MGT 332 Final 2

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14. Operating ROA is calculated as __________ while ROE is calculated as _________. A. EBIT/Total Assets; Net Profit/Total Assets B. Net Profit/Total Assets; EBIT/Total Assets C. EBIT/Total Assets; Net Profit/Equity D. Net Profit/EBIT; Sales/Total Assets

16. The highest possible value for the interest burden ratio is ______ and this occurs when the firm _________. A. 0; uses as much debt as possible B. 1; uses debt to the point where ROA = interest cost of debt C. 1; uses no interest bearing debt D. -1; pays down its existing debts

18. Portfolio manager Peter Lynch would classify Coca-Cola as _________. A. an asset play B. a slow grower C. a stalwart D. a turnaround

35. Everything else equal, an increase in the government budget deficit would ______. I. increase the government's demand for funds II. shift the demand curve for funds to the left III. increase the interest rate in the economy A. II only B. I and II only C. I and III only D. I, II and III

43. Capital goods industries such as industrial equipment, transportation or construction would be good investments during the _____ stage of the business cycle. A. peak B. contraction C. trough D. expansion

46. The Board of Governors of the Federal Reserve System are appointed by ____________ to serve _____________ terms. A. the Senate; 10 year B. the House of Representatives; 8 year C. the President; 14 year D. the Secretary of the Treasury; 6 year

48. Which of the following describes the ratio of the number of people classified as out of work to the total labor force? A. The capacity utilization rate B. The participation rate C. The unemployment rate D. The natural rate

49. Which of the following is the rate at which the general level of prices for goods and services is rising? A. The exchange rate B. The gross domestic product growth rate C. The inflation rate D. The real interest rate

50. An analyst starts by examining the broad economic environment and then considers the implications of the economy on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called __________ analysis. A. bottom-up B. outside-inside C. top-down D. upside-down

55. A high price to book ratio may indicate which one of the following? A. The firm expanded its plant and equipment in the past few years. B. The firm is doing a better job controlling its inventory expense than other related firms. C. Investors may believe that this firm has opportunities of earnings a rate of return excess of the market capitalization rate. D. The firm's P/E ratio is too high.

66. Another term for EVA is ______. A. net income B. operating income C. residual income D. market based income

70. A supply side economist would likely agree with which of the following statements? A. Real output and aggregate employment are primarily determined by aggregate demand. B. Real income will rise when government expenditures and tax rates increase. C. Real output and aggregate employment are primarily determined by tax rates. D. Increasing the money supply will increase real output without causing higher inflation.

72. The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S. goods in Japan? A. U.S. goods will increase in cost and Japan will import more. B. U.S. goods will increase in cost and Japan will import less. C. U.S. goods will decrease in cost and Japan will import more. D. U.S. goods will increase in cost and Japan will export less.

75. What economic variable is most closely associated with increasing corporate profits? A. Exchange rates B. Inflation C. Gross domestic product D. Budget deficits

8. The Conference Board's Consumer Confidence Index is released ______. A. daily B. weekly C. monthly D. quarterly

82. Quick ratio is a measure of firm's __________. A. asset turnover B. market valuation C. liquidity D. interest burden

85. Cash cows are typically found in the _________ stage of the industry life cycle. A. startup B. consolidation C. maturity D. relative decline

9. Which of the following is not one of the three key financial statements available to investors in publicly traded firms? A. Income statement B. Balance sheet C. Statement of operating earnings D. Statement of cash flows

64. The beta of this stock is _____. a. 0.12 b. 0.35 c. 1.32 d. 4.05

C. 1.32

10. Which of the following industries would most analysts classify as mature? A. Internet service providers B. Biotechnology C. Wireless communication D. Auto manufacturing

83. Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer to this type of event as a ______________. A. demand shock B. equilibrium event C. expanding commodity event D. supply shock

C. nonzero alphas will quickly disappear

64. An implication of the efficient market hypothesis is that __________. A. high beta stocks are consistently overpriced B. low beta stocks are consistently overpriced C. nonzero alphas will quickly disappear D. growth stocks are better buys than value stocks

A. Active management

71. A technical analyst is most likely to be affiliated with which investment philosophy? A. Active management B. Buy and hold C. Passive investment D. Index funds

A. be less price-volatile

71. If an investment returns a higher percentage of your money back sooner, it will ______. A. be less price-volatile B. have a higher credit rating C. be less liquid D. have a higher modified duration

ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. At what P/E ratio would you expect ART to sell? A. 14.29 B. 11.43 C. 8.33 D. 15.25

A. Cash flow matching

78. What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders? A. Cash flow matching B. Index tracking C. Yield pickup swaps D. Substitution swap

79. During a period when prices have been rising, the _________ will be _______ the current price. A. relative strength index; declining with B. relative strength index; declining faster than C. moving average; above D. moving average; below

D. Preferred stock effect

79. Which of the following is not a concept related to explaining abnormal excess stock returns? A. January effect B. Neglected firm effect C. P/E effect D. Preferred stock effect

D. I, II, and III

79. You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if: I. Interest rates increase. II. Interest rates stay the same. III. Interest rates fall. A. I only B. II only C. I and II only D. I, II, and III

D. horizon analysis

8. A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon is called a _________. A. contingent immunization B. dedication strategy C. duration analysis D. horizon analysis

8. Market breadth is a ______ indicator. A. sentiment B. flow of funds C. technical D. fundamental

A. early in the month

8. The small firm in January effect is strongest ________. A. early in the month B. in the middle of the month C. late in the month D. in even numbered years

B. I and II only

80. Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because: I. The portfolio must be rebalanced every time interest rates change. II. The portfolio must be rebalanced over time even if interest rates don't change. III. Convexity implies duration-based immunization strategies don't work. A. I only B. I and II only C. II only D. I, II, and III

B. liquidity effect

80. The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the ____________________. A. January effect B. liquidity effect C. neglected firm effect D. P/E effect

A. I only

81. Advantages of cash flow matching and dedicated strategies include: I. Once the cash flows are matched, there is no need for rebalancing. II. Cash flow matching typically earns a higher rate of return than active bond portfolio management. III. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching even more desirable. A. I only B. II only C. I and III only D. I, II, and III

B. Neglected firm effect

81. Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock? A. January effect B. Neglected firm effect C. P/E effect D. Reversal effect

81. The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the ___________. A. intermediate trend level B. minor trend level C. resistance level D. support level

82. The moving average generates buy signal(s) _____. A. on days 3, 11, and 15 B. on days 2 and 16 C. on days 5, 9, and 13 D. on no days - -https://o.quizlet.com/xAfpntKQrNIAesKahzMyNw_m.png

C. I and IV only

82. Convexity implies that duration predictions: I. Underestimate the percentage increase in bond price when the yield falls. II. Underestimate the percentage decrease in bond price when the yield rises. III. Overestimate the percentage increase in bond price when the yield falls. IV. Overestimate the percentage decrease in bond price when the yield rises. A. I and III only B. II and IV only C. I and IV only D. II and III only

A. survivorship bias

82. When testing mutual fund performance over time one must be careful of ___________, which means that a certain percentage of poorer performing funds fail over time which makes the performance of remaining funds seem more consistent over time. A. survivorship bias B. lucky event bias C. magnitude bias D. mean reversion bias

83. The moving average generates sell signals _____. A. on days 3, 11, and 15 B. on days 7, 15, and 18 C. on days 5, 9, and 13 D. on day 16 - -https://o.quizlet.com/XcuwhCmvAiXxSrrrgAip-w_m.png

A. reasonably weak form and semi-strong form efficient

83. Most evidence indicates that U.S. stock markets are _______________________. A. reasonably weak form and semi-strong form efficient B. strong form efficient C. reasonably weak form but not semi- or strong form efficient D. neither weak form, semi- or strong form efficient

84. The price of a stock fluctuates over a period of 10 days. The movement of the stock price below the 10-day minimum price of $25 triggers a rash of selling. The $25 price might now be considered the _______________. A. congestion area B. penetration point C. resistance level D. support level

D. If a market is strong form efficient it is also semi- and weak form efficient

84. Which of the following statements is/are correct? A. If a market is weak form efficient it is also semi- and strong form efficient B. If a market is semi-strong efficient it is also strong form efficient C. If a market is strong form efficient it is also semi-strong but not weak form efficient D. If a market is strong form efficient it is also semi- and weak form efficient

D. Engaging in active portfolio management to enhance returns

85. According to Markowitz and other proponents of modern portfolio theory which of the following activities would not be expected to produce any benefits? A. Diversification B. Investing in Treasury bills C. Investing in stocks of utility companies D. Engaging in active portfolio management to enhance returns

B. the rate of change of the slope of the price-yield curve divided by the bond price

85. Convexity of a bond is ___________. A. the same as horizon analysis B. the rate of change of the slope of the price-yield curve divided by the bond price C. a measure of bond duration D. none of these options

85. Trend analysts who follow bonds are most likely to monitor the ____________. A. confidence index B. odd-lot trading C. short interest D. trin statistic

A. risk premium

86. According to results by Seyhun the main reason why investors cannot earn excess returns by following inside trades after they become public is ______________. A. risk premium B. transaction costs C. the SEC late disclosure rule D. the stock reversal effect

86. You find that the confidence index is down, the market breadth is up, and the trin ratio is down. In total, how many bullish signs do you have? A. 0 B. 1 C. 2 D. 3

87. You find that the trin ratio is up, the market breadth is down, and the market has closed below its 50-day moving average. In total, how many bearish signs do you have? A. 0 B. 1 C. 2 D. 3

B. increases; a decreasing

9. A bond's price volatility _________ at _________ rate as maturity increases. A. increases; an increasing B. increases; a decreasing C. decreases; an increasing D. decreases; a decreasing

9. The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________. A. market breadth B. market volume C. trin ratio D. relative strength ratio

69. Counter-cyclical fiscal policy is best described by which of the following statements? A. Government surpluses are planned during economic booms, and deficits are planned during economic recessions. B. The annual budget should always be balanced. C. Deficits should always equal surpluses. D. Government deficits are planned during economic booms, and surpluses are planned during economic recessions.

7. The yield curve spread between 10-year T-bond and federal funds rate is a _______ economic indicator. A. leading B. lagging C. coincident D. mixed

71. A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations? A. $50 increase B. $100 increase C. $150 increase D. $250 increase

20. The analysis of the determinants of firm value is called _____________. A. fundamental analysis B. technical analysis C. momentum analysis D. indexing

21. Operating ROA can be found as the product of ______. A. return on sales x ATO B. tax burden x Interest burden C. interest burden x Leverage ratio D. ROE x Dividend payout ratio

26. If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions. A. below average B. average C. above average D. since growth is expected to be slow, sensitivity to economic conditions is not an issue

28. Economic Value Added (EVA) is: A. The difference between the return on assets and the opportunity cost of capital times the capital base B. ROA x ROE C. A measure of the firm's abnormal return D. Largest for high growth firms

29. Which of the following statements is true concerning Economic Value Added? A. A growing number of firms tie managers' compensation to EVA. B. A profitable firm will always have a positive EVA. C. EVA recognizes that the cost of capital is not a real cost. D. If a firm has positive present value of growth opportunities it will have positive EVA.

3. An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker, Toyota, to either _____________ on its U.S. sales. A. lose market share or reduce its profit margin B. gain market share or reduce its profit margin C. lose market share or increase its profit margin D. gain market share or increase its profit margin

30. Which one of the following is probably the most direct and immediate way to stimulate or slow the economy although it is not very useful for fine tuning economic performance? A. Fiscal policy B. Monetary policy C. Supply-side policy D. Rising minimum wages

38. An example of a highly cyclical industry is _________. A. the automobile industry B. the tobacco industry C. the pharmaceutical industry D. the utility industry

39. The stock price index and contracts and orders for non defense capital goods are _________. A. leading economic indicators B. coincidental economic indicators C. lagging economic indicators D. leading and coincidental indicators respectively

4. Depreciation expense is in what broad category of expenditures? A. Cost of goods sold B. General and administrative expenses C. Debt interest expense D. Tax expenditures

47. A firm in the early stages of its industry life cycle will likely have _________. A. low dividend payout rates B. low rates of investment C. low rates of return on investment D. low R&D spending

5. Since 1999, the purchasing power of the U.S. dollar has increased relative to the purchasing power of _______. A. UK B. Euro C. Switzerland D. Canada

51. Assume that the Federal Reserve increases the money supply. This will cause ____________. I. interest rates to decrease II. consumption and investment to decrease III. inflation to fall A. I only B. I and II only C. II and III only D. I, II and III

52. The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income. A. understate; overstate B. understate; understate C. overstate; understate D. overstate; overstate

53. If a firm's ratio of (stockholders' equity/total assets) is lower than the industry average and its ratio of (long-term debt/stockholders' equity) is also lower than the industry average, this would suggest that the firm _________. A. has more current liabilities than the industry average B. has more leased assets than the industry average C. will be less profitable than the industry average D. has more current assets than the industry average

55. Increases in the money supply will cause demand for investment and consumption goods to __________ in the short run and may cause prices to __________ in the long run. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

56. A firm has a ROE equal to the industry average but its price to book ratio is below the industry average. You know that the firm's _________. A. earnings yield is above the industry average B. P/E ratio is above the industry average C. dividend payout ratio is too high D. interest burden must be below the industry average

58. Order the following stages in the industry life cycle from earliest to latest that occur after the start up phase ________. I. maturity II. relative decline III. consolidation A. III, I, II B. I, III, II C. III, II, I D. I, II, III

59. An investment strategy which entails shifting the portfolio into industry sectors that are forecast to outperform others based on macroeconomic forecasts is termed ______________. A. sector rotation B. contraction/expansion analysis C. life cycle analysis D. business cycle shifting

6. If you believe the economy is about to go into a recession you might change your asset allocation by selling _______ and buying ______. A. growth stocks; long-term bonds B. long-term bonds; growth stocks C. defensive stocks; growth stocks D. defensive stocks; long-term bonds

67. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15-20% per year in recent years are expected to grow at 10-15% per year over the next three years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the U.S. is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the U.S. based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market Characteristics ____ would be typical of an industry that is in the consolidation stage. A. 6 and 7 B. 1 and 4 C. 5 and 6 D. 2 and 8

67. Which of the following transactions will result in a decrease in cash flow from operations? A. Increase in accounts receivable B. Decrease in inventories C. Decrease in taxes payable D. Decrease in bonds outstanding

68. Which of the following transactions will result in a decrease in cash flow from investments? A. Acquisition of another business B. Capital gain from sale of a subsidiary C. Decrease in net investments D. Sale of equipment

23. Everything else equal, if you expect a larger interest rate increase than other market participants, you should _________. A. buy long-term bonds B. buy short-term bonds C. buy common stocks D. buy preferred stocks

89. Which of the following comprise barriers to entry? I. Large economies of scale required to be profitable II. Established brand loyalty III. Patent protection for the firm's product IV. Rapid industry growth A. I and II only B. I, II and III only C. II, III and IV only D. III and IV only

A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of 15% and an ROE of 18%. What is the stock's P/E ratio? A. 9.46 B. 7.69 C. 12.82 D. 8.33

23. If a firm has a positive tax rate, a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be _________. A. greater than zero but it is impossible to determine how operating ROA will compare to ROE B. equal to ROE C. greater than ROE D. less than ROE

