finance final

15: The stock of Cleaner Homes is currently selling for $16.90 a share. The company has decided to raise funds through a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares being offered are priced at $14 plus four rights. What is the value of one right?

$.58

15: The stock of Cleaner Homes is currently selling for $16.90 a share. The company has decided to raise funds through a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares being offered are priced at $14 plus four rights. What is the value of one right?

$.58 Cost per share = [$14 + (4 × $16.90)] / (1 + 4) = $16.32 Value of right = $16.90 - 16.32 = $.58

12: One year ago, you purchased 400 shares of SL Industries stock at a price of $26.15 a share. The stock pays an annual dividend of $1.34 per share. Today, you sold all of your shares for $28.20 per share. What is your total dollar return on this investment?

$1,356 Total dollar return = ($28.20 - 26.15 + 1.34)*400 = $1,356

15: Jefferson Refining is issuing a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares in this offering are priced at $19 plus 3 rights. The current market price of the stock is $23 a share. What is the value of one right?

$1.00 Cost per share = [$19 + (3 × $23)] / (1 + 3) = $22.00 Value of one right = $23 - 22.00 = $1.00

15: Mountain Products has decided to raise $8.4 million in additional funding via a rights offering. The firm will issue one right for each share of stock outstanding and it will take 4 rights to purchase one new share. The offering consists of a total of 210,000 new shares. The current market price of the stock is $45.60. What is the value of one right?

$1.12 Subscription price = $8,400,000 / 210,000 shares = $40 a share Cost per share = [$40 + (4 × $45.60] / (1 + 4) = $44.48Value of right= $45.60 - 44.48 = $1.12

15: Bakers' Town Bread is selling 1,200 shares of stock through a Dutch auction. The bids received are as follows: 100 shares at $14 a share, 300 shares at $12, 400 shares at $11, 700 shares at $10, and 900 shares at $9 a share.How much cash will Bakers' Town Bread receive from selling these shares of stock? Ignore all transaction and flotation costs.

$12,000 Total cash received = 1,200 × $10 = $12,000

15: The Boat Works has decided to take the company public by offering a total of 150,000 shares of common stock to the public. The firm has hired an underwriter who arranges a firm commitment underwriting and suggests an initial selling price of $22 a share with a spread of 8 percent. As it turns out, the underwriters only sell 122,400 shares. How much cash will the firm receive from its first public offering?

$3,036,000 Total cash received = 150,000 × $22 (1 - .08) = $3,036,000

12: West Wind Tours stock is currently selling for $48 a share. The stock has a dividend yield of 3.2 percent. How much dividend income will you receive per year if you purchase 200 shares of this stock?

$307.20 Dividend income = $48 �.032 �200 = $307.20

13: You want your portfolio beta to be 0.90. Currently, your portfolio consists of $4,000 invested in stock A with a beta of 1.47 and $3,000 in stock B with a beta of 0.54. You have another $9,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset?

$5,034.48 BetaPortfolio = 0.90 = ($4,000/$16,000)(1.47) + ($3,000/$16,000)(0.54) + (×/$16,000)(1.74) + (($9,000 - ×)/$16,000)(0); Investment in risk-free asset = $9,000 - $3,965.52 = $5,034.48

15: LC Delivery has decided to sell 1,500 shares of stock through a Dutch auction. The bids received are as follows:300 shares at $36 a share, 500 shares at $35, 1,000 shares at $34, 1,200 shares at $33, and 1,800 shares at $32 a share. How much will LC Delivery receive in total from selling the 1,500 shares? Ignore all transaction and flotation costs.

$51,000 Total cash received = 1,500 × $34 = $51,000

15: Nelson Paints recently went public by offering 65,000 shares of common stock to the public. The underwriters provided their services in a best efforts underwriting. The offering price was set at $16 a share and the gross spread was $2. After completing their sales efforts, the underwriters determined that they sold a total of 57,500 shares. How much cash did Nelson Paints receive from its IPO?

