7-1. If you believe that Toshiba, an electrical equipment manufacturer is undervalued relative to peers, you expect the share price of Toshiba to ____ relative to peers.

1 outperform

2 underperform

7-2. The usual compensation model and industrial structure for equity analysts may be problematic. One of the reasons is that _____ analysts may make outlandish and contrary predictions, hoping that a lucky break will propel them to the top of the rankings.

1 high-ranking

2 low-rankingall

7-3. In 2012, Facebook conducted its initial public offering and sold 421 million shares to the public for the first time. Which player in the capital markets helped it sell these shares?

1. Analysts
2. The buy side
3. The sell side
4. The media
5. Institutional investors

7-4. The fact that professional realtors sell their own homes for 10 percent higher prices, on average, than comparable homes they sell for others, as noted in Freakonomics (by Steven Levitt and Stephen Dubner), could be said as a manifestation of?

1. The principal-agent problem
2. Board oversight
3. Herding
4. The buy side

7-5. If a division of a firm has lower risks than other divisions, the firm has a risk of ____ in that division.

1 under investing

2 over investing

7-6. If a firm's ROE is 5 percent and its cost of capital is 10 percent, its market-to-book

ratio should be:

1. Greater than 1
2. Less than 1
3. Equal to 1
4. I don't have enough information

7-7. Suppose you are evaluating a project to establish a new car factory. Having analyzed several scenarios, you come up with three outcomes. First, the worst-case scenario (probability of 25%) the expected cashflow is $50 billion. The cashflow for the base-case scenario (probability of 50%) is $100 billion. Finally, the best-case scenario (probability of 25), would result in a cashflow of $200 billion. What is the highest amount you would be prepared to pay to establish the factory?

1. $50 billion
2. $100 billion
3. $112.5 billion
4. $116.7 billion
5. $200 billion

7-8. When a firm is announcing that it is acquiring another firm, and when shares of both firms are traded on the market, share prices of the firms would move in different directions, depending on the views of the market regarding value transfer. What is the best interpretation when the price of acquirer's stock dropped by 10 percent, resulting in the loss of $50 million in market capitalization, while the price of target company's stock jumped by 15 percent, resulting in a gain of $25 million in market capitalization.

1. Value destruction and transfer of wealth from acquirer to target
2. Value destruction and transfer of wealth from target to acquirer
3. Value creation and transfer of wealth from acquirer to target
4. Value creation and transfer of wealth from target to acquirer

7-9. A firm has to choose how to allocate free cash flows among organic growth, dividends, and share buybacks. If a firm has the opportunity to engage in organic growth, which requires an investment of $1 million and has an NPV of $0.9 million; offer a $1 dividend to each of its one million shareholders; or buy back 100,000 shares at $10 each, which would be the value-creating option for the firm.

1. Distribute $1 million through a share buyback program.
2. Offer a $0.50 dividend and use the remaining $500,000 to purchase 50,000 shares.
3. Distribute $1 million in dividends.
4. Use the $1 million for the organic growth project.