27. Which of the following is not an example of fiscal policy? A. Social Security spending B. Medicare spending C. Fed purchases of Treasury securities D. Changes in the tax rate

3. Many observers believe that firms "manage" their income statements to _______. A. minimize taxes over time B. maximize expenditures C. smooth their earnings over time D. generate level sales

33. The average duration of unemployment is _________. A. a leading economic indicator B. a coincidental economic indicator C. a lagging economic indicator D. both coincidental and lagging

11. Which one of the following stocks represents industries with below-average sensitivity to the state of the economy? A. Financials B. Technology C. Food and beverage D. Cyclicals

12. The most widely used monetary policy tool is _________. A. altering the discount rate B. altering reserve requirements C. open market operations D. increasing the budget deficit

14. According to __________ economists, the growth of the U.S. economy in the 1980s can be attributed to lower marginal tax rates which improved the incentives for people to work. A. Keynesian B. monetarist C. supply-side D. demand-side

The price of a stock fluctuates over a period of 10 days. The movement of the stock price below the 10 day minimum price of $25 triggers a rash of selling. The $25 price might now be considered the _______________. A. congestion area B. penetration point C. resistance level D. support level

The primary difference between Treasury notes and bonds is ________. A. maturity at issue B. default risk C. coupon rate D. tax status

To earn a high rating from the bond rating agencies, a company would want to have _________. I. a low times interest earned ratio II. a low debt to equity ratio III. a high quick ratio A. I only B. II and III only C. I and III only D. I, II and III

87. 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

84. A firm has a compound leverage factor greater than 1 indicates that ______. A. this firm has no interest payments B. this firm uses less debt as a percentage of financing C. its interest payments are equal to the firm's pretax profits D. its debt has a positive contribution to the firm's ROA

Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS

The Dow Theory gives a buy signal when you can identify a primary bull trend by identifying _________. A. a pattern of upward moving tops and bottoms B. a pattern of declining oscillators C. declining volume on up moves and increasing volume on down moves D. tertiary trends that support the primary trend

The Dow Theory is a technique that attempts to identify ___________________. A. only long-term trends in stock market prices B. only short-term trends in stock market prices C. both long-term and short-term trends in stock market prices D. trends in arbitrage trading opportunities

C. weak

20. You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume or short interest but you do not believe stock prices reflect all publicly available or inside information. You are a proponent of ____________. A. semi-strong B. strong C. weak D. perfect

27. If investors overweight recent performance in forecasting the future, they are exhibiting _______. A. representativeness bias B. framing error C. memory bias D. overconfidence

B. duration of the portfolio

28. In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to the ____. A. average bond maturity in the portfolio B. duration of the portfolio C. difference between the shortest duration and longest duration of the individual bonds in the portfolio D. average of the shortest duration and longest duration of the bonds in the portfolio

D. are wasting their time

28. Proponents of the EMH think technical analysts __________. A. should focus on relative strength B. should focus on resistance levels C. should focus on support levels D. are wasting their time

28. Trading activity and average returns in brokerage accounts tend to be _________. A. uncorrelated B. negatively correlated C. positively correlated D. positively correlated for women and negatively correlated for men

A. price; reinvestment

29. Bond portfolio immunization techniques balance ________ and ________ risk. A. price; reinvestment B. price; liquidity C. credit; reinvestment D. credit; liquidity

C. use a passive trading strategy such as purchasing an index fund or an ETF

29. Evidence supporting semi-strong form market efficiency suggests that investors should _________________________. A. rely on technical analysis to select securities B. rely on fundamental analysis to select securities C. use a passive trading strategy such as purchasing an index fund or an ETF D. select securities by throwing darts at the financial pages of the newspaper

29. Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________. A. mental accounting B. framing bias C. conservatism D. representativeness bias

C. 2.29 years

3. A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the year after that. If the discount rate is 8%, what is the duration of this set of payments? A. 2 years B. 2.15 years C. 2.29 years D. 2.53 years

3. The trin statistic is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

A. filter rule

30. "Buy a stock if its price moves up by 2% more than the Dow Average," is an example of a _________________. A. filter rule B. market anomaly C. fundamental approach D. passive trading strategy

30. Which of the following is not a sentiment indicator? A. Confidence index B. Short interest C. Odd-lot trading D. Put/call ratio

C. increased, decreased

31. Jaffee found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares. A. decreased, decreased B. decreased, increased C. increased, decreased D. increased, increased

C. the value weighted average of the durations of the individual bonds in the portfolio

31. The duration of a portfolio of bonds can be calculated as _______________. A. the coupon weighted average of the durations of the individual bonds in the portfolio B. the yield weighted average of the durations of the individual bonds in the portfolio C. the value weighted average of the durations of the individual bonds in the portfolio D. averages of the durations of the longest- and shortest-duration bonds in the portfolio

31. Which of the following is considered a sentiment indicator? A. A 200-day moving average B. Short interest C. Credit balances in brokerage accounts D. Relative strength

32. An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________. A. overconfidence B. representativeness C. forecast errors D. mental accounting

A. higher

32. In a recent study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher. A. higher B. lower C. unaffected D. more skewed

B. long-duration bonds

32. Pension fund managers can generally best bring about an effective reduction in their interest rate risk by holding ___________________. A. long-maturity bonds B. long-duration bonds C. short-maturity bonds D. short-duration bonds

B. low

33. Fama and French (1991) and Reinganum (1988) found that firms with __________ market/book ratios had higher stock returns. A. high B. low C. medium D. paired

33. Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability? A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts

D. Asset-liability swap

33. Which of the following is not a type of bond swap used in active portfolio management? A. Intermarket spread swap B. Substitution swap C. Rate anticipation swap D. Asset-liability swap

34. A trin ratio of greater than 1 is considered a __________. A. bearish signal B. bullish signal C. bearish signal by some technical analysts and a bullish signal by other technical analysts D. trend reversal signal

B. the weak-form EMH

34. Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57 and then he sold once he had eliminated his loss. If other investors do the same to establish a trading pattern this would contradict _______. A. the strong-form EMH B. the weak-form EMH C. technical analysis D. the semistrong-form EMH

A. a substitution swap

34. The exchange of one bond for a bond that has similar attributes but is more attractively priced is called ______________. A. a substitution swap B. an intermarket spread swap C. a rate anticipation swap D. a pure yield pickup swap

D. gradually over time

35. According to recent research securities markets fully adjust to earnings announcements _______. A. instantly B. in 1 day C. in 1 week D. gradually over time

35. Contrarian investors consider a high put/call ratio a __________. A. bearish signal B. bullish signal C. trend confirmation signal D. signal to enter the options market

C. III, I, II

35. Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: I. 8% coupon, noncallable 20-year maturity par bond II. 9% coupon, currently callable 20-year maturity premium bond III. Zero-coupon 30-year maturity bond A. I, II, III B. II, III, I C. III, I, II D. III, II, I

C. a rate anticipation swap

36. A bond swap made in response to forecasts of interest rate changes is called ______. A. a substitution swap B. an intermarket spread swap C. a rate anticipation swap D. a pure yield pickup swap

36. The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________. A. bond price index B. confidence index C. relative strength index D. trin ratio

A. positive; positive

36. When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns. A. positive; positive B. positive; negative C. negative; positive D. positive; zero

C. earned lower average returns than firms with low P/E ratios

37. Basu found that firms with high P/E ratios __________. A. earned higher average returns than firms with low P/E ratios B. earned the same average returns as firms with low P/E ratios C. earned lower average returns than firms with low P/E ratios D. had higher dividend yields than firms with low P/E ratios

D. a pure yield pickup swap

37. Moving to higher-yield bonds, usually with longer maturities, is called ________. A. a substitution swap B. an intermarket spread swap C. a rate anticipation swap D. a pure yield pickup swap

38. Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, _________________________________________. A. Bill will have more regret over the loss than Shelly B. Shelly will have more regret over the loss than Bill C. Bill and Shelly will have equal regret over their losses D. Bill's and Shelly's risk aversion will increase in the future

B. neglected stocks

38. Fundamental analysis is likely to yield best results for _______. A. NYSE stocks B. neglected stocks C. stocks that are frequently in the news D. fast growing companies

B. shorter-duration; longer-duration

38. In a pure yield pickup swap, ________ bonds are exchanged for _________ bonds. A. longer-duration; shorter-duration B. shorter-duration; longer-duration C. high-coupon; high-yield D. low-yield; high-yield

A. underestimates

39. The duration rule always ________ the value of a bond following a change in its yield. A. underestimates B. provides an unbiased estimate of C. overestimates D. The estimated price may be biased either upward or downward, depending on whether the bond is trading at a discount or a premium.

39. The most common measure of __________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price. A. market breadth B. market volume C. odd-lot trading D. short interest

D. You cannot tell from the information given

39. You are looking to invest in one of three stocks. Stock A has high expected earnings growth, Stock B has only modest expected earnings growth and Stock C is expected to generate poor earnings growth. Which stock is likely to generate the greatest alpha for you? A. Stock A B. Stock B C. Stock C D. You cannot tell from the information given

C. A 21-year zero-coupon bond yielding 10%

4. All other things equal, which of the following has the longest duration? A. A 21-year bond with a 10% coupon yielding 10% B. A 20-year bond with a 10% coupon yielding 11% C. A 21-year zero-coupon bond yielding 10% D. A 20-year zero-coupon bond yielding 11%

4. The put/call ratio is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

D. I, II and III

48. The _________ effect may explain much of the small firm anomaly. I. January effect II. neglected effect III. liquidity effect A. I only B. II only C. II and III only D. I, II and III

49. In technical analysis, __________ is a value below which the market is relatively unlikely to fall. A. book value B. resistance level C. support level D. the Dow line

B. 5%

49. Studies show that the bid-ask spread for the least liquid stocks may be as high as ______. A. 3% B. 5% C. 9% D. 12%

5. Relative strength is ______ indicator. A. a fundamental B. an economic C. a technical D. an international

B. inversely

5. The duration of a perpetuity varies _______ with interest rates. A. directly B. inversely C. convexly D. randomly

C. all information including inside information

5. The strong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information including inside information D. all costless information

50. A possible limit on arbitrage activity that may allow behavioral biases to persist is _______. A. technical trends in prices B. momentum effects C. fundamental risk D. trend reversals

C. strong form efficiency argument

50. The broadest information set is included in the A. weak form efficiency argument B. semi-strong form efficiency argument C. strong form efficiency argument D. technical analysis trading method

B. decreases

50. When interest rates increase, the duration of a 20-year bond selling at a premium _________. A. increases B. decreases C. remains the same D. increases at first and then declines

C. maturities

51. Duration facilitates the comparison of bonds with differing ___________. A. default risks B. conversion ratios C. maturities D. yields to maturity

51. If you are not a contrarian, you consider a high put/call ratio to be a __________. A. bearish signal B. bullish signal C. trend confirmation signal D. signal to enter the options market

C. either high book to market firms are underpriced or the book to market ratio is a proxy for a systematic risk factor

51. The Fama and French evidence that high book to market firms outperform low book to market firms even after adjusting for beta means _________. A. high book to market firms are underpriced B. low book to market firms are underpriced C. either high book to market firms are underpriced or the book to market ratio is a proxy for a systematic risk factor D. high book to market firms have more post earnings drift

D. A low coupon and a long maturity

59. Which of the following set of conditions will result in a bond with the greatest price volatility? A. A high coupon and a short maturity B. A high coupon and a long maturity C. A low coupon and a short maturity D. A low coupon and a long maturity

B. lower coupon rates

11. All else equal, bond price volatility is greater for __________. A. higher coupon rates B. lower coupon rates C. shorter maturity D. lower default risk

11. Technical analysis focuses on _____________________. A. finding opportunities for risk-free investing B. finding repeating trends and patterns in prices C. changing prospects for earnings growth of particular firms or industries D. forecasting technical regulatory changes

12. Behavioralists point out that even if market prices are ____________, there may be _______________. A. distorted; limited arbitrage opportunities B. distorted; fundamental efficiency C. allocationally efficient; limitless arbitrage opportunities D. distorted; allocational efficiency

A. Convexity

12. ______________ is an important characteristic of the relationship between bond prices and yields. A. Convexity B. Concavity C. Complexity D. Linearity

13. According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________. A. the price index pierces the left shoulder B. the price index pierces the right shoulder C. the price index pierces the head D. none of these options takes place

A. more; lower

13. Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to maturity. A. more; lower B. more; higher C. less; lower D. equally; higher or lower

C. Earnings forecasting

13. Which of the following is not a method employed by followers of technical analysis? A. Charting B. Relative strength analysis C. Earnings forecasting D. Trading around support and resistance levels

C. Frederick Macaulay

14. The pioneer of the duration concept was _________. A. Eugene Fama B. John Herzog C. Frederick Macaulay D. Harry Markowitz

14. When a stock price breaks through the moving average from below, this is considered to be ______. A. the starting point for a new moving average B. a bearish signal C. a bullish signal D. none of these options

B. Relative strength analysis

14. Which of the following is not a method employed by fundamental analysts? A. Analyzing the Fed's next interest rate move B. Relative strength analysis C. Earnings forecasting D. Estimating the economic growth rate

D. an intermarket spread

15. A portfolio manager sells Treasury bonds and buys corporate bonds because the spread between corporate- and Treasury-bond yields is higher than its historical average. This is an example of __________ swap. A. a pure yield pickup B. a rate anticipation C. a substitution D. an intermarket spread

C. mis-priced stocks

15. The primary objective of fundamental analysis is to identify __________. A. well run firms B. poorly run firms C. mis-priced stocks D. high P/E stocks

15. When the stock price falls below a moving average, a possible conclusion is that _____. A. market momentum has become positive B. market momentum has become negative C. there is no regular pattern for this stock's market momentum D. professional analysts' opinions are invalid until the stock price rises again

16. Following a period of falling prices, the moving average will _____. A. be below the current price B. be above the current price C. be equal to the current price D. become more volatile than it had been before prices fell

A. semi-strong

16. If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. A. semi-strong B. strong C. weak D. perfect

B. 5

16. The duration of a 5-year zero-coupon bond is ____ years. A. 4.5 B. 5 C. 5.5 D. 3.5

17. A moving average of stock prices _________________. A. always lies above the most recent price B. always lies below the most recent price C. is less volatile than the actual prices D. is more volatile than the actual prices

B. a rate anticipation

17. A portfolio manager believes interest rates will drop and decides to sell short-duration bonds and buy long-duration bonds. This is an example of __________ swap. A. a pure yield pickup B. a rate anticipation C. a substitution D. an intermarket spread

B. strong

17. If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information including information that is available only to insiders. A. semi-strong B. strong C. weak D. perfect

B. about 10 minutes

18. Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________. A. about 30 seconds B. about 10 minutes C. 6 months D. 2 years

C. pension funds

18. Target date immunization would primarily be of interest to _________. A. banks B. mutual funds C. pension funds D. individual investors

18. When the housing bubble burst in 2007, it set off the worst financial crisis _____. A. in 25 years. B. in 40 years. C. in 50 years. D. in 75 years.

