umuc finc340 final exam latest 2016 july 10th

| June 14, 2018

NAME: _____________________________________Quiz NumberQuestionAnswer1A 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: $15.38B: $20.00C: $22.60D: $26.13E: $65.002Bond mutual funds offer the following advantages over direct investment in bonds EXCEPT:A: Better diversificationB: Transaction cost economiesC: Buy and sell individual bonds at individual investor’s discretionD: Reinvestment of intermediate cash flowsE: Better liquidity3A $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%4An immunization strategy protects a portfolio from:A: Interest rate riskB: Default riskC: Liquidity riskD: Prepayment riskE: Event risk5Market multiple methods include valuations based on all of the following EXCEPT:A: Price/earningsB: Price/free cash flowC: Price/dividendsD: Price/salesE: All of the above are acceptable market multiples6Factors that should be considered in taking a stock option position include:A: The dividend paid on the underlying stockB: The volatility of the underlying stockC: The time to expirationD: The anticipated direction of market movementE: All of the above are relevant factors in the option decision7A 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: $11,758B: $12,547C: $25,000D: $61,758E: $62,5478Disadvantages of investing in the futures market include all of the following EXCEPT:A: Market is extremely volatileB: Daily mark-to-marketC: ClearinghouseD: Possibility of frequent margin callsE: Possibility of losing more than the original investment9A 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%10Factors that should be considered in the purchase of a stock includes all of the following EXCEPT:A: DividendB: Growth potentialC: Quality of firm’s managementD: Coupon rate on the firm’s bondsE: Price11The 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: $17.25B: $20.99C: $24.56D: $31.14E: $32.7612Rob 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%13The 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: $0.00B: $1.09C: $1.24D: $1.49E: $1.6214Information included in “tombstone ads” include all of the following EXCEPT:A: The bond issuerB: The price of the bondC: The size of the issueD: The maturity dateE: The coupon15Advantages of investing in tax-exempt bond funds include all of the following EXCEPT:A: DiversificationB: Provides additional benefits to tax-deferred retirement plansC: Automatic reinvestingD: Fund maintains individual investor’s tax reports and recordsE: Low initial depositThe next two problems refer to a four year project with an opportunity cost of 9% and the following cash flows:16What 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%17What 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%18The satisfaction an investor gets out of consumption of goods and services and out of obtaining a given level of wealth isA: GreedB: UtilityC: ReturnD: RiskE: Beta19Susan 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 IndexB: the S&P 500 IndexC: a government security indexD: a 50%/50% combination of A and BE: a combination of A, B, and C20DurationA: Increases with maturityB: Measures the linear relationship between bond prices and bond yieldsC: Is always greater than the maturityD: All of the above are trueE: A and B are true, but C is false21What is the Sharpe ratio for Portfolio P?A: 0.478B: 0.577C: 0.582D: 0.783E: 0.81722What is the Treynor ratio for Portfolio P?A: 8.40%B: 10.20%C: 11.79%D: 12.92%E: 14.43%23What is Jensen’s alpha for Portfolio P?A: -1.81%B: -0.63C: 0.00%D: +1.58%E: +1.79%24The financial planning process include all of the following EXCEPTA: 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.25Techniques to actively select securities include:A: Bottom-up approachB: Top-down approachC: Indexing approachD: All of the above are acceptable approachesE: A and B are active approaches, but C is not26What is the correlation with the greatest potential for diversification?A: -1.0B: -0.5C: 0.0D: +1.0E: +2.027Regular, periodic investments in a security without regard to price isA: income averaging.B: dollar cost averaging.C: dividend reinvesting.D: fundamental investing.E: time investing.28Hedging strategies areA: 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.29To calculate the total asset turnover, the following financial statements are needed:A: Balance SheetB: Income StatementC: Statement of Cash FlowsD: All of the above are neededE: A and B, but not C30Variables in the put-call parity include all of the following EXCEPT:A: Risk-free rateB: Time to maturityC: Strike priceD: Price of the underlying assetE: Price earnings ratio31In the accumulation phase of the investor life cycleA: 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.32The semi-strong form of the efficient market hypothesis states:A: Security prices reflect all information, public and privateB: Security prices reflect all public informationC: Security prices reflect all market informationD: Security prices reflect all accounting informationE: Security prices reflect all economic information33A 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: 5.71B: 6.00C: 6.24D: 6.66E: 7.0034Given 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%35Deviations of a straddle include:A: ButterflyB: CollarC: StrangleD: All of the above are deviations of a straddleE: A and C are deviations of a straddle, but B is not36An immunization strategy protects a portfolio from:A: Interest rate riskB: Default riskC: Liquidity riskD: Prepayment riskE: Event risk37The semi-strong form of the efficient market hypothesis states:A: Security prices reflect all information, public and privateB: Security prices reflect all public informationC: Security prices reflect all market informationD: Security prices reflect all accounting informationE: Security prices reflect all economic information38Susan 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 toA: Invest in the 10-year bond since the yield is higherB: Invest in the 10-year bond because it has greater maturityC: Invest in the 10-year bond since the coupons can be reinvestedD: Reinvest in the “bunny bond” to avoid lost of accrued interestE: Reinvest in the “bunny bond” to lock-in the yield39High price multiples:A: May indicate the firm is overvaluedB: May indicate high expected future growthC: May indicate high levels of earnings or book valueD: All of the above are trueE: A and B are true, but C is not true40Three 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 isA: $ 200,000B: $ 500,000C: $ 700,000D: $1,000,000E: $1,200,000

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