of biases in the price index. Should Walker agree or disagree with these statements? Statement 1 Statement 2

C) Disagree Disagree Walker should disagree with both statements. Price changes resulting from increases in the quality of goods, do not represent inflation. However, the Consumer Price Index is affected by biases from product quality, as well as new goods and substitution, causing it to overstate the rate of inflation. As a result, increases in wages that are based on CPI will more than compensate for actual increases in the cost of living.

Which is NOT an assumption of capital market theory? A) There are no taxes or transaction costs. B) There is no inflation. C) Investments are not divisible.

C) Investments are not divisible. Capital market theory assumes that all investments are infinitely divisible. The other statements are basic assumptions of capital market theory.

A monopolist will expand production until: A) P = MC and the price of the product will be determined by the MC curve. B) MR = MC and the price of the product will be determined by the MR curve. C) MR = MC and the price of the product will be determined by the demand curve.

C) MR = MC and the price of the product will be determined by the demand curve. A monopolist will expand production until MR = MC. The demand curve lies above the intersection of the MR and MC curve and the price charged is the price on the demand curve for the output where MR = MC.

What is the relationship between price and marginal revenue for a price searcher? A) Marginal revenue = price. B) Marginal revenue > price. C) Marginal revenue < price.

C) Marginal revenue < price. For a price searcher, demand is downward sloping, marginal revenue is less than price since price must be reduced to sell additional units of output.

Which of the following statements describes a limitation of Monte Carlo simulation? A) Simulations do not consider possible input values that lie outside historical experience. B) Variables are assumed to be normally distributed but may actually have non-normal distributions. C) Outcomes of a simulation can only be as accurate as the inputs to the model.

C) Outcomes of a simulation can only be as accurate as the inputs to the model. Monte Carlo simulations can be set up with inputs that have any distribution and any desired range of possible values. However, a limitation of the technique is that its output can only be as accurate as the assumptions an analyst makes about the range and distribution of the inputs.

If X has a normal distribution with μ = 100 and σ = 5, then there is approximately a 90% probability that: A) P(90.2 < X < 109.8). B) P(93.4 < X < 106.7). C) P(91.8 < X < 108.3).

C) P(91.8 < X < 108.3) 100 +/- 1.65 (5) = 91.75 to 108.25 or P (P(91.75 < X < 108.25).

If X and Y are independent events, which of the following is most accurate? A) P(X or Y) = (P(X)) × (P(Y)). B) P(X or Y) = P(X) + P(Y). C) P(X | Y) = P(X).

C) P(X | Y) = P(X) Note that events being independent means that they have no influence on each other. It does not necessarily mean that they are mutually exclusive. Accordingly, P(X or Y) = P(X) + P(Y) - P(X and Y). By the definition of independent events, P(X|Y) = P(X).

Under which of these conditions is a machine learning model said to be underfit? A) The model identifies spurious relationships. B) The input data are not labeled. C) The model treats true parameters as noise.

C) The model treats true parameters as noise. Underfitting describes a machine learning model that is not complex enough to describe the data it is meant to analyze. An underfit model treats true parameters as noise and fails to identify the actual patterns and relationships. A model that is overfit (too complex) will tend to identify spurious relationships in the data. Labeling of input data is related to the use of supervised or unsupervised machine learning techniques.

Which of the following statements about primary and secondary markets is least accurate? A) A primary market is a market in which new securities are sold. B) The primary market benefits from the liquidity provided by the secondary market. C) The proceeds from a sale in the secondary market go to the issuer.

C) The proceeds from a sale in the secondary market go to the issuer. Proceeds in a primary market go to the issuing firm. Proceeds from a sale in the secondary market go to the current owner who is selling the securities.

Which of the following statements about the univariate, multivariate, and standard normal distributions is least accurate? A) A univariate distribution describes a single random variable. B) A multivariate distribution specifies the probabilities for a group of related random variables. C) The standard normal random variable, denoted Z, has mean equal to one and variance equal to one.

C) The standard normal random variable, denoted Z, has mean equal to one and variance equal to one. The standard normal random variable, denoted Z, has mean equal to 0 and variance equal to 1.

Garner Corporation is investing $30 million in new capital equipment. The present value of future after-tax cash flows generated by the equipment is estimated to be $50 million. Currently, Garner has a stock price of $28.00 per share with 8 million shares outstanding. Assuming that this project represents new information and is independent of other expectations about the company, what should the effect of the project be on the firm's stock price? A) The stock price will increase to $34.25. B) The stock price will remain unchanged. C) The stock price will increase to $30.50.

C) The stock price will increase to $30.50. In theory, a positive NPV project should provide an increase in the value of a firm's shares. NPV of new capital equipment = $50 million - $30 million = $20 million Value of company prior to equipment purchase = 8,000,000 × $28.00 = $224,000,000 Value of company after new equipment project = $224 million + $20 million = $244 million Price per share after new equipment project = $244 million / 8 million = $30.50 Note that in reality, changes in stock prices result from changes in expectations more than changes in NPV.

Which of the following statements concerning the support tranche in a planned amortization class (PAC) CMO backed by agency RMBS is least accurate? A) The purpose of a support tranche is to provide prepayment protection for one or more PAC tranches. B) If prepayments are too low to maintain the scheduled PAC payments, the shortfall is provided by the support tranche. C) The support tranches are exposed to high levels of credit risk.

C) The support tranches are exposed to high levels of credit risk. The support tranches are exposed to high levels of prepayment risk, not credit risk.

Which of the following statements on the forms of the efficient market hypothesis (EMH) is least accurate? A) The strong-form EMH assumes perfect markets. B) The semi-strong form EMH addresses market and non-market public information. C) The weak-form EMH states that stock prices reflect current public market information and expectations.

C) The weak-form EMH states that stock prices reflect current public market information and expectations. The weak-form EMH assumes the price of a security reflects all currently available historical information. Thus, the past price and volume of trading has no relationship with the future, hence technical analysis is not useful in achieving superior returns. The other statements are true. The strong-form EMH states that stock prices reflect all types of information: market, non-public market, and private. No group has monopolistic access to relevant information; thus no group can achieve excess returns. For these assumptions to hold, the strong-form assumes perfect markets - information is free and available to all.

Historically, which of the following asset classes has exhibited the smallest standard deviation of monthly returns? A) Large-capitalization stocks. B) Long-term corporate bonds. C) Treasury bills.

C) Treasury bills. Based on data for securities in the United States from 1926 to 2008, Treasury bills exhibited a lower standard deviation of monthly returns than both large-cap stocks and long-term corporate bonds.

Which of the following is a limitation of the portfolio duration measure? Portfolio duration only considers: A) a nonparallel shift in the yield curve. B) the market values of the bonds. C) a linear approximation of the actual price-yield function for the portfolio.

C) a linear approximation of the actual price-yield function for the portfolio. Duration is a linear approximation of a nonlinear function. The use of market values has no direct effect on the inherent limitation of the portfolio duration measure. Duration assumes a parallel shift in the yield curve, and this is an additional limitation.

A technical analyst who identifies a decennial pattern and a Kondratieff wave most likely: A) is analyzing a daily or intraday price chart. B) associates these phenomena with U.S. presidential elections. C) believes market prices move in cycles.

C) believes market prices move in cycles. The decennial pattern and the Kondratieff wave are cycles of ten and 54 years, respectively. A technical analyst would be most likely to use these cycles to interpret long-term charts of monthly or annual data. Presidential elections in the United States are a possible explanation for a four-year cycle.

In an informationally efficient market: A) the conditions exist for active investment strategies to achieve superior risk-adjusted returns. B) share prices adjust rapidly when companies announce results in line with expectations. C) buying and holding a broad market portfolio is the preferred investment strategy.

C) buying and holding a broad market portfolio is the preferred investment strategy. If financial markets are informationally efficient, active investment strategies cannot consistently achieve risk-adjusted returns superior to holding a passively managed index portfolio. In addition, a passive investment strategy has lower transactions costs than an active management strategy. Share prices should not adjust when a company announces results in line with expectations in an informationally efficient market, because the market price already reflects the expected results.

A p-value of 0.02% means that a researcher: A) can reject the null hypothesis at the 5% significance level but cannot reject at the 1% significance level. B) cannot reject the null hypothesis at either the 5% or 1% significance levels. C) can reject the null hypothesis at both the 5% and 1% significance levels.

C) can reject the null hypothesis at both the 5% and 1% significance levels. A p-value of 0.02% means that the smallest significance level at which the hypothesis can be rejected is 0.0002, which is smaller than 0.05 or 0.01. Therefore the null hypothesis can be rejected at both the 5% and 1% significance levels.

