428prelim1_sol_08 - AEM 428 Valuation Prelim 1 1 hour 15...

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AEM 428 Valuation Prelim 1 1 hour 15 minutes 106 points Multiple Choices (6 questions, 4 points each): 1) If the five-year spot rate is 5%, the present value of a risk-free cash flow of $200 to be received in five years is: a) $157 b) $190 c) $205 d) $255 Ans: NPV = $200*1/ (1+0.05) 5 = $200/1.276 = $156.7 ANS: D REF: 10.3 TYPE: fact retention 2. In a strong-form efficient market, accounting announcements: a. will impact stock price only if it is related to cash flows b. will impact stock price if it involves new public information c. will impact stock price if it affects a firm's ability to borrow funds d. will not impact stock price e. b and c 3) The proper discount rate for the firm’s dividend stream is: a) The firm’s weighted average cost of capital (WACC) b) The WACC plus an adjustment for the business risk of the firm c) The after-tax cost of debt d) The firm’s cost of equity capital. Ans: d) 4) Approximately what percentages of stocks are recalled in a given month? a) 0.2% b) 2% c) 10% d) 20% Ans: b) 5) What item is not included in other comprehensive income? a) foreign exchange adjustment b) minimum pension liability c) unrealized gain on security available for sale d) net income Ans: d)
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ANS: C REF: 10.1 TYPE: application of concepts 6) If stock returns follow a random walk, you should: a. employ a mean reversion investment trading strategy b. base trades on recurring patterns in stock prices c. not attempt to find a predictable pattern in stock returns d. employ an industry-based momentum trading strategy e. all of the above Short questions (5 questions, total 82 points) 1) (15 points) a) (5 points) Which form of market efficiency is violated when high price-to-book stock outperform low price-to-book stock? Ans: 5 points if reasonable explanation Value stocks (i.e. low PB) outperform growth stocks (i.e. high PB stocks) over a long horizon of 3 to 5 years. However, in the intermediate term, stocks with good momentum may outperform stocks with bad momentum. Such stocks with good momentum over have high price-to-book, while stocks with bad momentum may have low price-to-book. In any case, price-to-book is public information. If price-to-book can predict returns, that means that semi-strong form of market efficiency is violated. b) (5 points) When insider trading is allowed within the law, would the market be efficient? Under which form of market efficiency? Ans: (0 point if insider trading leads to market inefficiency 2 points if right answer for "efficient" but wrong form of efficiency. 5 points if the answer is strong form efficient.) If insider trading law is allowed, then any insider can trade using any information that is produced. Hence the stock price should reflect all public and private information. This means the price is strong form efficient. c) (5 points) Should a firm that pays a higher dividend have a higher value? Explain some
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This note was uploaded on 09/23/2009 for the course AEM 4280 taught by Professor Ng,d. during the Spring '08 term at Cornell.

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428prelim1_sol_08 - AEM 428 Valuation Prelim 1 1 hour 15...

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