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fundamentals of investments valuation

Questions and Answers of Fundamentals Of Investments Valuation

You are trying to value a long-term call option on the NYSE Composite index, expiring in five years, with a strike price of 275.The index is currently at 250, and the annualized standard deviation in
A new security on AT&T will entitle the investor to all dividends on AT&T over the next three years, limiting upside potential to 20% but also providing downside protection below 10%.
Which of the following is an implication of market efficiency? (There may be more than one right answer.)a. Resources are allocated among firms efficiently (i.e., put to best use).b. No investor will
Suppose you are following a retailing stock that has a strong seasonal pattern to sales. Would you expect to see a seasonal pattern in the stock price as well?
Tests of market efficiency are often referred to as joint tests of two hypotheses—the hypothesis that the market is efficient and an expected returns model. Explain. Is it ever possible to test
You are in a violent argument with a chartist. He claims that you are violating the fundamental laws of economics by trying to find intrinsic value. “Price is determined by demand and supply, not
You are testing the effect of merger announcements on stock prices.(This is an event study.) Your procedure goes through the following steps:Step 1: You choose the 20 biggest mergers of the year.Step
In an efficient market, the market price is defined to be an “unbiased estimate” of the true value. This implies that (choose one):a. The market price is always equal to true value.b. The market
Evaluate whether the following actions are likely to increase stock market efficiency, decrease it, or leave it unchanged, and explain why.a. The government imposes a transaction tax of 1% on all
The following is a graph of cumulative abnormal returns around the announcement of asset divestitures by major corporations.How best would you explain the:a. Market behavior before the
What is the phenomenon of the size effect in stock performance?How does it relate to the turn-of-the-year effect? Can you suggest any good reasons why small stocks, after adjusting for beta, still do
A study examining market reactions to earnings surprises found that prices tend to drift after earnings surprises. What does this tell you about the market’s capacity to learn from events and new
One explanation of the turn-of-the-year or January effect has to do with sales and purchases related to the tax year.a. Present the tax effect hypothesis.b. Studies have shown that the January effect
The following are the expected price appreciation and dividend yield components of returns on two portfolios—a high dividend yield portfolio and a low dividend yield portfolio.You are a taxable
Answer true or false to the following questions:a. Low price-earnings stocks, on average, earn returns in excess of expectations, while high price-earnings stocks earn less than expected.This is
You are examining the performance of two mutual funds. AD Value Fund has been in existence since January 1, 1988, and invests primarily in stocks with low price-earnings ratios and high dividend
The value of an investment is:a. The present value of the cash flows on the investment.b. Determined by investor perceptions about it.c. Determined by demand and supply.d. Often a subjective
There are many who claim that value is based on investor perceptions, and perceptions alone, and that cash flows and earnings do not matter. This argument is flawed because:a. Value is determined by
Discounted cash flow valuation is based on the notion that the value of an asset is the present value of the expected cash flows on that asset, discounted at a rate that reflects the riskiness of
Why might discounted cash flow valuation be difficult to do for the following types of firms?a. A private firm, where the owner is planning to sell the firm.b. A biotechnology firm with no current
The following are the projected cash flows to equity and to the firm over the next five years:The firm has a cost of equity of 12% and a cost of capital of 9.94%.Answer the following questions:a.
You are estimating the price-earnings multiple to use to value Paramount Corporation by looking at the average price-earnings multiple of comparable firms. The following are the price-earnings ratios
Coca-Cola's balance sheet for December 1998 is summarized (in millions of dollars) for problems 1 through 9:Consider the assets on Coca-Cola's balance sheet and answer the following questions:a.
Examine the liabilities on Coca-Cola's balance sheet.a. How much interest-bearing debt does Coca-Cola have outstanding?(You can assume that other short-term liabilities represent sundry payables, and
Coca-Cola's most valuable asset is its brand name. Where in the balance sheet do you see its value? Is there any way to adjust the balance sheet to reflect the value of this asset?
Assume that you have been asked to analyze Coca-Cola's working capital management.a. Estimate the net working capital and noncash working capital for Coca-Cola.b. Estimate the firm's current ratio.c.
How much operating income did Coca-Cola earn, before taxes, in 1998? How does this compare to how much Coca-Cola earned in 1997?What are the reasons for the difference?
The biggest expense for Coca-Cola is advertising, which is part of the selling, generals and administrative (G&A) expenses. A large portion of these expenses is designed to build up Coca-Cola's brand
What effective tax rate did Coca-Cola have in 1998? How does it compare with what the company paid in 1997 as an effective tax rate?What might account for the difference?
You have been asked to assess the profitability of Coca-Cola as a firm. To that end, estimate the pretax operating and net margins in 1997 and 1998 for the firm. Are there any conclusions you would
The book value of equity at Coca-Cola in 1997 was $7,274 million.The book value of interest-bearing debt was $3,875 million. Estimate:a. The return on equity (beginning of the year) in 1998.b. The
Suppose Borg Corporation was operating at 88 percent of capacity. What would sales be at full capacity? What is the EFN in this case? What is the capital intensity ratio at full capacity?
