Chapter 13&15
You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A __________. A) will be higher than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) The answer cannot be determined from the information given.
A) will be higher than the intrinsic value of stock B
You want to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A __________. A) will be higher than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) The answer cannot be determined from the information given.
A) will be higher than the intrinsic value of stock B
Ace Ventura, Inc., has expected earnings of $5 per share for next year. The firm's ROE is 15%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities? A. $25 B. $50 C. $75 D. $100
A. $25
Annie's Donut Shops, Inc., has expected earnings of $3 per share for next year. The firm's ROE is 18%, and its earnings retention ratio is 60%. If the firm's market capitalization rate is 12%, what is the value of the firm excluding any growth opportunities? A. $25 B. $50 C. $83.33 D. $208
A. $25
Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 1.4. Using the constant-growth DDM, the intrinsic value of the stock is _________. A. $45.45 B. $22.73 C. $27.78 D. $41.67
A. $45.45
Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock and use the constant-growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using the constant-growth DDM and the CAPM, the beta of the stock is __________. A) 1.4 B) 0.9 C) 0.8 D) 0.5
B) 0.9
Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____. A) 4.5% B) 10.5% C) 15% D) 30%
B) 10.5%
Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock and use the constant-growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using the constant-growth DDM and the CAPM, the beta of the stock is __________. A) 9% B) 12% C) 14% D) 18%
B) 12%
The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 50%, its P/E ratio will be_______. A) 8.33 B) 12.5 C) 19.23 D) 24.15
B) 12.5
The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 60%, its P/E ratio will be_______. A) 7.14 B) 14.29 C) 16.67 D) 22.22
B) 14.29
A firm has a PVGO of 0 and a market capitalization rate of 12%. What is the firm's P/E ratio? A) 12 B) 8.33 C) 10.25 D) 18.55
B) 8.33
In 1973, trading of standardized options on a national exchange started on the ________. A) AMEX B) CBOE C) NYSE D) CFTC
B) CBOE
An Asian call option gives its holder the right to ________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life
B) buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life
A European call option gives the buyer the right to ________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price only at the expiration date
B) buy the underlying asset at the exercise price only at the expiration date
A convertible bond is deep in the money. This means the bond price will closely track the ________. A) straight debt value of the bond B) conversion value of the bond C) straight debt value of the bond minus the conversion value D) straight debt value of the bond plus the conversion value
B) conversion value of the bond
Generally speaking, as a firm progresses through the industry life cycle, you would expect the PVGO to ____________ as a percentage of share price. A) increase B) decrease C) stay the same D) No typical pattern can be expected.
B) decrease
When issued, most convertible bonds are issued ________. A) deep in the money B) deep out of the money C) slightly out of the money D) slightly in the money
B) deep out of the money
A firm cuts its dividend payout ratio. As a result, you know that the firm's _______. A) return on assets will increase B) earnings retention ratio will increase C) earnings growth rate will fall D) stock price will fall
B) earnings retention ratio will increase
You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the- money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is ________ than if you buy at-the-money puts and your maximum gain is ________. A) greater; lower B) greater; greater C) lower; greater D) lower; lower
B) greater; greater
The PEG ratio normalizes the P/E ratio by the A) tax rate. B) growth rate. C) market cap. D) book rate
B) growth rate.
