Q&A Hero

Q: Single-country funds have traditionally:outperformed international funds.underperformed international funds.been open-end.been closed-end.

Q: The 2 largest fund supermarkets are: a. Merrill Lynch and Charles Schwab b. Edward D. Jones and Vanguard c. Vanguard and Fidelity d. Charles Schwab and Fidelity

Q: A portfolio of directly-owned individual securities guided by an investment manager is known as a: a. IRA. b. IMA. c. SMA. d. DCA.

Q: Unregulated companies that seek to exploit various market opportunities and require a substantial investment from investors are known as: a. derivatives. b. options. c. hedge funds. d. SMAs.

Q: Each investment company investor shares in the returns of the fund's portfolio and also shares in the cost of running the fund.

Q: To qualify as a regulated investment company, a fund must distribute at least 50 percent of its taxable income to the shareholders.

Q: Buying shares of a mutual fund is an example of indirect investing.

Q: Most unit investment trusts are considered active investments.

Q: Under the Securities Act of 1933, investment companies are required to register with the SEC.

Q: ETFs are managed investment portfolios that offer investors targeted diversification.

Q: Many ETFs report little or no capital gains over the years giving them greater tax efficiency than many mutual funds.

Q: if the investor buys a stock index put, the individual will profit if the market rises.

Q: the time premium paid for an option to buy stock is affected by a. the length of time to expiration b. the firm's credit rating c. the existence of a rights offering d. the firm's financial statements

Q: warrants and calls do not have a. an expiration date b. a specified exercise price c. the right to receive dividends d. a strike price

Q: warrants are issued by a. individuals b. firms c. governments d. investors

Q: options sell for a time premium over their intrinsic value because a. they earn dividends b. they are debt obligations c. they offer potential leverage d. they are long-term investments

Q: options to buy stock offer a. potential leverage b. potential income c. safety of principal e. liquidity

Q: because of arbitrage, the price of an option a. exceeds its intrinsic value b. is less than its intrinsic value c. cannot be less than its intrinsic value d. cannot be greater than its intrinsic value

Q: the price of a call depends on 1>the strike price 2>the price of the underlying stock 3>the term (i.e., life) of the call a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: call options offer buyers a. potential leverage b. liquidity c. income d. safety of principal

Q: a call option is similar to a warrant except a. the strike price is fixed b. it may be issued by individual investors c. it is not marketable (saleable) d. it receives dividend payments

Q: a call is an option to a. sell stock at a specified price b. buy stock at a specified price c. deliver stock at a specified price d. deliver bonds at a specified price

Q: the dividend-growth valuation model depends on dividends and the required rate of return.

Q: the expected return depends on future dividends and future price appreciation.

Q: if the industry average days sales outstanding is 65 days and a firm with sales of $1,034,550 has receivables of $268,700, how much in interest expense could the firm save if the receivables turn over as quickly as the industry average and the cost of carrying the receivables is 9%?

Q: what is the debt/net worth ratio and the debt to total assets ratio for a firm with total debt of $600,000 and equity of $400,000?

Q: the inventory turnover for an industry is 6 (every two months) but slow corp. turns over its inventory 4 times a year (every three months). if annual sales are $1,000,000 and the interest cost to carry inventory is 12 percent, what is the potential savings in interest expense if the firm achieves the industry for the turnover of its inventory?

Q: an analysis of last year's financial statements produced the following results. current ratio 3.6 quick ratio 2.2 days sales outstanding 78.0 days inventory turnover 4.4 fixed asset turnover 6.4 operating profit margin 11.9% net profit margin 6.1% return on assets 8.8% return on equity 13.7% debt ratio 35.5% times-interest-earned 9.3x payout ratio 41.4% use the following data to compute the comparable financial ratios for next fiscal year. has the firm's financial position changed? current assets cash and shortterm investments $ 14,657,000 accounts receivable 71,873,000 inventory 56,372,0001 plant and equipment 26,881,000 long-term investments and other assets 20,606,000 total assets $190,389,000 current liabilities $ 37,481,000 long-term debt 17,895,000 equity 135,013,000 total liabilities and equity $190,389,000 sales $254,553,000 cost of goods sold 149,903,000 selling, administrative, and other expenses 69,609,000 earnings before interest and taxes 35,041,000 interest 2,529,000 taxes 13,972,540 net income $ 18,540,000 earnings per share $4.13 dividends per share $1.80 1 average inventory = $56,530,000

Q: using the income statement and balance sheet constructed in (1) and (2), compute the following ratios. compare the results with the industry averages. what strengths and weaknesses are apparent? ratio industry average current ratio 2:1 acid test (quick ratio) 1:1 inventory turnover a. annual sales 2.5 b. cost of goods sold 1.2 receivables turnover a. annual credit sales 5.0x b. annual sales 6.0x days sales outstanding 75 days operating profit margin 26% net profit margin 19% return on assets 10% return on equity 15% debt/equity 33% debt ratio (debt/total assets) 25% timesinterestearned 7.1x additional information: last year's inventory $40,000 credit sales $90,000

Q: given the following information, construct the statement of changes in financial position. what happened to the firm's liquidity position during the year? net income $16.7 decrease in accounts receivable 6.1 increase in accounts payable 13.6 sale of bonds 55.1 dividends 14.8 retirement of bonds 10.8 increase in inventory 15.2 depreciation expense 56.0 cost of goods sold 72.1 reduction in income taxes payable 5.0 sale of stock 0.4 purchase of plant and equipment 91.0 beginning cash 1.1 repurchase of stock 5.6

