FIN 350 Week 7 Quiz – Strayer


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Quiz 6 Chapter 11 and 13

Chapter 11—Stock Valuation and Risk

     1.   The price-earnings valuation method applies the ____ price-earnings ratio to ____ earnings per share in order to value the firm's stock.
a.
firm's; industry
b.
firm's; firm's
c.
average industry; industry
d.
average industry; firm's


                                          
          
          

     2.   A firm is expected to generate earnings of $2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firm's shares based on the price-earnings (PE) method is
a.
$2.22.
b.
$6.76.
c.
$33.30.
d.
none of the above


                                          
          
          

     3.   The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derive the PE ratio.
a. True
b. False

                                          
          


     4.   Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.
a.
33.33
b.
166.67
c.
41.67
d.
60.00


                                          
          
          

     5.   Protsky Inc. just paid a dividend of $2.20 per share. The dividend growth rate for Protsky's dividends is 3 percent per year. If the required rate of return on Protsky stock is 12 percent, the stock should be valued at $____ per share according to the dividend discount model.
a.
24.44
b.
25.18
c.
18.88
d.
75.53


                                          
          
          

     6.   The limitations of the dividend discount model are more pronounced when valuing stocks
a.
that pay most of their earnings as dividends.
b.
that retain most of their earnings.
c.
that have a long history of dividends.
d.
that have constant earnings growth.


                                          
          
          

     7.   Vansel Inc. retains most of its earnings. The company currently has earnings per share of $11. Vansel expects its earnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Vansel's industry is 12. Vansel is expected to pay dividends per share of $3.50 during each of the next three years. If investors require a 10 percent rate of return on Vansel stock, a fair price for Vansel stock today is $____.
a.
113.95
b.
111.32
c.
105.25
d.
none of the above


                                          
          
          

     8.   When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns.
a.
beta; standard deviation
b.
standard deviation; beta
c.
intercept; beta
d.
beta; error term


                                          
          


     9.   The ____ is commonly used as a proxy for the risk-free rate in the Capital Asset Pricing Model.
a.
Treasury bond rate
b.
prime rate
c.
discount rate
d.
federal funds rate


                                          
          
          

   10.   A beta of 1.8 implies that the stock has a risk premium of 1.8%.
a. True
b. False

                                          
          


   11.   Stock prices of U.S. firms primarily involved in exporting are likely to be ____ affected by a weak dollar and ____ affected by a strong dollar.
a.
favorably; adversely
b.
adversely; adversely
c.
favorably; favorably
d.
adversely; favorably


                                          
          
          

   12.   A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy.
a. True
b. False

                                          
          
          

   13.   The January effect refers to the ____ pressure on ____ stocks in January of every year.
a.
downward; large
b.
upward; large
c.
downward; small
d.
upward; small


                                          
          
          

   14.   The expected acquisition of a firm typically results in ____ in the target's stock price.
a.
an increase
b.
a decrease
c.
no change
d.
none of the above


                                          
          
          

   15.   The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's volatility.
a.
Sharpe
b.
Treynor
c.
arbitrage
d.
margin


                                          
          
          

   16.   The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta.
a.
Sharpe
b.
Treynor
c.
arbitrage
d.
margin


                                          
          
          

   17.   Stock price volatility increased during the credit crisis.
a. True
b. False

                                          
          
          

   18.   The Sharpe Index measures the
a.
average return on a stock.
b.
variability of stock returns per unit of return
c.
stock's beta adjusted for risk.
d.
excess return above the risk-free rate per unit of risk.


                                          
          
          

   19.   A stock's average return is 11 percent. The average risk-free rate is 9 percent. The stock's beta is 1 and its standard deviation of returns is 10 percent. What is the Sharpe Index?
a.
.05
b.
.5
c.
.1
d.
.02
e.
.2


                                          
          
          

   20.   A stock's average return is 10 percent. The average risk-free rate is 7 percent. The standard deviation of the stock's return is 4 percent, and the stock's beta is 1.5. What is the Treynor Index for the stock?
a.
.03
b.
.75
c.
1.33
d.
.02
e.
50


                                          
          
          

   21.   If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are
a.
weak-form efficient.
b.
semi-strong form efficient.
c.
strong form efficient.
d.
B and C
e.
none of the above


                                          
          
          

   22.   If security markets are semi-strong form efficient, investors cannot solely use ____ to earn excess returns.
a.
previous price movements
b.
insider information
c.
publicly available information
d.
A and C


                                          
          


   23.   The ____ is commonly used to determine what a stock's price should have been.
a.
Capital Asset Pricing Model
b.
Treynor Index
c.
Sharpe Index
d.
B and C


                                          
          
          

   24.   A stock's beta is estimated to be 1.3. The risk-free rate is 5 percent, and the market return is expected to be 9 percent. What is the expected return on the stock based on the CAPM?
a.
5.2 percent
b.
11.7 percent
c.
16.7 percent
d.
4 percent
e.
10.2 percent


                                          
          
          

   25.   According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ____ affected by a weak dollar. Stock prices of U.S. importing firms could be ____ affected by a weak dollar.
a.
adversely; favorably
b.
favorably; adversely
c.
favorably; favorably
d.
adversely; adversely


                                          
          


   26.   The demand by foreign investors for the stock of a U.S. firm sold on a U.S. exchange may be higher when the dollar is expected to ____, other things being equal. (Assume the firm's operations are unaffected by the value of the dollar.)
a.
strengthen
b.
weaken
c.
stabilize
d.
B and C


                                          
          


   27.   A higher beta of an asset reflects
a.
lower risk.
b.
lower covariance between the asset's returns and market returns.
c.
higher covariance between the asset's returns and the market returns.
d.
none of the above



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