Prepare a pro forma income statement for Paul Bunyan Lumber Co. assuming a 5 percent increase in sales. Based only on the pro forma income statement, what is the projected stock price?
Operating cash flow is:a. $20.b. $16.c. $12.d. $30. Net income: Depreciation/amortization: Repurchase of outstanding common stock: Issuance of new debt: Sale of property: Purchase of equipment:
Investing cash flow is:a. $2.b. ($2).c. $12.d. ($12). Net income: Depreciation/amortization: Repurchase of outstanding common stock: Issuance of new debt: Sale of property: Purchase of equipment:
Financing cash flow is:a. $8.b. ($8).c. $4.d. ($4). Net income: Depreciation/amortization: Repurchase of outstanding common stock: Issuance of new debt: Sale of property: Purchase of equipment:
Net cash increase is:a. $18.b. $20.c. $22.d. $24. Net income: Depreciation/amortization: Repurchase of outstanding common stock: Issuance of new debt: Sale of property: Purchase of equipment:
Consider the following information on GDP and CPI for an economy over the last three years:Calculate nominal GDP growth for 2021 and 2022. GDP ($ billions) CPI 2020 125.4 105.3 2021 136.1 106.1 2022
Given the information in the previous problem, how would the trade change if instead the futures price for gasoline were $2.95 per gallon?Problem 17.19Suppose unleaded gasoline is currently trading
a. Look up prices for Freddie Mac and Fannie Mae common stock under their ticker symbols FMCC and FNMA online at finance.yahoo.com.
The principal reduction component of a monthly payment for a fixed-rate mortgage is:a. Highest during the first year of the mortgage.b. Highest during the middle year of the mortgage.c. Highest
Which of the following mortgages will pay the smallest total interest over the life of the mortgage (no calculation necessary)?a. 30-year, 8 percentb. 30-year, 10 percentc. 15-year, 8
The most important difference between effective duration and Macaulay duration for a mortgage passthrough security is that:a. Macaulay duration is easier to calculate.b. Effective duration is
Which of the following most accurately measures interest rate sensitivity for mortgage passthrough securities with prepayment risk?a. Static durationb. Effective durationc. Modified
Higher prepayments have what impact on the effective duration of a mortgage passthrough security?a. They decrease effective duration for all maturity mortgages.b. They increase effective duration
For a given mortgage pool, which of the following CMOs based on that pool is most likely to increase in price when market interest rates increase?a. 100/300 PAC bondb. A-tranche sequential
A bond analyst at Omnipotent Bank (OB) notices that the prepayment experience on his holdings of high-coupon GNMA issues has been moving sharply higher. What does this indicate?a. Interest rates are
Which of the following should a bond portfolio manager purchase if the manager is looking for mortgage-backed securities that would perform best during a period of rising interest rates?a. A 12
Which of the following is not a source of risk for GNMA mortgage pool investors?a. Prepayment riskb. Default riskc. Interest rate riskd. Reinvestment risk.
Mortgages in GNMA pools are said to be fully modified because GNMA guarantees bondholders which of the following?a. A minimum rate of return on their investmentb. A modified schedule of cash flows
Which of the following mortgages will have the largest remaining balance after 180 monthly payments (no calculation necessary)?a. 30-year, 8 percentb. 30-year, 10 percentc. 15-year, 8
a. Suppose a $100,000 mortgage financed at 9 percent (.75 percent monthly) is paid off in the first month after issuance. In this case, what are the cash flows to an IO strip and a PO strip from
Which of the following mortgages has the lowest monthly payment (no calculation necessary)?a. 30-year, 8 percentb. 30-year, 10 percentc. 15-year, 8 percentd. 15-year, 10 percent.
a. GNMA bond investors face significant cash flow uncertainty. Why might cash flow uncertainty be a problem for many portfolio managers?b. Why might cash flow uncertainty be less of a problem for
The remaining balance on a 30-year, $100,000 mortgage loan financed at 8 percent after the 180th payment is (no calculation necessary):a. $100,000.b. $50,000.c. $76,782.d. $23,219.
a. Referring to Figure 21.2, what are the CPRs for seasoned 50 PSA, 100 PSA, and 200 PSA mortgages?b. Referring to Figure 21.2, what is the CPR for an unseasoned 100 PSA mortgage in month 20 of the
After five years of payments on a mortgage loan financed at 8 percent, what are the remaining balance and interest and principal reduction components of the monthly payment?
Identify upcoming mergers and acquisitions.
Suppose unleaded gasoline is currently trading at $3 per gallon. You face an interest rate of 4 percent and a carrying cost of $.07 per gallon per month. The current market price of a four-month
Sky High Partners is evaluating a high-rise office building to add to its investment portfolio. To calculate a value, Sky High plans to use the income approach, based on the following
You have decided to purchase 25 oil futures contracts at a settle price of $55 per barrel. Each futures contract has a standard size of 1,000 barrels and an initial margin requirement of
Why do agency bonds carry a higher yield than comparable U.S. Treasury bonds?
