Multiple Choice Questions on Investment Theory and Applications, Exams of Investment Theory

Download Multiple Choice Questions on Investment Theory and Applications and more Exams Investment Theory in PDF only on Docsity! INVESTMENT THEORY & APPLICATIONS MULTIPLE CHOICE QUESTIONS (100 pts, 1 pt ea) 1. MBI has a current price of 36, an expected dividend per share of $0.90, expected EPS of $5.50, expected EPS growth of 10% per year, and a typical P/E ratio of 13.5. According to the Discounted Present Value Model, what is the expected price for MBI in five years? > A. 119 9/16 B. 74 1/4 C. 57 15/16 D. 133 13/16 2. MBI has a current price of 36, an expected dividend per share of $0.90, expected EPS of $5.50, expected EPS growth of 10% per year, and a typical P/E ratio of 13.5. According to the Discounted Present Value Model, what is the expected rate of return on MBI over the next five years? > A. 29.6% B. 22.3% C. 27.1% D. 18.1% 3. MBI has a current price of 36, an expected dividend per share of $0.90, expected EPS of $5.50, expected EPS growth of 10% per year, and a typical P/E ratio of 13.5. According to the Discounted Present Value Model, MBI is overvalued if investors have a risk-adjusted required return of: A. 29.6% B. 27.1% C. 22.3% > D. none of the above. 4. BEN has a current price of 25, is expected to pay a 25¢ dividend next year, and grow dividends at a rate of 15% for the foreseeable future. According to the dividend discount model, the required rate of return for BEN investors is: A. 15%. > B. 16%. C. 12%. D. 1%. 5. BEN has a current price of 25, is expected to pay a 25¢ dividend next year, and grow dividends at a rate of 15% for the foreseeable future. According to the dividend discount model, BEN is: A. over valued if investors require an 15% rate of return. B. undervalued if the actual dividend next year is 26¢. C. overvalued if the actual rate of growth is 18%. > D. worth $50 if investors require a 15.5% rate of return. 6. The constant growth version of the dividend valuation model is: > A. D1/(k-g). B. D1/(k+g). C. D0/(k+g). D. D0/(k-g). 7. As the required rate of return increases, the P/E ratio: > A. decreases. B. increases. C. is not affected. D. first rises, then falls. docsity.com 2 8. The P/E ratio is inversely related to the: > A. required rate of return. B. payout ratio. C. expected growth of dividends. D. expected growth of earnings. docsity.com 5 A. cannot be justified by assets, earnings, dividends, sure prospects, and management. B. can be justified by dividends and expected capital gains. C. and current market price typically coincide. > D. and current market price rarely coincide given investor pessimism and euphoria. 27. According to Graham & Dodd: A. investors are rarely rational. B. and intrinsic value tends to converge on price over time. > C. a sound valuation is eventually validated in an efficiently functioning marketplace. D. a sound valuation is quickly validated in an efficiently functioning marketplace. 28. According to Graham & Dodd, the objective of security analysis is to: > A. seek company valuations which, on average, prove more reliable than the marketplace. B. form an informed opinion of historical profitability and growth. C. picture the company as a going concern over all business conditions. D. identify overpriced securities, and to enjoy excess returns following the market's subsequent upward revaluation to a price consistent with intrinsic value. 29. Holding all else equal, ROE will fall with a rise in: > A. the book value of stockholders' equity. B. profit margin. C. sales. D. leverage. 30. An attractive measure of the firm's success in managing operating and financial leverage is the rate of: > A. return on equity. B. return on assets. C. return on sales. D. earnings per share growth. 31. ROE will fall with a rise in: > A. net worth. B. profit margin. C. total asset turnover. D. leverage. 32. The value of ROE is calculated as the ratio of: > A. ROE divided by P/E. B. the EPS growth rate divided by P/E. C. P/E divided by ROE. D. P/E divided by the EPS growth rate. 33. Assume EPS = $1, P = $15 and P/B = 3. A retention rate of 60% implies sustainable growth of: > A. 12%. B. 60%. C. 40%. D. 6.7%. 34. Assume EPS = $1, P = $15, P/B = 3, and zero dividends. EPS in the coming year will equal: > A. $1.20 B. $1.00 C. $3.00 docsity.com 6 D. $2.00 35. One of the problems with accrual accounting is that revenue can be reported without any increase in: > A. cash. B. debt. C. sales. D. accounts receivable. 36. Holding all else equal, the rate of growth made possible by internally generated funds rises with an increase in: A. dividends. B. the Treasury Bill rate. C. stockholders' equity. > D. EBIDTA. 37. Free cash flow falls with a rise in: A. depreciation. B. amortization. > C. capital expenditures. D. dividends. 38. The market capitalization of all 30 DJIA stocks combined is roughly what share of the total market capitalization of U.S. equities? A. 10%. B. 20%. > C. 30%. D. 50%. 39. The 500 stocks in the S&P 500: A. include 400 industrials, 40 utilities, 40 financial, and 20 transportation stocks. > B. are chosen based upon industry representation, liquidity, and stability. C. are the 500 largest companies according to market capitalization.. D. are the 500 largest listed companies according to market capitalization.. 40. The Russell 2000 Index measures the performance of: > A. a subcomponent of the Russell 3000, after eliminating the largest 1,000 stocks. B. the 2,000 largest US companies based on total capitalization. C. approximately 98% of the market value of US equity market. D. the 2,000 largest listed US companies based on total capitalization. 