A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is ________. A) at the money B) in the money C) out of the money D) knocked in
B) in the money
A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is ________. A) at the money B) in the money C) out of the money D) knocked out
B) in the money
If you anticipate a dramatic decline in stock prices, which naked strategy will make you the most profit? A) long call B) long put C) short call D) short put
B) long put
You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a ________. A) time spread B) long straddle C) short straddle D) money spread
B) long straddle
What strategy could be considered insurance for an investment in a portfolio of stocks? A) covered call B) protective put C) short put D) straddle
B) protective put
An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ________ option. A) an American B) a European C) an Asian D) an Australian
C) an Asian
Buyers of listed options ________ required to post margins, and writers of naked listed options ________ required to post margins. A) are; are not B) are; are C) are not; are D) are not; are not
C) are not; are
Advantages of exchange-traded options over OTC options include all but which one of the following? A) ease and low cost of trading B) anonymity of participants C) contracts that are tailored to meet the needs of market participants D) no concerns about counterparty credit risk
C) contracts that are tailored to meet the needs of market participants
A "bet" option is also called a ________ option. A) barrier B) lookback C) digital D) foreign exchange
C) digital
If a firm increases its plowback ratio, this will probably result in _______P/E ratio. A) a higher B) a lower C) an unchanged D) The answer cannot be determined
D) The answer cannot be determined
In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price? A) import/export trade B) software C) telecommunications D) Utility
D) Utility
A firm increases its dividend plowback ratio. All else equal, you know that __________. A) earnings growth will increase and the stock's P/E will increase B) earnings growth will decrease and the stock's P/E will increase C) earnings growth will increase and the stock's P/E will decrease D) earnings growth will increase and the stock's P/E will may or may not increase
D) earnings growth will increase and the stock's P/E will may or may not increase
A quanto provides its holder with the right to ________. A) participate in the payoffs from a portfolio of gambling casino stocks B) exchange a fixed amount of a foreign currency for dollars at a specified exchange rate C) participate in the investment performance of a foreign security D) exchange the payoff from a foreign investment for dollars at a fixed exchange rate
D) exchange the payoff from a foreign investment for dollars at a fixed exchange rate
Everything else equal, which variable is negatively related to the intrinsic value of a company? A) D1 B) D0 C) g D) k
D) k
Generally speaking, the higher a firm's ROA, the ___________ the dividend payout ratio and the ____________ the firm's growth rate of earnings. A) higher; lower B) higher; higher C) lower; lower D) lower; higher
D) lower; higher
You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________. A) time spread B) long straddle C) short straddle D) money spread
D) money spread
Which of the following valuation measures is often used to compare firms that have no earnings? A) Price-to-book ratio B) P/E ratio C) price-to-cash flow ratio D) price-to-sales ratio
D) price-to-sales ratio
An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break- even point for the investor? A) $24.15 B) $25 C) $25.87 D) $27.86
A) $24.15
Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5.Using the constant-growth DDM, the intrinsic value of the stock is___________. A) $50 B) $100 C) $150 D) $200
A) $50
Flanders, Inc., has expected earnings of $4 per share for next year. The firm's ROE is 8%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities? A) -$6.33 B) $0 C) $20.34 D) $26.67
A) -$6.33
Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the market capitalization rate? A) .5% B) 1% C) 1.5% D) 2%
A) .5%
A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $95 million today. The firm has total debt at a book value of $40 million, but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm's market-to-book ratio is_____. A) 1.83 B) 1.5 C) 1.35 D) 1.46
A) 1.83
Which strategy benefits from upside price movement and has some protection should the price of the security fall? A) Bull spread B) Long put C) Short call D) Straddle
A) Bull spread
Which one of the following is a correct statement? A) Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not. B) A convertible bond consists of a straight bond plus a specified number of detachable warrants. C) Call options always have an initial maturity greater than 1 year, while warrants have an initial maturity less than 1 year. D) Call options may be convertible into the stock, while warrants are not convertible into the stock
A) Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not.
The value of a listed put option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs. A) II only B) II and IV only C) I, II, and III only D) I, II, III, and IV
A) II only
Why is the holder of an option not required to post margin under the Option Clearing Corporation rules? A) Once an option is purchased, no further money is at risk. B) The seller pays all costs. C) The credit worthiness of the holder covers all potential losses. D) The holder must post securities instead of margin.
A) Once an option is purchased, no further money is at risk.
Earnings yield tend to _________ when Treasury yields fall. A) fall B) rise C) remain unchanged D) fluctuate wildly
A) fall
Firms with higher expected growth rates tend to have P/E ratios that are ___________ the P/E ratios of firms with lower expected growth rates. A) higher than B) equal to C) lower than D) There is not necessarily any linkage between risk and P/E Ratios
A) higher than
Value stocks are most likely to have a PEG ratio ________. A) less than 1 B) equal to 1 C) greater than 1 D) less than zero
A) less than 1
The initial maturities of most exchange-traded options are generally ________. A) less than 1 year B) less than 2 years C) between 1 and 2 years D) between 1 and 3 years
A) less than 1 year
What combination of puts and calls can simulate a long stock investment? A) long call and short put B) long call and long put C) short call and short put D) short call and long put
A) long call and short put
All else the same, an American-style option will be ________ valuable than a ________ style option. A) more; European- B) less; European- C) more; Canadian- D) less; Canadian-
A) more; European-
The price-to-scales ratio is probably most useful for firms in which phase of the industry life cycle? A) start-up phase B) consolidation C) maturity D) relative decline
A) start-up phase
Strips and straps are variations of ________. A) straddles B) collars C) money spreads D) time spread
A) straddles
The Option Clearing Corporation is owned by ________. A) the exchanges on which stock options are traded B) the Federal Deposit Insurance Corporation C) the Federal Reserve System D) major U.S. banks
A) the exchanges on which stock options are traded
Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on __________. A) the terminal value used B) whether one uses FCFF or FCFE C) the time period used to estimate the cash flows D) whether the firm is currently paying dividends
A) the terminal value used
You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a ________. A) time spread B) long straddle C) short straddle D) money spread
A) time spread
Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A _________. A) will be higher than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) The answer cannot be determined from the information given.
