Question 1

Which of the following is not considered a basic economic force?

Accepted Answer

A)  Fiscal policy 
B)  Monetary policy 
C)  Inflation 
D)  P/E ratio 
E)  None of the above (that is, all are basic economic forces) 
A)  Fiscal policy 
B)  Monetary policy 
C)  Inflation 
D)  P/E ratio 
E)  None of the above (that is, all are basic economic forces)

Question 2

The general economic influences would include inflation,political upheavals,monetary policy,and fiscal policy initiatives.

Accepted Answer

A) True 
 B)False

Question 3

The infinite period dividend discount model (DDM)can be used to value a supernormal growth company.

Accepted Answer

A) True 
 B)False

Question 4

The process of fundamental valuation requires estimates of all the following factors,except

Accepted Answer

A)  The time pattern of returns. 
B)  The economy's real risk-free rate. 
C)  The risk premium for the asset. 
D)  The times series of stock prices. 
E)  The expected rate of inflation. 
A)  The time pattern of returns. 
B)  The economy's real risk-free rate. 
C)  The risk premium for the asset. 
D)  The times series of stock prices. 
E)  The expected rate of inflation.

Question 5

The P/E ratio for BMI Corporation is 21,and the P/S ratio is 5.2.The industry P/E ratio is 35 and the industry P/S ratio is 7.5.Based on relative valuation,BMI is

Accepted Answer

A)  undervalued on the basis of relative P/E and relative P/S. 
B)  overvalued on the basis of relative P/E and undervalued on the basis of relative P/S. 
C)  undervalued on the basis of relative P/E and overvalued on the basis of relative P/S. 
D)  overvalued on the basis of relative P/E and relative P/S. 
E)  none of the above. 
A)  undervalued on the basis of relative P/E and relative P/S. 
B)  overvalued on the basis of relative P/E and undervalued on the basis of relative P/S. 
C)  undervalued on the basis of relative P/E and overvalued on the basis of relative P/S. 
D)  overvalued on the basis of relative P/E and relative P/S. 
E)  none of the above.

Question 6

Using the constant growth model,a decrease in the required rate of return from 15 to 13 percent combined with an increase in the growth rate from 5 to 6 percent would cause the price to

Accepted Answer

A)  Rise more than 50%. 
B)  Rise less than 50%. 
C)  Remain constant. 
D)  Fall more than 50%. 
E)  Fall less than 50%. 
A)  Rise more than 50%. 
B)  Rise less than 50%. 
C)  Remain constant. 
D)  Fall more than 50%. 
E)  Fall less than 50%.

Question 7

Growth companies are those firms that consistently earn higher rates of return by assuming greater amounts of risk.

Accepted Answer

A) True 
 B)False

Question 8

The importance of an industry's performance on an individual stock's performance varies across industries.

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 11.2
Use the Information Below for the Following Problem(S)
A major manufacturer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 7 years remaining till maturity. The bonds were issued with an 8 percent coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 10 percent.
-Refer to Exhibit 11.2.What is the current value of these securities?

Accepted Answer

A)  $900.18 
B)  $1151.92 
C)  $972.52 
D)  $1113.63 
E)  $904.00 
A)  $900.18 
B)  $1151.92 
C)  $972.52 
D)  $1113.63 
E)  $904.00

Question 10

Exhibit 11.1
Use the Information Below for the Following Problem(S)
A major retailer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 8 years remaining until maturity. The bonds were issued with a 6.5 percent coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 4.25 percent.
-Refer to Exhibit 11.1.What will be the value of these securities in one year if the required return is 7 percent?

Accepted Answer

A)  $970.14 
B)  $388.13 
C)  $1031.15 
D)  $1035.81 
E)  $972.52 
A)  $970.14 
B)  $388.13 
C)  $1031.15 
D)  $1035.81 
E)  $972.52

Question 11

Growth rates of the (1)labor force,(2)average number of hours worked and (3)labor productivity are the main determinants of a foreign country's

Accepted Answer

A)  Dividend payout ratio. 
B)  Beta. 
C)  Real risk free rate. 
D)  Nominal risk free rate. 
E)  Risk premium. 
A)  Dividend payout ratio. 
B)  Beta. 
C)  Real risk free rate. 
D)  Nominal risk free rate. 
E)  Risk premium.

Question 12

A company has a dividend payout ratio of 35 percent.If the company's return on equity is 15 percent,what is the expected growth rate if no new outside financing is used?

