FIN-451 Final Study set
8. In 2018, Smiths Corp, issued a $50 par value preferred stock that pays a 6 percent annual dividend. Due to changes in the overall economy and in the company's financial condition, investors are now requiring a 7 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now? a. $42.86 b. $30.00 c. $31.54 d. $33.38 e. $38.37
a. $42.86
9.In 2018, Swisten Inc. issued a $150 par value preferred stock that pays an 8 percent annual dividend. Due to changes in the overall economy and in the company's financial condition, investors are now requiring a 15 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now? a. $80 b. $75 c. $59 d. $95 e. $110
a. $80
12. Which of the following statements regarding fundamental and relative valuation techniques is TRUE? a. Both techniques require an appropriate estimate of the required rate of return and the growth rate. b. Both techniques require an estimate of a discount rate. c. Both techniques require an estimate of future cash flows and a discount rate. d. Both techniques require an estimate of future cash flows and a growth rate. e. Both techniques require an estimate of future cash flows, the required r
a. Both techniques require an appropriate estimate of the required rate of return and the growth rate.
6. ____ refers to the rules, policies, and procedures that are used to direct and control a company a. Corporate governance b. Capital allocation c. Executive compensation d. Going public e. A stock pitch
a. Corporate governance
14. The gross margin is defined as a. Gross Profit/Sales. b. Operating Profit/Sales. c. Net Income/Sales. d. Sales/Gross Profit. e. Debt/Long-Term Capital.
a. Gross Profit/Sales.
1. A benchmark portfolio is defined as a passive portfolio whose average characteristics match the client's risk-return objectives. a. True b. False
a. True
10. In a buy-and-hold strategy, bonds are purchased in light of the investor's objectives and constraints and then held until maturity. a. True b. False
a. True
11. The value investor focuses on share price in anticipation of a market correction and, possibly, improving company fundamentals. a. True b. False
a. True
12. A portfolio manager who uses tactical asset allocation is attempting to create alpha. a. True b. False
a. True
14. A pure yield pickup swap involves a switch from a low-coupon bond to a higher-coupon bond of similar quality and maturity. a. True b. False
a. True
15. When applying active management techniques to a global portfolio, the additional concern is an expectation regarding exchange rates between countries. a. True b. False
a. True
16. When applying active management techniques to a global portfolio, the additional concern is an expectation regarding exchange rates between countries. a. True b. False
a. True
16. The goal of active equity management is to earn a return that exceeds the return of a passive benchmark portfolio, net of transaction costs, on a risk-adjusted basis. a. True b. False
a. True
19. A bond portfolio is immunized from interest rate risk if the modified duration of the portfolio is always equal to the desired investment horizon. a. True b. False
a. True
3. Completeness funds are portfolios designed to complement active portfolios that do not cover the entire market. a. True b. False
a. True
4. The longer the time to maturity, the greater the percentage change in a bond's price. a. True b. False
a. True
4. Style investing involves constructing portfolios in such a way as to capture one or more of the characteristics of equity securities. a. True b. False
a. True
5. A way to distinguish between these strategies is to decompose the total actual return that the portfolio manager attempts to produce. a. True b. False
a. True
6. For a given change in yield bond price, volatility is inversely related to coupon. a. True b. False
a. True
6. Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and cash flows of securities held by financial institutions. a. True b. False
a. True
7. Modified duration is determined by making small adjustments to the Macaulay duration. a. True b. False
a. True
7. Tracking error is defined as the degree to which the portfolio's returns deviate from those of the actual index. a. True b. False
a. True
8. Curve Convexity is a measure of how much a bond's price-yield curve deviates from the linear approximation of that a. True b. False
a. True
9. The investment style of a bond portfolio can be summarized by its two most important characteristics: credit quality and interest rate sensitivity. a. True b. False
a. True
9. Insured asset allocation is a strategy to limit investment losses by shifting funds between an existing equity portfolio and a risk-free security. a. True b. False
a. True
12. The ____ refers to firms that actually invest in securities. a. buy-side b. sell-side c. SEC d. issuing firm e. investment bank
a. buy-side
1. Returns from the overall market (or an individual stock) can be thought of as a combination of which of the following factors? a. earnings growth, multiple expansion, and dividend yield b. earnings growth, multiple expansion, and annualized return c. earnings growth, interest rates, and dividend yield d. inflation, multiple contraction, and dividend yield e. inflation, contraction, and annualized return
a. earnings growth, multiple expansion, and dividend yield
22. An investment bank can do an IPO offering as a a. firm commitment. b. best efforts commitment. c. firm offering. d. bought offering. e. red herring.
a. firm commitment.