A) will be higher than the intrinsic value of stock B
An Asian put option gives its holder the right to ________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life
D) sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life
A European put option gives its holder the right to ________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price only at the expiration date
D) sell the underlying asset at the exercise price only at the expiration date
A time spread may be executed by ________. A) selling an option with one exercise price and buying a similar one with a different exercise price B) buying two options that have the same expiration dates but different strike prices C) selling two options that have the same expiration dates but different strike prices D) selling an option with one expiration date and buying a similar option with a different expiration date
D) selling an option with one expiration date and buying a similar option with a different expiration date
Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? A) long call and short put B) long call and long put C) short call and short put D) short call and long put
D) short call and long put
Exchange-traded stock options expire on the ________ of the expiration month. A) second Monday B) third Wednesday C) second Thursday D) third Friday
D) third Friday
The potential loss for a writer of a naked call option on a stock is ________. A) equal to the call premium B) larger the lower the stock price C) limited D) unlimited
D) unlimited
Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the CAPM, the return you should require on the stock is _________. A. 2% B. 5% C. 8% D. 9%
D. 9%
At expiration of an option contract, which phrase describes the point at which both calls and puts have the same gross profit? A) at the money B) in the money C) out of the money D) knocked in
A) at the money
The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called A) book value B) market value C) liquidation value D) Tobin's q
A) book value
Which one of the following is an assumption required by the argument above? A) book value per share B) liquidation value per share C) market value per share D) Tobin's q
A) book value per share
An American call option gives the buyer the right to ________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price only at the expiration date
A) buy the underlying asset at the exercise price on or before the expiration date
The maximum loss a buyer of a stock call option can suffer is the ________. A) call premium B) stock price C) stock price minus the value of the call D) strike price minus the stock price
A) call premium
What strategy is designed to ensure a value within the bounds of two different stock prices? A) collar B) covered Call C) protective put D) straddle
A) collar
You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a ________. A) covered call B) long straddle C) naked call D) money spread
A) covered call
A writer of a call option will want the value of the underlying asset to ________, and a buyer of a put option will want the value of the underlying asset to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increas
A) decrease; decrease
You are considering purchasing the Zions Bank $4.50 preferred stock. If you require a $% return on this investment. what should you be willing to pay for this stock? A) $11.25 B) $112.50 C) $4.50 D) $45.00
B) $112.50
Weyerhaeuser Incorporated has a balance sheet that lists $70 million in assets, $45 million in liabilities, and $25 million in common shareholders' equity. It has 1 million common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is _________. A) $16.67 B) $25 C) $37.50 D) $40.83
B) $25
Westsyde Tool Company expects to pay a $2 dividend next year. The risk-free rate is 6%, and the market portfolio's expected return is 12%. Analysts expect a $29 Westsyde share price next year. Westsyde stock's beta is 1.20. Using a one-period valuation model, the intrinsic value of Westyde Tool Company stock today is__________. A) $24.29 B) $27.39 C) $31.13 D) $34.52
B) $27.39
You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is _________ if you wanted to earn a 12% return. A) $31.25 B) $32.37 C) $38.47 D) $41.32
B) $32.37
Exercise prices for listed stock options usually occur in increments of ________ and bracket the current stock price. A) $1 B) $5 C) $20 D) $25
B) $5
Grott and Perrin, Inc., has expected earnings of $3 per share for next year. The firm's ROE is 20%, and its earnings retention ratio is 70%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities? A) $20 B) $70 C) $90 D) $115
B) $70
Longer-term American-style options with maturities of up to 3 years are called ________. A) warrants B) LEAPS C) GICs D) CATs
B) LEAPS
____________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders. A) Book value per share B) Liquidation value per share C) Market value per share D) Tobin's q
B) Liquidation value per share
New-economy companies generally have higher________than old-economy companies. A) book value per share B) P/E multiples C) profits D) asset values
B) P/E multiples
A covered call strategy benefits from what environment? A) Falling interest rates B) Price stability C) Price volatility D) Unexpected events
B) Price stability
________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed. A) Writing an uncovered call option B) Writing an uncovered put option C) Buying a call option D) Buying a put option
B) Writing an uncovered put option
A company with an expected earnings growth rate which is greater than that of the typical company in the same industry most likely has _________________. A) a dividend yield which is greater than that of the typical company B) a dividend yield which is less than that of the typical company C) less risk than the typical company D) less sensitivity to market trends than the typical company
B) a dividend yield which is less than that of the typical company
Assuming all other factors remain unchanged, ________ would increase a firm's price-earnings ratio A) an increase in the dividend payout ratio B) a reduction in investor risk aversion C) an expected increase in the level of inflation D) an increase in the yield on Treasury bills
B) a reduction in investor risk aversion
The writer of a put option ________. A) agrees to sell shares at a set price if the option holder desires B) agrees to buy shares at a set price if the option holder desires C) has the right to buy shares at a set price D) has the right to sell shares at a set price
B) agrees to buy shares at a set price if the option holder desires
You sell one Huge-Packing August 50 call contract and sell one Huge-Packing August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is ________ in August. A) either lower than $44.25 or higher than $55.75 B) between $44.25 and $55.75 C) higher than $55.75 D) lower than $44.25
B) between $44.25 and $55.75
You are convinced that a stock's price will move by at least 15% over the next 3 months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario? A) buy a strip. B) buy a strap. C) buy a straddle. D) write a straddle
B) buy a strap.
Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index? A) SPX B) DJX C) CME D) OEX
D) OEX
A firm's earnings per share increased from $10 to $12, its dividends increased from $4 to $4.40, and its share price increased from $80 to $100. Given this information, it follows that __________. A) the stock experienced a drop in its P/E ratio B) the company had a decrease in its dividend payout ratio C) both earnings and share price increased by 20% D) the required rate of return increased
B) the company had a decrease in its dividend payout ratio
A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock_______. A) has a Tobin's q value < 1 B) will generate a positive alpha C) has an expected return less than its required return D) has a beta > 1
B) will generate a positive alpha
Todd Mountain Development Corp expects to pay a $2.50 dividend next year. They expect to grow dividends at 8% annually. The risk-free rate is 5%, and the market portfolio's expected return is 12%. Todd Mountain Development stock's beta is 0.75. Using CAPM, you should require a __________ return on this stock. A. 7.25% B. 10.25% C. 14.75% D. 21.00%
B. 10.25%
Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating an ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next 5 years. Given this, the firm's optimal dividend payout ratio is now ______. A. 0% B. 100% C. between 0% and 50% D. between 50% and 100%
B. 100%
You purchase one MBI March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is ________. A) $120 B) $1,000 C) $11,000 D) $12,000
C) $11,000
A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today? A) $25 B) $16.87 C) $19.24 D) $20.99
C) $19.24
Cash Cow, Inc. earned $750,000,000 last year. If it retains 40% of its earnings, and has 100 million shares outstanding, what was its dividend last year? A) $3.00 B) $3.75 C) $4.50 D) $7.50
C) $4.50
You buy one Huge-Packing August 50 call contract and one Huge-Packing August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is ________. A) $125 B) $450 C) $575 D) unlimited
C) $575
Each listed stock option contract gives the holder the right to buy or sell ________ shares of stock. A) 1 B) 10 C) 100 D) 1,000
C) 100
Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be __________ if it follows a policy of paying 30% of earnings in the form of dividends. A) 5% B) 15% C) 17.5% D) 45%
C) 17.5%
Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you expect to have a higher P/E ratio? A) Firm A B) Firm B C) Both would have the same P/E if they were in the same industry D) There is not necessarily any linkage between risk and P/E ratios
C) Both would have the same P/E if they were in the same industry
The SEC requires public U.S. companies to file registration statements and periodic reports electronically through A) Yahoo. B) Google. C) EDGAR D) FINRA
C) EDGAR
The value of a listed call option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs. A) II, III, and IV only B) I, III, and IV only C) I, II, and III only D) I, II, III, and IV
C) I, II, and III only
The term "residual claimant" refers to A) bond holders. B) option holders. C) equity/shareholders D) Suppliers
C) equity/shareholders
If the gross profit is positive and the net profit is negative, you will ________. A) let the option expire with no action B) not exercise the option C) exercise the option D) sell the option for less than the gross profit
C) exercise the option
An underpriced stock provides an expected return that is ____________ the required return based on the capital asset pricing model (CAPM). A) less than B) equal to C) greater than D) greater than or equal to
C) greater than
The value of Internet companies is based primarily on A) current profits B) Tobin's q C) growth opportunities D) replacement cost
C) growth opportunites
The constant-growth dividend discount model (DDM) can be used only when the ___________. A) growth rate is less than or equal to the required return B) growth rate is greater than or equal to the required return C) growth rate is less than the required return D) growth rate is greater than the required return
C) growth rate is less than the required return
P/E ratios tend to be _______ when inflation is ______. A) higher; higher B) lower; lower C) higher; lower D) they are unrelated
C) higher; lower
The greatest value to an analyst from calculating a stock's intrinsic value is _____. A) how easy it is to come up with accurate model inputs B) the precision of the value estimate C) how the process forces analysts to understand the critical variables that have the greatest impact on value D) how all the different models typically yield identical value results
C) how the process forces analysts to understand the critical variables that have the greatest impact on value
Which one of the following is a common term for the market consensus value of the required return on a stock? A) dividend payout ratio B) intrinsic value C) market capitalization rate D) plowback ratio
C) market capitalization rate
You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a ________. A) long straddle B) naked put C) protective put D) short stroll
C) protective put