Accepted Answer

A)  4.50% 
B)  5.25% 
C)  7.75% 
D)  8.25% 
E)  9.75% 
A)  4.50% 
B)  5.25% 
C)  7.75% 
D)  8.25% 
E)  9.75%

Question 13

Hunter Corporation had a dividend payout ratio of 63% in 1999.The retention rate in 1999 was

Accepted Answer

A)  37% 
B)  63% 
C)  50% 
D)  0% 
E)  100% 
A)  37% 
B)  63% 
C)  50% 
D)  0% 
E)  100%

Question 14

A preferred stock is a perpetuity.

Accepted Answer

A) True 
 B)False

Question 15

In 2004,Venus Fly Co.issued a $75 par value preferred stock which pays a 7 percent annual dividend.Due to changes in the overall economy and in the company's financial condition investors are now requiring a 5 percent return.What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Accepted Answer

A)  $125 
B)  $84 
C)  $91 
D)  $145 
E)  $105 
A)  $125 
B)  $84 
C)  $91 
D)  $145 
E)  $105

Question 16

Exhibit 11.4
Use the Information Below for the Following Problem(S)
Davenport Corporation's last dividend was $2.70 and the directors expect to maintain the historic 3 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 5 percent for the next three years and the stock will then reach $25 per share.
-Refer to Exhibit 11.4.How much should you be willing to pay for the stock if you require a 17 percent return?

Accepted Answer

A)  $16.97 
B)  $22.16 
C)  $21.32 
D)  $32.63 
E)  $23.63 
A)  $16.97 
B)  $22.16 
C)  $21.32 
D)  $32.63 
E)  $23.63

Question 17

The required rate of return is determined by (1)the real risk free rate,(2)the expected rate of inflation and (3)liquidity risk.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is an underlying assumption of the constant growth dividend discount model (DDM)?

Accepted Answer

A)  Dividends have a constant growth rate 
B)  The constant growth rate of dividends will continue for an infinite time period 
C)  The required rate of return is greater than the expected growth rate 
D)  All of the above 
E)  None of the above 
A)  Dividends have a constant growth rate 
B)  The constant growth rate of dividends will continue for an infinite time period 
C)  The required rate of return is greater than the expected growth rate 
D)  All of the above 
E)  None of the above

Question 19

The growth rate of dividends and profit margin are the main determinants of the P/E ratio.

Accepted Answer

A) True 
 B)False

Question 20

Exhibit 11.7
Use the Information Below for the Following Problem(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9% per year for the next three years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%.
-Refer to Exhibit 11.7.The present value today of dividends for years 1 to 3 is

Accepted Answer

A)  $4.67 
B)  $3.08 
C)  $5.67 
D)  $4.5 
E)  $1.53 
A)  $4.67 
B)  $3.08 
C)  $5.67 
D)  $4.5 
E)  $1.53

Exam 11: Security Valuation Principles

Which of the following is not considered a basic economic force?

The general economic influences would include inflation,political upheavals,monetary policy,and fiscal policy initiatives.

The infinite period dividend discount model (DDM)can be used to value a supernormal growth company.

The process of fundamental valuation requires estimates of all the following factors,except

The P/E ratio for BMI Corporation is 21,and the P/S ratio is 5.2.The industry P/E ratio is 35 and the industry P/S ratio is 7.5.Based on relative valuation,BMI is

Using the constant growth model,a decrease in the required rate of return from 15 to 13 percent combined with an increase in the growth rate from 5 to 6 percent would cause the price to

Growth companies are those firms that consistently earn higher rates of return by assuming greater amounts of risk.

The importance of an industry's performance on an individual stock's performance varies across industries.

Growth rates of the (1)labor force,(2)average number of hours worked and (3)labor productivity are the main determinants of a foreign country's

A company has a dividend payout ratio of 35 percent.If the company's return on equity is 15 percent,what is the expected growth rate if no new outside financing is used?

Hunter Corporation had a dividend payout ratio of 63% in 1999.The retention rate in 1999 was

A preferred stock is a perpetuity.

The required rate of return is determined by (1)the real risk free rate,(2)the expected rate of inflation and (3)liquidity risk.

Which of the following is an underlying assumption of the constant growth dividend discount model (DDM)?

The growth rate of dividends and profit margin are the main determinants of the P/E ratio.

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts,convertible Securities,and Other Embedded Derivatives

Professional Money Management, alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

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