Please assist with the final exam. Please see the attached.

FINC 340 INVESTMENTS FINAL EXAMINATION_04 DIRECTIONS: Here is the Final Examination Question Sheet. Please submit your Final Examination Answer Sheet to your Final Examination Folder. Submit your Final Examination in MS Word format with the following file name: LastNameFirstInitial_MidtermExamAnswerSheet.docx. For example, if you name is John Smith, the file name of your Answer Sheet should be SmithJ_FinalExamAnswerSheet.docx. If you have any questions or comments, please do not hesitate to contact me at kathleen.sindell@faculty.umuc.edu. Good luck! NAME: _____________________________________ Question Number 1 Question A company has paid $2 per share in dividends for the past several years and plans to continue to do so indefinitely. If an investor's required return is 13%, what is the most she should pay for a share of this firm's stock? A: B: C: D: E: 2 Bond mutual funds offer the following advantages over direct investment in bonds EXCEPT: A: B: C: D: E: 3 $15.38 $20.00 $22.60 $26.13 $65.00 Better diversification Transaction cost economies Buy and sell individual bonds at individual investor's discretion Reinvestment of intermediate cash flows Better liquidity A $1,000 par value bond with a 5% coupon that pays interest semiannually and matures in 2 years and has a current price of $977. What is the annualized yield to maturity? A: B: C: D: E: 3.0% 4.0% 5.0% 6.0% 7.0% 1 FINC 340 INVESTMENTS FINAL EXAMINATION_04 4 An immunization strategy protects a portfolio from: A: B: C: D: E: 5 1. Market multiple methods include valuations based on all of the following EXCEPT: A: B: C: D: E: 6 The dividend paid on the underlying stock The volatility of the underlying stock The time to expiration The anticipated direction of market movement All of the above are relevant factors in the option decision A three-year project costs $50,000 and returns $20,000 the first year, $30,000 the second year, and $25,000 the third year. If the required return is 10.0%, what is the Net Present Value (NPV)? A: B: C: D: E: 8 Price/earnings Price/free cash flow Price/dividends Price/sales All of the above are acceptable market multiples Factors that should be considered in taking a stock option position include: A: B: C: D: E: 7 Interest rate risk Default risk Liquidity risk Prepayment risk Event risk $11,758 $12,547 $25,000 $61,758 $62,547 Disadvantages of investing in the futures market include all of the following EXCEPT: A: B: C: D: E: Market is extremely volatile Daily mark-to-market Clearinghouse Possibility of frequent margin calls Possibility of losing more than the original investment 2 FINC 340 INVESTMENTS FINAL EXAMINATION_04 9 A portfolio has a standard deviation of 22%. If the risk-free rate is 3.5%, the expected return on the market portfolio is 12%, and the standard deviation of the market portfolio is 25%, what is the required return on the market portfolio? A: B: C: D: E: 10 Factors that should be considered in the purchase of a stock includes all of the following EXCEPT: A: B: C: D: E: 11 $17.25 $20.99 $24.56 $31.14 $32.76 Rob pays 28% in combined local, state, and federal taxes. If a corporate bond yields 8.3%, what is the after-tax yield? A: B: C: D: E: 13 Dividend Growth potential Quality of firm's management Coupon rate on the firm's bonds Price The risk-free rate is 3.6% and the required return on the market portfolio is 11.8%. A company that has just paid $1.80 per share in annual dividends has a beta of 0.9 and long-term growth rate of 5.2%. What is the dollar value of this stock? A: B: C: D: E: 12 7.48% 10.98% 12.00% 13.16% 14.06% 2.3% 6.0% 8.3% 10.7% 11.5% The risk-free rate is currently 2.8%. In one year the price of a given share of stock that currently trades at $40 per share is expected to either increase by 8% or decrease by 2%. What is the current value of a call on this stock with exercise price of $40? A: B: C: D: E: $0.00 $1.09 $1.24 $1.49 $1.62 3 FINC 340 INVESTMENTS FINAL EXAMINATION_04 14 Information included in \"tombstone ads\" include all of the following EXCEPT: A: B: C: D: E: 15 The bond issuer The price of the bond The size of the issue The maturity date The coupon Advantages of investing in tax-exempt bond funds include all of the following EXCEPT: A: B: C: D: E: Diversification Provides additional benefits to tax-deferred retirement plans Automatic reinvesting Fund maintains individual investor's tax reports and records Low initial deposit The next two problems refer to a four year project with an opportunity cost of 9% and the following cash flows: 16 What is the safe-rate-reinvestment-rate IRR for this project? A: B: C: D: E: 17 10.6% 11.1% 11.6% 12.1% 12.6% What is the borrowing-rate-reinvestment-rate IRR for this project? A: B: C: D: E: 10.6% 11.1% 11.6% 12.1% 12.6% 4 FINC 340 INVESTMENTS FINAL EXAMINATION_04 18 The satisfaction an investor gets out of consumption of goods and services and out of obtaining a given level of wealth is A: B: C: D: E: 19 Susan has 40% of her portfolio invested in a mutual fund to track the S&P 500 and 40% in a mutual fund to track the Dow Jones Industrial Average (DJIA) and 20% in government securities. To evaluate the performance of her portfolio, what is Susan's best benchmark? A: B: C: D: E: 20 Increases with maturity Measures the linear relationship between bond prices and bond Is always