A futures call option provides its holder with the right to ________. A) purchase a particular stock at some time in the future at a specified price B) purchase a futures contract for the delivery of options on a particular stock C) purchase a futures contract at a specified price for a specified period of time D) deliver a futures contract and receive a specified price at a specific date in the future
C) purchase a futures contract at a specified price for a specified period of time
An American put option gives its holder the right to ________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price only at the expiration date
C) sell the underlying asset at the exercise price on or before the expiration date
Which of the following strategies makes a profit if the stock price stays stable? A) long call and short put B) long call and long put C) short call and short put D) short call and long put
C) short call and short put
If you combine a long stock position with selling an at-the-money call option, the resulting net payoff profile will resemble the payoff profile of a ________. A) long call B) short call C) short put D) long put
C) short put
If a stock is correctly priced, then you know that _______. A) the dividend payout ratio is optimal B) the stock's required return is equal to the growth rate in earnings and dividends C) the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return D) the present value of growth opportunities is equal to the value of assets in place
C) the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return
Rose Hill Trading Company is expected to have a $6 EPS next year and an 18% ROE. An appropriate required return on this stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value in the upcoming year should be __________. A. $20.93 B. $69.77 C. $128.57 D. $150.00
C. $128.57
Rose Hill Trading Company is expected to have an $8 EPS next year and an 18% ROE. An appropriate required return on this stock is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be __________. A. $1.12 B. $1.44 C. $2.40 D. $5.60
C. $2.40
Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________. A. 8% B. 10.8% C. 15.6% D. 16.8%
C. 15.6%
A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; it, dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth ________. A) $13.50 B) $45.50 C) $91 D) $114.29
D) $114.29
The May 17, 2015, price quotation for a Boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring November 50 call contract is ________. A) $1,980 B) $4,900 C) $5,000 D) $2,080
D) $2,080
Todd Mountain Development Corp expects to pay a $3 dividend next year. They expect to grow dividends at 8% annually. The risk-free rate is 5%, and the market portfolio's expected return is 17%. Todd Mountain Development stock's beta is 0.75. Using the constant-growth DDM, the intrinsic value of the stock is___________. A) $4 B) $17.65 C) $37.50 D) $50
D) $50
Suppose that in 2018 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant-growth formula for valuation, if interest rates increase to 9%, the value of the market will change by___________. A) -10% B) -20% C) -25% D) -33%
D) -33%
______ option can only be exercised on the expiration date. A) A Mexican B) An Asian C) An American D) A European
D) A European
Bill, Jim, and Shelly are all interested in buying the same stock that pays dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct? A) Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells. B) Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's. C) Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends. D) All three should be willing to pay the same amount for the stock regardless of their holding period.
D) All three should be willing to pay the same amount for the stock regardless of their holding period.
Which one of the statements about margin requirements on option positions is not correct? A) The margin required will be lower if the option is in the money. B) If the required margin exceeds the posted margin, the option writer will receive a margin call. C) A buyer of a put or call option does not have to post margin. D) Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.
D) Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.
Warrants differ from listed options in that: I. Exercise of warrants results in dilution of a firm's earnings per share. II. When warrants are exercised, new shares of stock must be created. III. Warrant exercise results in cash flows to the firm, whereas exercise of listed options does not. A) I only B) I and II only C) II and III only D) I, II, and III
D) I, II, and III
Which of the following statements about convertible bonds are true? I. The conversion price does not change over time. II. The associated stocks may not pay dividends as long as the bonds are outstanding. III. Most convertibles are also callable at the discretion of the firm. IV. They may be thought of as straight bonds plus a call option. A) I and III only B) I and IV only C) I, II, and IV only D) III and IV only
D) III and IV only
Which of the following statements about market and book value is correct? A) All firms sell at a market-to-book ratio above 1. B) All firms sell at a market-to-book ratio greater than or equal to 1. C) All firms sell at a market-to-book ratio below 1 D) Most firms have a market-to-book ratio above 1, but not all.
D) Most firms have a market-to-book ratio above 1, but not all.
