Practice Exam II

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

2. What factors affect commodity price?A. Industry demand and supply of the commodityB. Strength of the dollarC. InflationD. A and CE. A, B, and C

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

4. A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________. A. has a Market to book value < 1B. will generate a positive alphaC. has an expected return less than its required returnD. has a beta > 1

5. Stockholders of Dog's R Us Pet Supply expect a 12% rate of growth on their stock. Management has consistently been generating a ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next five 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%

6. Suppose that in 2009 the expected dividends of the stocks in a broad market index equaled $240 million when the required rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant growth formula for valuation, if required rates increase to 9% the value of the market will change by _____. A. -10%B. -20%C. -25%D. -33%

7. You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for one 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. $31.25B. $32.37C. $38.47D. $41.32

8. 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 $1.0 billion, what is the value of the equity using the free cash flow valuation approach? A. $1 billionB. $2 billionC. $3 billionD. $4 billion

9. A firm is planning on paying its first dividend of $2 after two years. Then 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. $25.00B. $16.87C. $19.24D. $20.99

10. Goog company has an EBIT*(1-tax) of $9,737, a depreciation of $1,851, change of NOW of $381, and a capital expenditure of $3,438. The growth rate of free cash flow is expected to be 17.68% for next two years. The beta of the firm is 1.19, the target capital structure of the firm is 6% debt 94% equity, the cost of debt is 3%, the tax rate is 40%, the market risk premium is 8% and the risk free rate is 1%. Given a comparable Price to Ebitda ratio of 14.15 and a market value of debt of $4,200, what is firm’s equity value using DCF approach?A. $102,120B. $214,190C. $138,792D. $360,012

11. Rose Hill Trading Company is expected to have EPS in the upcoming year of $6.00. The expected ROE is 18.0%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be _________. A. $20.93B. $69.77C. $128.57D. $150.00

The following information is used for question 12 and 13: The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next three months. The price of a three-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.

 12. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement? A. Sell a callB. Purchase a putC. Sell a straddleD. Buy a straddle

13. Selling a straddle would generate total premium income of _____. A. $300B. $400C. $500D. $700

14. A covered call strategy benefits from what environment? A. Falling interest ratesB. Price stabilityC. Price volatilityD. Unexpected events

15. You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date when IBM stock sells for $95 per share. You will realize a ______ on this strip. A. $300 profitB. $100 lossC. $500 profitD. $200 profit

16. Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons but he is concerned the stock will drop in value before year end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2 and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is _________. A. $195,000B. $220,000C. $175,000D. $215,00017. If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium, that standard deviation would be called the _______. A. variabilityB. volatilityC. implied volatilityD. deviance

18. The __________ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option. A. intrinsic valueB. time valueC. stated valueD. discounted value

19. A call option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value. A. negative; positiveB. positive; negativeC. zero; zeroD. zero; positive

20. All else equal call option values are _____ if the _____ is lower. A. higher; stock priceB. higher; exercise priceC. higher; time to expirationD. lower; stock volatility

21. You are considering purchasing a call option with a strike price of $35. The price of the underlying stock is currently $27. Without any further information, you would expect the delta for this option to be _______________. A. negative and near 0B. negative and near -1C. positive and near 0D. positive and near 1

22. The current stock price of Alcoa is $70 and the stock does not pay dividends. A put option on this stock with an exercise price of $75 has an expiration date 30 days from now and the N(d) term according to the Black-Scholes formula is 0.31, you should hold __________ shares of stock per 100 put options to establish a delta neutral strategy to hedge your risk.A. 30B. 34C. 69D. 74

24. Security X has a forecasted return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________. A. fairly pricedB. overpricedC. underpricedD. None of the above25. Consider the following two stocks, A and B. Stock A has an expected return of 10%, 10% standard deviation, and a beta of 1.20. Stock B has an expected return of 14%, 25% standard deviation, and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy if we are building a portfolio because _________. A. A, it offers better Sharpe ratioB. A, it offers better alphaC. B, it offers better alphaD. B, it offers better Sharpe ratio

26. You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in Intel, $12,000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of 1.3, 1.0 and 0.8 respectively. What is your portfolio beta? A. 1.048B. 1.033C. 1.000D. 1.037