TRUE OR FALSE? Only the answer, no explanation needed. Please answer all of them in 30 minutes.

Question 41

Tobins Q. Tobins Q is the ratio of market price to book value.

True

False

Question 42

Industry Life Cycle: When conducting an analysis, the companys positioning on the industry life

cycle may oftentimes yield important valuation information. For example, as one travels from

start-up to consolidation to maturity to relative decline, one

will usually witness an increase in the price / earnings ratio.

True

False

Question 43

Constant Growth DDM (CG): The CG is best suited for firms that are expected to exhibit stable

growth rates over the foreseeable future. It is oftentimes used as a normalized measure of

terminal value in intrinsic value calculations after shorter horizon DCFs (i.e., 3-5 years, for

example) are modeled.

True

False

Question 44

Risk Adjusted Performance: Because portfolio or position risk must be considered in assessing

performance, risk adjusted performance measures have been developed. Sharpes Ratio,

Treynors Measure, Jensens Alpha, and the Information Ratio each measure risk adjusted

performance that can be compared to a peer universe or benchmark.

True

False

Question 45

Straddle. A long straddle is established by buying both a call and a put on the stock, each with the same exercise price and the same expiration date. A straddle is an example of how options can be combined to capture an anticipated outcome.

True

False

Question 46

Dollar vs. Time Weighted Returns: Time weighted rates of return are fundamentally the internal

rate of return (IRR) while the dollar weighted returns are the geometric average rate of return.

True

False

Question 47

Commodity Cost of Carry: The commodity cost of carry is similar to the financial cost of carry

except that storage costs are added in the place of dividends: F = S (1 + RF + C)^T, where the

latter term in parenthesis is the cost of carry.

True

False

Question 48

Economic Value Added: EVA is the spread between ROC and the COC and measures the return

in excess of the opportunity cost. Stern Stewart, the human resources consulting firm, uses the

term residual income to describe EVA and in the HR function, it can be used as a hurdle rate for

bonuses.

True

False

Question 49

International Risk: Exchange rate risk imparts an extra source of uncertainty to investments

dominated in foreign currencies. To this end, political risk in international markets is generally a

risk factor as well. International equities are generally subdivided into developed and emerging

markets

True

False

Question 49

International Risk: Exchange rate risk imparts an extra source of uncertainty to investments

dominated in foreign currencies. To this end, political risk in international markets is generally a

risk factor as well. International equities are generally subdivided into developed and emerging

markets

True

False

Question 50

DCF: Discounted cash flow models give estimates of the intrinsic value (V) of a stock that in

turn, can be compared to market prices (P) for purchase (buy when V > P) or sale (sell when V <

P) decision making. The discounted cash flows, in general, are the free cash flows that can be

returned to the capital providers

True

False

Question 51

Good Companies as Good Investments. Good companies are not necessarily good investments.

Stock market prices of successful firms may be bid up to levels that reflect that success, or

perhaps more. These firms are often labeled glamour firms and have high, embedded growth and

/ or profitability expectations.

True

False

Question 52

Out of the Money Call Option. An out-of-the-money call option would be where the stock price

is greater than the exercise price.

True

False

Question 53

Cyclical vs. Defensive Industries. Cyclical industries have an above average sensitivity to the

business cycle while defensive industries have below average sensitivity.

True

False

Question 54

European vs. American style options. European style options can be exercised early (i.e., at any

time over the life of the contract) while American style can be exercised on at the maturity date of

the contract.

True

False

Question 55

Financial Cost of Carry: The financial cost of carry is determined by the relative costs of buying a

stock with deferred delivery in the futures market versus buying it in the spot market with

immediate delivery and carrying it in inventory. The financial cost of carry is depicted as F = S

(1 + RF D)^T where the latter term in parenthesis is the cost of carry.

True

False

Question 56

Market Value Added: MVA and EVA are usually inversely related. In general, when EVA rises,

MVA falls. Conceptually, a positive MVA is a byproduct of a high or positive EVA (or

series of EVAs).

True

False