$805,000 Total cash received = 57,500 × ($16 - 2) = $805,000

15: You are a broker and have been instructed to place an order for a client to purchase 500 shares of every IPO that comes to market. The next two IPOs are each priced at $25 a share and will begin trading on the same day. The client is allocated 500 shares of IPO A and 100 shares of IPO B. At the end of the first day of trading, IPO A was selling for $23.50 a share and IPO B was selling for $29 a share. What is the client's total profit or loss on these two IPOs as of the end of the first day of trading?

-$350 Total profit = [500 × ($23.50 - 25)] + [100 × ($29 - 25)] = -$350

15: Richard has an outstanding order with his stockbroker to purchase 1,000 shares of every IPO. The next three IPOs are each priced at $30 a share and will all start trading on the same day. Richard is allocated 1,000 shares of IPO A, 400 shares of IPO B, and 100 shares of IPO C. On the first day of trading, IPO A opened at $31.50 a share and ended the day at $28.25 a share. IPO B opened at $31 a share and finished the day at $32 a share. IPO C opened at $36.50 a share and ended the day at $38.75 a share. What is Richard's total profit or loss on these three IPOs as of the end of the first day of trading?

-$75 Total profit = [1,000 × ($28.25 - 30)] + [400 × ($32 - 30)] + [100 × ($38.75 - 30)] = -$75

12: One year ago, you purchased 100 shares of Best Wings stock at a price of $49.65 a share. The company pays an annual dividend of $.64 per share. Today, you sold for the shares for $43.30 a share. What is your total percentage return on this investment?

-11.5% Total percentage return = ($43.30 - 49.65 + .64)/$49.65 = -.1150, or -11.50 percent

12: You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 2 percent, -12 percent, 16 percent, 22 percent, and 18 percent. What is the variance of these returns?

.01972 Average = (.02 - .12 + .16 + .22 + .18)/5 = .092 Variance = [1/(5 - 1)] [(.02 - .092)2 + (-.12 - .092)2 + (.16 - .092)2 + (.22 - .092)2 + (.18 - .092)2] = .01972

12: What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 2.8 percent and the market rate of return is 8.35 percent?

0 percent

13: Your portfolio is comprised of 40 percent of stock X, 15 percent of stock Y, and 45 percent of stock Z. Stock X has a beta of 1.16, stock Y has a beta of 1.47, and stock Z has a beta of 0.42. What is the beta of your portfolio?

0.87 BetaPortfolio = (0.40 × 1.16) + (0.15 × 1.47) + (0.45 × 0.42) = 0.87

13: What is the beta of the following portfolio? StickAmount InvestedSecurity Beta A $6,700 1.41 B 3,000 1.23 C 8,500 0.79

1.09 ValuePortfolio = $6,700 + 3,000 + 8,500 = $18,200 BetaPortfolio = ($6,700/$18,200)(1.41) + ($4,900/$18,200)(1.23) + ($8,500/$18,200)(0.79) = 1.09

13: You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market. What is the beta of the second stock?

1.10 p = 1.0 = (1/3)(0) + (1/3)(?x) + (1/3)(1.9); ?x = 1.1

12: You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 6 percent, -14 percent, 12percent, 9 percent, and 11 percent. Suppose the average inflation rate over this time period was 2.8 percent and the average T-bill rate was 3.2 percent. Based on this information, what was the average nominal risk premium?

1.6 percent

12: A stock had returns of 12 percent, 16 percent, 10 percent, 19 percent, 15 percent, and -6 percent over the last six years. What is the geometric average return on the stock for this period?

10.68 percent Geometric average = (1.12 �1.16 �1.10 �1.19 �1.15 �.94)1/6 - 1 = .1068, or 10.68 percent

13: You own a portfolio that has $2,000 invested in stock A and $3,500 invested in stock B. The expected returns on these stocks are 14 percent and 9 percent, respectively. What is the expected return on the portfolio?