Treasury Inflation Protected Securities, which provide investors with protection against inflation by adjusting the par value and keeping the coupon rate fixed, are best described as: A) interest-indexed bonds. B) indexed-annuity bonds. C) capital-indexed bonds.

C) capital-indexed bonds. Indexed bonds that adjust the principal value while keeping the coupon rate fixed are best described as capital-indexed bonds. Interest-indexed bonds adjust the coupon rate. Indexed-annuity bonds are fully amortizing with the payments adjusted.

A price index that is calculated using the current weights of the index's basket of goods and services is known as a: A) hedonic price index. B) Laspeyres price index. C) chained price index.

C) chained price index. A chained or chain-weighted price index uses updated weights for each good and service in its market basket. A price index that is not chain-weighted, such as a Laspeyres index, is calculated using weights for each good and service in the market basket as of the index's base period. Hedonic pricing is a technique used to adjust a price index for upward bias from quality changes of goods in its market basket.

A price index that is calculated using the current weights of the index's basket of goods and services is known as a: A) hedonic price index. B) Laspeyres price index. C) chained price index.

C) chained price index. Achieved A chained or chain-weighted price index uses updated weights for each good and service in its market basket. A price index that is not chain-weighted, such as a Laspeyres index, is calculated using weights for each good and service in the market basket as of the index's base period. Hedonic pricing is a technique used to adjust a price index for upward bias from quality changes of goods in its market basket.

An increase in real interest rates can be expected to: A) decrease investment and increase net exports. B) increase government spending and decrease consumption. C) decrease investment and decrease consumption.

C) decrease investment and decrease consumption. An increase in real interest rates can be expected to decrease business investment and decrease consumption. The impact on government spending and net exports is not clear-cut.

High risk tolerance, a long investment horizon, and low liquidity needs are most likely to characterize the investment needs of a(n): A) insurance company. B) bank. C) defined benefit pension plan.

C) defined benefit pension plan. A defined benefit pension plan typically has a long investment time horizon, low liquidity needs, and high risk tolerance. Insurance companies and banks typically have low risk tolerance and high liquidity needs. Banks and property and casualty insurers typically have short investment horizons.

If a lessee enters into a finance lease rather than an operating lease, it can expect to have a: A) higher return on assets. B) lower debt-to-equity ratio. C) higher debt-to-equity ratio.

C) higher debt-to-equity ratio. Leasing the asset with an operating lease avoids recognition of the debt on the lessee's balance sheet. Having fewer assets and liabilities on the balance sheet than would exist if the assets were purchased increases profitability ratios (e.g., return on assets) and decreases leverage ratios (e.g., debt-to-equity ratio). In the case of a finance lease, the assets are reported on the balance sheet and are depreciated.

An investor purchases a fixed coupon bond with a Macaulay duration of 5.3. The bond's yield to maturity decreases before the first coupon payment. If the YTM then remains constant and the investor sells the bond after three years, the realized yield will be: A) lower than the YTM at the date of purchase. B) equal to the YTM at the date of purchase. C) higher than the YTM at the date of purchase.

C) higher than the YTM at the date of purchase. If the investment horizon is shorter than the Macaulay duration, the price impact of a decrease in YTM dominates the loss of reinvestment income and the realized yield will be higher than the YTM at purchase.

The country of Zurkistan is experiencing both high interest rates and high inflation. The government passes laws that reduce government spending and increase taxes. It takes many months before interest rates fall and inflation is reduced. This is an example of: A) recognition lag in discretionary fiscal policy. B) action lag and automatic stabilizers. C) impact lag in discretionary fiscal policy.

C) impact lag in discretionary fiscal policy. This is an example of discretionary fiscal policy involving impact lag because it takes time for the impact of the change in taxing and spending to be felt throughout the economy.

A good is considered an inferior good if it exhibits a negative: A) substitution effect. Failed B) elasticity of demand. Failed C) income effect.

C) income effect. The income effect is negative for an inferior good. An increase in income results in a decrease in the quantity demanded.

Because some input prices do not adjust rapidly to changes in the price level, the short-run aggregate supply curve: A) may be interpreted as representing the economy's potential output. B) exhibits a negative relationship between quantity supplied and the price level. C) is more elastic than the long-run aggregate supply curve.

C) is more elastic than the long-run aggregate supply curve. The short-run aggregate supply curve slopes upward (i.e., is not perfectly inelastic) because in the short run some input prices do not adjust fully to changes in the price level. Because firms can increase profit in the short run by increasing output in response to higher prices, there is a positive short-run relationship between the price level and quantity supplied.

The risk of receiving less than market value when selling a bond is referred to as: A) loss severity risk. B) recovery rate risk. C) market liquidity risk.

C) market liquidity risk. Market liquidity risk is the risk of receiving less than market value when selling a bond and is reflected in the size of the bid-ask spreads. Market liquidity risk is greater for the bonds of less creditworthy issuers and for the bonds of smaller issuers with relatively little publicly traded debt. Loss severity and recovery rate refer to defaults.

The factors that must be considered when estimating the credit risk of a bond include: A) only the bond rating. B) the bond rating, the recovery rate, and the yield volatility. C) only the bond rating and the recovery rate.

C) only the bond rating and the recovery rate. Credit risk is calculated with the probability of default (estimated from the bond rating) and the estimated recovery value should the bond default. Yield volatility is combined with duration to estimate the price risk of a bond.

Consider $1,000,000 par value, 10-year, 6.5% coupon bonds issued on January 1, 20X5. The market rate for similar bonds is currently 5.7%. A sinking fund provision requires the company to redeem $100,000 of the principal each year. Bonds called under the terms of the sinking fund provision will be redeemed at par. A bondholder would: A) prefer to have her bonds called under the sinking fund provision. B) be indifferent between having her bonds called under the sinking fund provision or not called. C) prefer not to have her bonds called under the sinking fund provision.

C) prefer not to have her bonds called under the sinking fund provision. With the market rate currently below the coupon rate, the bonds will be trading at a premium to par value. Thus, a bondholder would prefer not to have her bonds called under the sinking fund provision.

Hume Inc. announces fourth quarter earnings per share of $1.20, which is 15% higher than last year. Hume's earnings are equal to the consensus analyst forecast for the quarter. Assuming markets are efficient, the announcement will most likely cause the price of Hume's stock to: A) decrease. B) increase. C) remain the same.

C) remain the same. An efficient capital market would price Hume's stock based on the expectation for earnings per share. Since actual earnings equal expected earnings, the stock price should not change as a result of the announcement.

The interests of community groups affected by a company's operations are most likely to be considered in corporate governance under: A) special interest theory. B) shareholder theory. C) stakeholder theory.

C) stakeholder theory. Community groups may be one of the stakeholder groups considered under stakeholder theory.

Which of the following statements is most accurate regarding monetarists? Monetarists believe that: A) discretionary monetary policy is the best way to moderate fluctuations in prices and output. B) fiscal policy is the most powerful of all government tools used to affect prices and output. C) steady, predictable money growth is the best monetary policy.

C) steady, predictable money growth is the best monetary policy. Monetarists believe that the Fed's tools are powerful and should not be used to moderate fluctuations in prices and outputs. Thus, steady, predictable growth is the best monetary policy. They believe in the power of the money supply, not fiscal policy, to affect prices and outputs.

Studies of performance of a sample of mutual fund managers most likely suffer from: A) look-ahead bias. B) sample-selection bias. C) survivorship bias.

C) survivorship bias. Studies of the performance of mutual fund managers often suffer from survivorship bias as poorly performing funds are closed down and are not included in the sample.

The measure of return on a security market index that includes any dividends or interest paid by the securities in the index is known as the: A) cash flow return. B) price return. C) total return.

C) total return. The total return on a security market index includes cash flows from the securities (dividends and interest) as well as price changes.

Austin Bruno, CFA, places a fill or kill, limit buy order at 92 for a stock. Bruno's order specifies: A) clearing and validity instructions. B) execution and clearing instructions. C) validity and execution instructions.

C) validity and execution instructions. Fill or kill is a validity instruction as it indicates when the order can be filled (i.e. immediately or cancel the order). A limit buy order is an execution instruction as it indicates how the order should be filled (e.g. buy at $92 or less). Clearing instructions indicate how to settle the trade (i.e., how and when to transfer the cash and the security).

Of the following types of firm, which is most suitable for P/B ratio analysis? A) A firm with accounting standards different from other firms. B) A service industry firm without significant fixed assets. C) A firm with accounting standards consistent to other firms.

C) A firm with accounting standards consistent to other firms. Assuming consistent accounting standards across firms, P/B ratios can reveal signs of misvaluation across firms

Which type of issuer is most likely to issue bonds by auction? A)Municipal. B)Corporate. C)Sovereign.

