Devry FIN 351 Week 8 Final Exam

Question 1 4 pts
(TCO 1) An investment requires a total return that comprises _____.

• a real rate of return and compensation for inflation
• a real rate of return, compensation for inflation, and a risk premium
• compensation for inflation and a risk premium
• a real rate of return, compensation for inflation, a risk premium, and compensation for time and effort devoted to researching alternative investments

Question 2 4 pts

(TCO 1) A difference between the primary market and the secondary market is _____.

• liquidity
• that primary markets allow corporations, government units, and others to raise needed funds for the expansion of their capital base
• that price competition in the secondary markets between different risk-return classes enables the primary market to price new issues at higher prices to reflect existing risk-return relationships
• that the secondary market is much more competitive than the primary market

Question 3 4 pts

(TCO 1) A stop order is similar to a limit order, except that once the set price is reached, the stop order _____.

• is executed after all limit orders at the same price
• becomes a limit order
• goes to the end of the execution cue
• immediately becomes a market order

Question 4 4 pts

(TCO 2) The first step in any stock valuation is _____.

• • economic analysis
  • an accurate stock market prediction

• • financial analysis

• industry analysis

Question 5 4 pts

(TCO 2) Which investing approach do stock pickers favor?

• Top-down approach
• Bottom-up approach
• Industry analysis
• Rotational investing

Question 6 4 pts

(TCO 2) One way of calculating Ke is to use the capital asset pricing model, as follows.

• Ke = RF + (KM – RF)
• Ke = RR + IP + ERP
• Ke = RF + b(KM – RF)
• Ke = D1/P0 + g

Question 7 4 pts

(TCO 2) An analyst can judge a company’s level of debt by comparing which of the following ratios?

• Return-on-equity to total debt-to-assets
• Return-on-equity to total asset turnover
• Return-on-equity to debt turnover
• Return-on-equity to return-on-assets

Question 8 4 pts

(TCO 3) In addition to management and prior performance, what primary factors should be considered by the investor in a new issue?

• The investor should consider intended use of funds from the issue.
• The investor should consider expected stock price in the secondary market.
• The investor should consider the investment banker handling the distribution.
• More than one of the above

Question 9 4 pts

(TCO 3) Volume of short sales represents a contrary opinion rule, because _____.

• short sellers generally do not know what they are doing
• short sellers tend to overreact
• short sales generate potential demand for stocks
• More than one of the above

Question 10 4 pts

(TCO 4) Foreign bonds normally provide _____.

• higher yields than U.S. bonds
• lower yields than U.S. bonds
• diversification benefits
• None of the above

Question 11 4 pts

(TCO 4) What effect, if any, will a decrease in interest rates have on bond values?

• Bond values will increase.
• Bond values will decrease.
• Bond values may increase or decrease, depending on the maturity, quality, and coupon rate.
• None of the above

Question 12 4 pts

(TCO 4) Duration is influenced by everything except _____.

• maturity
• market rate of interest
• coupon rate on the bond
• the issuer of the bond

Question 13 4 pts

(TCO 5) What factor(s) could cause the pure bond value to change?

• A call provision
• An increase in stock price
• A change in market interest rates
• More than one of the above

Question 14 4 pts

(TCO 5) _____ was the first organized exchange to trade options, in 1973.

• The New York Stock Exchange
• The American Exchange
• The Chicago Board Option Exchange
• The International Securities Exchange

Question 15 4 pts

(TCO 5) The New York Futures Exchange specializes in _____.

• transactions involving companies listed on AMEX and NYSE
• American-produced commodities
• financial futures
• grains and livestock

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Question 16 4 pts

(TCO 5) Options may have advantages over futures for some investors because _____.

• options have a lower margin requirement
• options provide more efficient hedging
• some investors are prohibited by law from participating in the futures market
• None of the above

Question 17 4 pts

(TCO 6) A load is _____.

• a commission paid to a selling agent
• paid directly from investors’ capital
• typically 3% to 4% on a stock fund
• Both A and B

Question 18 4 pts

(TCO 6) Methods of indirect international investment include all of the following except _____.

• buying shares of a multinational corporation
• investing in mutual or closed-end worldwide investment funds
• hiring a specialist in foreign investments
• None of the above

Question 19 4 pts

(TCO 6) Which of the following allow the individual to invest in gold without actually owning gold?

• Gold stock
• Gold futures
• Options on gold futures
• All of the above

Question 20 4 pts

(TCO 7) The point of tangency between the efficient frontier and the capital market line _____.

• is the ideal portfolio of available investments
• can be calculated by using the Markowitz portfolio theory and CAPM
• represents the point at which the market is in equilibrium
• All of the above

Question 21 15 pts

(TCO 1) The stock of Furniture Unlimited went from $90 to $99 last year. The firm also paid 80 cents in dividends. Compute the rate of return

Question 22 15 pts

(TCO 2) Widji Outfitters is expected to pay a dividend (D1) of $1.00 next year, with an expected constant growth in dividends of 5%. The required rate of return is 10%. Calculate the present value of this stock

Question 23 15 pts
(TCO 4) Assume a $1,000 Treasury bill is quoted to pay 9.5% interest over a 6-month period.
Part 1: How much interest would an investor receive?
Part 2: What will be the price of the Treasury bill?

Question 24 15 pts

(TCO 5) A convertible bond has a face value of $1,000 and the conversion price is $40 per share. The stock is selling at $40 per share. The bond pays $55 per year in interest and is selling in the market for $975. It matures in 7 years. Market rates are 10% annually.

(I) What is the conversion ratio?
(II) What is the conversion value?

Question 25 15 pts

(TCO 5) Assume that a stock is selling for $47 with options available at 20, 30, and 40 strike prices. The 40 call option is at 7 1/2. Calculate the following.

(I) The intrinsic value of the $40 call
(II) Is the call in-the-money?

Question 26 15 pts

(TCO 6) A fund is set up to charge a load. Its net asset value is $17.70 and its offer price is $18.60. What percentage of the offer price does the load represent?

Question 27 15 pts

(TCO 6) A shopping center has an annual net operating income of $1,025,000 and a capitalization rate of 8%. What is its value?

Question 28 15 pts

(TCO 7) Using the formula for the security market line, if the risk-free rate (RF) is 8%, the market rate of return (KM) is 10%, and the beta (bi) is 1.5, compute the anticipated return for stock i (Ki).

Question 29 10 pts

(TCO 1) Why was the Sarbanes-Oxley Act enacted?

Question 30 10 pts

(TCO 2) How can the analysis of an industry’s structure help investors?

Question 31 10 pts

(TCO 3) Explain the weak form of the efficient market hypothesis and what this means for investors.

Question 32 10 pts

(TCO 6) What are several differences between the developed world and emerging markets?

Question 33 10 pts
(TCO 7) Define systematic risk, and provide several examples of this type of risk. Can this type of risk be diversified?