41. The Nasdaq Composite Index: A. represents all common stocks listed on The Nasdaq Stock Market, and includes over 7,500 companies. B. represents all common stocks listed on The Nasdaq Stock Market, and includes over 25,000 companies. C. measures the geometric rate of return on domestic and non-U.S. based common stocks listed on The Nasdaq Stock Market. > D. is market-value weighted. 42. Electronic trading on Instinet, Nasdaq, and other systems accounts for: A. more than 500 million shares per day of trading in NYSE-listed securities. B. more than one billion shares per day of trading in NYSE-listed securities. > C. 5-10% of composite trading in NYSE-listed securities. D. 50% of composite trading in NYSE-listed securities. 43. At the NYSE, the auction process for each listed stock is assigned to a: docsity.com 7 > A. specialist. B. broker. C. dealer. D. member. 44. The New York Stock Exchange maintains an orderly market in roughly: A. 500 issues. > B. 3,700 issues. C. 7,400 issues. D. 25,000 issues. 45. Nasdaq is: A. an auction market. > B. a negotiated market. C. an agent auction market. D. the largest stock exchange in the U.S. 46. Which one of the following is not a self-regulatory organization: A. the National Association of Securities Dealers. B. the New York Stock Exchange. > C. the Security and Exchange Commission. D. the Municipal Securities Rulemaking Board. 47. Before they can take effect, all Self Regulatory Organization rules and regulations must be approved by the: A. National Association of Securities Dealers. > B. Securities and Exchange Commission. C. various state regulatory bodies. D. U.S. Congress. 48. Securities professionals must qualify through examinations administered by the: > A. NASD. B. SEC. C. NYSE. D. Nasdaq. 49. Microsoft Corp. comprises roughly 4% of the market value of stocks included in the S&P 500 Index. On a day that Microsoft stock rises by 2%, it causes a rise in the S&P 500 of: A. 2%. > B. 0.08%. C. 4%. D. 2 points. 50. The S&P 500 is a: A. price-weighted index. > B. value-weighted index. C. equally-weighted index. D. share-weighted index. 51. NYSE composite volume does not include trading on: > A. the ASE. B. the floor of the NYSE. C. regional exchanges. docsity.com 10 D. investment partnership opportunity. 69. The New York Stock Exchange is a: A. negotiated market. B. network of dealers. > C. secondary market. D. regional exchange. 70. Limit orders: A. specify a certain price at which a market order takes effect. > B. specify a particular price to be met or bettered. C. are executed at the best price available. D. are orders entered for a particular day. 71. The market for equities is predominantly a: A. primary market. B. market dominated by individual investors. > C. secondary market. D. market dominated by foreign investors. 72. Primary markets: A. involve the organized trading of outstanding securities on exchanges. B. involve the organized trading of outstanding securities in the over-the-counter market. C. involve the organized trading of outstanding securities on exchanges and over-the-counter markets. > D. are where new issues (IPOs) are sold by corporations to raise new capital. 73. The role of investment banker does not include: A. giving companies advice on the price, amount and timing of an issue. > B. a commitment to maintain a continuous primary market for listed issues. C. managing a syndicate for distribution on a firm-price (dealer) or best-efforts (broker) basis. D. helping maintain an after market for OTC issues. 74. A stock is said to be under accumulation if volume expands on days when the price: A. moves down. B. is unchanged. > C. moves up. D. none of the above. 75. On the NYSE, firms that make a market in a given security are called: A. brokers. > B. specialists. C. members. D. arbitragers. 76. The short interest ratio is the ratio of total short sales to average: A. monthly trading volume. B. annual trading volume. > C. daily trading volume. D. shares outstanding. docsity.com 11 77. In selling a stock short: A. dividends are ignored. B. the seller must complete the transaction within a specified period. > C. the short seller must have a margin account. D. the seller immediately receives the net proceeds. docsity.com 12 78. The taxable equivalent yield for an investor in the 33% marginal tax bracket holding a 9% municipal bond is: > A. 13.4%. B. 3%. C. 9%. D. 6%. 79. Preferred stock: A. has a specified life. B. has a price that does not fluctuate. C. is a debt security. > D. dividends are not tax-deductible for issuers. 80. Zero coupon bonds: > A. eliminate reinvestment rate risk. B. are free from taxes until maturity. C. must be issued at face (or par) value. D. are free from price volatility. 81. When the yield to maturity for short-term bonds exceeds that for long-term bonds, yield spreads are said to be: A. inverted. B. flat. C. normal. > D. none of these. 82. Using annual compounding, the future value of a $5,000 investment earning 9% interest over a period of 15 years is: A. $3,642. B. $8,642. C. $14,871. > D. $18,212. 83. An original issue deep-discount bond that pays no interest is called a: > A. zero. B. CMO. C. PIK. D. convertible. 84. The coupon divided by the current price of a bond is called the: A. yield to maturity. B. approximate yield to maturity. > C. current yield. D. internal rate of return. 85. The relation of yield to maturity with term to maturity at a given point in time is called the: A. yield spread. > B. term structure of interest rates. C. liquidity preference hypothesis. D. segmented market hypothesis. 86. Yield spreads rise with a: A. fall in term to maturity. B. rise in term to maturity. docsity.com