PRACTICE EXAM-set 1

PRACTICE EXAM-set 1 - 1. Nicholas Manufacturing just...

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1. Nicholas Manufacturing just announced yesterday that its 4 th quarter earnings will be 10% higher than last year's 4 th quarter. You observe that Nicholas had an abnormal return of -1.2% yesterday. This suggests that A) the market is not efficient. B) Nicholas' stock will probably rise in value tomorrow. C) investors expected the earnings increase to be larger than what was actually announced. D) investors expected the earnings increase to be smaller than what was actually announced. E) earnings are expected to decrease next quarter. Answer: C Rationale: Anticipated earnings changes are impounded into a security's price as soon as expectations are formed. Therefore a negative market response indicates that the earnings surprise was negative, that is, the increase was less than anticipated. 2. When Maurice Kendall first examined stock price patterns in 1953, he found that A) certain patterns tended to repeat within the business cycle. B) there were no predictable patterns in stock prices. C) stocks whose prices had increased consistently for one week tended to have a net decrease the following week. D) stocks whose prices had increased consistently for one week tended to have a net increase the following week. E) the direction of change in stock prices was unpredictable, but the amount of change followed a distinct pattern. Answer: B Rationale: The first studies in this area were made possible by the development of computer technology. Kendall's study was the first to indicate that markets were efficient. 3. If stock prices follow a random walk A) it implies that investors are irrational. B) it means that the market cannot be efficient. C) price levels are not random. D) price changes are random. E) price movements are predictable. Answer: D Rationale: A random walk means that the changes in prices are random and independent. 4. The main difference between the three forms of market efficiency is that A) the definition of efficiency differs. B) the definition of excess return differs. C) the definition of prices differs. D) the definition of information differs.
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E) they were discovered by different people. Answer: D 5.You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 9% at the time you sell. A) 10.00% B) 23.8% C) 13.8% D) 1.4% E) none of the above Answer: B Rationale: $1,000/(1.11) 7 = $481.66; $1,000/(1.09) 6 = $596.27; ($596.27 - $481.66)/ $481.66 = 23.8%. 6. A convertible bond has a par value of $1,000 and a current market price of $975. The current price of the issuing firm's stock is $42 and the conversion ratio is 22 shares. The bond's market conversion value is ______ . A) $729
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This note was uploaded on 01/26/2009 for the course FBE 441 taught by Professor Callahan during the Fall '07 term at USC.

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PRACTICE EXAM-set 1 - 1. Nicholas Manufacturing just...

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