10.82 percent E(Rp) = [$2,000/($2,000 + $3,500)] [0.14] + [$3,500/($2,000 + $3,500)] [0.09] = 10.82 percent

15: You currently own 12 percent of the 2.8 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $23 a share. One right will be issued for each share of outstanding stock. This offering will provided $4.6 million of new financing for the firm, ignoring all issue costs. Assume that all rights are exercised. What will be your new ownership position if you opted to sell your rights rather than exercise them personally?

11.2 percent Number of shares owned = .12 × 2,800,000 = 336,000Number of shares offered = $4,600,000 / $23 = 200,000New ownership position = 336,000 / (2,800,000 + 200,000) = .112, or 11.2 percent

13: What is the expected return on this portfolio? StockExcepted ReturnNumber of SharesStock Price A 12% 300 $28 B 7 500 10 C 15 600 19

12.37 Portfolio value = (300 × $28) + (500 × $10) + (600 × $19) = $8,400 + $5,000 + $11,400 = $24,800; E(r) = ($8,400/$24,800) (0.12) + ($5,000/$24,800) (0.07) + ($11,400/$24,800) (0.15) = 12.37 percent

13: Thayer Farms stock has a beta of 1.12. The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent. What is the expected rate of return on this stock?

13.21 percent

13: What is the expected return on a portfolio comprised of $6,200 of stock M and $4,500 of stock N if the economy enjoys a boom period?

13.69% E(r)Boom = [$6,200/($6,200 + $4,500)][0.20] + [$4,500/($6,200 + $4,500)] [0.05] = 13.69 percent

12: The common stock of Air United had annual returns of 13.7 percent, 4.8 percent, -6.7 percent, and 27.9 percent over the last four years, respectively. What is the standard deviation of these returns?

14.61% Average return = (.137 + .048 - .067 + .279)/4 = .09925, or 9.925 percent σ = √[1/(4 - 1)] [(.137 - .09925)2 + (.048 - .09925)2 + (-.067 - .09925)2 + (.279 - .09925)2] = .1461, or 14.61 percent

13: What is the expected return of an equally weighted portfolio comprised of the following three stocks? State of EconomyProbability ofState of EconomyRate of Returnif State Occurs Stock AStock BStock C Boom0.640.190.130.31 Bust0.360.150.110.17

18.6% E(RP)Boom = (0.19 + 0.13 + 0.31)/3 = 0.21 E(RP)Normal = (0.15 + 0.11 + 0.17)/3 = 0.1433E(RP) = 0.64(0.21) + 0.36(0.1433) = 18.60 percent

15: Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:

2 years

What is the standard deviation of the returns on a stock given the following information? State of Economy Probability of State of Economy Rate of Return if State Occurs Boom 30% 15% Normal 65 12 Recession 5 6

2.03 percent E(r) = (0.30 × 0.15) + (0.65 × 0.12) + (0.05 × 0.06) = 0.126Var = 0.30(0.15 - 0.126)2+ 0.65 (0.12 - 0.126)2 + 0.05 (0.06 - 0.126)2 = .000414Std dev = √.000414= 2.03 percent

15: The Motor Plant wants to raise $28.6 million through a rights offering so it can modernize its facilities. The subscription price for the offering is set at $25 a share. Currently, the company has 2.6 million shares of stock outstanding at a market price of $29.50 a share. Each shareholder will receive one right for each share of stock they own. How many rights will a shareholder need to purchase one new share of stock in this offering?

2.27 rights Number of rights issued = 1 right per share × 2,600,000 shares = 2,600,000 Number of shares needed = $28,600,000 / $25 = 1,144,000Rights needed for each new share = 2,600,000 / 1,144,000 = 2.27 rights

15: Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $47.50. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $40 a share. How many rights will a shareholder need to purchase one new share of stock in this offering?