C)Sovereign. Many national governments use auctions to issue sovereign bonds. Corporate bonds are typically issued in an underwriting or private placement process while municipal bonds are typically issued in a negotiated or underwritten process.

Which of the following statements about an embedded call feature in a bond is least accurate? The call feature: A)reduces the bond's capital appreciation potential. B)exposes investors to additional reinvestment rate risk. C)increases the bond's duration, increasing price risk.

C)increases the bond's duration, increasing price risk. A call provision decreases the bond's duration because a call provision introduces prepayment risk that should be factored in the calculation.

Which of the following describes the yield to worst? The: A)yield given default on the bond. B)lowest of all possible prices on the bond. C)lowest of all possible yields to call.

C)lowest of all possible yields to call. Yield to worst involves the calculation of yield to call for every possible call date, and determining which of these results in the lowest expected return.

The initial margin is the: A)equity represented in the margin account at any time. B)amount of cash that an investor must maintain in his/her margin account. C)minimum amount of funds that must be supplied when purchasing a security on margin.

C)minimum amount of funds that must be supplied when purchasing a security on margin Margin is the amount of equity in the account at a given time. Initial margin is the amount of equity required initially to execute an order.

U.S. GAAP treats interest paid as ______ whereas IAS GAAP treats interest paid as ________________

CFO; either CFO or CFF.

corr (Ri,Rm)

COV (Ri,Rm) / (st dev Ri)(st dev Rm)

COV between 2 stocks

COV(1,2) = {∑[(R1 - Mean R)(R2 - Mean R2)]} / (n - 1)

Which of the following choices best describes the effects on consumption, investment, and net exports that would result from an increase in the price level, other factors held constant? Consumption Investment Net exports inc or decr for reach

Decrease Decrease Decrease At higher price levels, consumption, investment, and net exports all decrease. A rising price level decreases consumers' real wealth, so they consume less. The higher price level will increase interest rates, which causes business investment to decrease. Rising domestic prices will also reduce foreign purchases of the country's goods, decreasing net exports.

Laser Tech has net temporary differences between tax and book income resulting in a deferred tax liability of $30.6 million. According to U.S. GAAP, an increase in the tax rate would have what impact on deferred taxes and net income, respectively: Deferred Taxes Net Income

Increase Decrease If tax rates rise then deferred tax liabilities will also rise. The increase in deferred tax liabilities will increase the current tax expense, and if expenses are increasing the net income will decrease.

A random variable follows a continuous uniform distribution over 27 to 89. What is the probability of an outcome between 34 and 38? A) 0.0645. B) 0.0546. C) 0.0719.

P(34 ≤ X ≤ 38) = (38 - 34) / (89 - 27) = 0.0645

The price to book value ratio (P/BV) is a helpful valuation technique when examining firms: A) that hold primarily liquid assets. B) with the same stock prices. C) with older assets compared to those with newer assets.

P/BV analysis works best for firms that hold primarily liquid assets.

Given that the two-year spot rate is 5.89% and the one-year forward rate one-year from now is 6.05%, assuming annual compounding what is the one year spot rate?

The spot rate is computed as follows: solve for (1+S1) spot rate0,1 = (1 + spot rate0,2)2(1 + forward rate1,2)1 - 1 = (1 + 0.0589)2(1 + 0.0605)1 - 1 = 5.73%

Justin Lopez, CFA, is the Chief Financial Officer of Waterbury Corporation. Lopez has just been informed that the U.S. Internal Revenue Code may be revised such that the maximum marginal corporate tax rate will be increased. Since Waterbury's taxable income is routinely in the highest marginal tax bracket, Lopez is concerned about the potential impact of the proposed change. Assuming that Waterbury maintains its target capital structure, which of the following is least likely to be affected by the proposed tax change? A) Waterbury's after-tax cost of noncallable, nonconvertible preferred stock. B) Waterbury's return on equity (ROE). C) Waterbury's after-tax cost of corporate debt.

Waterbury's after-tax cost of noncallable, nonconvertible preferred stock. Corporate taxes do not affect the cost of preferred stock to the issuing firm. Waterbury's after-tax cost of debt, and consequently, its weighted average cost of capital will decrease because the tax savings on interest will increase. Also, since taxes impact net income, Waterbury's ROE will be affected by the change.

Which of the following five year bonds has the highest interest rate sensitivity? A)Option-free 5% coupon bond. B)Floating rate bond. C)Zero-coupon bond.

Zero-coupon bond. The Macaulay duration of a zero-coupon bond is equal to its time to maturity. Its price is greatly affected by changes in interest rates because its only cash-flow is at maturity and is discounted from the time at maturity until the present.

DOL = (degree of operating leverage)

[Q(P - V)] / [Q(P - V) - F]

Capital rationing exists when

a company has a fixed (maximum) amount of funds to invest. If profitable project opportunities exceed the amount of funds available, the firm must ration, or prioritize its funds to achieve the maximum value for shareholders given its capital limitations.

Ivo Company has a $10 million face value bond issue outstanding. These bonds include a call option that permits Ivo to redeem the bonds at any time for 101% of par. These bonds were issued at a premium and have a carrying value of $10,200,000. If Ivo calls the bonds, its income statement will reflect: A) a gain on redemption. B) neither a gain nor a loss on redemption. C) a loss on redemption.

a gain on redemption. The firm can call the bonds for 101% of $10 million, or $10,100,000. Redeeming bonds for less than the carrying value of the bond liability results in a gain.

The semi-strong form of efficient market hypothesis (EMH) asserts that:

all public information is already reflected in security prices.

If market rates do not change, as time passes the price of a zero-coupon bond will:

approach par A bond's value may differ substantially from it's maturity value prior to maturity. But as maturity draws nearer the bond's value converges to it's maturity value. This statement is true for regular bonds as well as zero-coupon bonds.

Gene Bawerk, an economics professor, is lecturing on the factors that influence the price elasticity of demand. He makes the following assertions: Statement 1: For most goods, demand is more elastic in the long run than the short run. Statement 2: Demand for a good becomes more elastic when a close substitute for it becomes available on the market. With respect to Bawerk's statements:

both are correct. Both of these statements are accurate. Price elasticity for most goods is greater in the long run because individuals can make long-term decisions that require different quantities of the good, such as buying more fuel efficient vehicles to use less gasoline. Price elasticity is greater the better the available substitutes because an increase in price will lead more buyers to switch to the substitute products.

If two projects are mutually exclusive, a company:

can accept either project, but not both projects.

Treasury Inflation Protected Securities, which provide investors with protection against inflation by adjusting the par value and keeping the coupon rate fixed, are best described as:

capital-indexed bonds. Indexed bonds that adjust the principal value while keeping the coupon rate fixed are best described as capital-indexed bonds

Financing costs for a capital project are: A) subtracted from estimates of a project's future cash flows. B) captured in the project's required rate of return. C) subtracted from the net present value of a project.

captured in the project's required rate of return. Financing costs are reflected in a project's required rate of return. Project specific financing costs should not be included as project cash flows. The firm's overall weighted average cost of capital, adjusted for project risk, should be used to discount expected project cash flows.

Sensitivity of a bond's price to a change in yield at a specific maturity is least appropriately estimated by using: A)partial duration. B)key rate duration. C)effective duration.

effective duration. Effective duration is used to measure the sensitivity of a bond price to a parallel shift in the yield curve. Key rate duration, also known as partial duration, is used to measure the sensitivity of a bond price to a change in yield at a specific maturity.

Two underlying assumptions of financial statements, according to the IASB conceptual framework, are: A) accrual accounting and historical cost. B) historical cost and going concern. C) going concern and accrual accounting.

going concern and accrual accounting. The two underlying assumptions of financial statements according to the conceptual framework are accrual accounting and the going concern assumption. Historical cost is one of several measurement bases that may be used for financial reporting.

Concentration measures are most likely to be used to: A) measure elasticity of demand facing an industry. B) analyze barriers to entry into an industry. C) identify the market structure of an industry.

identify the market structure of an industry. Concentration measures are used to identify the market structure of an industry (perfect competition, monopolistic competition, oligopoly, or monopoly). Concentration measures do not directly indicate an industry's barriers to entry or elasticity of demand.

Which of the following most accurately describes the Monetarist school of macroeconomic thought in relation to aggregate demand and aggregate supply? Monetarists believe that the money supply should be: A) increased by a predictable rate annually. B) reduced during inflationary periods and increased during recessionary periods. C) increased during inflationary periods and reduced during recessionary periods.

increased by a predictable rate annually. Monetarists believe that to keep aggregate demand stable and growing, the central bank should follow a policy of steady and predictable increases in the money supply. Furthermore, monetarists believe that recessions are caused by inappropriate decreases in the money supply and that recessions can be persistent because money wage rates are downward sticky.