25. An investment bank can do an IPO offering as a a. firm commitment. b. best efforts commitment. c. firm offering. d. bought offering. e. red herring.
a. firm commitment.
3. Which of the following is correct? a. if estimated value > Market price, you should buy. b. if estimated value > Market price, you should sell. c. if estimated value < Market price, you should do nothing. d. if estimated value < Market price, you should buy. e. if estimated value > Market price, you should do nothing.
a. if estimated value > Market price, you should buy.
7. Corporations can use many tools in order to prevent takeovers, including a. poison pills. b. non-staggered boards. c. retaining the most profitable part of the company. d. requiring a minority of shareholder votes to approve selling the firm. e. staging a walk out.
a. poison pills.
16 The investment bank helps stabilize the price of new issues in the secondary market by a. purchasing shares in the open market. b. selling shares in the open market. c. risking its capital. d. market manipulation. e. under allotment of shares.
a. purchasing shares in the open market.
3. A stock pitch includes all of the following EXCEPT a. that stock returns are mean reverting. b. merits of a stock. c. models and multiples. d. risks. e. background information about the company.
a. that stock returns are mean reverting.
2. Calculate the duration of a 6 percent, $1,000 par bond maturing in three years if the yield to maturity is 10 percent and interest is paid semiannually. a. 1.35 years b. 2.78 years c. 2.95 years d. 1.78 years e. 2.50 years
b. 2.78 years
11. ____ is the description of how management uses resources to create value on behalf of shareholders. a. Corporate governance b. Capital allocation c. Executive compensation d. Going public e. A stock pitch
b. Capital allocation
11. ____ do well as the economy recovers. a. Financial stocks b. Consumer durable goods c. Capital goods d. Cyclical companies e. Consumer staples
b. Consumer durable goods
10. Tactical asset allocation is used to determine the long-term policy asset weights in a portfolio. a. True b. False
b. False
11. Indexing is an active portfolio management strategy that seeks to copy the composition and performance of a selected market index. a. True b. False
b. False
12. Interest rate anticipation is the most conservative management strategy. a. True b. False
b. False
13. A bond swap involves liquidating a current bond position and later investing in a similar issue under more favorable conditions. a. True b. False
b. False
13. An advantage of quadratic programming is that it relies on historical correlations. a. True b. False
b. False
14. Following an earnings momentum strategy, an investor acquires stocks that have enjoyed above-market stock price increases. a. True b. False
b. False
15. The three basic techniques for constructing a passive index are: full replication, sampling, and linear programming. a. True b. False
b. False
17. Altman-Nammacher (1987) created a modified -score model using a multiple regression analysis technique. a. True b. False
b. False
17. There is a direct relationship between a passive portfolio's tracking error relative to its index and the time and expense necessary to create and maintain the portfolio. a. True b. False
b. False
18. An investor in a pure yield pickup swap is most concerned about changes in interest rates. a. True b. False
b. False
2. Active portfolio managers just try to capture the expected return consistent with the risk level of their portfolios. a. True b. False
b. False
5 For a given change in yield bond price, volatility is inversely related to term to maturity. a. True b. False
b. False
8. An advantage of sampling is that portfolio returns will not track the index as closely as with full replication. a. True b. False
b. False
15.Operating margins are defined as a. Gross Profit/Sales. b. Operating Profit/Sales. c. Net Income/Sales. d. Sales/Gross Profit. e. Debt/Long-Term Capital.
b. Operating Profit/Sales.
18. When a firm seeks to identify itself as unique in its industry in an area that is important to buyers, it is known as a a. defensive strategy. b. differentiation strategy. c. low-cost strategy. d. focused strategy. e. value strategy.
b. differentiation strategy.
