Scribd Logo
Upload

Welcome to Scribd!

  • 371 views

    HW#3

    Uploaded by

    digital1dw
    This document appears to be a homework assignment containing 18 multiple choice questions related to investment principles and efficient market hypothesis. The questions cover topics like stock valuation using dividend discount models, bond pricing, yield curves and forms of the efficient market hypothesis.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    HW#3

    Uploaded by

    digital1dw
    371 views9 pages
    This document appears to be a homework assignment containing 18 multiple choice questions related to investment principles and efficient market hypothesis. The questions cover topics like stock valuation using dividend discount models, bond pricing, yield curves and forms of the efficient market hypothesis.

    Original Description:

    Fin 350

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document appears to be a homework assignment containing 18 multiple choice questions related to investment principles and efficient market hypothesis. The questions cover topics like stock valuation using dividend discount models, bond pricing, yield curves and forms of the efficient market hypothesis.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    371 views9 pages

    HW#3

    Uploaded by

    digital1dw
    This document appears to be a homework assignment containing 18 multiple choice questions related to investment principles and efficient market hypothesis. The questions cover topics like stock valuation using dividend discount models, bond pricing, yield curves and forms of the efficient market hypothesis.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 9

    Investment Principles

    Homework#3

    Dr. Wikrom Prombutr

    Question 1
    ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%,
    and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share. Investors
    expect a 12% rate of return on the stock.

    At what price would you expect ART to sell?

    $25.00
    $34.29
    $42.86
    none of the above

    Question 2
    ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%,
    and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share. Investors
    expect a 12% rate of return on the stock.

    At what P/E ratio would you expect ART to sell?

    8.33
    11.43
    14.29
    none of the above

    Investment Principles

    Homework#3

    Dr. Wikrom Prombutr

    Question 3
    ART has come out with a new and improved product. As a result, the firm projects an ROE of
    25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share.
    Investors expect a 12% rate of return on the stock.

    What is the present value of growth opportunities for ART?

    $8.57
    $9.29
    $14.29
    none of the above

    Question 4
    ART has come out with a new and improved product. As a result, the firm projects an ROE of
    25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share.
    Investors expect a 12% rate of return on the stock.

    What price do you expect ART shares to sell for in 4 years? ?

    $53.96
    $44.95
    $41.68

    Investment Principles

    Homework#3

    Dr. Wikrom Prombutr

    none of the above

    Question 5
    A common stock pays an annual dividend per share of $1.60. The risk-free rate is 5 percent and
    the risk premium for this stock is 4 percent. If the annual dividend is expected to remain at
    $1.60 per share, what is the value of the stock?

    $17.78
    $32.00
    $40.00
    none of the above

    Question 6
    A firm has a return on equity of 30% and an earnings retention rate of 40%. Its sustainable
    earnings growth rate is __________.

    6%
    10%
    12%
    18%

    Question 7
    Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected
    to grow at the rate of 10% per year. The risk-free rate of return is 4% and the expected return
    on the market portfolio is 13%. The stock of Interior Airline has a beta of 4.00. Using the

    Investment Principles

    Homework#3

    Dr. Wikrom Prombutr

    constant growth DDM (i.e. constand growth model or Gordon's growth model), the intrinsic
    value of the stock is __________.

    $10.00
    $22.73
    $27.78
    $41.67

    Question 8
    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 0.75. Using the constant growth DDM (i.e.
    constand growth model or Gordon's growth model), the intrinsic value of the stock is
    __________.

    4.00
    17.65
    37.50
    50.00

    Question 9
    Annie's Donut Shops, Inc. has expected earnings of $3.00 per share for next year. The firm's ROE
    is 18% and its earnings retention ratio is 60%. If the firm's market capitalization rate is 12%,
    what is the value of the firm excluding any growth opportunities?

    Investment Principles

    Homework#3

    Dr. Wikrom Prombutr

    $25.00
    $50.00
    $83.33
    $208

    Question 10
    Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming
    year. Dividends are expected to grow at 8% per year. The riskfree rate of return is 4% and the
    expected return on the market portfolio is 14%. Investors use the CAPM to compute the market
    capitalization rate, and the constant growth DDM (i.e. constand growth model or Gordon's
    growth model) to determine the value of the stock. The stock's current price is $84.00. Using the
    constant growth DDM, the market capitalization rate (k) is __________.

    9%
    12%
    14%
    18%

    Question 11
    Rose Hill Trading Company is expected to have EPS in the upcoming year of $6.00. The expected
    ROE is 18.0%. An appropriate required return on the stock is 14%. If the firm has a plowback
    ratio of 70%, its intrinsic value should be __________.

    $20.93
    $69.77

    Investment Principles

    Homework#3

    Dr. Wikrom Prombutr

    $128.57
    $150.00

    Question 12
    Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2.00, a dividend in
    year 2 of $3.00, and a dividend in year 3 of $4.00. After year 3, dividends are expected to grow
    at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the
    multistage DDM (i.e. Shifting Growth Rate Model), the stock should be worth __________
    today.

    $63.80
    $65.13
    $67.98
    $85.60

    Question 13
    A coupon bond which pays interest semi-annually, has a par value of $1,000, matures in 5 years,
    and has a yield to maturity of 8%. If the coupon rate is 10%, the intrinsic value of the bond today
    will be __________.

    $855.55
    $1,000
    $1,081
    $1,100

    Investment Principles

    Homework#3

    Dr. Wikrom Prombutr

    Question 14
    A bond presently has a price of $1,030. The present yield on the bond is 8.00%. If the yield
    changes from 8.00% to 8.10%, the price of the bond will go down to $1,020. The modified
    duration of this bond is __________.

    -10.5
    -8.5
    9.7
    10.5

    Question 15
    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 (i.e. Shifting Growth Rate Model), the stock should be worth __________ today.

    $13.06
    $13.38
    $18.25
    $18.78

    Question 16
    Consider the following $1,000 par value zero-coupon bonds:

    Investment Principles
    Bond
    A
    B
    C
    D
    E

    Homework#3
    Years to Maturity
    1
    2
    3
    4
    5

    Dr. Wikrom Prombutr


    Yield to Maturity
    6%
    7.50%
    7.99%
    8.49%
    10.70%

    The expected one-year interest rate one year from now should be __________.

    7.00%
    8.00%
    9.00%
    10.00%

    Question 17
    If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant
    information including historical stock prices and current public information about the firm, but
    not information that is available only to insiders.

    semi-strong
    strong
    weak
    none of the above

    Question 18
    In an efficient market, __________.

    Investment Principles

    Homework#3

    Dr. Wikrom Prombutr

    security prices react quickly to new information


    security prices are seldom far above or below their justified levels
    security analysis will not enable investors to realize superior returns consistently
    All of the above

    You might also like