19. A support level is ___________________. A. a level beyond which the market is unlikely to rise B. a level below which the market is unlikely to fall C. an equilibrium price level justified by characteristics such as earnings and cash flows D. the peak of a market wave or cycle

C. price volatility

19. Duration is a concept that is useful in assessing a bond's _________. A. credit risk B. liquidity risk C. price volatility D. convexity risk

C. An abnormal return

19. __________ is the return on a stock beyond what would be predicted from market movements alone. A. A normal return B. A subliminal return C. An abnormal return D. An excess return

D. A 10-year zero-coupon bond

2. All other things equal(YTM = 10%), which of the following has the shortest duration? A. A 30-year bond with a 10% coupon B. A 20-year bond with a 9% coupon C. A 20-year bond with a 7% coupon D. A 10-year zero-coupon bond

A. there were no predictable patterns in stock prices

2. In a 1953 study of stock prices, Maurice Kendall found that ________. A. there were no predictable patterns in stock prices B. stock prices exhibited strong serial autocorrelation C. day to day stock prices followed consistent trends D. fundamental analysis could be used to generate abnormal returns

2. Models of financial markets that emphasize psychological factors affecting investor behavior are called _______. A. data mining B. fundamental analysis C. charting D. behavioral finance

20. According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately _________________. A. 18 months B. 4 years C. 8 years D. 50 years

A. always be higher than

6. Because of convexity, when interest rates change, the actual bond price will ____________ the bond price predicted by duration. A. always be higher than B. sometimes be higher than C. always be lower than D. sometimes be lower than

6. Short interest is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

60. An important assumption underlying the use of technical analysis techniques is that ___________________. A. security prices adjust rapidly to new information B. security prices adjust gradually to new information C. security dealers will provide enough liquidity to keep price changes relatively small D. all investors have immediate and costless access to information

D. zero; long

60. An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a _________ coupon and a _________ term to maturity. A. low; long B. high; short C. high; long D. zero; long

C. Every January, the stock market earns above normal returns.

60. Which of the following contradicts the proposition that the stock market is weakly efficient? A. Over 25% of mutual funds outperform the market on average. B. Insiders earn abnormal trading profits. C. Every January, the stock market earns above normal returns. D. Applications of technical trading rules fail to earn abnormal returns.

61. If the put/call ratio increases, market contrarians may interpret this as what kind of signal? A. Buy signal B. Sell signal C. Hold signal D. This is not interpreted as a signal

B. I and II only

61. If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct? I. You will have no interest rate risk on this bond. II. In the absence of default, you can be sure you will earn the promised yield rate. III. The duration of your bond is less than the time to your investment horizon. A. I only B. I and II only C. II and III only D. I, II, and III

C. Earning abnormal returns after a firm announces surprise earnings.

61. Which of the following would violate the efficient market hypothesis? A. Intel has consistently generated large profits for years. B. Prices for stocks before stock splits show on average consistently positive abnormal returns. C. Earning abnormal returns after a firm announces surprise earnings. D. High earnings growth stocks fail to generate higher returns for investors than low earnings growth stocks.

B. greater price volatility

62. As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________. A. greater reinvestment risk B. greater price volatility C. less call protection D. shorter average maturity

62. The tendency of investors to hold on to losing investments is called the ________. A. overweighting effect B. head-in-the-sand effect C. disposition effect D. prospector effect

C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.

62. Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis? A. The average rate of return is significantly greater than zero. B. The correlation between the market return one week and the return the following week is zero. C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. D. You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology

D. Technical analysis cannot; fundamental analysis cannot

63. The semi-strong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns. A. Technical analysis cannot; fundamental analysis can B. Technical analysis can; fundamental analysis can C. Technical analysis can; fundamental analysis cannot D. Technical analysis cannot; fundamental analysis cannot

63. Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short term part of the market is lower than the equilibrium interest rate in the long-term part of the market

63. Which one of the following best describes fundamental risk? A. A stock is overpriced, but your fund does not allow you to engage in short sales. B. Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error. C. You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results. D. A stock is trading in two different markets at two different prices.

64. Day Advances 870 760 960 840 Declines 880 990 790 910 Volume↑ 580 620 480 510 Volume ↓ 670 580 720 520 Yiel@CB 6.8%6.7%6.7%6.6% The trin on day 2 is ___. A. .72 B. 1.04 C. .92 D. .55

. A major problem with technical trading strategies is that ________. A. it is very difficult to identify a true trend before the fact B. it is very difficult to identify the correct trend after the fact C. it is so easy to identify trends that all investors quickly do so D. Kondratieff showed that you can't identify trends without 48 to 60 years of data

A. A 30-year bond with a 10% coupon

1. All other things equal (YTM = 10%), which of the following has the longest duration? A. A 30-year bond with a 10% coupon B. A 20-year bond with a 9% coupon C. A 20-year bond with a 7% coupon D. A 10-year zero-coupon bond

1. Testing many different trading rules until you find one that would have worked in the past is called _______. A. data mining B. perceived patterning C. pattern searching D. behavioral analysis

10. A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal. A. bearish; bullish B. bullish; bearish C. bearish; false D. bullish; false

A. greater than

10. As a result of bond convexity, an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude. A. greater than B. equivalent to C. smaller than D. The answer cannot be determined from the information given.

21. According to Elliot's wave theory, stock market behavior can be explained as _________________. A. a series of medium-term wave cycles with no short-term trend B. a series of long-term wave cycles with no short-term trend C. a series of superimposed long-term and short-term wave cycles D. sine and cosine functions

B. index

22. A mutual fund which attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund. A. stock B. index C. hedge D. money market

22. Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______. A. rational; irrational B. irrational; rational C. greedy; philanthropic D. philanthropic; greedy

D. the same regardless of the discount rate

22. Given its time to maturity, the duration of a zero-coupon bond is _________. A. higher when the discount rate is higher B. higher when the discount rate is lower C. lowest when the discount rate is equal to the risk-free rate D. the same regardless of the discount rate

C. smaller than

23. An increase in a bond's yield to maturity results in a price decline that is ________ the price increase resulting from a decrease in yield of equal magnitude. A. greater than B. equivalent to C. smaller than D. The answer cannot be determined.

B. technical analysis

23. Choosing stocks by searching for predictable patterns in stock prices is called ________. A. fundamental analysis B. technical analysis C. index management D. random walk investing

23. The only way for behavioral patterns to persist in prices is if ______________. A. markets are not weak-form efficient B. there are limits to arbitrage activity C. there are no significant trading costs D. market psychology is inconsistent over time

B. lower when the yield to maturity is higher

24. All other things equal, a bond's duration is _________. A. higher when the yield to maturity is higher B. lower when the yield to maturity is higher C. the same at all yield rates D. indeterminable when the yield to maturity is high

24. In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________. A. buy signal B. sell signal C. congestion area D. trend reversal

B. The tax loss selling issue

24. Which of the following is not an issue that is central to the debate regarding market efficiency? A. The magnitude issue B. The tax loss selling issue C. The lucky event issue D. The selection bias issue

C. interest rates rise

25. A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is 3.5 years. The bank's market value of equity is at risk if _______________________. A. interest rates fall B. credit spreads fall C. interest rates rise D. the price of all fixed-income securities rises

25. Even though indexing is growing in popularity, only about _____ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________. A. 5%; are excessively conservative B. 15%; overestimate their ability C. 20%; suffer from framing biases D. 25%; engage in mental accounting

C. strong form efficient

25. Most people would readily agree that the stock market is not _________. A. weak form efficient B. semi-strong form efficient C. strong form efficient D. efficient at all

B. lower when the coupon rate is higher

26. All other things equal, a bond's duration is _________. A. higher when the coupon rate is higher B. lower when the coupon rate is higher C. the same when the coupon rate is higher D. indeterminable when the coupon rate is high

26. If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______. A. representativeness bias B. framing error C. conservatism D. memory bias

A. the month of January

26. Small firms have tended to earn abnormal returns primarily in __________. A. the month of January B. the month July C. the trough of the business cycle D. the peak of the business cycle

C. matching the durations of their assets and liabilities

27. Banks and other financial institutions can best manage interest rate risk by _____________. A. maximizing the duration of assets and minimizing the duration of liabilities B. minimizing the duration of assets and maximizing the duration of liabilities C. matching the durations of their assets and liabilities D. matching the maturities of their assets and liabilities

D. varying risk premiums

27. Fama and French have suggested that many market anomalies can be explained as manifestations of ____________. A. regulatory effects B. high trading costs C. information asymmetry D. varying risk premiums

59. Technical traders view mutual fund investors as _________ market timers. A. excellent B. frequent C. neutral D. poor

40. Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates __________________. A. regret avoidance B. overconfidence C. that she has a diminishing marginal utility of wealth D. prospect theory loss aversion

D. (1 + y)/y

40. Where y = yield to maturity, the duration of a perpetuity would be _________. A. y B. y/(1 + y) C. 1/y D. (1 + y)/y

B. I and II only

41. Even if the markets are efficient, professional portfolio management is still important because it provides investors with _________. I. low cost diversification II. provides a portfolio with a specified risk level III. provides better risk adjusted returns than an index A. I only B. I and II only C. II and III only D. I, II and III

41. When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to ___________. A. buy the stock B. hold the stock C. sell the stock D. short the stock

A. was higher than the risk-adjusted returns of large firms

42. Banz found that, on average, the risk-adjusted returns of small firms __________. A. was higher than the risk-adjusted returns of large firms B. was the same as the risk-adjusted returns of large firms C. was lower than the risk-adjusted returns of large firms D. was negative

42. If you believed in the reversal effect, you should __________. A. buy bonds this period if you held stocks last period B. buy stocks this period that performed poorly last period C. buy stocks this period that performed well last period D. do nothing if you held the stock last period

43. According to technical analysts, a shift in market fundamentals will __________. A. be reflected in stock prices immediately B. lead to a gradual price change that can be recognized as a trend C. lead to high volatility in stock market prices D. leave prices unchanged

A. the markets cannot be allocationally efficient

43. If the U.S. capital markets are not informationally efficient ______. A. the markets cannot be allocationally efficient B. then systematic risk does not matter C. then no type of analysis can be used to generate abnormal returns D. then returns must follow a random walk

A. magnitude

44. "Active investment management may generate additional returns at times of about 0.1%. However, the standard deviation of the typical well diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are. A. magnitude B. selection bias C. lucky event D. allocation

44. According to market technicians, a trin statistic of less than 1 is considered a __________. A. bearish signal B. bullish signal C. volume decline D. signal reversal

B. good, poor

45. DeBondt and Thaler (1985) found that the poorest performing stocks in one time period experienced __________ performance in the following period and the best performing stocks in one time period experienced __________ performance in the following time period. A. good, good B. good, poor C. poor, good D. poor, poor

45. It is difficult to test the Kondratieff wave theory because _________. A. it applies to only Russian stocks B. its main proponent found contrary research results C. only two independent data points are generated each century D. the stock market is too volatile to generate smooth waves

46. A _________ is a value above which it is difficult for the market to rise. A. book value B. resistance level C. support level D. confidence level

C. lucky event

46. J.M. Keyes put all his money in one stock and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J.M. got his picture on the front page of the Wall Street Journal. However the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are. A. magnitude B. selection bias C. lucky event D. small firm

D. joint tests of market efficiency and the risk adjustment measure

47. Most tests of semi-strong efficiency are _________. A. designed to test whether inside information can be used to generate abnormal returns B. based on technical trading rules C. unable to generate any evidence of market anomalies D. joint tests of market efficiency and the risk adjustment measure

47. _____________ is a tool that can help identify the direction of a stock's price. A. Prospect theory B. Framing C. A moving average D. Conservatism

48. If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________. A. loss aversion B. regret avoidance C. mental accounting D. framing bias

A. investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public

52. According to results by Seyhun __________. A. investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public B. investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public C. investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public D. investors cannot earn abnormal returns by trading before insiders

a Day 1 Ratio=12/127=0.09449 Day 2 Ratio=15/139=0.107914

52. On day 1, the stock price of Ford was $12 and the automotive stock index was 127. On day 2, the stock price of Ford was $15 and the automotive stock index was 139. Consider the ratio of Ford to the automotive stock index at day 1 and day 2. Ford is __________ the automotive industry, and technical analysts who follow relative strength would advise __________ the stock. A. outperforming; buying B. outperforming; selling C. underperforming; buying D. underperforming; selling Since the ratio is increasing, the relative strength of Ford is improving; it is outperforming and should be bought.

C. buy the AAA and short the AA

52. The historical yield spread between the AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels, you should ________________________. A. buy the AA and short the AAA B. buy both the AA and the AAA C. buy the AAA and short the AA D. short both the AA and the AAA

d CI(July)=0.0765/0.0842=0.91 CI(August)=0.0600/0.0671=.89

53. At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and 6.71%, respectively. The confidence index _________ during August, and bond technical analysts are likely to be ________. A. increased; bullish B. increased; bearish C. decreased; bullish D. decreased; bearish Since the confidence index decreased, this would be considered a bearish signal.

A. I only

53. The duration of a bond normally increases with an increase in: I. Term to maturity II. Yield to maturity III. Coupon rate A. I only B. I and II only C. II and III only D. I, II, and III

B. future changes in stock prices cannot be predicted from any information that is publicly available

54. According to the semi-strong form of the efficient markets hypothesis ____________. A. stock prices do not rapidly adjust to new information B. future changes in stock prices cannot be predicted from any information that is publicly available C. corporate insiders should have no better investment performance than other investors even if allowed to trade freely D. arbitrage between futures and cash markets should not produce extraordinary profits

c Market breadth = 890 - 723 = 167

54. On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is __________. A. -10,449,000 B. -167 C. 167 D. 10,449,000

d Trin=70,397,000/723/80,846,000/920=1.11

55. On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is __________, and technical analysts are likely to be __________. A. .90; bullish B. .90; bearish C. 1.11; bullish D. 1.11; bearish

C. stock price changes that are random and unpredictable

55. The term random walk is used in investments to refer to ______________. A. stock price changes that are random but predictable B. stock prices that respond slowly to both old and new information C. stock price changes that are random and unpredictable D. stock prices changes that follow the pattern of past price changes

56. An accumulation of cash by mutual funds may be viewed by technical traders as a __________ indicator. A. bullish B. neutral C. bearish D. trend reversal

D. I, II and III

56. Important characteristic(s) of market efficiency is that _________________. I. there are no arbitrage opportunities II. security prices react quickly to new information III. active trading strategies will not consistently outperform passive strategies A. I only B. II only C. I and III only D. I, II and III

57. A point and figure chart: I. Gives a sell signal when the stock price penetrates previous lows II. Tracks significant upward or downward movements III. Has no time dimension IV. Indicates congestion areas A. I and II only B. II and III only C. I, III, and IV only D. I, II, III, and IV

B. overwhelmingly optimistic

57. Stock market analysts have tended to be ___________ in their recommendations to investors. A. slightly overly optimistic B. overwhelmingly optimistic C. slightly overly pessimistic D. overwhelmingly pessimistic

A. an abnormal price change immediately following the announcement

58. Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________. A. an abnormal price change immediately following the announcement B. an abnormal price increase before the announcement C. an abnormal price decrease after the announcement D. no abnormal price change before or after the announcement

58. When technical analysts say a stock has good "relative strength," they mean that in the recent past __________. A. it has performed well compared to its closest competitors B. it has exceeded its own historical high C. trading volume in the stock has exceeded the normal trading volume D. it has outperformed the market index

D. price behavior that differs from the behavior predicted by the efficient market hypothesis

59. A market anomaly refers to _______. A. an exogenous shock to the market that is sharp but not persistent B. a price or volume event that is inconsistent with historical price or volume trends C. a trading or pricing structure that interferes with efficient buying and selling of securities D. price behavior that differs from the behavior predicted by the efficient market hypothesis

A. investing in index stocks in proportion to the stock's fundamental value

65. Fundamental indexing refers to ________. A. investing in index stocks in proportion to the stock's fundamental value B. investing in index stocks in proportion to the stock's market value C. investing an equal dollar amount in index stocks D. investing in an equal amount shares in each of the index stocks

d Breadth on day 3 = 960 - 790 = 170

66. The breadth on day 3 is _______. A. -70 B. 10 C. 90 D. 170 - -https://o.quizlet.com/4mky81awCxQ4P7VGrjS2Sw_m.png

B. higher expense and turnover ratios

66. Tests of mutual fund performance indicate that funds with ______________ tend to have poorer performance. A. more funds in the family B. higher expense and turnover ratios C. lower management fees D. larger asset size

a Cumulative breadth, days 1 and 2 = (870 - 880) + (760 - 990) = -240

67. The cumulative breadth for the first 2 days is ___. A. -240 B. -50 C. 110 D. 250 - -https://o.quizlet.com/4mky81awCxQ4P7VGrjS2Sw_m.png

D. I, II and III

67. Value stocks may provide investors with better returns than growth stocks if _______. I. value stocks are out of favor with investors II. prices of growth stocks include premiums for overly optimistic growth levels III. value stocks are likely to generate positive earnings surprises. A. I only B. II only C. I and III only D. I, II and III

b Cumulative breadth, days 1-4 = (870 - 880) + (760 - 990) + (960 - 790) + (840 - 910) = -140 Negative cumulative breadth is bearish.

