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Fall 2012 Exam 1 Name: ______________________________

There are 30 questions in this exam. Each question is equally weighted. Make sure you read all questions and instructions carefully! You have the entire class period to complete this exam, so take your time. If you have any questions during the exam, please raise your hand.

Good luck!

1. Real assets in the economy include all but which one of the following?
A. Land
B. Buildings
C. Consumer durables
D. Common stock

2. Security selection refers to the ________.
A. allocation of the investment portfolio across broad asset classes
B. nalysis of the value of securities
C. choice of specific securities within each asset class
D. top down method of investing

3. The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________.
A. interest building
B. book building
C. market analysis
D. customer identification

4. Money Market securities are characterized by ________.

I. maturity less than one year

II. safety of the principal investment

III. low rates of return
A. I only
B. I and II only
C. I and III only
D. I, II and III

5. An example of a derivative security is _________.
A. a common share of General Motors
B. a call option on Intel stock
C. a Ford bond
D. a U. S. Treasury bond

6. Which of the following indices are market-value weighted?

I. The NYSE Composite

II. The S&P 500

III. The Wilshire 5000
A. I and II only
B. II and III only
C. I and III only
D. I, II and III

7. Preferred stock is like long-term debt in that ___________.
A. it gives the holder voting power regarding the firm’s management
B. it might promise to pay to its holder a fixed stream of income each year
C. the preferred dividend is a tax-deductible expense for the firm
D. n the event of bankruptcy preferred stock has equal status with debt

8. A stock quote indicates a stock price of $60 and a dividend annual yield of 3%. The firm pays quarterly dividends in a year. The latest quarterly dividend received by stock investors must have been ______ per share.
A. $0. 55
B. $1. 80
C. $0. 45
D. $1. 25

9. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock prices for the three stocks are $54, $23, and $44. What is the price weighted index value of the Chompers Index?
A. 23. 43
B. 35. 36
C. 40. 33
D. 49. 58

10. Eurodollars are _________.
A. dollar denominated deposits at any foreign bank or foreign branch of an American bank
B. dollar denominated bonds issued by firms outside their home market
C. currency issued by Euro Disney and traded in France
D. dollars that wind up in banks as a result of money laundering activities

11. A tax free municipal bond provides a yield of 3. 2%. What is the equivalent taxable yield on the bond given a 35% tax bracket?
A. 3. 20%
B. 3. 68%
C. 4. 92%
D. 5. 00%

12. You purchased a share of stock for $29. One year later you received $2. 5 as dividend and sold the share for $28. Your holding-period return was _________.
A. -3. 57%
B. – 3. 45%
C. 4. 31%
D. 8. 03%

13. Suppose your tax bracket is 15%. Would you prefer to earn
A. a 6% taxable return
B. a 5% tax-free yield

Answer: A

14. Historically, September usually has low stock returns in a year. However, in an efficient market, an investor’s investment decision ______ be affected by the historical data, if he believes the stock market is efficient.
A. should
B. should not

15. If an investor places a _________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its price rises above the stipulated level.
A. stop-buy; stop-loss
B. market; limit
C. stop-loss; stop-buy
D. limit; market

16. The difference between the price at which a dealer is willing to buy, and the price at which a dealer is willing to sell, is called the _________.
A. market spread
B. bid-ask spread
C. bid-ask gap
D. market variation

17. Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________.
A. 20,000
B. $12,000
C. $8,000
D. $15,000 500($40)(0. 40) = $8,000

18. You purchased 100 shares of ABC common stock on margin at $60 per share. Assume the initial margin is 60% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends and ignore interest on the margin loan. )
A. $26. 55
B. $34. 29
C. $28. 95
D. $30. 77

19. You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65% and the stock pays no dividen
D. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin.
A. 35%
B. 39%
C. 43%
D. 28%

20. You sell short 100 shares of ABC company which are currently selling at $50 per share. You post the 60% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account and the firm does not pay any dividends)
A. $61. 54
B. $70. 72
C. $62. 98
D. $64. 50

21. You sell short 200 shares of Doggie Treats In
C. which are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account and the firm does not pay any dividends)
A. $28. 85
B. $35. 71
C. $31. 50
D. $32. 25

22. The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?
A. 9%
B. 15%
C. 48%
D. 57%

23. Which one of the following is a common term for the market consensus value of the required rate of return on a stock?
A. Dividend payout ratio
B. Intrinsic value
C. Market capitalization rate
D. Plowback ratio

24. __________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.
A. Book value per share
B. Liquidation value per share
C. Market value per share
D. Tobin’s Q

25. Stockholders of Dog’s R Us Pet Supply expect a 12% rate of dividend yield on their stock. Management has consistently been generating a ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next five years. Given this the firm’s optimal dividend payout ratio is now ______.
A. 0%
B. 100%
C. between 0% and 50%
D. between 50% and 100%

26. You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for one year. You expect to receive both $1. 25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return.
A. $31. 25
B. $32. 37
C. $38. 47
D. $41. 32

27. The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12% and its expected EPS is $5. 00. If the firm’s plow-back ratio is 60%, its P/E ratio will be _________.
A. 7. 14
B. 14. 29
C. 16. 67
D. 22. 22

28. Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____.
A. 4. 5%
B. 10. 5%
C. 15. 0%
D. 30. 0%

29. Todd Mountain Development Corporation is expected to pay a dividend of $3. 00 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of 0. 5. Using the constant growth DDM, the intrinsic value of the stock is _________.
A. 4. 00
B. 17. 65
C. 37. 50
D. 50. 00

30. Ace Frisbee Corporation produces a good that is very mature in their product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3. 00, a dividend in year 2 of $2. 00, and a dividend in year 3 of $1. 00. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today.
A. $13. 07
B. $13. 58
C. $18. 25
D. $18. 78