Question 1

The credit crisis caused major problems in the mortgage market but had no impact on the stock market.

Accepted Answer

A) True 
 B)False

Question 2

When a firm's announced earnings are lower than expected, investors will increase their valuation of the firm's future cash flows and its stock.

Accepted Answer

A) True 
 B)False

Question 3

A relatively simple method of valuing a stock is to apply the mean price-earnings (PE) ratio of all publicly traded competitors in the respective industry to the firm's expected earnings fortheyear.

Accepted Answer

A) True 
 B)False

Question 4

Tarzak Inc. has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industryas Tarzak is 15. Tarzak is expected to pay a dividend of $3 per share over the next four years, and an investor in Tarzak requires a return of 12 percent. The estimated stock price of Tarzak today should be ____ using the adjusted dividend discount model.

Accepted Answer

A)  $116.41 
B)  $104.91 
C)  $161.15 
D)  none of the above 
A)  $116.41 
B)  $104.91 
C)  $161.15 
D)  none of the above

Question 5

The market risk premium is:

Accepted Answer

A)  the yield on newly issued Treasury bonds. 
B)  the return of the market in excess of the risk-free rate. 
C)  the covariance between the risk-free rate and the return of the market. 
D)  the return of the market in excess of expected cash flows. 
A)  the yield on newly issued Treasury bonds. 
B)  the return of the market in excess of the risk-free rate. 
C)  the covariance between the risk-free rate and the return of the market. 
D)  the return of the market in excess of expected cash flows.

Question 6

When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns.

Accepted Answer

A)  beta; standard deviation 
B)  standard deviation; beta 
C)  intercept; beta 
D)  beta; error term 
A)  beta; standard deviation 
B)  standard deviation; beta 
C)  intercept; beta 
D)  beta; error term

Question 7

A beta of 1.8 implies that the stock has a risk premium of 1.8 percent.

Accepted Answer

A) True 
 B)False

Question 8

The capital asset pricing model (CAPM) suggests that the required rate of return on a stock is directly influenced by the stock's :

Accepted Answer

A)  prevailing level of the industry competition. 
B)  beta. 
C)  liquidity. 
D)  size (market capitalization). 
A)  prevailing level of the industry competition. 
B)  beta. 
C)  liquidity. 
D)  size (market capitalization).

Question 9

A stock's beta can be measured from the estimate of the ________ using regression analysis.

Accepted Answer

A)  intercept 
B)  market return 
C)  risk-free rate 
D)  slope coefficient 
A)  intercept 
B)  market return 
C)  risk-free rate 
D)  slope coefficient

Question 10

LeBlanc Inc. currently has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in thesame industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an investor in LeBlanc requires a return of 12 percent. What is the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model?

Accepted Answer

A)  $150.00 
B)  $163.91 
C)  $45.00 
D)  $168.83 
E)  none of the above 
A)  $150.00 
B)  $163.91 
C)  $45.00 
D)  $168.83 
E)  none of the above

Question 11

According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ____ affected by a weak dollar. Stock prices of U.S. importing firms couldbe____ affected by a weak dollar.

Accepted Answer

A)  adversely; favorably 
B)  favorably; adversely 
C)  favorably; favorably 
D)  adversely; adversely 
A)  adversely; favorably 
B)  favorably; adversely 
C)  favorably; favorably 
D)  adversely; adversely

Question 12

Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent.Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.

Accepted Answer

A)  33.33 
B)  166.67 
C)  41.67 
D)  60 
A)  33.33 
B)  166.67 
C)  41.67 
D)  60

Question 13

The ____ is not a measure of a stock's risk.

Accepted Answer

A)  stock's price volatility 
B)  stock's return 
C)  stock's beta 
D)  value-at-risk method 
E)  All of the above are measures of a stock's risk. 
A)  stock's price volatility 
B)  stock's return 
C)  stock's beta 
D)  value-at-risk method 
E)  All of the above are measures of a stock's risk.

Question 14

The dividend discount model can be adapted to assess the value of any firm, even those that retain most or all of their earnings.