2.51 right Number of rights issued = 1 right per share × 540,000 shares = 540,000 rights Number of shares needed = $8,600,000 / $40 = 215,000Rights needed for each new share = 540,000 / 215,000 = 2.51 rights

13: You are comparing Stock A to Stock B. Given the following information, what is the difference in the expected returns of these two securities? State of EconomyProbability of State of EconomyRate of Return if State Occurs Stock AStock B Normal45%12%17% Recession55%-22 -31

2.7% E(rA) = (.45 × .12) + (.55 × -0.22) = -6.70 percent E(rB) = (.45 × .17) + (.55 × -0.31) = -9.40 percentDifference = -6.70 percent - (-9.40 percent) = 2.70 percent

12: You own 1,200 shares of Western Feed Mills stock valued at $46.80 per share. What is the dividend yield if your annual dividend income is $1,644?

2.93% Dividend yield = ($1,644/1,200)/$46.80 = .0293, or 2.93 percent

13: The returns on the common stock of New Image Products are quite cyclical. In a boom economy, the stock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative 28 percent in a recessionary period. The probability of a recession is 25 percent while the probability of a boom is 20 percent. What is the standard deviation of the returns on this stock?

21.41 E(r) = (0.20 ×0.32) + (0.55 ×0.14) + (0.25 ×-0.28) = 0.071 Var = 0.20 (0.32 - 0.071)2 + 0.55 (0.14 - 0.071)2 + 0.25 (-0.28 - 0.071)2 = 0.045819Stddev = √0.045819 = 21.41 percent

12: One year ago, you purchased a stock at a price of $49.60 a share. Today, you sold the stock and realized a total loss of 16.54 percent. Your capital gain was -$9.92 a share. What was your dividend yield?

3.46 percent Dividend yield = -.1654 - (-$9.92 /$49.60) = .0346, or 3.46 percent

13: You own the following portfolio of stocks. What is the portfolio weight of stock C? StockNumberof SharesPrice per Share A 500$14 B 200 23 C 600 18 D 100 47

39.85 percent Portfolio weightC = (600 × $18)/[(500 × $14) + (200 × $23) + (600 × $18) + (100 × $47)] = $10,800/$27,100 = 39.85 percent

13: You own the following portfolio of stocks. What is the portfolio weight of stock C? StockNumberof SharesPrice per Share A500$14 B200 23 C600 18 D100 47

39.85% Portfolio weightC = (600 × $18)/[(500 × $14) + (200 × $23) + (600 × $18) + (100 × $47)] = $10,800/$27,100 = 39.85 percent

15: Mountain Teas wants to raise $8.9 million to open a new production center. The company estimates the issue costs for legal and accounting fees will be $510,000. The underwriters have set the stock price at $26 a share and the underwriting spread at 8.35 percent. How many shares of stock does Mountain Teas have to sell to meet its cash need? (Round up to the next whole share.)

394,897 shares Total value of issue = ($8,900,000 + 510,000) / (1 - .0835) = $10,267,321.33 Number of shares needed = $10,267,321.33 / $26 = 394,896.97, or 394,897 shares

15: Wear Ever is expanding and needs $12.6 million to help fund this growth. The firm estimates it can sell new shares of stock for $35 a share. It also estimates it will cost an additional $340,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a 7 percent spread. How many shares of stock must Wear Ever sell if it is going to have $12.6 million available for its expansion needs? (Round up to the next whole share)

397,543 shares Total value of issue = ($12,600,000 + 340,000) / (1 - .07) = $13,913,978.49 Number of shares needed = $13,913,978.49 / $35 = 397,542.24, or 397,543 shares

12: Today, you sold 300 shares of stock and realized a total return of 5.2 percent. You purchased the shares one year ago at a price of $28 a share and have received a total of $96in dividends. What is your capital gains yield on this investment?

