SOAL 2

Which of the following variables affect the P/E ratio?

I. capital structure of a firm;
Il. amount of dividends to be paid;
Ill. inflation ratel;
V. earnings rate of growth

A. I, Il and III only

B. I, Il and IV only
C. I, Ill and IV only
D. I, II, Ill and IV

Investor overconfidence leads to:

A. too little trading.
B. an overestimation of risk.
C. overly optimistic predictions.
D. narrow framing.

The yield curve depicts the relationship between a bond's yield to maturity and ItS....
A. Duration.
B. term to call.
C. term to maturity.
D. volatility.

One of the most popular tools of technical analysis is

A. charting.
B. financial statement analysis.
C. investor profiling.
D. investor behavior analysis.

The value of a stock is a function of

A. future returns.
B. historic dividend growth rate.
C. most recent earnings per share.
D. past returns.
The single most important issue in the stock valuation process is a company's
A. past earnings record.
B. historic dividend growth rate.
C. expected future returns.
D. capital structure.

Markhem Enterprises is expected to earn $1.34 per share this year. The company has a
dividend payout ratio of 40% and a P/E ratio of 18. What should one share of common
stock in Markhem Enterprises be selling for in the market?
A. $9.65
B. $14.47
C. $24.12 1.34 x 18
D. $33.77

The duration of a bond will increase as the time to maturity………. and/or as the
YTM on the bond………..
A. increases; increases
B. increases; decreases
C. decreases; increases
D. decreases; decreases

A company has an annual dividend growth rate of 5% and a retention rate of 40%.
The company's dividend payout ratio is:
A. 35%.
B. 40%.
C. 45%. 1-40%
D. 60%.

The process that quickly eliminates price discrepancies in efficient markets is known
as:
A. arbitration.
B. market correction.
C. arbitrage.
D. random fluctuation.
Which one of the following activities is likely to be useful if the market is only weak form
efficient?
A. attempting to find the best times to buy and sell
B. attempting to find repeating pattern in stock price behavior
C. attempting to determine if stock prices have upward or downward momentum
D. None of the above would be useful.

Followers of the efficient market hypothesis believe that:

A. very few investors actually analyze or evaluate stocks before they make a purchase
decision.
B. the needed information to assess the market is available only to corporate insiders.
C. investors react quickly and accurately to new information.
D. individual traders can have a significant impact on the price of a security.

A bond matures in 30 years, has a 20 year duration and a yield to maturity of 9.32%.
The market interest rate has increased by 0.47%. The modified duration is
A. 9.4 years.
B. 14.1 years.
C. 18.29 years.
D. 27.44 years.

What is the current price of a $1,000, 6% coupon bond that pays interest semiannually
if the bond matures in ten years and has a yield-to-maturity of 7.1325%?
A. $567
B. $920
C. $1,030
D. $1,080

Which of the following activities would be most useful in an efficient market?

A. buying and holding a diversified portfolio
B. searching for patterns in charts based on stock price movements
C. analyzing financial ratios based on accounting data
D. buying only securities that have performed well in the recent past
High P/E ratios can be expected when investors expect
A. a high rate of growth in earnings.
B. low earnings. relative to market prices.
C. high interest rates.
D. a bear market.

The mathematical link between a bond's price and interest rate changes is the:
A. Macaulay duration.
B. modified duration.
C. yield to market.
D. yield-to-call.

The current annual sales of Flower Bud, Inc. are $178,000. Sales are expected to *
increase by 4% next year. The company has a net profit margin of 5% which is
expected to remain constant for the next couple of years. There are 10,000 shares of
common stock outstanding. The market multiple is 16.4 and the relative P/E of the firm
is 1.21. What is the expected market price per share of common stock for next year?
A. $15.18
B. $17.66
C. $18.37
D. $19.29

GLOO stock's P/E ratio is 45 at a time when the market's P/E ratio is 15. GLOO's
relative P/E ratio is
A. 30.
B. -30.
C. 3.
D. 33.

The current yield on a bond is most similar to:

A. the discount rate on a Treasury Bill.
B. the effective annual rate on a certificate of deposit.
C. the dividend yield on a stock.
D. the internal rate of return if the bond is held to maturity.
E. Opsi 6
The Merry Co. has current annual sales of $350,000 and a net profit margin of 6%.
Sales are expected to increase by 5% annually while the profit margin is expected to
remain constant. What is the projected after-tax earnings for two years from now?
A. $19,294
B. $22,050
C. $23,100
D. $23,153

Long-term bonds are……..than short-term bonds.

A. less risky
B. more liquid
C. subject to more uncertainty
D. less sensitive to interest rate changes

The single most important factor that influences the behavior of market interest rates is:
A. inflation.
B. business profits.
C. the supply of new bonds.
D. the stock market

The risk-free rate of return is equal to the:

A. real rate plus a risk premium.
B. required return minus the inflation premium.
C. real rate plus the inflation premium.
D. required return minus the real rate.

The risk-free rate of return is 2.2 percent, the expected market return is 11 percent, and
the beta for Solstice, Inc. is 1.12. What is Solstice's required rate of return?
A. 8.80%
B. 12.05%
C. 13.20%
Ri = Rf +Beta x ( Rm - Rf )
D. 14.30%
Ri = 2.2 % + 1.12 X ( 11% - 2.2%)

The major forces behind earnings per share are:

A. return on assets and total asset value.
B. gross revenue and the stock price.
C. growth and the number of shares outstanding.
D. net income and the number of shares outstanding.

What is the coupon rate of an annual bond that has a yield to maturity of 8.5%, a
current price of $942.32, a par value of $1,000 and matures in thirteen years?
A. 7.67%
B. 7.75%
C. 8.33%
D. 8.50%

According to expectations theory if the 1 year interest is 3% this year and expected to
be 5% next year, the 2 year interest rate should be approximately:
A. 8%.
B. 5%.
C. 4%.
D. 3%.

Which of the following contributes to high P/E ratios?

A. high dividend payout ratios
B. high rate of earnings growth
C. periods of high inflation
D. high debt ratios

Market anomalies are caused by:

A. investors' efforts to avoid or postpone taxes.
B. different levels of risk.
C. statistical quirks.
D. some poorly understood combination of factors.

Which one of the following statements is true about a $1,000, 6% annual coupon bond
that is selling for $1,012?
A. The current yield is less than 6%.
B. The current yield is 6%.
C. The yield-to-maturity is greater than 6%.
D. The yield-to-maturity is 6%.

One of the calendar effect market anomalies indicates that ………… in value during
January.
A. large cap stocks tend to decline
B. equities in general tend to decline
C. small cap stocks tend to increase
D. equities in general tend to increase

A bond has a YTM of 6.75%, a modified duration of 14.05 years, a duration of 15 years
and a 20 year maturity. By what percentage will the bond's price change if market
interest rates decrease by 0.75%?
A. -0.750 percent
B. +0.750 percent
C. +10.53 percent
D. -10.53 percent