68. Cumulative breadth for the 4 days is ___, which is ___. A. -140; bullish B. -140; bearish C. -300; bullish D. -300; bearish - -https://o.quizlet.com/6Uc-G1-xihQhHieuCyTEgA_m.png

A. low, low

68. Value stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios. A. low, low B. low, high C. high, low D. high, high

C. Price volatility decreases at a decreasing rate.

68. When bonds sell above par, what is the relationship of price sensitivity to rising interest rates? A. Price volatility increases at an increasing rate. B. Price volatility increases at a decreasing rate. C. Price volatility decreases at a decreasing rate. D. Price volatility decreases at an increasing rate.

c The trin has decreased, and this is bullish.

69. From day 1 to day 4, the trin has ___ and is ___. A. increased; bullish B. increased; bearish C. decreased; bullish D. decreased; bearish - -https://o.quizlet.com/NcaS4XayGD-7OF--nwn.SA_m.png

D. 13 years

69. A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If the yield to maturity of the bond is 6.7%, what is the duration of the bond? A. 6.7 years B. 8 years C. 10 years D. 13 years

D. high, high

69. Growth stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios. A. low, low B. low, high C. high, low D. high, high

7. Moving averages are ______ indicators. A. sentiment B. flow of funds C. trend D. fundamental

B. Buy the Canon bond, and short the Xerox bond.

7. You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon bond priced to yield 6.5%. If you expect interest rates to rise, which of the following should you do? A. Short the Canon bond, and buy the Xerox bond. B. Buy the Canon bond, and short the Xerox bond. C. Short both the Canon bond and the Xerox bond. D. Buy both the Canon bond and the Xerox bond.

D. Technical analysis

70. A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy? A. EMH B. Fundamental analysis C. Strong form market efficiency D. Technical analysis

71. Problems with behavioral finance include: I. The behavioralists tell us nothing about how to exploit any irrationality. II. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction. III. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait. A. I only B. II only C. I and III only D. I, II, and III

72. A major problem with technical trading strategies is that ________. A. it is very difficult to identify a true trend before the fact B. it is very difficult to identify the correct trend after the fact C. it is so easy to identify trends that all investors quickly do so D. Kondratieff showed that you can't identify trends without 48 to 60 years of data

D. Passive investment

72. Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using what approach? A. Active management B. Arbitrage C. Fundamental analysis D. Passive investment

D. the percentage of the total present value of the investment received in year t

72. Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ____________. A. the dollar amount of the investment received in year t B. the percentage of the future value of the investment received in year t C. the present value of the dollar amount of the investment received in year t D. the percentage of the total present value of the investment received in year t

D. under perform passive fixed-income indexes by an amount equal to fund expenses

73. Evidence by Blake, Elton and Gruber indicates that on average actively managed bond funds A. outperform passive fixed-income indexes __________. B. under perform passive fixed-income indexes by a wide margin C. perform as well as passive fixed-income indexes D. under perform passive fixed-income indexes by an amount equal to fund expenses

C. Perpetuities

73. The duration is independent of the coupon rate only for which one of the following? A. Discount bonds B. Premium bonds C. Perpetuities D. Short-term bonds

74. In 1997 CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below preacquisition levels and took many years to recover. This may be an example of ________________. A. loss aversion B. mental accounting C. overreaction D. managerial overconfidence

C. Strong form efficiency

74. Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency? A. Weak form efficiency B. Semi-strong form efficiency C. Strong form efficiency D. Technical analysis

C. interest rates fall

74. You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. The answer cannot be determined from the information given.

A. Buy the 5-year bonds, and short the surrounding maturity bonds.

75. A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a bond manager take advantage of this event? A. Buy the 5-year bonds, and short the surrounding maturity bonds. B. Buy the 5-year bonds, and buy the surrounding maturity bonds. C. Short the 5-year bonds, and short the surrounding maturity bonds. D. Short the 5-year bonds, and buy the surrounding maturity bonds.

75. An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as _______________. A. loss aversion B. mental accounting C. overreaction D. winner's curse

B. Diversification

75. In an efficient market and for an investor that believes in a passive approach to investing, what is the primary duty of a portfolio manager? A. Accounting for results B. Diversification C. Identifying undervalued stocks D. No need for a portfolio manager

76. Identify the resistance-level stock price. A. $40 B. $42 C. $44 D. $46 - -https://o.quizlet.com/PgIiZDaBeFn8kmpniKTYow_m.png

B. Switch from high-duration to low-duration bonds.

76. Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? A. Switch from low-duration to high-duration bonds. B. Switch from high-duration to low-duration bonds. C. Switch from high-grade to low-grade bonds. D. Switch from low-coupon to high-coupon bonds.

A. IPO results

76. Which of the following is not a topic related to the debate over market efficiency? A. IPO results B. Lucky event issue C. Magnitude issue D. Selection bias

77. Identify the support level stock price. A. $40 B. $42 C. $44 D. $46 - -https://o.quizlet.com/k2C7b3LWYuT3A7phK09r9Q_m.png

B. Peter Lynch

77. Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets? A. Jeff Vinik B. Peter Lynch C. Robert Stansky D. William Hayes

A. interest rates increase

77. You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. The answer cannot be determined from the information given.

78. Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern? A. Overconfidence B. Loss aversion C. Mental accounting D. Calendar bias

C. momentum effect

78. The tendency of poorly performing stocks and well performing stocks in one period to continue their performance into the next period is called the ________________. A. fad effect B. martingale effect C. momentum effect D. reversal effect

1. Which of the following assets is most liquid? A. Cash equivalents B. Receivables C. Inventories D. Plant and equipment

13. Common size balance sheets are prepared by dividing all quantities by ____________. A. total assets B. total liabilities C. shareholder's equity D. fixed assets

13. Which one of the following is the ratio of actual output from factories to potential output from factories? A. Capacity utilization B. Participation rate C. Durable goods orders D. Industrial production

15. The market value of all goods and services produced during a given time period is called ______. A. GDP B. industrial production C. capacity utilization D. factory orders

16. A big increase in government spending is an example of _________. A. a positive demand shock B. a positive supply shock C. a negative demand shock D. a negative supply shock

18. The process of decomposing ROE into a series of component ratios is called ______________. A. DuPont analysis B. technical analysis C. comparative analysis D. liquidity analysis

2. Cost of goods sold refers to ___________. A. direct costs attributable to producing the product sold by the firm B. salaries, advertising and selling expenses C. payments to the firm's creditors D. payments to federal and local governments

71. Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation? A. Sell government bonds, reducing money supply, increasing interest rates and slowing aggregate demand. B. Buy government bonds, reducing money supply, increasing interest rates and slowing aggregate demand. C. Decrease the discount rate, lowering interest rates, causing both costs and prices to fall. D. Increase taxes, reducing costs, causing prices to fall.

73. Which of the following are examples of cyclical industries? I. Maytag II. Computer chip manufacturers III. Kellogg's Frosted Flakes IV. Pfizer A. I and II only B. I, II and III only C. II, III and IV only D. I, II, III and IV

74. You would expect the beta of cyclical industries to be ______ and the beta of defensive industries to be ______. A. greater than 1; less than 1 B. less than 1; less than 1 C. less than 1; greater than 1 D. greater than 1; greater than 1

76. The federal government decides to pay for the transition to private social security accounts with a one time $1 trillion bond issue. What will be the biggest concern to businesses relative to the "crowding out" effect? A. Higher interest rates due to the new government borrowing B. Inflation resulting from more government purchases C. A negative supply shock D. Shortage of investment due to new accounts

76. The practice of 'selling' large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed _____________. A. channel stuffing B. clogging the network C. spamming the johns D. artificial sales

77. What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets? A. Asset turnover B. Current ratio C. Liquidity ratio D. Quick ratio

8. If the interest rate on debt is higher than the ROA, then a firm's ROE will _________. A. decrease B. increase C. not change D. change but in an indeterminable manner

80. The supply of funds in the economy is controlled primarily by ____________. A. the Federal Reserve System B. the Congress C. money center banks D. the Treasury department

82. During 2004 China increased its use of global oil by 40%. This followed a 100% increase during the previous 5 years. How do economists refer to this kind of economic event? A. Demand shock B. Equilibrium event C. Expanding commodity event D. Supply shock

84. Items that are ____________ and product purchases where ________ is not important tend to be less cyclical in nature. A. necessities; income B. luxuries; leverage C. discretionary goods; time of purchase D. produced with high fixed costs; entertainment

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 less than that of the typical company B. less risk than the typical company C. less sensitivity to market trends than the typical company D. a dividend yield which is greater than that of the typical company

A firm cuts its dividend payout ratio. As a result, you know that the firm's _______. A. earnings retention ratio will increase B. stock price will fall C. return on assets will increase D. earnings growth rate will fall

A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct? I. All else equal, the firm's growth rate will accelerate after the payout change. II. All else equal, the firm's stock price will go up after the payout change. III. All else equal, the firm's P/E ratio will increase after the payout change. A. I only B. I and II only C. I, II, and III D. II and III only

A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is, 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. $114.29 B. $13.50 C. $91 D. $45.50

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. Both would have the same P/E if they were in the same industry. B. There is not necessarily any linkage between risk and P/E ratios. C. Firm A D. Firm B

In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price? A. Utility B. Software C. Telecommunications D. Import/export trade

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. 100% B. 0% C. between 50% and 100% D. between 0% and 50%

Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding? correct A. Book value per share B. Market value per share C. Liquidation value per share D. Tobin's q

Which one of the following statements about market and book value is correct? A. Most firms have a market-to-book ratio above 1, but not all. B. All firms sell at a market-to-book ratio above 1. C. All firms sell at a market-to-book ratio below 1. D. All firms sell at a market-to-book ratio greater than or equal to 1.

A firm has a stock price of $54.75 per share. The firm's earnings are $75 million, and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio? A. 1.5 B. 1 C. 1.25 D. 1.1

A EPS = $75,000,000/20,000,000 = $3.75 P/E = $54.75/$3.75 = 14.6 g = .65 × 15% = .0975 = 9.75% PEG = 14.6/9.75 = 1.5

The free cash flow to the firm is reported as $205 million. The interest expense to the firm is $22 million. If the tax rate is 35% and the net debt of the firm increased by $25 million, what is the approximate market value of the firm if the FCFE grows at 2% and the cost of equity is 11%? A. $2,445 billion B. $2,565 billion C. $2,168 billion D. $2,998 billion

A FCFE = 205 - 22(1 - .35) + 25 = 215.70 Value = (215.7×1.02)/(.11 - .02) = 2,445

The free cash flow to the firm is reported as $275 million. The interest expense to the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is the free cash flow to the equity holders of the firm? A. $269 million B. $327 million C. $296 million D. $305 million

A FCFE = 275 - 60(1 - .35) + 33 = 269

The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm? A. $125 B. $185 C. $305 D. $85

A FCFF = 300(1 - .35) + 20 - 60 - 30 = $125 million

The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach? A. $2 billion B. $3 billion C. $1 billion D. $4 billion

A Total value = 300/.10 = $3 billion Equity value = $3 billion - 1 billion = $2 billion

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. $26.67 C. $0 D. $20.34

A Value with no growth = $4/.15 = $26.67 Growth rate = .4 × 8% = 3.2% Value with growth = $4 × (1 - .4)/(.15 - .032) = $20.34 PVGO = $20.34 - 26.67 = -$6.33

Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is _________. A. $42.94 B. $26.67 C. $35.19 D. $59.89

A g = (1 - .6) × 13% = 5.2% D1 = $4 × (1.052) = $4.208 Intrinsic value = $4.208/(.15 - .052) = $42.94

Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the constant-growth DDM, the intrinsic value of the stock is _________. correct A. 50 B. 4 C. 17.65 D. 37.50

A k = .05 + .75(.17 − .05) = .14 V0 = [3/(.14 − .08)] = 50

When Google's share price reached $475 per share, Google had a P/E ratio of about 68 and an estimated market capitalization rate of 11.5%. Google pays no dividends. Approximately what percentage of Google's stock price was represented by PVGO? A. 87% B. 64% C. 92% D. 77%

A EPS = $475/68 = $6.985 PVGO = $475 - ($6.985/.115) = $414.26 $414.26/$475 = 87.21%

A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock? A. $20 B. $40 C. $17.78 D. None of these options

A P = $1.80/.09 = $20

A 1% decline in yield will have the least effect on the price of the bond with a _________. A. 10-year maturity, selling at 80 B. 10-year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100

A Japanese firm issued and sold a pound denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A. Both bonds are examples of Eurobonds. B. The Japanese bond is a Eurobond and the U.S. bond is termed a foreign bond. C. The U.S. bond is a Eurobond and the Japanese bond is termed a foreign bond. D. Neither bond is a Eurobond.

