Q&A Hero

Q: A company paid a dividend last year of $1.75. The expected ROE for next year is 14.5%. An appropriate required return on the stock is 10%. If the firm has a plowback ratio of 75%, the dividend in the coming year should be A. $1.80. B. $2.12. C. $1.77. D. $1.94.

Q: High Tech Chip Company is expected to have EPS in the coming year of $2.50. The expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 70%, the growth rate of dividends should be A. 5.00%. B. 6.25%. C. 6.60%. D. 7.50%. E. 8.75%.

Q: Fools Gold Mining Company is expected to pay a dividend of $8 in the upcoming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Fools Gold Mining Company has a beta of 0.25. The return you should require on the stock is A. 2%. B. 4%. C. 6%. D. 8%.

Q: Midwest Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Midwest Airline has a beta of 3.00. The return you should require on the stock is A. 10%. B. 18%. C. 30%. D. 42%.

Q: Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Torque Corporation has a beta of 1.2. What is the intrinsic value of Torque's stock? A. $14.29 B. $14.60 C. $12.33 D. $11.62

Q: Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Torque Corporation has a beta of 1.2. What is the return you should require on Torque's stock? A. 12.0% B. 14.6% C. 15.6% D. 20% E. None of the options are correct.

Q: If a firm's sales decrease by 15%, and profits decrease by 20% during a recession, the firm's operating leverage is A. -1.33. B. 0.75. C. 5. D. −5.

Q: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the after-tax profit of firm C will be A. $0. B. $6,000. C. $36,000. D. $60,000. E. -$630,000.

Q: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the tax of firm C will be A. -$420,000. B. $750,000. C. $510,000. D. $204,000.

Q: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the before-tax profit of firm C will be A. $1,680,000. B. -$1,050,000. C. $510,000. D. $204,000.

Q: The industry with the lowest return in 2016 was A. -asset management. B. telecom services. C. health care. D. business software. E. money center banks.

Q: The industry with the lowest ROE in 2015-2016 was A. money center banks. B. chemical products. C. business software. D. biotech. E. -integrated oil and gas.

Q: The industry with the highest ROE in 2015-2016 was A. -major airlines. B. trucking. C. business software. D. computer systems. E. integrated oil and gas.

Q: In recent years, P/E multiples for S&P 500 companies have A. ranged from −1 to −10. B. ranged from 1 to 8. C. ranged from 6 to 10. D. -ranged from 12 to 25. E. ranged from 20 to more than 50.

Q: A top-down analysis of a firm's prospects starts with A. an examination of the firm's industry. B. an evaluation of the firm's position within its industry. C. a forecast of interest-rate movements. D. -an assessment of the broad economic environment. E. the application of the CAPM to find the firm's theoretical return.

Q: Investment manager Peter Lynch refers to firms that are in bankruptcy or soon might be as A. slow growers. B. stalwarts. C. cyclicals. D. asset plays. E. -turnarounds.

Q: The life cycle stage in which industry leaders are likely to emerge is the A. start-up stage. B. maturity stage. C. -consolidation stage. D. relative decline stage. E. All of the options are correct.

Q: The stock market exhibiting the highest U.S. dollar return in 2015 was A. -Japan. B. Singapore. C. Greece. D. South Korea. E. China.

Q: The process of estimating the dividends and earnings that can be expected from the firm based on determinants of value is called A. business-cycle forecasting. B. macroeconomic forecasting. C. technical analysis. D. -fundamental analysis. E. None of the options are correct.

Q: A variety of factors relating to industry structure affect the performance of the firm, including A. threat of entry. B. rivalry between existing competitors. C. the state of the economy. D. threat of entry and the state of the economy. E. -threat of entry and rivalry between existing competitors.

Q: In the decline stage of the industry life cycle, A. the product may have reached obsolescence. B. the industry will grow at a rate less than the overall economy. C. the industry may experience negative growth. D. the product may have reached obsolescence, and the industry will grow at a rate less than the overall economy. E. -the product may have reached obsolescence, the industry will grow at a rate less than the overall economy, and the industry may experience negative growth.

Q: In the maturity stage of the industry life cycle, A. the product has reached full potential. B. profit margins are narrower. C. producers are forced to compete on price to a greater extent. D. the product has reached full potential and profit margins are narrower. E. -the product has reached full potential, profit margins are narrower, and producers are forced to compete on price to a greater extent.