The value of an asset that a rational investor with full knowledge about the asset's characteristics would willingly pay is best described as the asset's:

intrinsic value

The zero volatility spread (Z-spread) is the spread that:

is added to each spot rate on the government yield curve that will cause the present value of the bond's cash flows to equal its market price.

An analyst studying Albion Industries determines that the average EV/EBITDA ratio for Albion's industry is 10. The analyst obtains the following information from Albion's financial statements: EBITDA = £11,000,000 Market value of debt = £30,000,000 Cash = £1,000,000 Based on the industry's average enterprise value multiple, what is the equity value of Albion Industries?

£81,000,000 Enterprise value = Average EV/EBITDA × company EBITDA = 10 × £11,000,000 = £110,000,000 Enterprise value = Equity value + debt - cash Equity value = Enterprise value - debt + cash = £110,000,000 - £30,000,000 + £1,000,000 = £81,000,000

beta formula

(Covstock,market)/(Varmarket)

A bond has a convexity of 51.44. What is the approximate percentage price change of the bond due to convexity if rates rise by 150 basis points?

0.58%. The convexity effect, or the percentage price change due to convexity, formula is: convexity × (ΔYTM)2. The percentage price change due to convexity is then: (½)(51.44)(0.015)2 = 0.0058.

A Treasury bond due in one-year has a yield of 8.5%. A Treasury bond due in 5 years has a yield of 9.3%. A bond issued by General Motors due in 5 years has a yield of 9.9%. A bond issued by Exxon due in one year has a yield of 9.4%. The yield spreads on the bonds issued by Exxon and General Motors are: Exxon General Motors

0.9% ; 0.6%

Washington, Inc.'s stock transactions during the year 20X4 were as follows: January 1 720,000 shares issued and outstanding May 1 2 for 1 stock split occurred What was Washington's weighted average number of shares outstanding during 20X4, for earnings per share (EPS) computation purposes?

1,440,000 The January 1 balance is adjusted retroactively for the stock split and (720,000 × 2 =) 1,440,000 shares are treated as outstanding from January.

The mean monthly return on U.S. Treasury bills (T-bills) is 0.42%. The mean monthly return for an index of small stocks is 4.56%, with a standard deviation of 3.56%. What is the Sharpe measure for the index of small stocks?

1.16%. The Sharpe ratio measures excess return per unit of risk. (4.56 - 0.42) / 3.56 = 1.16%.

z score for 90%, 95%, 99%

1.645, 1.960, 2.575

Consider a bond selling for $1,150. This bond has 28 years to maturity, pays a 12% annual coupon, and is callable in 8 years for $1,100. The yield to call is closest to:

10.05%.

n one year, a security market index has the following quarterly price returns: First quarter 3% Second quarter 4% Third quarter -2% Fourth quarter 5% The price return for the year is closest to:

10.2%. Return for the year = (1.03)(1.04)(0.98)(1.05) − 1 = 10.23%.

An analyst projects the following pro forma financial results for Magic Holdings, Inc., in the next year: Sales of $1,000,000 Earnings of $200,000 Total assets of $750,000 Equity of $500,000 Dividend payout ratio of 62.5% Shares outstanding of 50,000 Risk free interest rate of 7.5% Expected market return of 13.0% Stock Beta at 1.8 If the analyst assumes Magic Holdings, Inc. will produce a constant rate of dividend growth, the value of the stock is closest to:

104 Infinite period DDM: P0 = D1 / (ke - g) D1 = (Earnings × Payout ratio) / average number of shares outstanding = ($200,000 × 0.625) / 50,000 = $2.50. ke = risk free rate + [beta × (expected market return - risk free rate)] ke = 7.5% + [1.8 × (13.0% - 7.5%)] = 17.4%. g = (retention rate × ROE) Retention = (1 - Payout) = 1 - 0.625 = 0.375. ROE = net income/equity = 200,000/500,000 = 0.4 g = 0.375 × 0.4 = 0.15. P0 = D1 / (ke - g) = $2.50 / (0.174 - 0.15) = 104.17.

An investor purchases 100 shares of Lloyd Computer at $26 a share. The initial margin requirement is 50%, and the maintenance margin requirement is 25%. The price below which the investor would receive a margin call is closest to:

17.33

Lawson, Inc.'s net income for the year was $1,060,000 with 420,000 shares of common stock outstanding. Lawson has 2,000 shares of 8%, $1,000 par value convertible preferred stock that were outstanding the entire year. Each share of preferred is convertible into 50 shares of common stock. Lawson's diluted earnings per share are closest to: A) $1.94. B) $2.04. C) $2.14.

2.04 Lawson's basic EPS ((net income − preferred dividends) / weighted average common shares outstanding) is ($1,060,000 − (2,000 × $1,000 × 0.08)) / 420,000 = $2.14. To calculate diluted EPS the convertible preferred shares are presumed to have been converted, the preferred dividends paid are added back to the numerator of the EPS equation, and the additional common shares are added to the denominator of the equation. Lawson's diluted EPS is $1,060,000 / (420,000 + 100,000) = $2.04.

An investor finds that for a 1% increase in yield to maturity, a bond's price will decrease by 4.21% compared to a 4.45% increase in value for a 1% decline in YTM. If the bond is currently trading at par value, the bond's approximate modified duration is closest to:

4.33

An investor purchases 200 shares of Rubble, Inc. on margin. The shares are trading at $40. Initial and maintenance margins are 50% and 25%. If the company pays a dividend of $0.75 and the investor sells the stock at year-end for $50 per share, the return on the investment would be closest to:

53.75% Dividend income = 0.75 × 200 = $150 Profit = 10,000 - 8,000 + 150 = 2,150 Return = 2,150 / 4,000 = 53.75%

An investor purchases 200 shares of Rubble, Inc. on margin. The shares are trading at $40. Initial and maintenance margins are 50% and 25%. If the company pays a dividend of $0.75 and the investor sells the stock at year-end for $50 per share, the return on the investment would be closest to:

53.75% Dividend income = 0.75 × 200 = $150 Profit = 10,000 - 8,000 + 150 = 2,150 Return = 2,150 / 4,000 = 53.75%

The mean monthly return on (U.S. Treasury bills) T-bills is 0.42% with a standard deviation of 0.25%. What is the coefficient of variation?

60% .25 / 0.42 = 0.595, or 60%.

A 20 year, 8% semi-annual coupon, $1,000 par value bond is selling for $1,100. The bond is callable in 4 years at $1,080. What is the bond's yield to call?

7.21 n = 4(2) = 8; PMT = 80/2 = 40; PV = -1,100; FV = 1,080 Compute YTC = 3.435(2) = 6.87%

An investor purchases a 5-year, A-rated, 7.95% coupon, semiannual-pay corporate bond at a yield to maturity of 8.20%. The bond is callable at 102 in three years. The bond's yield to call is closest to:

8.9% st determine the price paid for the bond:> N = 5 × 2 = 10; I/Y = 8.20 / 2 = 4.10; PMT = 7.95 / 2 = 3.975; FV = 100; CPT PV = -98.99 Then use this value and the call price and date to determine the yield to call: N = 3 × 2 = 6; PMT = 7.95 / 2 = 3.975; PV = -98.99; FV = 102; CPT I/Y = 4.4686 × 2 = 8.937%

t value formula

=

Form 144:

A company can issue securities to certain qualified buyers without registering the securities with the SEC, but must notify the SEC that it intends to do so.

What will $10,000 become in 5 years if the annual interest rate is 8%, compounded monthly? A) $14,898.46. B) $14,802.44. C) $14,693.28.

A) $14,898.46. FV(t=5) = $10,000 × (1 + 0.08 / 12)^60 = $14,898.46 N = 60 (12 × 5); PV = -$10,000; I/Y = 0.66667 (8% / 12months); CPT → FV = $14,898.46

Lincoln Coal is planning a new coal mine, which will cost $430,000 to build, with the expenditure occurring next year. The mine will bring cash inflows of $200,000 annually over the subsequent seven years. It will then cost $170,000 to close down the mine over the following year. Assume all cash flows occur at the end of the year. Alternatively, Lincoln Coal may choose to sell the site today. What minimum price should Lincoln set on the property, given a 16% required rate of return? A) $280,913. B) $325,859. C) $376,872.

A) $280,913. The key to this problem is identifying this as a NPV problem even though the first cash flow will not occur until the following year. Next, the year of each cash flow must be property identified; specifically: CF0 = $0; CF1 = -430,000; CF2-8 = +$200,000; CF9 = -$170,000. One simply has to discount all of the cash flows to today at a 16% rate. NPV = $280,913.

