Rquiz1 - Name: _ Regular Quiz #1 October 12, 2004 FIN 4504...

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Name: _____________________ Regular Quiz #1 October 12, 2004 FIN 4504 Equity and Capital Markets Fall 2004 Instructor: Cem Demiroglu Instructions: The total time for the test is 45 minutes. Multiple choice questions are each worth 6 points. You can only choose one of the answers. There is no partial credit for multiple choice questions. Questions 5-8 are worth 20 points each. 1) Firm A has $1,000 cash at hand and $1,100 worth of debt that will mature in a month. There are two projects available to the firm. Both projects require an investment outlay of $1,000. Project 1 pays off $800 with probability 0.75 and $1,450 with probability 0.25. Project 2 pays off $1,000 with probability 0.50 and $1,250 with probability 0.50. The pay offs of both projects will be due just before the debt matures. What will the management of Firm A do? a) Invest in Project 1 b) Invest in Project 2 c) Do nothing d) None of the above 2) Which of the following most closely approximates the performance of a buy and hold portfolio strategy? a) an equally weighted index b) a price weighted index c) a value weighted index d) weights are not a factor in this situation 3) Which one of the following statements regarding trading orders is FALSE? a) A market order is simply an order to buy or sell a stock immediately at the prevailing market prices. b) If stock ABC is selling at $50, a limit order to buy may instruct the broker to buy the stock if the price falls below $45. c) A stop-loss order to sell is an order to limit the losses from short selling. d) None of the above 4) You short-sell 300 shares of GOOG, now selling for $50 per share. You also place a stop-loss- buy order at $60. What is your maximum possible loss? a) $50 b) $150 c) $3,000 D) unlimited 1
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5) Kate purchases 1,000 shares of AMD stock at $20 a share by putting up the minimum amount cash and borrowing the remaining from his broker. The initial margin is 50% and the maintenance margin is 40%. Assume that the interest rate on the broker’s loan is 2% per month. a) How much would to the stock price have to fall (in percentage) at the end of first month before Kate will get a margin call? Initial equity = 50% * 1,000 * $20 = $10,000
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Rquiz1 - Name: _ Regular Quiz #1 October 12, 2004 FIN 4504...

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