Q: In the consolidation stage of the industry life cycle, A. it is difficult to predict which firms will succeed and which firms will fail. B. industry growth is very rapid. C. -the performance of firms will more closely track the performance of the overall industry. D. it is difficult to predict which firms will succeed and which firms will fail, and industry growth is very rapid. E. industry growth is very rapid, and the performance of firms will more closely track the performance of the overall industry.

Q: In the start-up stage of the industry life cycle, A. it is difficult to predict which firms will succeed and which firms will fail. B. industry growth is very rapid. C. firms pay a high level of dividends. D. -it is difficult to predict which firms will succeed and which firms will fail, and industry growth is very rapid. E. industry growth is very rapid, and firms pay a high level of dividends.

Q: The industry life cycle is described by which of the following stage(s)? A. Start-up B. Consolidation C. Absolute decline D. -Start-up and consolidation E. All of the options are correct.

Q: ________ is a proposition that a strong proponent of supply-side economics would most likely stress. A. Higher marginal tax rates will lead to a reduction in the size of the budget deficit and lower interest rates as they depend on government revenues B. -Higher marginal tax rates promote economic inefficiency and thereby retard aggregate output as they encourage investors to undertake low productivity projects with substantial tax shelter benefits C. Income redistribution payments will exert little impact on real aggregate supply as they do not consume resources directly D. A tax reduction will increase the disposable income of households, and thus, the primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus E. None of the options is a likely statement for a supply-side proponent.

Q: Which of the following are examples of defensive industries? A. Food producers B. Durable goods producers C. Pharmaceutical firms D. Public utilities E. -Food producers, pharmaceutical firms, and public utilities

Q: Which of the following are not examples of defensive industries? A. Food producers B. -Durable goods producers C. Pharmaceutical firms D. Public utilities

Q: Supply-side economists wishing to stimulate the economy are most likely to recommend A. a decrease in the money supply. B. a decrease in production output. C. an increase in the real interest rate. D. a decrease in the tax rate. E. -an increase in mortgage rates.

Q: Classifying firms into groups, such as _________, provides an alternative to the industry life cycle. A. slow-growers B. stalwarts C. countercyclicals D. -slow-growers and stalwarts E. slow-growers and countercyclicals

Q: Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50 per widget. Firm B has total fixed costs of $240,000 and variable costs of 75 per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets. Calculate firm B's degree of operating leverage. A. .714 B. 9.09 C. -7.86 D. 7.14

Q: Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50 per widget. Firm B has total fixed costs of $240,000 and variable costs of 75 per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets. Calculate firm A's degree of operating leverage. A. -11.0 B. 2.86 C. 9.09 D. 1.00

Q: If the currency of your country is depreciating, the result should be to ______ exports and to _______ imports. A. increase; increase B. -increase; decrease C. decrease; increase D. decrease; decrease E. not affect; not affect

Q: Assume that the Federal Reserve decreases the money supply. This action will cause ________ to decrease. A. interest rates B. the unemployment rate C. -investment in the economy D. trade balance

Q: Assume the U.S. government was to decide to increase the budget field. Holding all else constant, this will cause ______ to decrease. A. interest rates B. government borrowing C. unemployment D. -interest rates and government borrowing E. None of the options are correct.

Q: Assume the U.S. government was to decide to increase the budget field. Holding all else constant, this will cause ______ to decrease. A. interest rates B. government borrowing C. unemployment D. -interest rates and government borrowing E. None of the options are correct.

Q: A firm in the early stages of the industry life cycle will likely have A. high market penetration. B. high risk. C. rapid growth. D. high market penetration and rapid growth. E. -high risk and rapid growth.

Q: The stock price index and new orders for nondefense capital goods are A. -leading economic indicators. B. coincidental economic indicators. C. lagging economic indicators. D. not useful as economic indicators.

Q: If the economy were going into a recession, an attractive industry to invest in would be the A. automobile industry. B. -medical services industry. C. construction industry. D. automobile and construction industries. E. medical services and construction industries.

Q: A firm in an industry that is very sensitive to the business cycle will likely have a stock beta A. -greater than 1.0. B. equal to 1.0. C. less than 1.0 but greater than 0.0. D. equal to or less than 0.0. E. There is no relationship between beta and sensitivity to the business cycle.

Q: The average duration of unemployment and changes in the consumer price index for services are A. leading economic indicators. B. coincidental economic indicators. C. -lagging economic indicators. D. composite economic indicators.