A _________ is a value above which it is difficult for the market to rise. A. book value B. resistance level C. support level D. confidence level

A __________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. treasury

A __________ bond is a bond where the issuer has an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. treasury

A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding period return in an investor decides to sell now? A. Increased B. Decreased C. Stayed the same D. Can not be determined

A collateral trust bond is ______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

A debenture is _____. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

A discount bond that pays interest semiannually will ______. I. have a lower price than an equivalent annual payment bond II. have a higher EAR than an equivalent annual payment bond III. sell for less than its conversion value A. I and II only B. I and III only C. II and III only D. I, II and III

A high amount of short interest is typically considered as a __________ signal and contrarians may consider it as a _________ signal. A. bearish; bullish B. bullish; bearish C. bearish; false D. bullish; false

A mortgage bond is ______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

A possible limit on arbitrage activity that may allow behavioral biases to persist is _______. A. technical trends in prices B. momentum effects C. fundamental risk D. trend reversals

A support level is ___________________. A. a level beyond which the market is unlikely to rise B. a level below which the market is unlikely to fall C. an equilibrium price level justified by characteristics such as earnings and cash flows D. the peak of a market wave or cycle

A trin ratio of less than 1.0 is considered as a __________. A. bearish signal B. bullish signal C. bearish signal by some technical analysts and as a bullish signal by other technical analysts D. trend reversal signal

10. Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What is the reward-to-variability ratio? a. .40 b. .50 c. .75 d. .80

A. .40

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%. 33. The proportion of the optimal risky portfolio that should be invested in stock A is __________. a. 0% b. 40% c. 60% d. 100%

A. 0%

65. This stock has greater systematic risk than a stock with a beta of ____. a. 0.50 b. 2.00 c. 4.00 d. 1.50

A. 0.50

1. A top-down analysis of a firm's prospects starts with an analysis of the ____. A. firm's position in its industry B. U.S. economy or even the global economy C. industry D. specific firm under consideration

24. The term "complete portfolio" refers to a portfolio consisting of __________________. a. The risk-free asset combined with at least one risky asset b. The market portfolio combined with the minimum variance portfolio c. Securities from domestic markets combined with securities from foreign markets d. Common stocks combined with bonds

A. The risk-free asset combined with at least one risky asset

According to Elliot wave theory, the stock market behavior can be explained as _________________. A. a series of medium-term wave cycles with no short-term trend B. a series of long-term wave cycles with no short-term trend C. a series of superimposed long-term and short-term wave cycles D. sine and cosine functions

According to Kondratieff, the macroeconomy moves in a series of waves that recur at intervals of approximately _________________. A. 18 months B. 4 years C. 8 years D. 50 years

According to market technicians a trin statistic of less than 1.0 is considered as a __________. A. bearish signal B. bullish signal C. volume decline D. signal reversal

According to market technicians it is time to sell stock in a head-and-shoulders formation when ___________. A. the price index pierces the left shoulder B. the price index pierces the right shoulder C. the price index pierces head D. none of the above takes place.

According to technical analysts, a shift in market fundamentals will __________. A. be reflected in stock prices immediately B. lead to a gradual price change that can be recognized as a trend C. lead to high volatility in stock market prices D. leave prices unchanged

According to the Dow Theory there are ______ key forces which simultaneously affect stock prices. A. 2 B. 3 C. 4 D. 5

According to the Dow Theory, primary trends are _________________. A. points of trend reversals B. daily fluctuations which are of little importance C. short-term deviations from the underlying price trend line D. long-term price movements lasting from months to years

According to the Dow Theory, secondary trends are _________________. A. points of trend reversals B. daily fluctuations which are of little importance C. short-term deviations from the underlying price trend line D. long-term price movements lasting from months to years

According to the Dow Theory, tertiary trends are _________________. A. points of trend reversals B. daily fluctuations which are of little importance C. short-term deviations from the underlying price trend line D. long-term price movements lasting from months to years

According to the liquidity preference theory of the term structure of interest rates an increase in the yield on long term corporate bonds versus short term bonds could be due to _______. A. declining liquidity premiums B. expectation of an upcoming recession C. a decline in future inflation expectations D. increase in expected interest rate volatility

19. Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis? A. Technical analysis B. Fundamental analysis C. Both technical analysis and fundamental analysis D. Indexing

An accumulation of cash by mutual funds may be viewed by technical traders as a __________ indicator. A. bullish B. neutral C. bearish D. trend reversal

An important assumption underlying the use of technical analysis techniques is that ___________________. A. security prices adjust rapidly to new information B. security prices adjust gradually to new information C. security dealers will provide enough liquidity to keep price changes relatively small D. all investors have immediate and costless access to information

An investor has her money segregated into checking, savings and investments. The allocation between each category is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as _______________. A. loss aversion B. mental accounting C. overreaction D. winner's curse

An investor holds a very conservative portfolio invested for retirement but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________. A. overconfidence B. representativeness C. forecast errors D. mental accounting

An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills but he will not sell any stock to do so. He is engaging in ___________. A. overconfidence B. representativeness C. forecast errors D. mental accounting

An investor purchases shares of an index fund. The investor could take on the same level of risk by taking out a loan and purchasing a higher risk specialty fund. The Sharpe measure on this complete portfolio is higher than her existing investment. What behavioral concept prevents the investor from taking out the loan and investing in the index fund? A. Framing bias B. Excessive volatility C. Loss aversion D. Mental accounting

Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis

20. By 2008, over 100 countries have adopted financial reporting standards which are in conformance with ________. A. GAAP B. IFRS C. FASB D. GASB

22. Inflation is caused by ________________. A. unions B. rapid growth of money supply C. excess supply D. low rates of capacity utilization

Bonds rated _____ or better by Standard and Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC

24. You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that ________. A. the firm's use of financial leverage is positively contributing to ROE B. the firm's use of financial leverage is negatively contributing to ROE C. the firm's use of operating leverage is positively contributing to ROE D. the firm's use of operating leverage is negatively contributing to ROE

29. Which one of the following describes the amount by which government spending exceeds government revenues? A. Balance of trade B. Budget deficit C. Gross domestic product D. Output gap

31. In macroeconomic terms an increase in the price of imported oil or a decrease in the availability of oil is an example of a _________. A. demand shock B. supply shock C. monetary shock D. refinery shock

32. ______________ in interest rates are associated with stock market declines. A. Anticipated increases B. Unanticipated increases C. Anticipated decreases D. Unanticipated decreases

34. The ratio of the purchasing power of two economies is termed the _______. A. balance of trade B. real exchange rate C. real interest rate D. nominal exchange rate

42. Pharmaceuticals, food, and other necessities would be good performers during the ____ stage of the business cycle. A. peak B. contraction C. trough D. expansion

44. If you are going to earn abnormal returns based on your macroeconomic analysis it will most likely have to be because __________. A. you have more information than others B. you are a better analyst than others C. you have the same information as others D. you are an equally good analyst as others

52. The discount rate is the ________. A. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed B. interest rate the Fed charges commercial banks on short term loans C. interest rate that the U.S. Treasury pays on its bills D. interest rate that banks charge their best corporate customers

53. If the currency of your country is depreciating, this should __________ exports and __________ imports. A. stimulate; stimulate B. stimulate; discourage C. discourage; stimulate D. discourage; discourage

6. One of the biggest impediments to a global capital market is _________. A. volatile exchange rates B. the lack of common accounting standards C. lower disclosure standards in the U.S. than abroad D. the lack of transparent reporting standards across the EU

62. The Fed funds rate is the __________. A. interest rate that banks charge their best corporate customers B. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed C. interest rate the Fed charges commercial banks on short term loans D. interest rate that the U.S. Treasury pays on its bills

64. The goal of supply side policies is to _______. A. increase government involvement in the economy B. create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods C. maximize tax revenues of the government D. focus more on wealth redistribution policies

64. When assessing sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources? A. Cash flow from investment activities B. Cash flow from operating activities C. Cash flow from financing D. Cash flow from extraordinary events

68. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15-20% per year in recent years are expected to grow at 10-15% per year over the next three years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the U.S. is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the U.S. based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market Which of the characteristics would be typical of an industry that is in the maturity stage? A. 1, 2 and 3 B. 4 and 5 C. 6, 7 and 8 D. all characteristics fit the maturity stage

75. The term quality of earnings refers to ________. A. how well reported earnings conform to GAAP B. the realism and sustainability of reported earnings C. whether actual earnings matched expected earnings D. how well reported earnings fit a trend line of earnings growth

78. An expanding economy puts stress on the manufacturing ability of a company. When a firm turns business down during periods of economic expansion a problem exist in the area of ____________. A. asset allocation B. capacity utilization C. employment management D. strategic planning

79. The expansion of the money supply at a rate that exceeds the increase in goods and services will likely result in ___________. A. expanding economy B. increased inflation C. interest rate declines D. lower GDP

81. The classification system used to classify firms into industries is now called the _____ code. A. SIC B. NAICS C. ISO 57 D. ISM

81. The major difference between IFRS and GAAP is that U.S. standards are ___________ and IFRS standards are _________. A. strictly enforced; weakly enforced B. rules based; principles based C. evolutionary; devolutionary D. based on government standards; based on corporate practice

86. At what point in an industry life cycle are inefficiencies in competitors most likely to be removed? A. Start up stage B. Consolidation stage C. Maturity stage D. Relative decline stage

87. Stalwarts are typically found in the _________ stage of the industry life cycle. A. startup B. consolidation C. maturity D. relative decline

88. Large growth companies generally emerge in the __________ stage. A. start up B. consolidation C. maturity D. relative decline

ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. At what price would you expect ART to sell? A. $25 B. $34.29 C. $42.86 D. $45.67

Ace Frisbee Corporation produces a good that is very mature in the firm's product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a dividend in year 2 of $2, and a dividend in year 3 of $1. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today. A. $18.25 B. $13.07 C. $18.78 D. $13.58

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. No typical pattern can be expected. D. stay the same

If a firm increases its plowback ratio, this will probably result in _______ P/E ratio. A. a lower B. The answer cannot be determined from the information given. C. a higher D. an unchanged

The constant-growth dividend discount model (DDM) can be used only when the ___________. A. growth rate is greater than the required return B. growth rate is less than the required return C. growth rate is less than or equal to the required return D. growth rate is greater than or equal to the required return

Value stocks are more likely to have a PEG ratio _____. A. less than zero B. less than 1 C. equal to 1 D. greater than 1

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. $40.83 D. $37.50

Which one of the following is a common term for the market consensus value of the required return on a stock? A. Plowback ratio B. Market capitalization rate C. Dividend payout ratio D. Intrinsic value

70. ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. What is the present value of growth opportunities for ART? A. $8.57 B. $9.29 C. $14.29 D. $16.29

B P0=3.00(1-.2)/12-.25(.2)=34.29 PVGO = P0 - (EPS1/k) = 34.29 - (3/.12) = $9.29

The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is the free cash flow to the equity holders of the firm? A. $553.5 million B. $405.6 million C. $505.8 million D. $454.2 million

B FCFE = 405 - 76(1 - .35) + 50 = 405.6

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. $50 B. $25 C. $100 D. $75

B Value with no growth = $5/.10 = $50 Growth rate = .4 × 15% = 6% Value with growth = $5 × (1 - .4)/(.10 - .06) = $75 PVGO = $75 - 50 = $25

A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock? A. $70 B. $37.50 C. $66.67 D. $27.27

B g = .25 × .20 = .05 D1 = $3(1 - .25) = $2.25 P0 = $2.25/(.11 - .05) = $37.50

Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. 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 a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is _________. A. $34.52 B. $27.39 C. $24.29 D. $31.13

B k = .06 + 1.2(.12 - .06) = .132

Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A. asset-backed bonds B. convertible bonds C. inverse floaters D. index bonds

31. The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is __________. a. -.0447 b. -.0020 c. .0020 d. .0447

B. -.0020

72. Which of the following correlation coefficients will produce the most diversification benefits? a. -0.6 b. -0.9 c. 0.0 d. 0.4

B. -0.9

82. The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio standard deviation is 12.0%, what is the reward to variability ratio of the portfolio? a. 0.0 b. 0.45 c. 0.74 d. 1.35

B. 0.45

Behavioralists point out that even if market prices are ____________ there may be _______________. A. distorted; limited arbitrage opportunities B. distorted; fundamental efficiency C. allocationally efficient; limitless arbitrage opportunities D. distorted; allocational efficiency

Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from all her friends. Both Bill and Shelly's stocks fall 15%. According to regret theory _________________________________________. A. Bill will have more regret over the loss than Shelly B. Shelly will have more regret over the loss than Bill C. Bill and Shelly will have equal regret over their losses D. Bill and Shelly's risk aversion will increase in the future

Bonds issued in the U.S. are ________ and most bonds issued overseas are ________. A. bearer bonds; registered bonds B. registered bonds; bearer bonds C. straight bonds; convertible bonds D. puttable bonds; callable

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. A. Eurobonds B. Yankee bonds C. Samurai bonds D. foreign bonds

9. You can earn abnormal returns on your investments via macro forecasting ______. A. if you can forecast the economy at all B. if you can forecast the economy as well as the average forecaster C. if you can forecast the economy better than the average forecaster D. only if you can forecast the economy with perfect accuracy

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. 1.46 B. 1.5 C. 1.83 D. 1.35

A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm? A. $95 B. $65 C. $75 D. $57

An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15-20% per year in recent years are expected to grow at 10-15% per year over the next three years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the U.S. is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the U.S. based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. 65. Characteristics 4 and 5 would indicate that the industry is in the _________ stage. A. start-up B. consolidation C. maturity D. relative decline

Assuming all other factors remain unchanged, __________ would increase a firm's price-earnings ratio. A. an increase in the dividend payout ratio B. an expected increase in the level of inflation C. a reduction in investor risk aversion D. an increase in the yield on Treasury bills

Earnings yields tend to _______ when Treasury yields fall. A. remain unchanged B. rise C. fall D. fluctuate wildly

Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on _______. A. whether the firm is currently paying dividends B. the time period used to estimate the cash flows C. the terminal value used D. whether one uses FCFF or FCFE

Everything else equal, which variable is negatively related to the intrinsic value of a company? A. D1 B. g C. k D. D0

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. There is not necessarily any linkage between risk and P/E ratios. B. equal to C. higher than D. lower than

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. lower; lower C. lower; higher D. higher; higher

Rose Hill Trading Company is expected to have EPS in the upcoming year of $6. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be _________. A. $20.93 B. $150 C. $128.57 D. $69.77

The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle? A. Relative decline B. Maturity C. Start-up phase D. Consolidation

Which one of the following statements about market and book value is correct? A. All firms sell at a market-to-book ratio greater than or equal to 1. B. All firms sell at a market-to-book ratio below 1. correct C. Most firms have a market-to-book ratio above 1, but not all. D. All firms sell at a market-to-book ratio above 1.

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 less than the intrinsic value of stock B B. will be the same as the intrinsic value of stock B C. will be higher than the intrinsic value of stock B D. The answer cannot be determined from the information given.

A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at this P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost of your investment? A. 55 years B. 37 years C. 75 years D. 27 years

C EPS = $55/75 = $.73333 per year Payback period = $55/$.73333 per year = 75 years

The free cash flow to the firm is reported as $198 million. The interest expense to the firm is $15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%? A. $2,585 billion B. $3,098 billion C. $1,950 billion D. $2,497 billion

C FCFE = 198 - 15(1 - .35) + 20 = 208.25 Value = (208.25 × 1.03)/(.14 - .03) = 1,950

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. $50 B. $208 C. $25 D. $83.33

C Value with no growth = $3/.12 = $25

29. The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is __________. a. .12 b. .36 c. .60 d. .77

C. .60

You find that the confidence index is down, market breadth is up, and the trin ratio is down. In total how many bullish signs do you have? A. 0 B. 1 C. 2 D. 3

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, one year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short term bonds than long term bonds B. a higher yield on long term bonds than short term bonds C. the same yield on both short term bonds and long term bonds D. the liquidity preference theory cannot be used to make any of the other statements.