7. The initial effect of a change in monetary policy appears in ____ and only later in ____ a. the aggregate economy, financial markets b. financial markets, the aggregate economy c. bond markets, stock markets d. stock markets, bond markets e. stock markets, the aggregate economy and only later in
b. financial markets, the aggregate economy
14. Which of the following factors does NOT indicate market liquidity? a. number of shareholders b. high price volatility c. number of shares outstanding d. number of shares traded e. institutional interest
b. high price volatility
18. If there is a demand for more shares than are available at the offering price, the offering is said to be a. undersubscribed b. oversubscribed c. overpriced d. underpriced e. popular
b. oversubscribed
20. The preliminary prospectus is often referred to as a/an a. SEC form S-1. b. red herring. c. registration statement. d. winner's curse. e. green shoe.
b. red herring.
17. Defensive companies are firms in which a. sales, earnings, and cash flows are extremely uncertain and not necessarily related to the economy. b. sales, earnings, and cash flows are likely to withstand changes caused by the economic environment. c. sales, earnings, and cash flows are heavily influenced by aggregate business activity. d. sales, earnings, and cash flows are growing exponentially. e. None of these are correct.
b. sales, earnings, and cash flows are likely to withstand changes caused by the economic
15. The ____ refers to firms that facilitate securities transactions. a. buy-side b. sell-side c. SEC d. issuing firm e. pension fund
b. sell-side
1. If you expected interest rates to rise, you would prefer to own bonds with a. long maturities and high coupons. b. short maturities and high coupons. c. long maturities and low coupons. d. short maturities and low coupons. e. None of these choices are correct.
b. short maturities and high coupons.
10. The dividend payout ratio, the required rate of return on common equity, and the expected growth rate of stock dividends are the major variables that affect a. the profit margin for the S&P Industrials Index. b. the earnings multiplier for common stock. c. aggregate tax revenues. d. capital gains tax revenues. e. aggregate GDP.
b. the earnings multiplier for common stock.
10. What is the value of a 10 percent semi-annual coupon bond with a par value of $1,000 that matures in 5 years and has a required rate of return of 9 percent? a. $1,021.95 b. $1.038.90 c. $1,039.56 d. $1,064.18 e. $1.078.23
c. $1,039.56
5. Which of the following is NOT normally associated with cyclical indicators? a. the Securities and Exchange Commission b. the Conference Board c. Business Week d. Center for International Business Cycle Research e. All of these are correct.
c. Business Week
4 Which of the following facts about executive compensation is TRUE? d. The level of compensation of the top five earners within each public company is not disclosed. b. Officers are permitted to hedge their stock and option awards. c. CEO compensation has increased much faster than the wages of the other corporate employees. d. Aligning compensation to share price will align management to shareholders. e. The majority of the compensation committee must be dependent directors.
c. CEO compensation has increased much faster than the wages of the other corporate employees
12. ____ tend to do well as the economy moves past recovery and into expansion. a. Financial stocks b. Consumer durable goods c. Capital goods d. Cyclical companies e. Consumer staples
c. Capital goods
16.Net margins are defined as a. Gross Profit/Sales. b. Operating Profit/Sales. c. Net Income/Sales. d. Sales/ Average Accounts Receivable. e. Debt/Long-Term Capital.
c. Net Income/Sales.
15. A growth company is one that has the ability to a. acquire capital at a low cost and is able to invest in projects that yield an average return. b. acquire capital at a low cost and is able to invest in projects that yield a below average return. c. acquire capital at an average cost and is able to invest in projects that yield an above average return. d. acquire capital at an average cost and is able to invest in projects that yield an average return. e. acquire capital at an above average
c. acquire capital at an average cost and is able to invest in projects that yield an above average
3. Which of the following are NOT cyclical indicators? a. selected series b. coincident indicators c. diffusion indicators d. leading indicators e. lagging indicators
c. diffusion indicators
13. In a ____ the issuing company could agree to sell the shares at a price below the clearing price. a. Book built offering b. discount offering c. dirty auction d. clean auction e. green shoe
c. dirty auction
19. The fee paid to the underwriter is called the a. tactical spread. b. net spread. c. gross spread. d. listing fee. e. banking fee.
c. gross spread.