If an investor buys 100 shares of a $50 stock on margin when the initial margin requirement is 40%, how much money must she borrow from her broker? A) $3,000. B) $4,000. C) $2,000.

A) $3,000 An initial margin requirement of 40% would mean that the investor must put up 40% of the funds and brokerage firm may lend the 60% balance. Therefore, for this example (100 shares) * ($50) = $5,000 total cost. $5,000 * 0.60 = $3,000.

An investor has two stocks, Stock R and Stock S in her portfolio. Given the following information on the two stocks, the portfolio's standard deviation is closest to: σR = 34% σS = 16% rR,S = 0.67 WR = 80% WS = 20% A) 29.4%. B) 7.8%. C) 8.7%.

A) 29.4%.

Given the following sample data, find the sample standard deviation of returns for Stock A and for Stock B. Stock A Stock B Year 1 16% 20% Year 2 20% 24% Year 3 12% 10% Std. Dev. A Std. Dev. B

A) 4.0% 7.2% For Stock A: (16 + 20 + 12)/3 = 48/3 = 16% average return. (16 - 16)² = 0² = 0 (20 - 16)² = 4² = 16 (12 - 16)² = -4² = 16 0 + 16 + 16 = 32; 32/(3-1) = 16; 16^1/2 = 4.0% For Stock B: (20 + 24 + 10) = 54/3 = 18% average return. (20 - 18)² = 2² = 4 (24 - 18)² = 6² = 36 (10 - 18)² = -8² = 64 4 + 36 + 64 = 104; 104 / (3 - 1) = 52; 52^1/2 = 7.2%

A local bank advertises that it will pay interest at the rate of 4.5%, compounded monthly, on regular savings accounts. What is the effective rate of interest that the bank is paying on these accounts? A) 4.59%. B) 4.50%. C) 4.65%.

A) 4.59%. (1 + 0.045 / 12)^12 - 1 = 1.0459 - 1 = 0.0459.

The coupon rate of a fixed income security is stated as 90-day LIBOR plus 125 basis points. This security is most accurately described as a(n): A) floating-rate note. B) reference-rate note. C) variable-rate note.

A) floating-rate note. A floating-rate note has a coupon rate based on a market-determined reference rate such as 90-day LIBOR. Typically the coupon rate will be stated as a margin above the reference rate. A variable-rate note has a margin above the reference rate that is not fixed over the life of the note. An index-linked bond has a coupon payment or principal amount that adjusts based on the value of a published index such as an equity market, commodity, or inflation index.

Matrix pricing is used primarily for pricing bonds that: A) have low liquidity. B) differ from their benchmark bond's credit rating. C) differ from their benchmark bond's maturity.

A) have low liquidity. For bonds that do not trade or trade infrequently, matrix pricing uses the yields on similar issues that do trade to estimate the required yield on the illiquid bonds.

Assuming stable inventory quantities, in a period of: A) rising prices, LIFO results in higher cost of goods sold and FIFO results in higher working capital. B) falling prices, LIFO results in higher gross profit and FIFO results in lower cost of goods sold. C) rising prices, LIFO results in higher ending inventory and FIFO results in higher gross profit.

A) rising prices, LIFO results in higher cost of goods sold and FIFO results in higher working capital In a period of rising prices, LIFO results in higher COGS, lower inventory balances, and lower gross profit, as compared to FIFO. In a falling price environment, these effects are the opposite. Working capital (current assets minus current liabilities) is higher under FIFO in a rising price environment because inventories are higher.

A competitive firm will tend to expand its output as long as: A) the market price is greater than the marginal cost. B) its marginal revenue is positive. C) its marginal revenue is greater than the market price.

A) the market price is greater than the marginal cost. A competitive firm faces a flat demand curve. This means the price is constant and the marginal revenue line is flat. A firm will continue to produce as long as MR > MC, so the competitive firm will produce as long as P > MC. It will stop when MC = MR = P.

Which of the following statements best describes the investment assumption used to calculate an equal weighted price indicator series? A) An equal dollar investment is made in each stock in the index. B) A proportionate market value investment is made for each stock in the index. C) An equal number of shares of each stock are used in the index.

An equal dollar investment is made in each stock in the index. An equal weighted price indicator series assumes that an equal dollar investment is made in each stock in the index. All stocks carry equal weight regardless of their price or market value.

The Fisher effect describes the relationship between: A) money supply growth and actual inflation. B) nominal and real interest rates. C) expected and unexpected inflation.

B) nominal and real interest rates. The Fisher effect states that a nominal interest rate is equal to a real interest rate plus the expected rate of inflation.

In behavioral finance theory, how is loss aversion most accurately defined? For gains and losses of equal amounts, investors: A) like gains more than they dislike losses. B) dislike for losses and like for gains are proportionate. C) dislike losses more than they like gains.

Behavioral finance proposes that investors are loss averse. Loss aversion means investors dislike losses more than they like gains of the same amount.

another formula for BETA

Betai = (σi/σM) × corr (I, M)

current yield of a bond formula

CY = (Face value × Coupon) / PV of bond use when comparing current yield vs yield - to - call

Form 8-K:

Companies must file this form to disclose material events including significant asset acquisitions and disposals, changes in management or corporate governance, or matters related to its accountants, financial statements, or the markets on which its securities trade.

value of pref stock formula

D / r

effective annual yield (EAY)

EAY = (1 + HPY)^(365/t) - 1

DFL = (degree of financial leverage)

EBIT / (EBIT - Int)

reject f stat if

F > critical value

The process of evaluating and selecting profitable long-term investments consistent with the firm's goal of shareholder wealth maximization is known as: A) monitoring. B) financial restructuring. C) capital budgeting.

In the process of capital budgeting, a manager is making decisions about a firm's earning assets, which provide the basis for the firm's profit and value. Capital budgeting refers to investments expected to produce benefits for a period of time greater than one year. Financial restructuring is done as a result of bankruptcy and monitoring is a critical assessment aspect of capital budgeting.

With a one-tier board structure:

Independent directors and senior managers both serve on a single board with a one-tier board structure and are jointly responsible for determining corporate strategy.

Nominal GDP =

MV so nominal GDP = PY

equation of exchange

MV = PY

Median = Mean = Mode =

Median = middle of distribution Mean = (3 + 3 + 5 + 8 + 9 + 13 + 17) / 7 = 8.28; Mode = most frequent observation

EBITDA =

Operating income + depreciation + amortization

Margin call price forumula

P0( 1 - initial margin %) / 1 - maintenance margin %)

limitation of fully efficient markets

Processing new information entails costs and takes at least some time

The "real assets" classification most likely includes: A)commodities. B)stocks. C)bonds

Real assets include commodities, real estate, durable equipment, and other physical assets. Bonds and stocks are classified as financial assets.

An analyst has collected the following data about a firm: Receivables turnover = 10 times. Inventory turnover = 8 times. Payables turnover = 12 times. What is the average receivables collection period, the average inventory processing period, and the average payables payment period? (assume 360 days in a year)

Receivables collection period = 360 / 10 = 36 days Inventory processing period = 360 / 8 = 45 days Payables payment period = 360 / 12 = 30 days

support from revenue bonds comes from

Revenue bonds are serviced by the income generated from specific projects (e.g., toll roads)

Safety First Ratio

SF Ratio = (expected return - threshold return) / standard deviation

The financial statement analysis framework consists of six steps:

State the objective and context. Determine what questions the analysis is meant to answer, the form in which it needs to be presented, and what resources and how much time are available to perform the analysis. Gather data. Acquire the company's financial statements and other relevant data on its industry and the economy. Ask questions of the company's management, suppliers, and customers, and visit company sites. Process the data. Make any appropriate adjustments to the financial statements. Calculate ratios. Prepare exhibits such as graphs and common-size balance sheets. Analyze and interpret the data. Use the data to answer the questions stated in the first step. Decide what conclusions or recommendations the information supports. Report the conclusions or recommendations. Prepare a report and communicate it to its intended audience. Be sure the report and its dissemination comply with the Code and Standards that relate to investment analysis and recommendations. Update the analysis. Repeat these steps periodically and change the conclusions or recommendations when necessary.

F statistic formula

S₁² / S₂²

Technical analysts who use cycles define a Kondratieff wave as a cycle of: A) 18 years. B) 54 years. C) 10 years.

The Kondratieff wave is a 54-year cycle that some technical analysts believe exists for equity market prices.

One of the assumptions of technical analysis is: A) all analysts have all current information. B) the market is efficient. C) supply and demand are driven by rational and irrational behavior.

The market is driven by rational and irrational behavior.

Form DEF-14A:

When a company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, it also files the statement with the SEC as Form DEF-14A.