Q: A declining GDP indicates a(n) ______ economy with ______ opportunity for a firm to increase sales. A. -stagnant; little B. stagnant; ample C. expanding; little D. expanding; ample E. stable; no

Q: A rapidly growing GDP indicates a(n) ______ economy with ______ opportunity for a firm to increase sales. A. stagnant; little B. stagnant; ample C. expanding; little D. -expanding; ample E. stable; no

Q: Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year year to maturity and a 10% coupon rate. 2) A zero-coupon bond, Y, with a 5-year year to maturity and a 10% yield to maturity. A. Bond X because of the higher yield to maturity B. Bond X because of the longer time to maturity C. Bond Y because of the longer duration D. Both have the same sensitivity because both have the same yield to maturity. E. None of the options are correct.

Q: The interest-rate risk of a bond is A. the risk related to the possibility of bankruptcy of the bond's issuer. B. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. C. the unsystematic risk caused by factors unique in the bond. D.the risk related to the possibility of bankruptcy of the bond's issuer, and the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. E. All of the options are correct.

Q: Given the time to maturity, the duration of a zero-coupon bond is higher when the discount rate is A. higher. B. lower. C. equal to the risk-free rate. D. The bond's duration is independent of the discount rate. E. None of the options are correct.

Q: The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity). A. current yield B. the Macaulay duration C. yield to call D. yield to maturity E. None of the options are correct.

Q: The "modified duration" used by practitioners is equal to the Macaulay duration A. times the change in interest rate. B. times (one plus the bond's yield to maturity). C. divided by (one minus the bond's yield to maturity). D. divided by (one plus the bond's yield to maturity). E. None of the options are correct.

Q: Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's A. term to maturity is higher. B. coupon rate is lower. C. yield to maturity is higher. D. term to maturity is higher and coupon rate is lower. E. All of the options are correct.

Q: Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's A. term to maturity is lower. B. coupon rate is higher. C. yield to maturity is higher. D. term to maturity is lower and coupon rate is higher. E. All of the options are correct.

Q: Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's A. term to maturity is lower. B. coupon rate is higher. C. yield to maturity is lower. D. term to maturity is lower and coupon rate is higher. E. All of the options are correct.

Q: Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's A. term to maturity is lower. B. coupon rate is lower. C. yield to maturity is higher. D. term to maturity is lower and yield to maturity is higher. E. None of the options are correct.

Q: Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's A. term to maturity is higher. B. coupon rate is higher. C. yield to maturity is higher. D. All of the options are correct. E. None of the options are correct.

Q: Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's A. term to maturity is lower. B. coupon rate is higher. C. yield to maturity is lower. D. current yield is higher. E. None of the options are correct.

Q: What should the purchase price of a 2-year zero-coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000? A. $877.54 B. $888.33 C. $883.32 D. $893.36 E. $871.80

Q: The yield curve A. is a graphical depiction of term structure of interest rates. B. is usually depicted for U.S. Treasuries in order to hold risk constant across maturities and yields. C. is usually depicted for corporate bonds of different ratings. D.is a graphical depiction of term structure of interest rates and is usually depicted for U.S. Treasuries in order to hold risk constant across maturities and yields. E. is a graphical depiction of term structure of interest rates and is usually depicted for corporate bonds of different ratings.

Q: The on the run yield curve is A. a plot of yield as a function of maturity for zero-coupon bonds. B. a plot of yield as a function of maturity for recently-issued coupon bonds trading at or near par. C. a plot of yield as a function of maturity for corporate bonds with different risk ratings. D. a plot of liquidity premiums for different maturities.

Q: The pure yield curve can be estimated A. by using zero-coupon Treasuries. B. by using stripped Treasuries if each coupon is treated as a separate "zero." C. by using corporate bonds with different risk ratings. D. by estimating liquidity premiums for different maturities. E. by using zero-coupon Treasuries and by using stripped Treasuries if each coupon is treated as a separate "zero."

Q: Forward rates ____________ future short rates because ____________. A. are equal to; they are both extracted from yields to maturity B. are equal to; they are perfect forecasts C. differ from; they are imperfect forecasts D. differ from; forward rates are estimated from dealer quotes while future short rates are extracted from yields to maturity E. are equal to; although they are estimated from different sources, they both are used by traders to make purchase decisions

Q: Given the bond described above, if interest were paid semi-annually (rather than annually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be A. less than 12%. B. more than 12%. C. 12%. D. Cannot be determined. E. None of the options are correct.

Q: When computing yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the A. coupon rate. B. current yield. C. yield to maturity at the time of the investment. D. prevailing yield to maturity at the time interest payments are received. E. the average yield to maturity throughout the investment period.

Q: The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n 1 period zero-coupon bond rolled over into a one-year bond in year n is defined as A. the forward rate. B. the short rate. C. the yield to maturity. D. the discount rate. E. None of the options are correct.