4.06 percent Capital gains yield = .052 - [($96/300)/$28] = .0406, or 4.06 percent

12: A stock had returns of 16 percent, 4 percent, 8 percent, 14 percent, -9 percent, and -5 percent over the past six years. What is the geometric average return for this time period?

4.26 percent Geometric average = (1.16 �1.04 �1.08 �1.14 �.91 �.95)1/6 - 1 = .0426, or 4.26 percent

15: Kurt currently owns 4.6 percent of Northeastern Transportation. The company has a total of 465,000 shares outstanding with a current market price of $26.20 a share. At present, the firm is offering an additional 25,000 shares at a price of $25 a share. Kurt decides not to participate in this offering. What will his ownership position be after the offering is completed?

4.37% Number of shares owned =.046 × 465,000 = 21,390 New ownership position = 21,390 / (465,000 + 25,000) = .0437, or 4.37 percent

12: A stock has annual returns of 5.4 percent, 12.9 percent, -3.8 percent, and 9.4 percent for the past four years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent.

5.98; 5.79 Arithmetic average = (.054 + .129 - .038+ .094)/4 = .0598, or 5.98 percent Geometric return = (1.054 ×1.129 ×.962 ×1.094).25 - 1 = .0579. or 5.79 percent

13: The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What is the expected market risk premium?

7.9% E(r) = 0.1429 = 0.037 + 1.34Mrp; Mrp = 7.90 percent

13: A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset currently earns 5.1 percent. The beta of a portfolio comprised of these two assets is 0.85. What percentage of the portfolio is invested in the stock?

71% βp = 0.85 = 1.2× + (1 - ×)(0); Bp= 71 percent

13: The common stock of Manchester & Moore is expected to earn 13 percent in a recession, 6 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 5 percent while the probability of a recession is 45 percent. What is the expected rate of return on this stock?

8.65% E(r) = (0.45 ×0.13) + (0.50 ×0.06) + (0.05 ×- 0.04) = 8.65 percent

12: Suppose a stock had an initial price of $80 per share, paid a dividend of $1.35 per share during the year, and had an ending share price of $87. What was the capital gains yield?

8.75 percent Capital gains yield = ($87 - 80)/$80 = .0875, or 8.75 percent

13: You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return? State ofEconomyProbability ofState of EconomyRate of Returnif State Occurs Boom27%17% Normal70 8 Recession3-11

9.86 percent E(r) = (0.27 × 0.17) + (0.70 × 0.08) + (0.03 × -0.11) = 9.86 percent

15: Which one of the following statements is correct?

A TV interview with a firm's CFO could cause a forced delay in the firm's IPO.

13: The systematic risk of the market is measured by:

A beta of 1.0

12: Which one of the following statements is correct concerning market efficiency?

A firm will generally receive a fair price when it issues new shares of stock if the market is efficient

12: Which one of the following statements best defines the efficient market hypothesis?

All securities in an efficient market are zero net present value investments

15: Individual investors might avoid requesting 100 shares in an upcoming IPO because they:

Are more apt to receive shares if the IPO is under allocated

13: Which one of the following stocks is correctly priced if the risk-free rate of return is 3.54 percent and the market rate of return is 11.76 percent? Stock Beta Expected Return A 0.87 11.03% B 1.09 12.50 C 1.18 13.12 D 1.34 15.02 E 1.62 17.07

B E(r)A = 0.0354 + [0.87 × (0.1176 - 0.0354)] = 0.1069, or 10.69 percent E(r)B = 0.0354 + [1.09 × (0.1176 - 0.0354)] = 0.1250, or 12.50 percent Stock B is correctly priced. E(r)C = 0.0354 + [1.18 × (0.1176 - 0.0354)] = 0.1324, or 13.24 percent E(r)D = 0.0354 + [1.34 × (0.1176 - 0.0354)] = 0.1455, or 14.55 percent E(r)E = 0.0354 + [1.62 × (0.1176 - 0.0354)] = 0.1686, or 16.86 percent