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pay interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

Contrarian investors consider a high put/call ratio as __________. A. a bearish signal B. a bullish signal C. a trend confirmation signal D. a signal to enter the options market

Conventional finance theory assumes investors are _______ and behavioral finance assumes investors are _______. A. rational; irrational B. irrational; rational C. greedy; philanthropic D. philanthropic; greedy

15. A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal this change will probably increase the firm's _______. I. beta II. earnings variability over the business cycle III. ROE IV. stock price A. I and II only B. III and IV only C. I, III and IV only D. I, II and III only

17. GDP refers to _________. A. the amount of personal disposable income in the economy B. the difference between government spending and government revenues C. the total manufacturing output in the economy D. the total production of goods and services in the economy

17. Which one of the following ratios is used to calculate the times interest earned ratio? A. Net profit/Interest expense B. Pretax profit/EBIT C. EBIT/Sales D. EBIT/Interest expense

19. Which of the following is not a ratio used in the DuPont analysis? A. Interest burden B. Profit margin C. Asset turnover D. Earnings yield ratio

21. Which of the following companies will be the best example of a turnaround? A. Coca Cola B. Microsoft C. Exxon-Mobil D. Kmart

24. To obtain an approximate estimate of the real interest rate, one must _________ the __________ the nominal risk-free rate. A. add; default premium to the B. subtract; default premium from the C. add; expected inflation to D. subtract; expected inflation from

25. Which of the following would not be considered a supply shock? A. A change in the price of imported oil B. Frost damage to the orange crop C. A change in the level of education of the average worker D. An increase in the level of government spending

28. Supply side economics tends to focus on _______________. A. government spending B. price controls C. monetary policy D. increasing productive capacity

36. Which of the following affects a firm's sensitivity of its earnings to the business cycle? I. Financial leverage II. Operating leverage III. Type of product A. II only B. I and II only C. I and III only D. I, II and III

37. Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment? A. The nominal exchange rate B. The nominal interest rate C. The real exchange rate D. The real interest rate

4. You estimate that the present value of a firm's cash flow is valued at $15 million. The break up value of the firm if you were to sell the major assets and divisions separately would give $20 million. This is an example of what Peter Lynch would call a/an ___________. A. stalwart B. slow growth C. star D. asset play

40. Which one of the following is not a demand shock? A. Increase in government spending B. Increases in the money supply C. Reductions in consumer spending D. Improvements in education of U.S. workers

41. Which one of the following is not a U.S. supply shock? A. Unions force an increase in national wage rates B. 30% drop in oil supply from the Middle East C. Extended droughts reduce U.S. food production 25% D. Increases in Chinese purchases of U.S. exports

45. If the economy is going into a recession, a good industry to invest in would be the __________ industry. A. automobile B. banking C. construction D. medical services

54. A firm has lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has _____________. I. lower ATO than the industry average II. lower ROA than the industry average III. lower ROE than the industry average A. I only B. I and II only C. II and III only D. I, II and III

54. If interest rates increase, business investment expenditures are likely to __________ and consumer durable expenditures are likely to _________. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

62. All of the following ratios are related to efficiency except for _______. A. total asset turnover B. fixed asset turnover C. average collection period D. cash ratio

63. Which of the following would result in a cash inflow under the heading cash flow from investing in the statement of cash flows? A. Purchase of capital equipment B. Payments to suppliers for inventory C. Collections on receivables D. Sale of production machinery

66. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15-20% per year in recent years are expected to grow at 10-15% per year over the next three years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the U.S. is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the U.S. based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market Characteristics _______ would be typical of an industry that is in the start-up stage. A. 4 and 7 B. 1 and 4 C. 2 and 5 D. none of the characteristics listed match the start-up stage

69. Which of the following results in an increase in cash to the firm? A. Dividends paid B. A delay in collecting on accounts receivable C. Net new investments D. Increase in accounts payable

7. Benjamin Graham thought that the benefits from detailed analysis of a firm's financial statements had _________ over his long professional life. A. increased greatly B. increased slightly C. remained constant D. decreased

77. An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the demand, what is the likely impact on the economy? A. An economic slowdown is likely B. Employment trends will reverse and unemployment will occur C. Government deficits will result from capacity utilization D. Inflation may result from upward wage pressures

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 increase and the stock's P/E will decrease C. earnings growth will decrease and the stock's P/E will increase D. earnings growth will increase and the stock's P/E may or may not increase

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 required rate of return increased B. the stock experienced a drop in its P/E ratio C. both earnings and share price increased by 20% D. the company had a decrease in its dividend payout ratio

An underpriced stock provides an expected return that is ____________ the required return based on the capital asset pricing model (CAPM). A. greater than or equal to B. less than C. equal to D. greater than

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 the same as the intrinsic value of stock B B. will be less than the intrinsic value of stock B C. The answer cannot be determined from the information given. D. will be higher than the intrinsic value of stock B

Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today. A. $65.13 B. $85.60 C. $63.80 D. $67.95

P/E ratios tend to be _______ when inflation is ______. A. higher; higher B. They are unrelated. C. lower; lower D. higher; lower

Suppose that in 2012 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. -20% B. -10% C. -25% D. -33%

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________. A. market value B. Tobin's q C. liquidation value D. book value

The value of Internet companies is based primarily on _____. A. current profits B. replacement cost C. Tobin's q D. growth opportunities

Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the CAPM, the return you should require on the stock is _________. A. 7.25% B. 21% C. 14.75% D. 10.25%

Which of the following valuation measures is often used to compare firms that have no earnings? incorrect A. Price-to-book ratio B. P/E ratio C. Price-to-cash-flow ratio D. Price-to-sales ratio

__________ 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. Market value per share B. Book value per share C. Tobin's q D. Liquidation value per share

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. 16.67 B. 7.14 C. 22.22 D. 14.29

D Dividend payout ratio = 1 - .46 = .4 Expected dividend = .4 × $5 = $2 Growth rate = .6 × 12% = 7.2% Value = $2/(.1 - .072) = $71.43 P/E = $71.43/$5 = 14.29

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. 24.15 C. 19.23 D. 12.5

D Dividend payout ratio = 1 - .5 = .5 Expected dividend = .5 × $5 = $2.50 Growth rate = .5 × 12% = 6% Value = $2.50/(.10 - .06) = $62.50 P/E = $62.50/$5 = 12.5

D EPS = $75,000,000/20,000,000 = $3.75 P/E = $54.75/$3.75 = 14.6 g = .65 × 15% = .0975 = 9.75% PEG = 14.6/9.75 = 1.5

A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm's P/E ratio? A. 10.25 B. 12 C. 18.55 D. 8.33

D P = E/k + 0; P/E = 1/.12 = 8.33

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. 1.5% B. 1% C. 2% D. .5%

D ROE = g/b = .05/.4 = 12.5%; k is given as 12%, so ROE - k = .5%

If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%? A $803.03 million B. $715.54 million C. $679.81 million D. $769.23 million

D Total value = 50/(.095 - .03) = 769.23

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 _____. incorrect A. 30% B. 15% C. 4.5% D. 10.5%

D b = 1 - .3 = .7 g = b × ROE = .7 × 15% = 10.5%

Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities? A. $75 B. $6 C. $44.44 D. $24.50

D g = .33 × .12 = .0396 Value with growth = ($6 × .67)/(.08 - .0396) = $99.50 Value without growth = $6/.08 = $75 PVGO = $99.50 - 75 = $24.50

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. .5 C. .8 D. .9

D k = $4.20/$84 + .08 = .13 .13 = .04 + β(.14 - .04) β = .09/.10 = .9

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 4. Using the constant-growth DDM, the intrinsic value of the stock is _________. A. $41.67 B. $22.73 C. $27.78 D. $10

D k = .04 + .4(.13 − .04) = .4 V0 = [3/(.4 − .1)] = 10

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. 16.8% C. 10.8% D. 15.6%

D k = .06 + 1.20(.14 − .06) = .156

37. The expected return on the optimal risky portfolio is __________. a. 17% b. 15% c. 18% d. 16%

D. 16%

During a period when prices have been rising the _________ will be _______ the current price. A. relative strength index; declining with B. relative strength index; declining faster than C. moving average; above D. moving average; below

Floating rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield

Even though indexing is growing in popularity only about _____ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________. A. 5%; are excessively conservative B. 10%; overestimate their ability C. 15%; suffer from framing biases D. 20%; engage in mental accounting

Everything else equal _________ bonds will require a higher promised YTM than ________ bonds. A. catastrophe; standard B. non-callable; callable C. mortgage; debenture D. AAA rated; BAA rated

Everything else equal the __________ the maturity of a bond and the __________ the coupon the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

If the coupon rate on a bond is 4.50% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.30% B. 4.50% C. 5.20% D. 5.50%

If investors are too slow to update their beliefs about a stock's future performance when new evidence arises they are exhibiting _______. A. representativeness bias B. framing error C. conservatism D. memory bias

If investors overweight recent performance in forecasting the future they are exhibiting _______. A. representativeness bias B. framing error C. memory bias D. overconfidence

If mutual fund portfolios are heavy in cash, market contrarians may interpret this as what kind of signal? A. Buy signal B. Sell signal C. Hold signal D. This is not interpreted as a signal

If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________. A. loss aversion B. regret avoidance C. mental accounting D. framing bias

If you are holding a premium bond you must expect a _______ each year until maturity. If you are holding a discount bond you must expect a _______ each year until maturity. A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss

If you believed in the reversal effect, you should __________. A. buy bonds this period if you held stocks last period B. buy stocks this period that performed poorly last period C. buy stocks this period that performed well last period D. do nothing if you held the stock last period

In 1997 CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below pre-acquisition levels and took many years to recover. This may be an example of ________________. A. loss aversion B. mental accounting C. overreaction D. managerial overconfidence

In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. Zero coupon bonds B. Coupon bonds selling at a discount C. Coupon bonds selling at a premium D. Floating rate bonds

In technical analysis, __________ is a value below which the market is relatively unlikely to fall. A. book value B. resistance level C. support level D. the Dow line

In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________. A. buy signal B. sell signal C. congestion area D. trend reversal

Investors gravitate towards the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern? A. Overconfidence B. Loss aversion C. Mental accounting D. Calendar bias

Jill is offered a choice between receiving $50 with certainty or the proceeds from a gamble. In the gamble a fair coin is tossed and if it comes up heads Jill will receive $100, if the coin comes up tails she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates __________________. A. regret avoidance B. overconfidence C. that she has a diminishing marginal utility of wealth D. prospect theory loss aversion

Market breadth is a ______ indicator. A. sentiment B. flow of funds C. technical D. fundamental

Models of financial markets that emphasize psychological factors affecting investor behavior are called _______. A. data mining B. fundamental analysis C. charting D. behavioral finance

Moving averages are ______ indicators. A. sentiment B. flow of funds C. trend D. fundamental

Problems with behavioral finance include: I. the behavioralists tell us nothing about how to exploit any irrationality II. the implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction III. like technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait A. I only B. II only C. I and III only D. I, II and III

Relative strength is a(n) ______ indicator. A. fundamental B. economic C. technical D. international

Serial bonds are associated with _________. A. staggered maturity dates B. collateral C. coupon payment dates D. conversion features

Short interest is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

Sinking funds are commonly viewed as protecting the _____ of the bond. A. issuer B. underwriter C. holder D. dealer

TIPS are an example of _______________. A. Eurobonds B. convertible bonds C. indexed bonds D. catastrophe bonds

TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity

Technical analysis focuses on _____________________. A. finding opportunities for risk-free investing B. finding repeating trends and patterns in prices C. changing prospects for earnings growth of particular firms or industries D. forecasting technical regulatory changes

Technical traders view mutual fund investors as _________ market timers. A. excellent B. frequent C. neutral D. poor

Testing many different trading rules until you find one that would have worked in the past is called _______. A. data mining B. perceived patterning C. pattern searching D. behavioral analysis

The __________ of a bond is computed as the ratio of coupon payments to market price. A. nominal yield B. current yield C. yield to maturity D. yield to call

The ___________ is the document defining the contract between the bond issuer and the bondholder. A. indenture B. covenant agreement C. trustee agreement D. collateral statement

The advance-decline line is constructed by plotting ________________. A. the number of advancing stocks against the number of declining stocks B. the number of advancing stocks and the number of declining stocks against time C. the number of advancing stocks minus the number of declining stocks against time D. the cumulative total of advances minus declines against time

The bonds of Elbow Grease Dishwashing Company have received a rating of "C" by Moody's. The "C" rating indicates the bonds are _________. A. high grade B. intermediate grade C. investment grade D. junk bonds

The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the ___________. A. intermediate trend level B. minor trend level C. resistance level D. support level

c CI day 1=6.8/7.4=0.92

The confidence index on day 1 is _____. A. .82 B. .89 C. .92 D. 1.09 Confidence index on day 1 = 6.8/7.4 = .92 - -https://o.quizlet.com/iZ83ABBpoiOjEZh-7Vqzkg_m.png

You find that the trin ratio is up, market breadth is down, and the market has closed below its 50-day moving average. In total how many bearish signs do you have? A. 0 B. 1 C. 2 D. 3

The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________. A. market breadth B. market volume C. trin ratio D. relative strength ratio

The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price

The issuer of a/an ________ bond may choose to pay interest either in cash or in additional bonds. A. asset backed bonds B. TIPS C. catastrophe D. pay in kind

8. Earnings yields tend to _______ when Treasury yields fall. A. fall B. rise C. remain unchanged D. fluctuate wildly

The most common measure of __________ is the spread between the number of stocks which advance in price and the number of stocks which decline in price. A. market breadth B. market volume C. odd-lot trading D. short interest

The only way for behavioral patterns to persist in prices is if ______________. A. markets are not weak form efficient B. there are limits to arbitrage activity C. there are no significant trading costs D. market psychology is inconsistent over time

The put/call ratio is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________. A. bond price index B. confidence index C. relative strength index D. trin ratio

The tendency of investors to hold on to losing investments is called the ________. A. overweighting effect B. head-in-the-sand effect C. disposition effect D. prospector effect

The yield to maturity on a bond is ________. I. above the coupon rate when the bond sells at a discount, and below the coupon rate when the bond sells at a premium II. the discount rate that will set the present value of the payments equal to the bond price III. equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II and III

89. 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

Trading activity and average returns in brokerage accounts tends to be _________. A. uncorrelated B. negatively correlated C. positively correlated D. positively correlated for women and negatively correlated for men

Trend analysts that follow bonds are most likely to monitor the ____________. A. confidence index B. odd-lot trading C. short interest D. trin statistic

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A. Callable feature B. Convertible feature C. Subordination clause D. Sinking fund

When discussing bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

When technical analysts say a stock has good "relative strength", they mean that in the recent past __________. A. it has performed well compared to its closest competitors B. it has exceeded its own historical high C. trading volume in the stock has exceeded the normal trading volume D. it has outperformed the market index

When the market breaks through the moving average line from below, a technical analyst would probably suggest it is a good time to ___________. A. buy the stock B. hold the stock C. sell the stock D. short the stock

Which of the following bonds would most likely sell at the lowest yield? A. A callable debenture B. A putable mortgage bond C. A callable mortgage bond D. A putable debenture

Which of the following is considered a sentiment indicator? A. A 200-day moving average B. Short interest C. Credit balances in brokerage accounts D. Relative strength

Which of the following is not a sentiment indicator? A. Confidence index B. Short interest C. Odd-lot trading D. Put-call ratio

Which one of the following best describes fundamental risk? A. A stock is overpriced but your fund does not allow you to engage in short sales. B. Your models indicate a stock is mispriced but you are not sure if this is a real profit opportunity or a model input error. C. You buy a stock that you believe is underpriced and the underpricing persists for a long time, hurting your short term results. D. A stock is trading in two different markets at two different prices.