Q: determine a firm's earnings per share from the following information. corporate income tax rate 25% number of shares outstanding 10,000 cost of goods sold $60,000 interest earned 2,400 selling and administrative expense 15,000 interest expense 5,000 sales 100,000 annual credit sales 90,000

Q: construct a balance sheet from the following information. accrued interest payable $4,000 accumulated depreciation 30,000 trade accounts payable 10,000 retained earnings 86,000 accrued wages 11,000 work in process 5,000 finished goods 30,000 plant and equipment 100,000 cash and marketable securities 10,000 land 10,000 accounts receivable 32,000 allowance for doubtful accounts 2,000 bank note (due in six months) 15,000 longterm debt 15,000 raw materials 7,000 investments 10,000 taxes due 1,000 additional paidin capital 20,000 $1 par value common stock 20,000 shares authorized 10,000 shares outstanding

Q: a firm's balance sheet has the following entries: cash $30,000,000 total assets 100,000,000 common stock (10,000,000 20,000,000 shares outstanding, $2 par) additional paidin capital 5,000,000 retained earnings 35,000,000 what will be each of these balance sheet entries after a a. $2 a share cash dividend b. fourforone split c. 5 percent stock dividend (current price of the stock is $20)?

Q: investors seek to minimize risk for a given return.

Q: by accepting more risk, the investor will increase the realized return.

Q: reinvestment rate risk results from higher stock prices in the future.

Q: investors may reduce risk by constructing diversified portfolios but not eliminate risk.

Q: exchange rate risk refers to fluctuations in the prices of foreign currencies (i.e., foreign exchange).

Q: inflation, which is a general decline in prices, is the source of financial risk.

Q: the negative relationship between interest rates and securities prices is the source of interest rate risk.

Q: unsystematic risk considers how firms finance their assets and the nature of their operations.

Q: unsystematic risk refers to factors that are unique to the specific asset.

Q: investors must bear the systematic risk associated with fluctuating securities prices.

Q: diversification reduces reinvestment rate risk.

Q: Mr. Baker, a single person in early retirement, owns a house, a well-used car, and minimal life insurance. He has pension assets of about half a million dollars. He wants it all in tax-exempt municipal bonds so that "I won't lose any money, and I won't have to pay taxes." Considering the life-cycle theory of asset allocation, would you suggest any alternatives to this client?

Q: Explain the life-cycle theory of portfolio policies.

Q: What is difference between strategic asset allocation and tactical asset allocation?

Q: How does the prudent man rule affect asset allocation?

Q: Give an example of how individual investors' preferences are taken into account by institutional investors?

Q: What are some of the differences between individual investors and institutional investors?

Q: What is the portfolio management process outlined by Maginn and Tuttle.

Q: Portfolio performance evaluation is an important determinant of your success in financial planning.

Q: In today's world, investor's time horizons have lengthened.

Q: Rebalancing is Difficult for many investors because it represents a contrarian strategy.

Q: The spending phase of the life cycle is avoided by investors who follow the prudent man rule.

Q: What is meant by the term "marked to the market"?

Q: What are the methods of settling a futures contract?

Q: Briefly discuss the concept of margin in futures trading.

Q: Compare the obligation entered into in a futures contract to the obligation in an options contract.

Q: Explain a long position and a short position in futures trading.

Q: What is the role of the clearinghouse in futures trading?

Q: Explain the difference between a forward contract and a futures contract.

Q: Basis = a. cash price b. futures price c. cash price + futures price d. cash price - futures price

Q: An attempt to exploit the differences between the prices of a stock index future and the prices of a stock index is known as: a. index programming. b. arbitrage speculation. c. index arbitrage. d. program speculation.

Q: If an investor strongly believes that the stock market is going to have a sharp decline shortly, he or she could maximize profit by a. short selling stock-index futures contracts. b. hedging current short positions. c. using stock-index futures to straddle the market. d. buying stock-index futures contracts.

Q: An investor who sells a Treasury bond futures contract is expecting to profit from a. an increase in the price of the treasury bond. b. an increase in the underlying level of interest rates. c. interest rates remaining unchanged. d. a decrease in the underlying level of interest rates.

Q: In the model P/E = (D1/E1)/(k - g), the P/E should increase if the dividend payout rate increases, other things the same. If the payout rate was intentionally increased by the board of directors, other things are likely not to stay the same. What is likely to happen to the dividend growth rate and the required return?

Q: What is meant by "quality of earnings," and how does it affect the equity analyst's job?

Q: How could unexpected inflation affect the P/E ratio?

Q: Should an investor seek companies with low P/Es or high P/Es?

Q: What three variables affect the P/E ratio? How does each affect it?

Q: Can an investor that wants to use the approach of projected earnings and P/Es find help in Value Line?

Q: What are "earnings surprises?" How do they affect stock prices?

Q: How accurate are professional earnings estimates? Do purely mechanical models give better results than analysts who add subjective assessment to the data?

Q: What is the internal (sustainable) growth rate? How is it calculated?

Q: When an investor buys a share of common stock he/she buys a claim of ownership. How is this claim represented on the balance sheet?

Q: What is the relationship of the Financial Accounting Standards Board and the Securities and Exchange Commission?

Q: Stock prices have almost always risen as the business cycle is approaching a trough.

Q: According to available evidence, investors lose more by missing a bull market than by staying in a bear market.

Q: Assuming a constant P/E ratio, the growth in stock prices should equal the growth in earnings.