13: Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.8 percent? StockBetaExpected ReturnA0.64 9.47%B0.9712.03C1.2214.44D1.3715.80E1.6818.37

C E(r)A = 0.037 + (0.64 × 0.088) = 0.0933, or 9.33 percent E(r)B = 0.037 + (0.97 × 0.088) = 0.1224, or 12.24 percent E(r)C = 0.037 + (1.22 × 0.088) = 0.1444, or 14.44 percent Stock C is correctly priced. E(r)D = 0.037 + (1.37 × 0.088) = 0.1576, or 15.76 percent E(r)E = 0.037 + (1.68 × 0.088) = 0.1848, or 18.48 percent

13: Which one of the following stocks is correctly priced if the risk-free rate of return is 3.54 percent and the market rate of return is 11.76 percent?

E(r)A = 0.0354 + [0.87 × (0.1176 - 0.0354)] = 0.1069, or 10.69 percent E(r)B = 0.0354 + [1.09 × (0.1176 - 0.0354)] = 0.1250, or 12.50 percent Stock B is correctly priced. E(r)C = 0.0354 + [1.18 × (0.1176 - 0.0354)] = 0.1324, or 13.24 percent E(r)D = 0.0354 + [1.34 × (0.1176 - 0.0354)] = 0.1455, or 14.55 percent E(r)E = 0.0354 + [1.62 × (0.1176 - 0.0354)] = 0.1686, or 16.86 percent

13: Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.8 percent?

E(r)A = 0.037 + (0.64 × 0.088) = 0.0933, or 9.33 percent E(r)B = 0.037 + (0.97 × 0.088) = 0.1224, or 12.24 percent E(r)C = 0.037 + (1.22 × 0.088) = 0.1444, or 14.44 percent Stock C is correctly priced. E(r)D = 0.037 + (1.37 × 0.088) = 0.1576, or 15.76 percent E(r)E = 0.037 + (1.68 × 0.088) = 0.1848, or 18.48 percent

13: Which one of the following statements is correct concerning unsystematic risk?

Eliminating unsystematic risk is the responsibility of the individual investor

15: What is an issue of securities that is offered for sale to the general public on a direct cash basis called?

General cash offer

12: The average compound return earned per year over a multiyear period is called the _____ average return.

Geometric

15: Mobile Units recently offered 30,000 new shares of stock for sale. The underwriters sold a total of 32,000 shares to the public at a price of $14.50 a share. The additional 2,000 shares were purchased in accordance with which one of the following?

Green shoe provision

15: The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the:

Gross spread

12: To convince investors to accept greater volatility, you must:

Increase the risk premium

15: JLK is a partnership that was formed two years ago for the purpose of creating new fad items and distributing them directly to consumers. The firm has been extremely successful thus far and has decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called?

Initial public offering

13: Which one of the following is an example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously

15: With firm commitment underwriting, the issuing firm:

Knows upfront the amount of money it will receive from the stocking offering

12: As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return.

Less than

12: Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2013? Rank from highest to lowest.

Long-term government bonds, long-term corporate bonds, intermediate-term government bonds

12: Individual investors who continually monitor the financial markets seeking mispriced securities:

Make the markets increasingly more efficient

13: If a stock portfolio is well diversified, then the portfolio variance:

May be less than the variance of the least risky stock in the portfolio.

12: Which one of the following correctly describes the dividend yield?

Next year's annual dividend divided by today's stock price

13: Which one of the following is least apt to reduce the unsystematic risk of a portfolio?

Reducing the number of stocks held in the portfolio

15: What is a seasoned equity offering?

Sale of newly issued equity shares by a firm that is currently publicly owned

12: Which one of the following categories of securities had the most volatile annual returns over the period 1926-2013?

Small-company stocks

13: Which one of the following should earn the most risk premium based on CAPM?