Which one of the following focuses more on past price movements of a firm's stock than on the underlying determinants of its future profitability? A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts

Which one of the following statements is correct? A. Invoice price = Flat price - Accrued Interest B. Invoice price = Flat price + Accrued Interest C. Flat price = Invoice price + Accrued Interest D. Invoice price = Settlement price - Accrued Interest

Which one of the following statements on the Dow Theory is correct? A. The Elliot wave theory is the only recent variation of the Dow Theory. B. The theory of Kondratieff waves is the only recent variation of the Dow Theory. C. Both the Elliot wave theory and the theory of Kondratieff waves are recent variations of the Dow Theory. D. Neither the Elliot wave theory nor the theory of Kondratieff waves are recent variations of the Dow Theory.

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection

Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. A. lower than B. slightly higher than C. identical to D. twice as high as

You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3% and 4% over the next three years. The total annual coupon income you will receive in year three is _________. A. $30.00 B. $33.00 C. $32.78 D. $30.90

You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate equal to its yield to maturity D. its coupon rate is less than its conversion value

You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. Mortgage bonds B. Senior debentures C. Preferred stock D. Equipment obligation bonds

You would typically find all but which one of the following in a bond contract? A. A dividend restriction clause B. A sinking fund clause C. A requirement to subordinate any new debt issued D. A price-earnings ratio

Your two best friends each tell you about a person they know who successively started a small business. That's it, you decide, if they can do it so can you. This is an example of _____________. A. mental accounting B. framing bias C. conservatism D. representativeness bias

_______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A. Asset backed bonds B. TIPS C. Catastrophe D. Pay in Kind

__________ are examples of synthetically created zero coupon bonds. A. COLTS B. OPOSSMS C. STRIPS D. ARMs

__________ is considered the grandfather of technical analysis. A. Fischer Black B. John Bratton C. Charles Dow D. Stanley Shapiro

1. 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

10. Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding? A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's q

11. 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

15. A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct? I. All else equal, the firm's growth rate will accelerate after the payout change. II. All else equal, the firm's stock price will go up after the payout change. III. All else equal, the firm's P/E ratio will increase after the payout change. A. I only B. I and II only C. II and III only D. I, II, and III

2. The price-to-sales 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

22. 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.

23. 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.

24. 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.

42. 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.

43. Value stocks are more likely to have a PEG ratio _____. A. less than 1 B. equal to 1 C. greater than 1 D. less than zero

67. A firm has a stock price of $54.75 per share. The firm's earnings are $75 million, and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio? A. 1.5 B. 1.25 C. 1.1 D. 1

a EPS = $75,000,000/20,000,000 = $3.75 P/E = $54.75/$3.75 = 14.6 g = .65 × 15% = .0975 = 9.75% PEG = 14.6/9.75 = 1.5

79. The free cash flow to the firm is reported as $198 million. The interest expense to the firm is $15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%? A. $1,950 billion B. $2,497 billion C. $2,585 billion D. $3,098 billion

a FCFE = 198 - 15(1 - .35) + 20 = 208.25 Value = (208.25 × 1.03)/(.14 - .03) = 1,950

77. The free cash flow to the firm is reported as $275 million. The interest expense to the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is the free cash flow to the equity holders of the firm? A. $269 million B. $296 million C. $305 million D. $327 million

a FCFE = 275 - 60(1 - .35) + 33 = 269

76. The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is the free cash flow to the equity holders of the firm? A. $405.6 million B. $454.2 million C. $505.8 million D. $553.5 million

a FCFE = 405 - 76(1 - .35) + 50 = 405.6

65. A stock is priced at $45 per share. The stock has earnings per share of $3 and a market capitalization rate of 14%. What is the stock's PVGO? A. $23.57 B. $15 C. $19.78 D. $21.34

a P0=E/k=PVGO: 45-3/0.14=23.57

29. 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 ROE=g/b=0.05/0.4=12.5%; k is given as 12%, so ROE-k=.5%

55. Ace Frisbee Corporation produces a good that is very mature in the firm's product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a dividend in year 2 of $2, and a dividend in year 3 of $1. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today. A. $13.07 B. $13.58 C. $18.25 D. $18.78

a V3 = $1× (0.98)/[.08 - (-.02)] = $9.80 is the value of D4, D5, . . . ∞ The total value at time 3 is $1 + 9.80 = $10.80 The discounted cash flows are

39. 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 Value with no growth = $3/.12 = $25

37. 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

a Value with no growth = $3/.15 = $20 Growth rate = .7 × 20% = 14% Value with growth = $3 × (1 - .7)/(.15 - .14) = $90 PVGO = $90 - 70 = $20

38. 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 Value with no growth = $5/.10 = $50 Growth rate = .4 × 15% = 6% Value with growth = $5 × (1 - .4)/(.10 - .06) = $75 PVGO = $75 - 50 = $25

40. 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 alue with no growth = $4/.15 = $26.67 Growth rate = .4 × 8% = 3.2% Value with growth = $4 × (1 - .4)/(.15 - .032) = $20.34 PVGO = $20.34 - 26.67 = -$6.33

51. 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 4. Using the constant-growth DDM, the intrinsic value of the stock is _________. A. $10 B. $22.73 C. $27.78 D. $41.67

a k = .04 + .4(.13 - .04) = .4 V0 = [3/(.4 - .1)] = 10

53. Caribou Gold Mining Corporation is expected to pay a dividend of $6 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 k = .05 + .5(.13 - .05) = .09 V0 = {6/[.09 - (-.03)]} = 50

17. __________ 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

13. 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

16. 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

19. 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%

44. 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.

5. New-economy companies generally have higher _______ than old-economy companies. A. book value per share B. P/E multiples C. profits D. asset values

56. 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

57. 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

58. 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

73. A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm? A. $57 B. $65 C. $75 D. $95

b FCFF = 100(1 - .35) + 20 - 10 = $75 million

28. 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 BVPS=25M/1M=25

27. 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 Dividend payout ratio = 1 - .46 = .4 Expected dividend = .4 × $5 = $2 Growth rate = .6 × 12% = 7.2% Value = $2/(.1 - .072) = $71.43 P/E = $71.43/$5 = 14.29

26. 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 Dividend payout ratio = 1 - .5 = .5 Expected dividend = .5 × $5 = $2.50 Growth rate = .5 × 12% = 6% Value = $2.50/(.10 - .06) = $62.50 P/E = $62.50/$5 = 12.5

84. When Google's share price reached $475 per share, Google had a P/E ratio of about 68 and an estimated market capitalization rate of 11.5%. Google pays no dividends. Approximately what percentage of Google's stock price was represented by PVGO? A. 92% B. 87% C. 77% D. 64%

b EPS = $475/68 = $6.985 PVGO = $475 - ($6.985/.115) = $414.26 $414.26/$475 = 87.21%

78. The free cash flow to the firm is reported as $205 million. The interest expense to the firm is $22 million. If the tax rate is 35% and the net debt of the firm increased by $25 million, what is the approximate market value of the firm if the FCFE grows at 2% and the cost of equity is 11%? A. $2,168 billion B. $2,445 billion C. $2,565 billion D. $2,998 billion

b FCFE = 205 - 22(1 - .35) + 25 = 215.70 Value = (215.7×1.02)/(.11 - .02) = 2,445

72. The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm? A. $85 B. $125 C. $185 D. $305

b FCFF = 300(1 - .35) + 20 - 60 - 30 = $125 million

36. Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 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 and use the constant-growth DDM to determine the value of the stock. The stock's current price is $84. Using the constant-growth DDM, the market capitalization rate is _________. A. 9% B. 12% C. 14% D. 18%

b From the relationship k = (3.36/84) + .08 = .12

63. A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock? A. $17.78 B. $20 C. $40 D. None of these options

b P = $1.80/.09 = $20

61. A firm has 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 P = E/k + 0; P/E = 1/.12 = 8.33

62. A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of 15% and an ROE of 18%. What is the stock's P/E ratio? A. 12.82 B. 7.69 C. 8.33 D. 9.46

b P/E1=1-.4/.15-(.18x.4)=7.69

68. ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. At what price would you expect ART to sell? A. $25 B. $34.29 C. $42.86 D. $45.67

b P0=3.00(1-.2)/(.12-.25(.2))=34.29

69. ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. At what P/E ratio would you expect ART to sell? A. 8.33 B. 11.43 C. 14.29 D. 15.25

b P0=3.00(1-.2)/(.12-.25(.2))=34.29

74. The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach? A. $1 billion B. $2 billion C. $3 billion D. $4 billion

b Total value = 300/.10 = $3 billion Equity value = $3 billion - 1 billion = $2 billion

25. 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 V=1.25+35/1+.12=32.37

30. 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 b = 1 - .3 = .7 g = b × ROE = .7 × 15% = 10.5%

81. A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock? A. $27.27 B. $37.50 C. $66.67 D. $70

b g = .25 × .20 = .05 D1 = $3(1 - .25) = $2.25 P0 = $2.25/(.11 - .05) = $37.50

83. Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities? A. $6 B. $24.50 C. $44.44 D. $75

b g = .33 × .12 = .0396 Value with growth = ($6 × .67)/(.08 - .0396) = $99.50 Value without growth = $6/.08 = $75 PVGO = $99.50 - 75 = $24.50

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. .9 C. .8 D. .5

b k = $4.20/$84 + .08 = .13 .13 = .04 + β(.14 - .04) β = .09/.10 = .9

47. Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. 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 a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is _________. A. $24.29 B. $27.39 C. $31.13 D. $34.52

b k = .06 + 1.2(.12 - .06) = .132 V=2.00+29.00/(1+.1320)=27.39

64. Transportation stocks currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the stock is selling at $60 per share, what must be the market's expectation of the constant-growth rate of TTT dividends? A. 5% B. 10% C. 20% D. None of these options

b k = D1/P0 + g .15 = 3/60 + g g = .10

48. Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the CAPM, the return you should require on the stock is _________. A. 7.25% B. 10.25% C. 14.75% D. 21%

b k=.05+.75(12-.05)=.1025

12. 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

18. 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

20. 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

4. The value of Internet companies is based primarily on _____. A. current profits B. Tobin's q C. growth opportunities D. replacement cost

41. 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.

6. P/E ratios tend to be _______ when inflation is ______. A. higher; higher B. lower; lower C. higher; lower D. They are unrelated.

80. Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that: I. Stock A will give us a higher return than Stock B. II. An investment in stock A is probably riskier than an investment in stock B. III. Stock A has higher forecast earnings growth than stock B. A. I only B. I and II only C. II and III only D. I, II, and III

88. 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

9. 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

35. Rose Hill Trading Company is expected to have EPS in the upcoming year of $6. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be _________. A. $20.93 B. $69.77 C. $128.57 D. $150

c 6000(1-.70)/.14-.18(.70)=128.57

34. Rose Hill Trading Company is expected to have EPS in the upcoming year of $8. The expected ROE is 18%. An appropriate required return on the 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 D1 = $8 (1 - .7) = $2.40

33. 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 Intrinsic value at time 2 = $2/(.14 - .06) = $25 Intrinsic value today = $25/(1.14)2 = $19.24

71. ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. What price do you expect ART shares to sell for in 4 years? A. $53.96 B. $44.95 C. $41.68 D. $39.76

c P3 = P0 (1 + g)4 = 34.29(1.05)4 = 41.68

75. If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%? A. $679.81 million B. $715.54 million C. $769.23 million D. $803.03 million

c Total value = 50/(.095 - .03) = 769.23

54. Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today. A. $63.80 B. $65.13 C. $67.95 D. $85.60

c V3 = $4 × (1.07)/(.12 - .07) = $85.60 is the value of D4, D5, . . . ∞ The total value at time 3 is $4 + 85.60 = $89.60 The discounted cash flows are

60. Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is _________. A. $26.67 B. $35.19 C. $42.94 D. $59.89

c g = (1 - .6) × 13% = 5.2% D1 = $4 × (1.052) = $4.208 Intrinsic value = $4.208/(.15 - .052) = $42.94

82. Next year's earnings are estimated to be $5. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities? A. $9.09 B. $10.10 C. $11.11 D. $12.21

c g = .20 × .15 = .03 Value with growth = ($5 × .80)/(.09 - .03) = 66.67 Value without growth = $5/.09 = $55.56 PVGO = $66.67 - 55.56 = $11.11

32. 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 g = .25(1 - .3) = .175

46. 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 k = .06 + 1.20(.14 - .06) = .156

14. 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.

3. 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 from the information given.

50. 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

59. Everything else equal, which variable is negatively related to the intrinsic value of a company? A. D1 B. D0 C. g D. k

7. Which one 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.

70. From day 1 to day 4, the confidence index has _____. This is _____. A. increased; bullish B. decreased; bullish C. increased; bearish D. decreased; bearish Confidence index, day 1 = 6.8/7.4 = .92 Confidence index, day 4 = 6.6/7.6 = .87 The CI is decreasing; this is bearish.

86. 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

85. A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at this P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost of your investment? A. 27 years B. 37 years C. 55 years D. 75 years

d EPS = $55/75 = $.73333 per year Payback period = $55/$.73333 per year = 75 years

21. Suppose that in 2012 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 Original value=240/.08-.06=12,000M New value=240/.09-.06=8,000M %A=8-12/12=-33.33%

66. 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 may or may not increase

d P0/E1=1-b/k-(ROExb)

31. A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is, 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 V=8/0.07=114.29

52. 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 k=.05+.5(.13-.05)=.09

49. Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the constant-growth DDM, the intrinsic value of the stock is _________. A. 4 B. 17.65 C. 37.50 D. 50

d k=0.05+.75(.17-.05)=.14 V=[3/.14-.08]=50

68. The stock is ______ riskier than the typical stock. a. 32% b. 15.44% c. 12% d. 38%

A. 32%

D. Stock prices follow recurring patterns.

1. Which of the following beliefs would not preclude charting as a method of portfolio management? A. The market is strong form efficient. B. The market is semi-strong form efficient. C. The market is weak form efficient. D. Stock prices follow recurring patterns.