9. The ____ gives the investment bank the right to buy 15 percent more shares within the next 30 days. a. underwriters fee b. red herring c. overallotment option d. winner's curse e. red shoe option
c. overallotment option
24. Disadvantages of a company going public include all of the following, EXCEPT that a. there are direct costs associated with compliance. b. management may have to disclose more of its strategy. c. publicly traded stock provides valuable signaling information. d. management will spend significant time meeting with analysts. e. management must answer to outside shareholders.
c. publicly traded stock provides valuable signaling information.
6. Growth rates of the (1) labor force, (2) average number of hours worked, and (3) labor productivity are the main determinants of a foreign country's a. dividend payout ratio. b. beta. c. real risk free rate. d. hominal risk free rate. e. risk premium.
c. real risk free rate.
16. Cyclical companies are firms in which a. sales, earnings, and cash flows are extremely uncertain and not necessarily related to the economy. b. sales, earnings, and cash flows are likely to withstand changes caused by the economic environment. c. sales, earnings, and cash flows are heavily influenced by aggregate business activity. d. sales, earnings, and cash flows are growing exponentially. e. None of these are correct.
c. sales, earnings, and cash flows are heavily influenced by aggregate business activity.
5. The most appropriate discount rate to use when applying the Operating Free Cash Flows model is the firm's a. required rate of return based on the capital asset pricing model (CAPM). b. required rate of return based on the dividend discount model (DDM). c. weighted average cost of capital (WACC) d. historical cost of debt and equity. e. All of these are correct.
c. weighted average cost of capital (WACC)
7. In 2018, Montpelier Inc. issued a $100 par value preferred stock that pays a 9 percent annual dividend. Due to changes in the overall economy and in the company's financial condition, investors are now requiring a 10 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now? a. $100 b. $110 c. $75 d. $90 e. $85
d. $90
13. ____ tend to move in anticipation of the business cycle, turning up in anticipation of recovery and turning down at signs of economic weakness. a. Financial stocks b. Consumer durable goods c. Capital goods d. Cyclical companies e. Consumer staples
d. Cyclical companies
1. Which of the following is NOT considered a basic economic force? a. fiscal policy b. monetary policy c. inflation d. P/E ratio e. All of these are basic economic forces.
d. P/E ratio
17.Accounts receivable turnover is defined as a. Gross Profit/Sales. b. Operating Profit/Sales. c. Net Income/Sales. d. Sales/Average Accounts Receivable. c. Debt/Long-Term Capital.
d. Sales/Average Accounts Receivable.
21. Which of the following describes the process of when the underwriter takes the issuing company's management to meet with potential investors? a. Indications of interest b. The pricing meeting c. The registration statement d. The road show e. The prospectus
d. The road show
2. An investment bank can do an IPO offering as a a. discounted commitment. b. best efforts commitment. c. premium commitment. d. best efforts offering. e. red herring.
d. best efforts offering.
2. The index of leading indicators includes all of the following, EXCEPT a. M2 money supply. b. S&P 500 index. c. orders for plant and equipment. d. changes in the sensitive materials price. e. index of industrial production.
d. changes in the sensitive materials price.
8. If interest rates increase due to inflation, but expected cash flows to a firm do not change, then you would expect stock prices to a. rise. b. rise and then decline. c. remain unchanged. d. decline. e. decline and then rise.
d. decline.
8. All of the following are primary ways to allocate capital, EXCEPT a. engaging in mergers and acquisitions. b. paying dividends. c. repurchasing shares. d. decreasing the working capital of the business. e. returning cash to debtholders.
d. decreasing the working capital of the business.