YTM formula for a zero coupon bond

Yield to Maturity = (Face Value / Current Price of Bond) ^ (1 / Years to Maturity) - 1 or put in calc, current price is PV, 1000 FV

A break point is calculated as:

amount of capital at which the components cost of capital changes / weight of the component in the capital structure

Break points occur

any time the cost of one of the components of the company's WACC changes.

The stakeholders most likely to be concerned with their legal liabilities are: A) regulators. B) directors. C) creditors.

directors Directors are legally responsible for their decisions and actions as board members. Neither regulators nor creditors face significant legal liabilities for their actions.

under priced vs overpriced in CAPM

expected return < CAPM return, then overpriced

Under accrual accounting, revenues are recognized in the same period in which the associated: A) expenses are incurred. B) cash is collected. C) invoices are billed.

expenses are occured Accrual accounting is based on the matching principle, under which revenues are recognized in the same period that the expenses are incurred to generate those revenues.

The Type II error is the error of

failing to reject a null hypothesis that is not true.

An Elliott wave theorist who forecasts prices based on Fibonacci ratios is most likely to predict that a wave will be: A) four-ninths the size of the previous wave. B) six-elevenths the size of the previous wave. C) five-eighths the size of the previous wave.

five-eighths the size of the previous wav The sequence of Fibonacci numbers is 0, 1, 1, 2, 3, 5, 8, 13... . Five-eighths is a Fibonacci ratio.

preferred stock typically has a __________ dividend and __________

fixed dividend, no maturity

Suppose the 3-year spot rate is 12.1% and the 2-year spot rate is 11.3%. Which of the following statements concerning forward and spot rates is most accurate? The 1-year: A)forward rate two years from today is 13.7%. B)forward rate two years from today is 13.2%. C)forward rate one year from today is 13.7%.

forward rate two years from today is 13.7%. The equation for the three-year spot rate, S3, is (1 + S1)(1 + 1y1y)(1 + 2y1y) = (1 + S3)3. Also, (1 + S1)(1 + 1y1y) = (1 + S2)2. So, (1 + 2y1y) = (1 + S3)3 / (1 + S2)2, computed as: (1 + 0.121)3 / (1 + 0.113)2 = 1.137. Thus, 2y1y = 0.137, or 13.7%.

Syndicated loans are

funded by more than one bank

If a firm's growth rate is 12% and its dividend payout ratio is 30%, its current return on equity (ROE) is closest to:

g = (RR)(ROE) g / RR = ROE 0.12 / (1 - 0.30) = 0.12 / 0.70 = 0.1714 or 17.14%

During a period of expansion in the economy, compared to firms with lower operating leverage, earnings growth for firms with high operating leverage will be: A) unaffected. B) higher. C) lower.

higher If a high percentage of a firm's total costs are fixed, the firm is said to have high operating leverage. High operating leverage, other things held constant, means that a relatively small change in sales will result in a large change in operating income. Therefore, during an expansionary phase in the economy a highly leveraged firm will have higher earnings growth than a lesser leveraged firm. The opposite will happen during an economic contraction.

coefficient of variation expresses

how much dispersion exists relative to the mean of a distribution and is found by CV = s / mean

In a net present value (NPV) profile, the internal rate of return is represented as the: A) intersection of the NPV profile with the horizontal axis. B) intersection of the NPV profile with the vertical axis. C) point where two NPV profiles intersect.

intersection of the NPV profile with the horizontal axis. The internal rate of return is the rate of discount at which the NPV of a project is zero. On an NPV profile, this is the point where the profile intersects the horizontal axis.

Total cash flows to investors in an ABS issue are:

less than the total interest and principal payments from the underlying asset pool. Cash flows from the underlying asset pool are used to pay fees to the servicer as well as payments to the ABS investors. Thus payments to investors are less than the total cash flows from the pool of assets.

when calculating WACC, use

market value of components

In a positively skewed distribution, the: A) mean is greater than the median. B) mean is less than the median. C) median equals the mean.

mean is greater than the median.

Roy's safety-first criterion requires the maximization

of the SF Ratio

operating leverage

percent change in EBIT from a given percent change in sales

beta is a measure of

systematic risk

total risk =

systematic risk + unsystematic risk

Convexity is a measure of

the curvature, or the degree of the curve, in the relationship between bond prices and bond yields. Convexity demonstrates how the duration of a bond changes as the interest rate changes.

yield - to - call formula

use the first callable price as the FV

st dev to var

var is st dev ^2

The following data pertains to a common stock: It will pay no dividends for two years. The dividend three years from now is expected to be $1. Dividends are expected to grow at a 7% rate from that point onward. If an investor requires a 17% return on this stock, what will they be willing to pay for this stock now?

$ 7.30 time line = $0 now; $0 in yr 1; $0 in yr 2; $1 in yr 3. P2 = D3/(k - g) = 1/(.17 - .07) = $10 Note the math. The price is always one year before the dividend date. Solve for the PV of $10 to be received in two years. FV = 10; n = 2; i = 17; compute PV = $7.30

Advantage Corp.'s capital structure was as follows: December 31, 2005 December 31, 2004 Outstanding shares of stock: Common 110,000 110,000 Convertible Preferred 10,000 10,000 % Convertible Bonds $1,000,000 $1,000,000 During 2005, Advantage paid dividends of $3 per share on its preferred stock. The preferred shares are convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shares of common stock. Net income for 2005 was $850,000. Assume the income tax rate is 30%. Calculate Advantage's basic and diluted earnings per share (EPS) for 2005.

$7.45 $5.66 Basic EPS = net income − pref div / wt. ave. shares of common [850,00 − (3 × 10,000)] / 110,000 = $7.45 Diluted EPS = [(net income − preferred dividends) + convertible preferred dividends + (convertible debt interest)(1 − t)] / [(weighted average shares) + (shares from conversion of conv. pfd shares) + (shares from conversion of conv. debt) + (shares issuable from stock options)] [(850,000 − (3 × 10,000)) + 30,000 + (80,000)(1 − 0.3)] / [(110,000) + (20,000) + (30,000)] = $5.66.

A company has 6% preferred stock outstanding with a par value of $100. The required return on the preferred is 8%. What is the value of the preferred stock?

$75.00. The annual dividend on the preferred is $100(.06) = $6.00. The value of the preferred is $6.00/0.08 = $75.00.

What value would be placed on a stock that currently pays no dividend but is expected to start paying a $1 dividend five years from now? Once the stock starts paying dividends, the dividend is expected to grow at a 5 percent annual rate. The appropriate discount rate is 12 percent.

$9.08 P4 = D5/(k-g) = 1/(.12-.05) = 14.29 14.29 / (1 + .012)^4

WACC foumula

(Wd)[(Kd(1 - t)] + (Wps)(Kps) + (Wce)(Kce)

An analyst gathered the following data for the Parker Corp. for the year ended December 31, 2005: EPS2005 = $1.75 Dividends2005 = $1.40 BetaParker = 1.17 Long-term bond rate = 6.75% Rate of return S&P 500 = 12.00% The firm is expected to continue their dividend policy in future. If the long-term growth rate in earnings and dividends is expected to be 6%, the forward P/E ratio for Parker Corp. will be:

11.61 The required rate of return on equity for Parker will be 12.89% = 6.75% + 1.17(12.00% - 6.75%) and the firm pays 80% (1.40 / 1.75) of its earnings as dividends. Forward P/E ratio = 0.80 / (0.1289 - 0.0600) = 11.61 Where r = required rate of return on equity, gn = growth rate in dividends (forever).

A T-bill with a face value of $100,000 and 140 days until maturity is selling for $98,000. What is its holding period yield?

2.04%. The holding period yield is the return the investor will earn if the T-bill is held to maturity. HPY = (100,000 - 98,000) / 98,000 = 0.0204, or 2.04%.

Given the following information, compute price/book value. Book value of assets = $550,000 Total sales = $200,000 Net income = $20,000 Dividend payout ratio = 30% Operating cash flow = $40,000 Price per share = $100 Shares outstanding = 1000 Book value of liabilities = $500,000

2.0X Book value of equity = $550,000 - $500,000 = $50,000 Market value of equity = ($100)(1000) = $100,000 Price/Book = $100,000/$50,000 = 2.0X

Calculate the effective duration for a 7-year bond with the following characteristics: Current price of $660 A price of $639 when the yield curve shifts up 50 basis points A price of $684 when the yield curve shifts down by 50 basis points

6.8

An investor bought a stock on margin. The margin requirement was 60%, the current price of the stock is $80, and the stock price was $50 one year ago. If margin interest is 5%, how much equity did the investor have in the investment at year-end?