Q: An upward-sloping yield curve A. may be an indication that interest rates are expected to increase. B. may incorporate a liquidity premium. C. may reflect the confounding of the liquidity premium with interest rate expectations. D. All of the options are correct. E. None of the options are correct.

Q: The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. What is the price of a 4-year maturity bond with a 12% coupon rate paid annually? (Par value = $1,000.) A. $742.09 B. $1,222.09 C. $1,000.00 D. $1,141.92 E. None of the options are correct.

Q: The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. What is the yield to maturity on a 3-year zero-coupon bond? A. 6.37% B. 9.00% C. 7.33% D. 10.00% E. None of the options are correct.

Q: The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. According to the expectations theory, what is the expected forward rate in the third year? A. 7.00% B. 7.33% C. 9.00% D. 11.19% E. None of the options are correct.

Q: Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the yield to maturity of a 3-year zero-coupon bond? A. 7.03% B. 9.00% C. 6.99% D. 7.49% E. None of the options are correct.

Q: Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000) A. $1,092 B. $1,054 C. $1,000 D. $1,073 E. None of the options are correct.

Q: Suppose that all investors expect that interest rates for the 4 years will be as follows: If you have just purchased a 4-year zero-coupon bond, what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same? (Par value of the bond = $1,000) A. 5% B. 7% C. 9% D. 10% E. None of the options are correct.

Q: Suppose that all investors expect that interest rates for the 4 years will be as follows: What is the price of a 3-year zero-coupon bond with a par value of $1,000? A. $863.83 B. $816.58 C. $772.18 D. $765.55 E. None of the options are correct.

Q: The expectations theory of the term structure of interest rates states that A. forward rates are determined by investors'expectations of future interest rates. B. forward rates exceed the expected future interest rates. C. yields on long- and short-maturity bonds are determined by the supply and demand for the securities. D. All of the options are correct. E. None of the options are correct.

Q: Which of the following are possible explanations for the term structure of interest rates? A. The expectations theory B. The liquidity preference theory C. Modern portfolio theory D. The expectations theory and the liquidity preference theory

Q: According to the expectations hypothesis, an upward-sloping yield curve implies that A. interest rates are expected to remain stable in the future. B. interest rates are expected to decline in the future. C. interest rates are expected to increase in the future. D. interest rates are expected to decline first, then increase. E. interest rates are expected to increase first, then decrease.

Q: An upward sloping yield curve is a(n) _______ yield curve. A. normal B. humped C. inverted D. flat E. None of the options are correct.

Q: An inverted yield curve implies that A. long-term interest rates are lower than short-term interest rates. B. long-term interest rates are higher than short-term interest rates. C. long-term interest rates are the same as short-term interest rates. D. intermediate-term interest rates are higher than either short- or long-term interest rates. E. None of the options are correct.

Q: Mortgage-backed CDOs were a disaster in 2007 because A. they were formed by pooling high quality fixed-rate loans with low interest rates. B. they were formed by pooling subprime mortgages. C. home prices stalled. D. the mortgages were variable rate loans, and interest rates increased. E. they were formed by pooling subprime mortgages, home prices stalled, the mortgages were variable rate loans, and interest rates increased.

Q: CDOs are divided in tranches A. that provide investors with securities with varying degrees of credit risk. B. and each tranch is given a different level of seniority in terms of its claims on the underlying pool. C. and none of the tranches is risky. D. and equity tranch is very low risk. E. that provide investors with securities with varying degrees of credit risk, and each tranch is given a different level of seniority in terms of its claims on the underlying pool.

Q: SIVs raise funds by ______ and then use the proceeds to ______. A. issuing short-term commercial paper; retire other forms of their debt B. issuing short-term commercial paper; buy other forms of debt such as mortgages C. issuing long-term bonds; retire other forms of their debt D. issuing long-term bonds; buy other forms of debt such as mortgages

Q: SIVs are A. structured investment vehicles. B. structured interest rate vehicles. C. semi-annual investment vehicles. D. riskless investments. E. structured insured variable rate instruments. SIVs are structured investment vehicles.

Q: The compensation from a CDS can come from A. the CDS holder delivering the defaulted bond to the CDS issuer in return for the bond's par value. B. the CDS issuer paying the swap holder the difference between the par value of the bond and the bond's market price. C. the federal government paying off on the insurance claim. D. the CDS holder delivering the defaulted bond to the CDS issuer in return for the bond's par value, and the CDS issuer paying the swap holder the difference between the par value of the bond and the bond's market price. E. None of the options are correct.