• 1.Which of the following statements is CORRECT?

      a. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few year

  

       b. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock’s dividend yield is also 5%.

      c. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.

      d. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

      e. The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.

2. An increase in a firm’s expected growth rate would cause its required rate of return to

            a.         increase.

            b.         decrease.

            c.         fluctuate less than before.

            d.         fluctuate more than before

3.If in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that the investor thinks

            a.         the stock is experiencing supernormal growth.

            b.         the stock should be sold

            c.         the stock is a good buy.

            d.         management is probably not trying to maximize the price per share.

            e.         dividends are not likely to be declared.

4.The preemptive right is important to shareholders because it

            a.         allows managers to buy additional shares below the current market price.

            b.         will result in higher dividends per share.

            c.         is included in every corporate charter.

            d.         protects the current shareholders against a dilution of their ownership interests.

            e.         protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.

5. Which of the following statements is CORRECT? ______

            a.         Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.

            b.         A bond’s current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.

            c.         If a bond sells at par, then its current yield will be less than its yield to maturity.

            d.         If a bond sells for less than par, then its yield to maturity is less than its coupon rate.

            e.         A discount bond’s price declines each year until it matures, when its value equals its par value.

6. A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT? ­­­­______

            a.         The bond’s current yield is less than 8%.

            b.         If the yield to maturity remains at 8%, then the bond’s price will decline over the next year.

            c.         The bond’s coupon rate is less than 8%.

            d.         If the yield to maturity increases, then the bond’s price will increase.

            e.         If the yield to maturity remains at 8%, then the bond’s price will remain constant over the next year.

7. Which of the following statements is CORRECT? ______

            a.         A zero coupon bond of any maturity will have more price risk than any coupon bond, even a perpetuity.

            b.         If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond.

            c.         A 10-year coupon bond would have more reinvestment risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment risk.

            d.         A 10-year coupon bond would have more price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of price risk.

            e.         If their maturities and other characteristics were the same, a 5% coupon bond would have less price risk than a 10% coupon bond.

8. Which of the following statements is CORRECT? __________

            a.         The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year.

            b.         Capital market transactions involve only preferred stock or common stock.

            c.         If General Electric were to issue new stock this year, this would be considered a secondary market transaction since the company already has stock outstanding.

            d.         Both NASDAQ dealers and "specialists" on the NYSE hold inventories of stocks.

            e.         Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.

9. A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter? _____

            a.         Either A or B, i.e., the investor should be indifferent between the two.

            b.         Stock A

            c.         Stock B.

            d.         Neither A nor B, as neither has a return sufficient to compensate for risk.

            e.         Add A, since its beta must be lower.

10.Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? ______

            a.         The periodic rate of interest is 1.5% and the effective rate of interest is 3%.

            b.         The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.

            c.         The periodic rate of interest is 1.5% and the effective rate of interest is greater

than 6%.

            d.         The periodic rate of interest is 3% and the effective rate of interest is 6%.

            e.         The periodic rate of interest is 6% and the effective rate of interest is also 6%.