73.8% Margin debt = 40% × $50 = $20; Interest = $20 × 0.05 = $1. Equity % = [Value - (margin debt + interest)] / Value $80 - $21 / $80 = 73.8%

The 3-year spot rate is 10%, and the 4-year spot rate is 10.5%. What is the 1-year forward rate 3 years from now?

A) 12.0%.

In equilibrium, investors should only expect to be compensated for bearing systematic risk because: A) nonsystematic risk can be eliminated by diversification. B) systematic risk is specific to the securities the investor selects. C) individual securities in equilibrium only have systematic risk.

A) nonsystematic risk can be eliminated by diversification.

An anti-dumping restriction on trade: A) prohibits foreign firms from selling products below cost to gain market share. B) keeps some highly sensitive products in the country. C) protects infant industries.

A) prohibits foreign firms from selling products below cost to gain market share. Firms dump their goods at a price lower than cost in order to drive out the competition. Once this is complete, they will be able to raise prices to much higher levels in order to gain abnormal profits. Of course, once prices are increased, new competitors may arise.

What is the present value of a 10-year, $100 annual annuity due if interest rates are 0%? A) No solution. B) $1,000. C) $900.

B) $1,000. When I/Y = 0 you just sum up the numbers since there is no interest earned.

A stock that pays no dividend is currently priced at €42.00. One year ago the stock was €44.23. The continuously compounded rate of return is closest to: A) +5.17%. B) -5.17%. C) -5.04%.

B) -5.17%. ln(S1/S0) = ln(42.00/44.23) = ln(0.9496) = −0.0517 = −5.17%

A sample of size n = 25 is selected from a normal population. This sample has a mean of 15 and a sample variance of 4. What is the standard error of the sample mean?

B) 0.4. The standard error of the sample mean is estimated by dividing the standard deviation of the sample by the square root of the sample size. The standard deviation of the sample is calculated by taking the positive square root of the sample variance 41/2 = 2. Applying the formula: sx = s / n^½ = 2 / (25)1/2 = 2 / 5 = 0.4.

The six-month spot rate is 4.0% and the 1 year spot rate is 4.5%, both stated on a semiannual bond basis. The implied six-month rate six months from now, stated on a semiannual bond basis, is closest to: A) 4%. B) 5%. C) 6%.

B) 5%

Which of the following is NOT a limitation to financial ratio analysis? A) Differences in international accounting practices. B) A firm that operates in only one industry. C) The need to use judgment.

B) A firm that operates in only one industry. If a firm operates in multiple industries, this would limit the value of financial ratio analysis by making it difficult to find comparable industry ratios.

Which of the following statements best describes the overreaction effect? A) High returns over a one-year period are followed by high returns over the following year. B) Low returns over a three-year period are followed by high returns over the following three years. C) High returns over a one-year period are followed by low returns over the following three years.

B) Low returns over a three-year period are followed by high returns over the following three years. The overreaction effect refers to stocks with poor returns over three to five-year periods that had higher subsequent performance than stocks with high returns in the prior period. The result is attributed to overreaction in stock prices that reverses over longer periods of time. Stocks with high previous short-term returns that have high subsequent returns show a momentum effect.

Monopolists will maximize profit by producing at an output level where which of the following conditions exists? A) Price = marginal revenue = marginal cost. B) Marginal revenue = marginal cost < price. C) Price = demand = marginal revenue = marginal cost.

B) Marginal revenue = marginal cost < price. To maximize profit, monopolists will expand output until marginal revenue equals marginal cost. Price will be greater than marginal revenue because a monopolist faces a downward sloping demand curve.

Which of the following items would NOT be included in cash flow from investing? A) Proceeds related to acquisitions. B) Selling stock of the company. C) Buying or selling a building.

B) Selling stock of the company. Selling stock of the company would be a financing cash flow.

Which of the following is a key determinant of operating leverage? A) Level and cost of debt. B) The tradeoff between fixed and variable costs. C) The competitive nature of the business.

B) The tradeoff between fixed and variable costs. Operating leverage can be defined as the trade off between variable and fixed costs.

Pearl River Heavy Industries shows the following information in its financial statements: Total Assets HK$146,000,000 Total Liabilities HK$87,000,000 Net Income HK$27,000,000 Price per Share HK$312 Shares Outstanding 200,000 The equity securities of Pearl River have a: A) market value of HK$146,000,000. B) book value of HK$59,000,000. C) book value of HK$62,400,000.

B) book value of HK$59,000,000. Book value = Total assets - total liabilities = 146,000,000 - 87,000,000 = HK$59,000,000 Market value of equity = Market price per share × shares outstanding = HK$312 × 200,000 = HK$62,400,000

A synthetic collateralized debt obligation (CDO) is backed by a pool of: A) leveraged bank loans. B) credit default swaps C) other CDOs.

B) credit default swaps A synthetic CDO is backed by a pool of credit default swaps. Collateralized loan obligations (CLOs) are backed by a pool of leveraged bank loans. CDOs backed by a pool of other CDOs are an example of structured finance CDOs.

Which of the following statements about kurtosis is least accurate? Kurtosis: A) is used to reflect the probability of extreme outcomes for a return distribution. B) describes the degree to which a distribution is not symmetric about its mean. C) measures the peakedness of a distribution reflecting a greater or lesser concentration of returns around the mean.

B) describes the degree to which a distribution is not symmetric about its mean. The degree to which a distribution is not symmetric about its mean is measured by skewness. Excess kurtosis which is measured relative to a normal distribution, indicates the peakedness of a distribution, and also reflects the probability of extreme outcomes

A company's use of financial leverage: A) decreases default risk and decreases potential return on equity. B) increases default risk and increases potential return on equity. C) increases default risk and decreases potential return on equity.

B) increases default risk and increases potential return on equity. Issuing debt introduces default risk. The interest expense associated with using debt represents a fixed cost that reduces net income. However, compared to financing entirely with equity, the lower net income is spread over a smaller base of shareholders' equity. This financing structure increases the potential return on equity.

In the Ricardian model of trade, the source of comparative advantage is: A) capital productivity. B) labor productivity. C) the difference between labor productivity and capital productivity.

B) labor productivity. The Ricardian model of trade only considers labor as a factor of production. Comparative advantage results from differences in labor productivity. Labor and capital inputs are both considered in the Heckscher-Ohlin model of trade.

An analyst has determined the projected trend rate of real GDP growth is 2.5% and the central bank's inflation target is 2.5%. If the central bank policy rate is 5.0%, monetary policy is most likely: A) expansionary. B) neutral. C) contractionary.

B) neutral. The neutral rate of interest is real trend rate of economic growth plus the inflation target. In this example, the neutral rate = 2.5% + 2.5% = 5.0%. Because the policy rate is the same as the neutral rate of interest, monetary policy is neither contractionary nor expansionary.

If the price of World Cup Soccer tickets increases from $40 a ticket to $50 a ticket and the quantity demanded of tickets stays the same, demand for the tickets is: A) elastic, but not perfectly elastic. B) perfectly inelastic. C) inelastic, but not perfectly inelastic.

B) perfectly inelastic. Since the quantity of tickets demanded stayed the same after the price changed, the demand curve would have to be vertical which is a perfectly inelastic demand curve.

Which of the following is the most accurate description of the market portfolio in Capital Market Theory? The market portfolio consists of all: A) equity securities in existence. B) risky assets in existence. C) risky and risk-free assets in existence.

B) risky assets in existence. The market portfolio, in theory, contains all risky assets in existence. It does not contain any risk-free assets.

The stakeholder group that typically prefers the greatest amount of business risk is: A) senior managers. B) shareholders. C) directors.

B) shareholders. Compared to the other two groups, shareholders have the greatest potential gains from riskier strategies and can diversify their holdings across firms in order to reduce the influence of company specific risk. While senior managers can gain from company outperformance, they typically prefer less risk than shareholders because managers' risk of poor company performance on the value of their options and on their careers cannot be easily diversified away.

If the outcome of event A is not affected by event B, then events A and B are said to be: A) mutually exclusive. B) statistically independent. C) conditionally dependent.

B) statistically independent If the outcome of one event does not influence the outcome of another, then the events are independent.

An analyst divides the population of U.S. stocks into 10 equally sized sub-samples based on market value of equity. Then he takes a random sample of 50 from each of the 10 sub-samples and pools the data to create a sample of 500. This is an example of: A) simple random sampling. B) stratified random sampling. C) systematic cross-sectional sampling.

B) stratified random sampling. In stratified random sampling we first divide the population into subgroups, called strata, based on some classification scheme. Then we randomly select a sample from each stratum and pool the results. The size of the samples from each strata is based on the relative size of the strata relative to the population. Simple random sampling is a method of selecting a sample in such a way that each item or person in the population being studied has the same (non-zero) likelihood of being included in the sample.