Stock with a beta of 1.38

15: Which one of the following is a key goal of the aftermarket period?

Supporting the market price for a new securities issue

12: Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $.75 in dividends. Which one of the following statements is correct in relation to this investment?

The capital gains yield is positive

12: Efficient financial markets fluctuate continuously because:

The markets are continually reacting to new info

15: Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:

Tombstones

13: Which one of the following risks is irrelevant to a well-diversified investor?

Unsystematic risk

12: Which one of the following is most indicative of a totally efficient stock market?

Zero net present values for all stock investments

13: Which one of the following is the best example of a diversifiable risk?

a firm's sales decrease

15: What is the definition of a syndicate?

a group of underwriters sharing the risk of selling a new issue of securities

15: Underwriters generally:

accept the risk of selling the new securities in exchange for the gross spread

15: With Dutch auction underwriting:

all successful bidders pay the same price per share

12: The return earned in an average year over a multiyear period is called the _____ average return.

arithmetic

15: Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares. Which one of the following terms best describes this underwriting?

best efforts

13: Unsystematic risk:

can be effectively eliminated by portfolio diversification

12: Which of the following yields on a stock can be negative?

capital gains yield and total return

12: Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price:

decreased proportionately with the dividend decrease

15: Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the current rights offering by this firm. As a result, Roy will most likely be subject to:

dilution

12: Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?

efficient capital market

13: The primary purpose of portfolio diversification is to

eliminate asset-specific risk

13: You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?

expected return

15: D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25,000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this

firm commitment

15: D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25,000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this?

firm commitment

15: The date on which a shareholder is officially listed as the recipient of stock rights is called the:

holder of record date

12: Assume the returns from an asset are normally distributed. The average annual return for the asset is 18.1 percent and the standard deviation of the returns is 32.5 percent. What is the approximate probability that your money will triple in value in a single year?

less than .5% The upper tail of the 99 percent range = .181 + (3 ×.325) = 1.156 = 115.6 percent, which is less than the 200 percent required to triple your money. Thus, the probability of occurrence is less than .5 percent.

15: The value of a right depends upon the number of rights required for each new share as well as the:

market and subscription prices

13: Which one of the following is represented by the slope of the security market line?

market risk premium

13: According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

market risk premium and the amount of systematic risk inherent in the security

13: The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

market value of the investment in each stock

15: existing shareholders

may or may not have a preemptive right to newly issued shares

12: Which one of the following is defined by its mean and its standard deviation?

normal distribution

15: Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000 shares outstanding. After the seasoned offering, you still owned 7,500 shares but the number of shares outstanding rose to 625,000. Which one of the following terms best describes this situation?

percentage ownership dilution

15: Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the firm is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called?

rights offering

13: Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?

security market line

15: Lamar has been experimenting in his garage and now has a product he feels could be successfully marketed. A venture capitalist has offered to finance the development of this product until it reaches the manufacturing and marketing stage. Which type of financing is being offered?

seed money

15: Pearson Electric recently registered 250,000 shares of stock under SEC Rule 415. The firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year. What type of registration was this?

shelf registration

12: Which one of the following categories of securities had the highest average return for the period 1926-2013?

small company stocks

13: The principle of diversification tells us that:

spreading an investment across many diverse assets will eliminate some of the total risk

13: Total risk is measured by _____ and systematic risk is measured by __

standard deviation; beta

12: The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient.

strong

12: Inside information has the least value when financial markets are:

strong form efficient

13: The intercept point of the security market line is the rate of return which corresponds to:

the risk-free rate

15: Executive Tours has decided to take its firm public and has hired an investment firm to handle this offering. The investment firm is serving as a(n):

underwriter

15: Business Aid is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called?

venture capital

15: Which one of the following statements concerning venture capital financing is correct?

venture capitalists often require at least a 40% equity position as a condition of financing

12: Standard deviation is a measure of which one of the following?

volatility