FINC 340 FINAL EXAM SOLUTIONS

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Question Answer

1 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: $15.38

B: $20.00

C: $22.60

D: $26.13

E: $65.00

2 Bond mutual funds offer the following advantages over

direct investment in bonds EXCEPT:

A: Better diversification

B: Transaction cost economies

C: Buy and sell individual bonds at individual investor’s

discretion

D: Reinvestment of intermediate cash flows

E: Better liquidity

3 A $1,000 par value bond with a 5% coupon that pays

interest semiannually and matures in 2 ½ years and has

a current price of $977. What is the annualized yield to

maturity?

A: 3.0%

B: 4.0%

C: 5.0%

D: 6.0%

E: 7.0%

4 An immunization strategy protects a portfolio from:

A: Interest rate risk

B: Default risk

C: Liquidity risk

D: Prepayment risk

E: Event risk

5 1. Market multiple methods include valuations based on all of the following EXCEPT:

A: Price/earnings

B: Price/free cash flow

C: Price/dividends

D: Price/sales

E: All of the above are acceptable market multiples

6 Factors that should be considered in taking a stock

option position include:

A: The dividend paid on the underlying stock

B: The volatility of the underlying stock

C: The time to expiration

D: The anticipated direction of market movement

E: All of the above are relevant factors in the option

decision

7 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: $11,758

B: $12,547

C: $25,000

D: $61,758

E: $62,547

8 Disadvantages of investing in the futures market include

all of the following EXCEPT:

A: Market is extremely volatile

B: Daily mark-to-market

C: Clearinghouse

D: Possibility of frequent margin calls

E: Possibility of losing more than the original investment

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: 7.48%

B: 10.98%

C: 12.00%

D: 13.16%

E: 14.06%

10 Factors that should be considered in the purchase of a

stock includes all of the following EXCEPT:

A: Dividend

B: Growth potential

C: Quality of firm’s management

D: Coupon rate on the firm’s bonds

E: Price

11 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: $17.25

B: $20.99

C: $24.56

D: $31.14

E: $32.76

12 Rob pays 28% in combined local, state, and federal

taxes. If a corporate bond yields 8.3%, what is the

after-tax yield?

A: 2.3%

B: 6.0%

C: 8.3%

D: 10.7%

E: 11.5%

13 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: $0.00

B: $1.09

C: $1.24

D: $1.49

E: $1.62

14 Information included in “tombstone ads” include all of the

following EXCEPT:

A: The bond issuer

B: The price of the bond

C: The size of the issue

D: The maturity date

E: The coupon

15 Advantages of investing in tax-exempt bond funds

include all of the following EXCEPT:

A: Diversification

B: Provides additional benefits to tax-deferred

retirement plans

C: Automatic reinvesting

D: Fund maintains individual investor’s tax reports and

records

E: 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: 10.6%

B: 11.1%

C: 11.6%

D: 12.1%

E: 12.6%

17 What is the borrowing-rate-reinvestment-rate IRR for this

project?

A: 10.6%

B: 11.1%

C: 11.6%

D: 12.1%

E: 12.6%

18 The satisfaction an investor gets out of consumption of

goods and services and out of obtaining a given level of

wealth is

A: Greed

B: Utility

C: Return

D: Risk

E: Beta

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: the DJIA Index

B: the S&P 500 Index

C: a government security index

D: a 50%/50% combination of A and B

E: a combination of A, B, and C

20 Duration

A: Increases with maturity

B: Measures the linear relationship between bond

prices and bond yields

C: Is always greater than the maturity

D: All of the above are true

E: A and B are true, but C is false

21 What is the Sharpe ratio for Portfolio P?

A: 0.478

B: 0.577

C: 0.582

D: 0.783

E: 0.817

22 What is the Treynor ratio for Portfolio P?

A: 8.40%

B: 10.20%

C: 11.79%

D: 12.92%

E: 14.43%

23 What is Jensen’s alpha for Portfolio P?

A: -1.81%

B: -0.63

C: 0.00%

D: +1.58%

E: +1.79%

24 The financial planning process include all of the following

EXCEPT

A: assessing the current status of the financial

markets.

B: analyzing the client’s financial status.

C: monitoring the portfolio.

D: developing a policy statement.

E: establishing a client-advisor relationship.

25 Techniques to actively select securities include:

A: Bottom-up approach

B: Top-down approach

C: Indexing approach

D: All of the above are acceptable approaches

E: A and B are active approaches, but C is not

26 What is the correlation with the greatest potential for

diversification?

A: -1.0

B: -0.5

C: 0.0

D: +1.0

E: +2.0

27 Regular, periodic investments in a security without

regard to price is

A: income averaging.

B: dollar cost averaging.

C: dividend reinvesting.

D: fundamental investing.

E: time investing.

28 Hedging strategies are

A: designed to limit investment losses.

B: a form of investment insurance.

C: transfers risk from one entity to another.

D: all of these statements are true.

E: statements A and C are true, but B is not.

29 To calculate the total asset turnover, the following

financial statements are needed:

A: Balance Sheet

B: Income Statement

C: Statement of Cash Flows

D: All of the above are needed

E: A and B, but not C

30 Variables in the put-call parity include all of the following

EXCEPT:

A: Risk-free rate

B: Time to maturity

C: Strike price

D: Price of the underlying asset

E: Price earnings ratio

31 In the accumulation phase of the investor life cycle

A: investors with long-term time horizons should

accept only low risk.

B: investors have high net worth.

C: investors are saving for retirement only.

D: investors may seek to accumulate wealth through

higher risk investments.

E: none of these choices apply.

32 The semi-strong form of the efficient market hypothesis

states:

A: Security prices reflect all information, public and

private

B: Security prices reflect all public information

C: Security prices reflect all market information

D: Security prices reflect all accounting information

E: Security prices reflect all economic information

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: 5.71

B: 6.00

C: 6.24

D: 6.66

E: 7.00

34 Given returns of 15%, -8%, 12%, and 5%, what is the

difference between the arithmetic average and geometric

average?

A: 0.00%

B: 0.07%

C: 0.39%

D: 1.30%

E: 1.53%

35 Deviations of a straddle include:

A: Butterfly

B: Collar

C: Strangle

D: All of the above are deviations of a straddle

E: A and C are deviations of a straddle, but B is not

36 An immunization strategy protects a portfolio from:

A: Interest rate risk

B: Default risk

C: Liquidity risk

D: Prepayment risk

E: Event risk

37 The semi-strong form of the efficient market hypothesis

states:

A: Security prices reflect all information, public and

private

B: Security prices reflect all public information

C: Security prices reflect all market information

D: Security prices reflect all accounting information

E: Security prices reflect all economic information

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: Invest in the 10-year bond since the yield is higher

B: Invest in the 10-year bond because it has greater

maturity

C: Invest in the 10-year bond since the coupons can be

reinvested

D: Reinvest in the “bunny bond” to avoid lost of accrued

interest

E: Reinvest in the “bunny bond” to lock-in the yield

39 High price multiples:

A: May indicate the firm is overvalued

B: May indicate high expected future growth

C: May indicate high levels of earnings or book

value

D: All of the above are true

E: A and B are true, but C is not true

40 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: $ 200,000

B: $ 500,000

C: $ 700,000

D: $1,000,000

E: $1,200,000