4. Which securities can be valued by dividing the annual dividend by the required rate of return? a. low coupon bonds b. junk bonds c. common stocks d. preferred stocks e. constant growth common stocks
d. preferred stocks
9. Which of the following is NOT a factor under the Free Cash Flow to Equity (FFE) Model? a. depreciation expense b. capital expenditure c. change in working capital d. principal debt repayment e. earnings multiplier
d. principal debt repayment
6. An examination of the relationship between stock prices and the economy has shown that the relationship is a. weak and that stock prices turn after the economy does. b. nonexistent. C. strong and that stock prices turn after the economy does. d. strong and that stock prices turn before the economy does. e. weak and that stock prices turn before the economy does.
d. strong and that stock prices turn before the economy does.
4. Excess liquidity is defined as a. the year-to year percentage change in the M2 money supply less the year-to-year percentage change in the nominal GNP. b. the growth rate in the M2 money supply less the growth rate in the M1 money supply. c. the year-to-year percentage change in the M1 money supply less the year-to-year percentage. d. the year-to-year percentage change in the "real" GNP less the year-to-year percentage change in the nominal GNP. e. None of these are correct.
d. the year-to-year percentage change in the "real" GNP less the year-to-year percentage change in the nominal GNP.
2.The process of fundamental valuation requires estimates of all the following factors, EXCEPT for the a. time pattern of returns. b. economy's real risk-free rate. c. risk premium for the asset. d. times series of stock prices. e. expected rate of inflation.
d. times series of stock prices.
3. A portfolio manager that attempts to select bonds based on their intrinsic value would be carrying out a. interest-rate analysis. b. yield-spread analysis. c. credit analysis. d. valuation analysis. e. horizon-matching analysis.
d. valuation analysis.
14. The ____ is the idea that anyone who wins an auction must have bid too much. a. blue herring b. red herring c. loser's curse d. winner's curse e. red shoe
d. winner's curse
11.XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6 percent annual growth rate indefinitely. If the required rate of return on this investment is 12 percent, what is the current value of this common stock? a. $1.50 b. $12.50 C. $13.25 d. $25.00 e. $26.50
e. $26.50
17. The overallotment option gives the investment bank the right to buy ____ more shares within the next a. 5 percent; 10 days b. 30 percent; 10 days c. 10 percent; 30 days d. 30 percent; 15 days e. 15 percent; 30 days
e. 15 percent; 30 days
13.All the following are ways in which a firm can increase its growth rate of equity earnings without any external financing EXCEPT a. decreasing its dividend payments. b. increasing its retention ratio. c. increasing its return on equity (ROE). d. increasing its return on assets (ROA). e. All of these are correct
e. All of these are correct
23. Which of the following is a document that helps potential investors understand the company? a. Indications of interest b. The pricing meeting c. The registration statement d. The road show e. The prospectus
e. The prospectus
10. The key issues that investors seem to care about with respect to a board include all of the following, EXCEPT a. the size of the board. b. the independence of the board. c. how the board responds to shareholder proposals. d. separation of the CEO and board chair positions. e. how management is compensated.
e. how management is compensated.
18.A high-quality balance sheet typically has a. limited footnotes. b. a poor reflection of reality. c. repeatable earnings. d. over use of debt or leverage. e. limited use of debt or leverage.
e. limited use of debt or leverage.
A high-quality balance sheet typically has a. limited footnotes. b. a poor reflection of reality. c. repeatable earnings. d. over use of debt or leverage. e. limited use of debt or leverage.
e. limited use of debt or leverage.
1 Advantages of a company going public include all of the following, EXCEPT that a. publicly traded stock provides valuable signaling information concerning the health of the company. b. the original investors and the management team would like liquidity. c. it is easier to use public stock as currency to acquire other companies. d. it might need more capital in order to finance growth. e. management must answer to outside shareholders.
e. management must answer to outside shareholders.
20. Which of the following is NOT a technique for valuing a firm's common stock? a. present value of free cash flow to equity b. present value of dividends c. price-earnings ratio d. price-book value ratios e. price-cost of goods sold ratio
e. price-cost of goods sold ratio
5. The goal of ____ is to convince an investor to buy a stock or to sell a stock short. a. corporate governance b. capital allocation c. executive compensation d. going public e. the stock pitch
e. the stock pitch
19. In SWOT analysis, one examines all of the following factors, EXCEPT a. strengths. b. weaknesses. c. opportunities. d. threats. e. turnarounds.
e. turnarounds.