greater than the maturity All of the above are true A and B are true, but C is false What is the Sharpe ratio for Portfolio P? A: B: C: D: E: 22 the DJIA Index the S&P 500 Index a government security index a 50%/50% combination of A and B a combination of A, B, and C Duration A: B: yields C: D: E: 21 Greed Utility Return Risk Beta 0.478 0.577 0.582 0.783 0.817 What is the Treynor ratio for Portfolio P? A: B: 8.40% 10.20% 5 FINC 340 INVESTMENTS FINAL EXAMINATION_04 C: D: E: 23 What is Jensen's alpha for Portfolio P? A: B: C: D: E: 24 Bottom-up approach Top-down approach Indexing approach All of the above are acceptable approaches A and B are active approaches, but C is not What is the correlation with the greatest potential for diversification? A: B: C: D: E: 27 assessing the current status of the financial markets. analyzing the client's financial status. monitoring the portfolio. developing a policy statement. establishing a client-advisor relationship. Techniques to actively select securities include: A: B: C: D: E: 26 -1.81% -0.63 0.00% +1.58% +1.79% The financial planning process include all of the following EXCEPT A: B: C: D: E: 25 11.79% 12.92% 14.43% -1.0 -0.5 0.0 +1.0 +2.0 Regular, periodic investments in a security without regard to price is A: B: C: D: E: income averaging. dollar cost averaging. dividend reinvesting. fundamental investing. time investing. 6 FINC 340 INVESTMENTS FINAL EXAMINATION_04 28 Hedging strategies are A: B: C: D: E: 29 To calculate the total asset turnover, the following financial statements are needed: A: B: C: D: E: 30 Risk-free rate Time to maturity Strike price Price of the underlying asset Price earnings ratio In the accumulation phase of the investor life cycle A: B: C: D: E: 32 Balance Sheet Income Statement Statement of Cash Flows All of the above are needed A and B, but not C Variables in the put-call parity include all of the following EXCEPT: A: B: C: D: E: 31 designed to limit investment losses. a form of investment insurance. transfers risk from one entity to another. all of these statements are true. statements A and C are true, but B is not. investors with long-term time horizons should accept only low risk. investors have high net worth. investors are saving for retirement only. investors may seek to accumulate wealth through higher risk investments. none of these choices apply. The semi-strong form of the efficient market hypothesis states: A: B: C: D: E: Security prices reflect all information, public and private Security prices reflect all public information Security prices reflect all market information Security prices reflect all accounting information Security prices reflect all economic information 7 FINC 340 INVESTMENTS FINAL EXAMINATION_04 33 A company currently has $3.50 earnings per share of which $1.05 is paid in annual dividends per share. If the growth rate for the firm is 4% per year and the required return is 9%, what is the theoretical P/E ratio? A: B: C: D: E: 34 Given returns of 15%, -8%, 12%, and 5%, what is the difference between the arithmetic average and geometric average? A: B: C: D: E: 35 Butterfly Collar Strangle All of the above are deviations of a straddle A and C are deviations of a straddle, but B is not An immunization strategy protects a portfolio from: A: B: C: D: E: 37 0.00% 0.07% 0.39% 1.30% 1.53% Deviations of a straddle include: A: B: C: D: E: 36 5.71 6.00 6.24 6.66 7.00 Interest rate risk Default risk Liquidity risk Prepayment risk Event risk The semi-strong form of the efficient market hypothesis states: A: B: C: D: E: Security prices reflect all information, public and private Security prices reflect all public information Security prices reflect all market information Security prices reflect all accounting information Security prices reflect all economic information 8 FINC 340 INVESTMENTS FINAL EXAMINATION_04 38 Susan has a 5-year \"bunny bond\" with a yield to maturity of 6.4% that will be automatically reinvested next month. She is considering liquidating the bond and reinvesting in a 10-year 3.5% coupon bond with a yield to maturity of 6.5%. Market rates are very unstable and are just as likely to rise or fall over Susan's 5 year time horizon. The best action for Susan is to A: B: C: D: E: 39 High price multiples: A: B: C: D: E: 40 Invest in the 10-year bond since the yield is higher Invest in the 10-year bond because it has greater maturity Invest in the 10-year bond since the coupons can be reinvested Reinvest in the \"bunny bond\" to avoid lost of accrued interest Reinvest in the \"bunny bond\" to lock-in the yield May indicate the firm is overvalued May indicate high expected future growth May indicate high levels of earnings or book value All of the above are true A and B are true, but C is not true Three years ago, an ETF was initiated with 1 million shares in 10 stocks each with a market value of $10. The total market value of the ETF was then $100 million (1 million shares * 10 stocks * $10). The ETF issued 20 million shares which originally sold for $5 a share. Last year, Nancy purchased 100,000 shares for $7 a share. The price has now increased to $12 a share, and Nancy is considering redeeming her shares. Assume none of the original shares have been sold or redeemed. If Nancy redeems her shares, her cost basis when she sells the shares is A: B: C: D: E: $ 200,000 $ 500,000 $ 700,000 $1,000,000 $1,200,000 9