Fall_06_Exam_Solutions

# Fall_06_Exam_Solutions - Fall 06 Test 3 1 Diversifying a...

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1) Diversifying a stock portfolio reduces _________. A) Firm-specific risk B) Both market and firm-specific risk C) Market risk 2) A) high, rises B) low, rises C) high, falls D) low, falls 3) The typical or average stock will have a beta of: A) –2 B) –1 C) 0 D) 1 E) 2 4) If most stocks in an industry have a P/B of around ____, it is likely that new competitors will enter the business. A) 5 B) 0.5 5) Stocks in which industry will have the higher P/B ratios? A) Home construction B) Pharmaceuticals 6) Companies A and B are otherwise identical, but Company A is manipulating earnings by understating the true amount of bad debts in its accounts receivable. Then, A) Company A will appear cheap based on P/E, but expensive based on P/FCF B) Company A will appear expensive based on P/E, but cheap based on P/FCF 7) Stock A has a P/E of 10 and a PEG of 1. Stock B has a P/E of 15 and a PEG of 2. Which stock has the higher expected growth rate? A) Stock A B) Stock B 8) Historically, stocks with _____ P/E ratios have earned higher future returns than stocks with _____ P/ E ratios. A) low, high B) high, low 9) Suppose ABC Company has acquired several other companies in the past for prices in excess of the fair value of their assets. As a result, ABC stock will have A) A higher Price/Book than Price/Tangible Book B) A higher Price/Tangible Book than Price/Book C) Price/Book and Price/Tangible Book will be the same 10) All else equal in an efficient market, if Stock X has higher risk than Stock Y, ________ will have the higher price-earnings (P/E) ratio. A) Stock X B) Stock Y 11) If ZZ stock has a lower price/sales ratio than other stocks in the industry, it might be because _____. A) ZZ has a higher profit margin on sales than its competitors B) ZZ has a lower profit margin on sales than its competitors 12) All else equal in an efficient market, if Stock X has higher expected growth than Stock Y, ________ will have the higher price-earnings (P/E) ratio. A) Stock X

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## This note was uploaded on 03/19/2008 for the course FI 320 taught by Professor Wiggins during the Spring '08 term at Michigan State University.

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Fall_06_Exam_Solutions - Fall 06 Test 3 1 Diversifying a...

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