Finance Exam

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FINAL EXAM

1. The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.  A. book value

 2. New-economy companies generally have higher _______ than old-economy companies.  B. P/E multiples

3. Earnings yields tend to _______ when Treasury yields fall.  A. fall
 
 
4. A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information which of the following statement(s) is/are correct? I. All else equal the firm's growth rate will accelerate after the payout change II. All else equal the firm's stock price will go up after the payout change III. All else equal the firm's P/E ratio will increase after the payout change  A. I only

 5. An underpriced stock provides an expected return which is ____________ the required return based on the capital asset pricing model (CAPM).  C. greater than

6. One of the biggest impediments to a global capital market is _________. 

B. the lack of common accounting standards
 
 
7. If the interest rate on debt is higher than the ROA, then a firm's ROE will _________.  A. decrease

 
8. Based on the cash flow data in the table for Interceptors Inc., which of the following statements is/are correct? I. This firm appears to be a good investment because of its steady growth in cash. II. This firm has only been able to generate growing cash flows by borrowing or selling equity to offset declining operating cash flows. III. Financing activities have been increasingly important for this firm's operations, at least in the short run. 

B. II and III only
 
 
9. All else the same, an ______ style option will be ______ valuable than a ______ style option.  A. American, more, European

 
 
10. An American put option gives its holder the right to _________.  C. sell the underlying asset at the exercise price on or before the expiration date  
 
11. An Asian call option gives its holder the right to ____________. 

B. buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life  
12. If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium, that standard deviation would be called the _______.  C. implied volatility

 
13. A call option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value.  D. zero; positive
 
14. A put option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value.  B. positive; positive

15. Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9 month maturity. All else equal as the time to expiration approaches the value of Investor A's position will _______ and the value of Investor B's position will _______.  C. decrease; increase

 
16. Before expiration the time value of an out-of-the money stock option is __________.  D. positive
 
 
17. Perfect dynamic hedging requires _______________. 
D. continuous rebalancing
 
 
18. Which of the following is a true statement? 
A. The actual value of a call option is greater than its intrinsic value prior to expiration

19. Suppose that in 2009 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant growth formula for valuation, if interest rates increase to 9% the value of the market will change by _____.  D. -33%

 
20. 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 50%, its P/E...
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