Review the current yields on major U.S. Treasury securities.
A particular bond matures in 30 years. It is callable in 10 years at 110. The call price is then cut by 1 percent of par each year until the call price reaches par. If the bond is called in 12 years,
Which is true for bonds issued by all agencies of the U.S. government?a. They become direct obligations of the U.S. Treasury.b. They are secured bonds backed by government holdings.c. They are
Collect financial statements for Goldman Sachs (GS).
Review the price ratios for Delta Air (DAL).
Cash flow per share is typically calculated as:a. Net cash flow/Shares outstanding.b. Operating cash flow/Shares outstanding.c. Investing cash flow/Shares outstanding.d. Financing cash
Evaluate earnings estimates for Harley-Davidson (HOG).
The difference between net income and operating cash flow is at least partially accounted for by which of the following items?a. Retained earningsb. Cash and cash
The interest component of a monthly payment for a fixedrate mortgage is:a. Highest during the first year of the mortgage.b. Highest during the middle year of the mortgage.c. Highest during the
Consider a 15-year, $210,000 mortgage with a 7 percent interest rate. After 10 years, the borrower (the mortgage issuer) pays it off. How much will the lender receive?
a. The most popular fixed-rate mortgages among home buyers are those with 15-year and 30-year maturities. What might be some of the comparative advantages and disadvantages of these two mortgage
Test the CPR to PSA calculator.
What is the monthly payment for a 15-year, $100,000 mortgage loan financed at 8 percent interest?
Which of the following statements about fixed-rate mortgages is false?a. Fifteen-year mortgages have higher monthly payments than 30-year mortgages.b. Scheduled monthly payments are constant over
What are the monthly payments on a 30-year, $150,000 mortgage if the mortgage rate is 6 percent? What portion of the first payment is interest? Principal?
Use the search function to identify available mortgage-backed securities.
You are a U.S. investor who invested $420,000 in India five years ago. Assume that your investment gained 7 percent per year. If the exchange rate moved from 70.1 rupees per dollar to 72.4 rupees per
Assume the following. In 2011, the U.S. had real GDP of $16.2 trillion and the CPI was at 211.4. At the end of 2021, real GDP in the U.S. was $19.5 trillion and the CPI was at 280.2. Calculate the
Using the information from Problem 10, calculate the inflation rates and approximate real GDP growth rates for 2021 and 2022.Problem 10Consider the following information on GDP and CPI for an economy
Which of the following is not one of Porter’s five forces?a. Bargaining power of buyersb. Threat of substitute productsc. Threat of new entrantsd. All of the above are part of Porter’s five
An analyst gathered the following year-end price level data for an economy:What is the economy’s annual inflation rate for 2022? What is the average compounded inflation rate for 2017–2022?
All of the following are ways the Federal Reserve changes the money supply except:a. The discount rate.b. Open market operations.c. The prime rate.d. All of the above are used by the Fed.
If the average wage rate increases from $15.23 per hour to $15.65 per hour and the inflation rate over the period is 4.2 percent, what is the approximate real increase in wages?a. 2.8 percentb. 1.4
Suppose you are a U.S. investor looking to buy assets in Mexico. If you have $10,000 and the current exchange rate is 11.87 pesos/dollar, how many pesos will you have to
Which of the following is not one of the four stages of the business cycle?a. Peakb. Contractionc. Troughd. Cliff.
Map out Boeing’s (BA) largest suppliers and customers.
Which of the following is not considered a leading economic indicator?a. Stock prices, 500 common stocksb. Money supply (M2) growth ratec. Average duration of unemploymentd. Index of consumer
a. Are all firms in the same sector comparable?b. How is Porter’s five forces model useful in analyzing industries?
Which of the following profitability ratios is incorrect?a. Gross margin = Gross profit/Cost of goods soldb. Operating margin = Operating income/Net salesc. Return on assets = Net income/Total
Identify which countries have the highest levels of debt to GDP.
Which of the following industries would be considered the most defensive?a. Consumer discretionaryb. Industrialsc. Technologyd. Consumer staples.
a. Who controls monetary policy? Who controls fiscal policyb. If the Fed adds $10 billion to the money supply, why would the money supply be expected to grow by more than $10 billion?
Determine which countries have the highest/lowest level of inflation.
Determine which countries have the highest/lowest level of inflation.
If the CPI increased from 123.4 to 125.3, the inflation rate is closest to:a. −1.5 percent.b. 0 percent.c. 1.5 percent.d. 3.0 percent.
a. If all else stayed the same, but the labor force participation rate declined, what would happen to the unemployment rate?b. What is the “Goldilocks” scenario with regard to economic
a. If all else stayed the same, but the labor force participation rate declined, what would happen to the unemployment rate?b. What is the “Goldilocks” scenario with regard to economic
a. If all else stayed the same, but the labor force participation rate declined, what would happen to the unemployment rate?b. What is the “Goldilocks” scenario with regard to economic

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