C. a passive investment strategy

10. Proponents of the EMH typically advocate __________. A. a conservative investment strategy B. a liberal investment strategy C. a passive investment strategy D. an aggressive investment strategy

B. indicate that the market is not incorporating new information into current stock prices

11. Stock prices that are stable over time _______. A. indicate that prices are useful indicators of true economic value B. indicate that the market is not incorporating new information into current stock prices C. ensure that an economy allocates its resources efficiently D. indicates that returns follow a random walk process

A. worst, best

12. The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect. A. worst, best B. worst, worst C. best, worst D. best, best

A. all past information including security price and volume data

3. The weak form of the EMH states that ________ must be reflected in the current stock price. A. all past information including security price and volume data B. all publicly available information C. all information including inside information D. all costless information

B. all publicly available information

4. The semi-strong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information including inside information D. all costless information

D. that markets are functioning efficiently

6. Random price movements indicate ________. A. irrational markets B. that prices cannot equal fundamental values C. that technical analysis to uncover trends can be quite useful D. that markets are functioning efficiently

B. fall

7. When the market risk premium rises, stock prices will ________. A. rise B. fall C. recover D. have excess volatility

D. short-run, long run

9. Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior. A. short-run, short-run B. long-run, long-run C. long-run, short-run D. short-run, long run

28. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24% while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is __________. a. 0.583 b. 0.225 c. 0.327 d. 0.128

A. 0.583

67. ____ percent of the variance is explained by this regression a. 12 b. 35 c. 4.05 d. 80

A. 12

34. The expected return on the optimal risky portfolio is __________. a. 14.0% b. 15.6% c. 16.4% d. 18.0%

A. 14.0%

46. Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitive to changes in the market as the returns of Stock B. a. 20% more b. Slightly more c. 20% less d. Slightly less

A. 20% more

79. Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two asset portfolio where the correlation coefficient is between +1 and -1? a. 2rp < (W1212 + W1212) b. 2rp = (W1212 + W1212) c. 2rp = (W1212 - W1212) d. 2rp > (W1212 + W1212)

A. 2rp < (W1212 + W1212)

80. What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A and the correlation coefficient between the two stocks is -.23. a. 9.7% b. 12.2% c. 14.0% d. 15.6%

A. 9.7%

5. Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and _______. a. Asset A b. Asset B c. No risky asset d. Can't tell from the data given

A. Asset A

2. The _______ decision should take precedence over the _____ decision. a. Asset allocation, stock selection b. Choice of fad, mutual fund selection c. Stock selection, asset allocation d. Stock selection, mutual fund selection

A. Asset allocation, stock selection

54. A security's beta coefficient will be negative if _____________. a. Its returns are negatively correlated with market index returns b. Its returns are positively correlated with market index returns c. Its stock price has historically been very stable d. Market demand for the firm's shares is very low

A. Its returns are negatively correlated with market index returns

27. Reward-to-variability ratios are ________ on the capital market line than (as) on the efficient frontier. a. Lower b. Higher c. The same d. Indeterminate

A. Lower

15. To eliminate the bias in calculating the variance and covariance of returns from historical data the average squared deviation must be multiplied by __________. a. N / (n-1) b. N * (n-1) c. (n-1) / n d. (n-1) * n

A. N / (n-1)

23. On a standard expected return vs standard deviation graph investors will prefer portfolios that lie to the a. Northeast b. Northwest c. Southeast d. Southwest

A. Northeast

86. Which stock is riskier to a non-diversified investor who puts all his money in only one of these stocks? a. Stock A is riskier b. Stock B is riskier c. Both stocks are equally risky d. You cannot tell from the information given

A. Stock A is riskier

60. If an investor does not diversify their portfolio and instead puts all of their money in one stock, the appropriate measure of security risk for that investor is the a. Stock's standard deviation b. Variance of the market c. Stock's beta d. Covariance with the market index

A. Stock's standard deviation

52. A stock has a correlation with the market of 0.45. The standard deviation of the market is 21% and the standard deviation of the stock is 35%. What is the stock's beta? a. 1.00 b. 0.75 c. 0.60 d. 0.55

B. 0.75

81. What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A and the correlation coefficient between the two stocks is -1.0. a. 0.0% b. 10.8% c. 18.0% d. 24.0%

B. 10.8%

40. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The expected return on stock A is 20% while on stock B it is 10%. The correlation coefficient between the return on A and B is 0%. The expected return on the minimum variance portfolio is approximately __________. a. 10.00% b. 13.60% c. 15.00% d. 19.41%

B. 13.60%

30. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35% while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is __________. a. 23.00% b. 19.76% c. 18.45% d. 17.67%

B. 19.76%

66. The characteristic line for this stock is Rstock = ___ + ___ Rmarket. a. 0.35, 0.12 b. 4.05, 1.32 c. 15.44, 0.97 d. 0.26, 1.36

B. 4.05, 1.32

35. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is__________. a. 0% b. 5% c. 7%

B. 5%

36. The proportion of the optimal risky portfolio that should be invested in stock B is approximately __________. a. 29% b. 71% c. 44% d. 56%

B. 71%

83. A project has a 60% chance of doubling your investment in one year and a 40% chance of losing half your money. What is the standard deviation of this investment? a. 62% b. 73% c. 50% d. 25%

B. 73%

49. You are constructing a scatter plot of excess returns for Stock A versus the market index. If the correlation coefficient between Stock A and the index is -1 you will find that the points of the scatter diagram ______________________ and the line of best fit has a _______________. a. All fall on the line of best fit; positive slope b. All fall on the line of best fit; negative slope c. Are widely scattered around the line; positive slope d. Are widely scattered around the line; negative slope

B. All fall on the line of best fit; negative slope

8. The ________ is equal to the square root of the systematic variance divided by the total variance. a. Covariance b. Correlation coefficient c. Standard deviation d. Reward-to-variability ratio

B. Correlation coefficient

14. The risk that can be diversified away is ___________. a. Beta b. Firm specific risk c. Market risk d. Systematic risk

B. Firm specific risk

4. Based on the outcomes in the table below choose which of the statements is/are correct: I. The covariance of Security A and Security B is zero II. The correlation coefficient between Security A and C is negative III. The correlation coefficient between Security B and C is positive a. I only b. I and II only c. II and III only d. I, II and III

B. I and II only

44. The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market a. I only b. I and II only c. II and III only d. I, II and III

B. I and II only

7. As you lengthen the time horizon of your investment period and decide to invest for multiple years you will find that I. the average risk per year may be smaller over longer investment horizons II. the variance of the total rate of return on your investment will be larger III. your overall risk on the investment will fall a. I only b. I and II only c. III only d. I, II and III

B. I and II only

69. Decreasing the number of stocks in a portfolio from 50 to 10 would likely __________________________. a. Increase the systematic risk of the portfolio b. Increase the unsystematic risk of the portfolio c. Increase the return of the portfolio d. Decrease the variation in returns the investor faces in any one year

B. Increase the unsystematic risk of the portfolio

59. Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ______________. a. 1 b. Less than 1 c. Between 0 and 1 d. Less than or equal to 0

B. Less than 1

25. Rational risk-averse investors will always prefer portfolios ______________. a. Located on the efficient frontier to those located on the capital market line b. Located on the capital market line to those located on the efficient frontier c. At or near the minimum variance point on the efficient frontier d. That are risk-free to all other asset choices

B. Located on the capital market line to those located on the efficient frontier

11. Diversification is most effective when security returns are __________. a. High b. Negatively correlated c. Positively correlated d. Uncorrelated

B. Negatively correlated

42. A measure of the riskiness of an asset held in isolation is _____________. a. Beta b. Standard deviation c. Covariance d. Semi-variance

B. Standard deviation

85. Which stock is riskier for an investor currently holding his portfolio in a well diversified portfolio of common stock? a. Stock A is riskier b. Stock B is riskier c. Both stocks are equally risky d. You cannot tell from the information given

B. Stock B is riskier

76. A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated through diversification, it is called a. Firm specific risk b. Systematic risk c. Unique risk d. None of the above

B. Systematic risk

17. Market risk is also called __________ and __________. a. Systematic risk, diversifiable risk b. Systematic risk, nondiversifiable risk c. Unique risk, nondiversifiable risk d. Unique risk, diversifiable risk

B. Systematic risk, nondiversifiable risk

20. Harry Markowitz is best known for his Nobel prize winning work on ______________. a. Strategies for active securities trading b. Techniques used to identify efficient portfolios of risky assets c. Techniques used to measure the systematic risk of securities d. Techniques used in valuing securities options

B. Techniques used to identify efficient portfolios of risky assets

50. The term excess-return refers to _______________. a. Returns earned illegally by means of insider trading b. The difference between the rate of return earned and the risk-free rate c. The difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk d. The portion of the return on a security which represents tax liability and therefore cannot be reinvested

B. The difference between the rate of return earned and the risk-free rate

21. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that a. The returns on the stock and bond portfolio tend to move inversely b. The returns on the stock and bond portfolio tend to vary independently of each other c. The returns on the stock and bond portfolio tend to move together d. The covariance of the stock and bond portfolio will be positive

B. The returns on the stock and bond portfolio tend to vary independently of each other

6. Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the _______. a. Up, right b. Up, left c. Down, right d. Down, left

B. Up, left

9. Which of the following statistics cannot be negative? a. Covariance b. Variance c. E[r] d. Correlation coefficient

B. Variance

41. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The correlation coefficient between the return on A and B is 0%. The standard deviation of return on the minimum variance portfolio is __________. a. 0% b. 6% c. 12% d. 17%

C. 12%

71. Which of the following correlations coefficients will produce the least diversification benefit? a. -0.6 b. -1.5 c. 0.0 d. 0.8

C. 0.0

55. The market value weighted average beta of firms included in the market index will always be ______________. a. 0 b. Between 0 and 1 c. 1 d. There is no particular rule concerning the average beta of firms included in the market index

C. 1

73. What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500? a. -1.0 b. 0.0 c. 1.0 d. 0.50

C. 1.0

38. The standard deviation of the returns on the optimal risky portfolio is __________. a. 25.5% b. 22.3% c. 21.4% d. 20.7%

C. 21.4%

32. Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return 10% and a standard deviation of return of 30%. The weight of security B in the global minimum variance is __________. a. 10% b. 20% c. 40% d. 60%

C. 40%

63. You find that the annual standard deviation of a stock's returns is equal to 25%. For a 3 year holding period the standard deviation of your total return would equal ________. a. 75% b. 25% c. 43% d. 55%

C. 43%

39. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24% while the standard deviation on stock B is 14%. The correlation coefficient between the return on A and B is 0.35. The expected return on stock A is 25% while on stock B it is 11%. The proportion of the minimum variance portfolio that would be invested in stock B is __________. a. 45% b. 67% c. 85% d. 92%

C. 85%

19. Which one of the following stock return statistics is usually the least stable over time? a. Covariance of returns b. Variance of returns c. Average return d. Correlation coefficient

C. Average return

70. If you want to know the portfolio standard deviation for a three stock portfolio you will have to a. Calculate two covariances and one trivariance b. Calculate only two covariances c. Calculate three covariances d. Average the variances of the individual stocks

C. Calculate three covariances

51. You are recalculating the risk of ACE stock in relation to the market index and you find the ratio of the systematic variance to the total variance has risen. You must also find that the _____________. a. Covariance between ACE and the market has fallen b. Correlation coefficient between ACE and the market has fallen c. Correlation coefficient between ACE and the market has risen d. Unsystematic risk of ACE has risen

C. Correlation coefficient between ACE and the market has risen

16. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum variance portfolio has a standard deviation that is always __________. a. Equal to the sum of the securities standard deviations b. Equal to -1 c. Equal to 0 d. Greater than 0

C. Equal to 0

26. The optimal risky portfolio can be identified by finding _____________. I. the minimum variance point on the efficient frontier II. the maximum return point on the efficient frontier the minimum variance point on the efficient frontier III. the tangency point of the capital market line and the efficient frontier IV. the line with the steepest slope that connects the risk free rate to the efficient frontier a. I and II only b. II and III only c. III and IV only d. I and IV only

C. III and IV only

48. According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and ___________. a. Identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return tradeoffs b. Identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile c. Identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion d. Choosing which risky assets an investor prefers according to their risk aversion level; minimizing the CAL by lending at the risk-free rate

C. Identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

22. You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolio have a correlation 0.55. The standard deviation of the resulting portfolio will be _________________. a. More than 18% but less than 24% b. Equal to 18% c. Less than 18% d. Zero

C. Less than 18%

13. Beta is a measure of __________. a. Firm specific risk b. Diversifiable risk c. Market risk d. Unique risk

C. Market risk

56. Diversification can reduce or eliminate __________ risk. a. All b. Systematic c. Non-systematic d. Only an insignificant

C. Non-systematic

7. An investor's degree of risk aversion will determine his or her _______. a. Optimal risky portfolio b. Risk-free rate c. Optimal mix of the risk-free asset and optimal risky asset d. Capital allocation line

C. Optimal mix of the risk-free asset and optimal risky asset

61. Which of the following provides the best example of a systematic risk event? a. A strike by union workers hurts a firm's quarterly earnings b. Mad Cow disease in Montana hurts local ranchers and buyers of beef c. The Federal Reserve increases interest rates 50 basis points d. A senior executive at a firm embezzles $10 million and escapes to South America

C. The Federal Reserve increases interest rates 50 basis points

12. The variance of a portfolio of risky securities is __________. a. The sum of the securities' covariances b. The sum of the securities' variances c. The weighted sum of the securities' covariances d. The weighted sum of the securities' variances

C. The weighted sum of the securities' covariances

3. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ____. a. They had to pay huge fines for obstruction of justice b. They had purchased fines for obstruction of justice c. Their 401k accounts were not well diversified d. None of the above

C. Their 401k accounts were not well diversified

58. In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of _________. a. 1.0 b. 0.5 c. 0 d. -1.0

D. -1.0

84. Which of the following is the most likely reward to variability ratio for a capital allocation line that is optimal, assuming all ratios are generated from the same set of potential assets? a. 0.45 b. 0.56 c. 0.65 d. 0.69

D. 0.69

43. Semitool Corp has an expected excess return of 5% for next year. However for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.3. Suppose it turns out the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information what was Semitool's actual excess return? a. 7.50% b. 6.95% c. 8.25% d. 7.95%

D. 7.95%

1. Risk that can be eliminated through diversification is called ______ risk. a. Unique b. Firm-specific c. Diversifiable d. All of the above

D. All of the above

45. The measure of risk used in the Capital Asset Pricing Model is ____________. a. Specific risk b. The standard deviation of returns c. Reinvestment risk d. Beta

D. Beta

57. According to Markowitz and other proponents of modern portfolio theory which of the following activities would not be expected to produce any benefits? a. Diversification b. Investing in Treasury bills c. Investing in stocks of utility companies d. Engaging in active portfolio management to enhance returns

D. Engaging in active portfolio management to enhance returns

47. As additional securities are added to a portfolio, total risk will generally ________ at a _________ rate. a. Rise; decreasing b. Rise; increasing c. Fall; decreasing d. Fall; increasing

D. Fall; increasing

62. Which of the following statements is true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the one-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk. a. I only b. II only c. II and III only d. I, II and III e. None of the statements are correct

D. I, II and III

78. You are considering adding a new security to your portfolio. In order to decide whether you should add the security you need to know the security's I. expected return II. standard deviation III. correlation with your portfolio a. I only b. I and II only c. I and III only d. I, II and III

D. I, II and III

74. Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk? a. Market risk b. Non-diversifiable risk c. Systematic risk d. Unique risk

D. Unique risk

18. Firm specific risk is also called __________ and ___________. a. Systematic risk, diversifiable risk b. Systematic risk, non-diversifiable risk c. Unique risk, non-diversifiable risk d. Unique risk, diversifiable risk

D. Unique risk, diversifiable risk

53. The values of beta coefficients of securities are ___________. a. Always positive b. Always negative c. Always between positive 1 and negative 1 d. Usually positive, but are not restricted in any particular way

D. Usually positive, but are not restricted in any particular way

75. Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk? a. Market risk b. Unique risk c. Unsystematic risk d. With a correlation of 1.0, no risk will be reduced

D. With a correlation of 1.0, no risk will be reduced

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