Contreras Fund is a mutual fund that invests in value stocks. The most appropriate type of equity index to use as a benchmark of manager performance for Contreras Fund is a: A) broad market index. B) style index. C) sector index.

B) style index. The index selected as a benchmark for manager performance should represent the investment universe from which the manager actually selects stocks. If the manager only invests in value stocks, then the most appropriate index is a style index that seeks to represent the returns from a value strategy. A sector index is appropriate for managers who invest in specific sectors (e.g., technology stocks, emerging market bonds).

Over a period of one year, an investor's portfolio has declined in value from 127,350 to 108,427. What is the continuously compounded rate of return? A) -14.86%. B) -13.84%. C) -16.09%.

C) -16.09%. The continuously compounded rate of return = ln(S1 / S0) = ln(108,427 / 127,350) = -16.09%.

food, beverage, and utility companies are examples of: A) declining industries. B) cyclical industries. C) defensive industries.

C) defensive industries. Food, beverage, and utility companies provide basic necessities of life and are considered to be defensive industries. In a recession, the demand for their products will not fall as much as for some of the other industry groups.

If quantity demanded increases 20% when the price drops 2%, this good exhibits: A) perfectly inelastic demand. B) inelastic, but not perfectly inelastic, demand. C) elastic, but not perfectly elastic, demand.

C) elastic, but not perfectly elastic, demand. If quantity demanded increases 20% when the price drops 2%, this good exhibits elastic demand. Whenever demand changes by a greater percentage than price, demand is considered to be elastic.

A decrease in the price of Good Y can result in a decrease of the quantity of Good Y demanded by consumers if the substitution effect: A) and the income effect are negative. B) is negative and larger than the positive income effect. C) is positive and the income effect is negative and larger than the substitution effect.

C) is positive and the income effect is negative and larger than the substitution effect. If the price of Good Y decreases, the substitution effect will have a positive impact on the quantity demanded of Good Y. Thus, the only way that quantity demanded of Good Y can decrease is if there is a negative income effect that is greater in magnitude than the substitution effect; i.e., if Good Y is a Giffen good.

The short-run supply curve to a firm operating under perfect competition is most accurately described as the segment of the: A) average total cost (ATC) curve above the average variable cost (AVC) curve. B) marginal cost (MC) curve below the average total cost (ATC) curve. C) marginal cost (MC) curve above the average variable cost (AVC) curve.

C) marginal cost (MC) curve above the average variable cost (AVC) curve. The short-run supply curve for a firm under perfect competition is the segment of its MC curve above the AVC curve.

How does the price-yield relationship for a callable bond compare to the same relationship for an option-free bond? The price-yield relationship is best described as exhibiting: A) negative convexity for the callable bond and positive convexity for an option-free bond. B) the same convexity for both bond types. C) negative convexity at low yields for the callable bond and positive convexity for the option-free bond.

C) negative convexity at low yields for the callable bond and positive convexity for the option-free bond. Since the issuer of a callable bond has an incentive to call the bond when interest rates are very low in order to get cheaper financing, this puts an upper limit on the bond price for low interest rates and thus introduces negative convexity between yields and prices.

The CFO of Axis Manufacturing is evaluating the introduction of a new product. The costs of a recently completed marketing study for the new product and the possible increase in the sales of a related product made by Axis are best described (respectively) as: A) externality; cannibalization. B) opportunity cost; externality. C) sunk cost; externality.

C) sunk cost; externality. The study is a sunk cost, and the possible increase in sales of a related product is an example of a positive externality.

The sampling distribution of a statistic is: A) the same as the probability distribution of the underlying population. B) always a standard normal distribution. C) the probability distribution consisting of all possible sample statistics computed from samples of the same size drawn from the same population.

C) the probability distribution consisting of all possible sample statistics computed from samples of the same size drawn from the same population.

COV formula

CovA,B = (rA,B)(SDA)(SDB)

other DOL formula

DOL = (Total Revenue - Total Variable Costs) / (TR - TVC - Total Fixed Costs)

DTL = (degree of total leverage)

DOL × DFL

The five key principles of the capital budgeting process are:

Decisions are based on cash flows, not accounting income. Cash flows are based on opportunity costs. The timing of cash flows is important. Cash flows are analyzed on an after-tax basis. Financing costs are reflected in the project's required rate of return.

Which type of cash dividend is most likely to be declared by a cyclical firm during good times? A) Regular dividend. B) Stock dividend. C) Special dividend.

Special dividend. Special dividends are used when favorable circumstances allow the firm to make a one-time cash payment to shareholders, in addition to any regular dividends the firm pays. Many cyclical firms (e.g., automakers) will use a special dividend to share profits with shareholders when times are good but maintain the flexibility to conserve cash when profits are down.

Which of the following statements about money-weighted and time-weighted returns is least accurate? A) If a client adds funds to an investment prior to an unfavorable market, the time-weighted return will be depressed. B) The money-weighted return applies the concept of internal rate of return to investment portfolios. C) If the investment period is greater than one year, an analyst must use the geometric mean to calculate the annual time-weighted return.

The time-weighted method is not affected by the timing of cash flows. The other statements are true.

Negative convexity is most likely to be observed in:

callable bonds. All noncallable bonds exhibit the trait of being positively convex. Callable bonds have negative convexity because once the yield falls below a certain point prices will rise at a decreasing rate, thus giving the price-yield relationship a negative convex shape.

Which of the following factors is most likely to cause a firm to need short-term financing? A) Return of principal from maturing investments. B) Shorter cash conversion cycle than the industry average. C) Operating cash inflows that fluctuate seasonally.

firms with operating cash inflows that fluctuate seasonally are likely to experience short-term imbalances between cash inflows and cash outflows and must forecast these imbalances to manage their net daily cash positions, for example by arranging short-term borrowing over seasons when operating cash inflows are expected to be relatively low and operating cash outflows are relatively high.

Features specified in a bond indenture least likely include the bond's:

issuer and rating. Features that are specified in the indenture for a fixed income security include its issuer, maturity date, par value, coupon rate and frequency, and currency

A conflict of interest between corporate stakeholders is least likely to be mitigated by: A) covenants in debt indentures. B) issuing stock dividends. C) including stock options as part of manager compensation.

issuing stock dividends. Issuing stock dividends does not necessarily favor one group of stakeholders over another because neither firm value nor earnings are affected by issuing a stock dividend. Covenants in debt issues protect creditor interests from management actions that would increase the risk of the debt. Including stock options as part of manager compensation serves to align the interests of senior management and shareholders.

recourse loan is a

loan which allows the lender to take action above and beyond repossessing the home (through the foreclosure process) to recover the mortgage debt. In other words, the lender has recourse to the borrower's assets other than the house securing the mortgage.

Settlement for a government bond trade most likely occurs on the:

next trading day after the trade.

In the currency market, traders quote the: A) base currency rate. B) nominal exchange rate. C) real exchange rate.

nominal exchange rate. The nominal exchange rate is quite simply the price of one currency relative to another. It is the quote observed in currency markets.

The three major steps in the portfolio management process are

planning, execution, and feedback. Asset allocation and security analysis are components of the execution step, as is portfolio construction (using top-down analysis). Preparation of an investment policy statement is a component of the planning step. Portfolio monitoring and rebalancing, as well as performance measurement and reporting, are part of the feedback step.

The safety-first criterion focuses on

shortfall risk which is the probability that a portfolio's value or return will fall below a given threshold level. The safety-first criterion minimizes the probability of falling below the threshold level or return.

If timing differences that give rise to a deferred tax liability are not expected to reverse then the deferred tax: A) must be reduced by a valuation allowance. B) should be considered an asset or liability. C) should be considered an increase in equity.

should be considered an increase in equity. If deferred tax liabilities are expected to reverse in the future, then they should be classified as liabilities. If, however, they are not expected to reverse in the future, then they should be classified as equity.

price to book value ratio is helpful when examining firms :

that hold primarily liquid assets

High levels of the VIX indicate Low mutual fund cash balances indicate A low put-call ratio indicates

that the outlook of investors is bearish hat mutual fund managers are bullish bullish investor sentiment

In a continuous probability density function, the probability that any single value of a random variable occurs is equal to what? A) Zero. B) 1/N. C) One.

zero Since there are infinite potential outcomes in a continuous pdf, the probability of any single value of a random variable occurring is 1/infinity = 0.

The critical value for a two-tailed test at the 95% confidence level with 24 degrees of freedom is

±2.06 standard deviations.

asset beta formula

βe x {1 / [ 1 + ((1 - t) D/E))]}

st dev of port formula

σ portfolio = [W₁²σ₁² + W₂²σ₂² + 2W₁W₂σ₁σ₂ corr₁,₂]¹/²