Accepted Answer

A) True 
 B)False

Question 15

The January effect refers to the ____ pressure on ____ stocks in January of every year.

Accepted Answer

A)  downward; large 
B)  upward; large 
C)  downward; small 
D)  upward; small 
A)  downward; large 
B)  upward; large 
C)  downward; small 
D)  upward; small

Question 16

Which of the following is incorrect regarding the capital asset pricing model (CAPM)?

Accepted Answer

A)  It is sometimes used to estimate the required rate of return for any firm with publicly traded stock. 
B)  It is based on the premise that the only important risk of a firm is systematic risk. 
C)  It is concerned with unsystematic risk. 
D)  All of the above are true. 
A)  It is sometimes used to estimate the required rate of return for any firm with publicly traded stock. 
B)  It is based on the premise that the only important risk of a firm is systematic risk. 
C)  It is concerned with unsystematic risk. 
D)  All of the above are true.

Question 17

If beta is thought to be the appropriate measure of risk, a stock's risk-adjusted returns should be determined by the Sharpe index.

Accepted Answer

A) True 
 B)False

Question 18

As a result of market integration, stock markets in emerging markets are likely to be as efficient as U.S. stock markets.

Accepted Answer

A) True 
 B)False

Question 19

A stock has a standard deviation of daily returns of 3 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from theexpected outcome. The stock's expected daily return is .1 percent. The lower boundary is

Accepted Answer

A)  -1.65 percent. 
B)  -3.00 percent 
C)  -4.85 percent. 
D)  -5.05 percent. 
A)  -1.65 percent. 
B)  -3.00 percent 
C)  -4.85 percent. 
D)  -5.05 percent.

Question 20

Fabrizio, Inc. is expected to generate earnings of $1.50 per share this year. If the mean ratio of share price to expected earnings of competitors in the same industry is 20, then the stock priceper share is $____.

Accepted Answer

A)  13.33 
B)  3 
C)  20 
D)  30 
E)  none of the above 
A)  13.33 
B)  3 
C)  20 
D)  30 
E)  none of the above

Exam 11: Stock Valuation and Risk

The credit crisis caused major problems in the mortgage market but had no impact on the stock market.

When a firm's announced earnings are lower than expected, investors will increase their valuation of the firm's future cash flows and its stock.

A relatively simple method of valuing a stock is to apply the mean price-earnings (PE) ratio of all publicly traded competitors in the respective industry to the firm's expected earnings fortheyear.

The market risk premium is:

When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns.

A beta of 1.8 implies that the stock has a risk premium of 1.8 percent.

The capital asset pricing model (CAPM) suggests that the required rate of return on a stock is directly influenced by the stock's :

A stock's beta can be measured from the estimate of the ________ using regression analysis.

According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ____ affected by a weak dollar. Stock prices of U.S. importing firms couldbe____ affected by a weak dollar.

Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent.Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.

The ____ is not a measure of a stock's risk.

The dividend discount model can be adapted to assess the value of any firm, even those that retain most or all of their earnings.

The January effect refers to the ____ pressure on ____ stocks in January of every year.

Which of the following is incorrect regarding the capital asset pricing model (CAPM)?

If beta is thought to be the appropriate measure of risk, a stock's risk-adjusted returns should be determined by the Sharpe index.

As a result of market integration, stock markets in emerging markets are likely to be as efficient as U.S. stock markets.

A stock has a standard deviation of daily returns of 3 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from theexpected outcome. The stock's expected daily return is .1 percent. The lower boundary is

Fabrizio, Inc. is expected to generate earnings of $1.50 per share this year. If the mean ratio of share price to expected earnings of competitors in the same industry is 20, then the stock priceper share is $____.

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Market Microstructure and Strategies

Financial Futures Markets

Options Markets

Swap Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance Operations

Pension Fund Operations

Filters

When evaluating stock performance, measures variability that is systematically related to market returns; measures total variability of a stock's returns.

According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be affected by a weak dollar. Stock prices of U.S. importing firms couldbe affected by a weak dollar.

The January effect refers to the pressure on stocks in January of every year.