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Are171a-midterm-key- - ~-BllLQ d-Lu~ ARE 171A 1 FALL 2010 4-8 M IDTERM post NAME This exam has two sections Section A consists of 11 multiple

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MIDTERM ARE 171A NAME:. _ ~ -BllLQ d--Lu~~ 1 FALL 2010 4-8 post-- This exam has two sections. Section A consists of 11 multiple choice questions worth 10 points each for a total of 110 out of350 total possible points (about 31% ofexam). Section B is made upof6 short problems, worth 40 points each. Thisadds up to 240outofthe total possible points on the exam (69% ofexam). Showyour work in section B; partial credit can be earned for correct approach even iffinal answer is wrong.
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Section A. (10 pts. each) 1. Thomas studies charts of past stock prices as a guide to timing his purchases and sales. What does this imply about his attitude toward market efficiency? a. He believes in the weak form ofthe efficient markets hypothesis. b. He believes in the semi-strong form ofthe efficient markets hypothesis. c. He believes in the strong form ofthe efficient markets hypothesis. @ None ofthe above. 2. A furniture store's assets had an original book value of$IO million, and have been depreciated by $3 million. The after-tax salvage value ofthese assets (ifsold today), is $5 million. The fum has liabilities of $2 million consisting of bonds, back wages and taxes due. The frrm has 1,000,000 shares of stock outstanding, and the market price ofthe stock is $8/share. What does this imply? a. The firm's book value is $7 million. b. The firm's market value is $6 million. @The firm's liquidation value is $3 million d. All of the above. e. None ofthe above. 3. Supposeyou purchase a newly issued30-yearAAAcorporate bond today for $1000, havinga coupon rate of6%. However, overthe next few years, you expect inflation(and thus the general level ofinterest rates) to decline. What is likely to occur? ra>lfyou hold your bond for 30 years, you will receive a yield of6%. '1>.'If you sell your bond in the next few years, you will receive a yield of less than 6%. c. Both a and b are true. d. Neither a nor b are true. 4. What is an advantage oforganizing as an S-corporation instead ofa partnership? a. Simplicity ofgetting startt:d. ® Protection of personal assets from lawsuits. c. Ability to pass income to owners' personal inC0me tax return!': d. AU of the above. 5 J~!;mine. expects inf1~tion to he 1 OJ,, fhi!': coming ye~r, 2% in ye~r 2, ~nct 3%. . in ye~r 3 Ahot1t how much ofan h~tion ~e~ium \~uldoshe r~ui~e to invest in bonds of various maturities? (i) IP j - 1Yo, IP z - 1.5 Yo, IP 3 - 2Yo h TP. = 1 ~/' . TP_ = 7% = 1~J" - j , - - ,t,. -_ . ., - -~. -- C. IP 1 = 1%,IP 2 =3%,IP 3 =6% j =-I%,IP 2 =-2%,IP 3 =-3% 6. What is an advantage of investing in STRIPS? ~~;:~~.~~ ~i:~~::~~~~I~~::,h~;:~t:::;~~:g~~~~~:~~:::'lmti1 the hond m~nJre~ c. Protection against inflation. d. Both a and b. e. a.bande.
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7. When would you be most likely to see an inverted yield curve? a. Economic activity has been weak, but is expected to improve. ® Economic activity has been strong, but is expected to weaken. c. Economic activity has been weak, and is expected to remain so. d. Economic activity has been strong, and is expected to remain so.
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Are171a-midterm-key- - ~-BllLQ d-Lu~ ARE 171A 1 FALL 2010 4-8 M IDTERM post NAME This exam has two sections Section A consists of 11 multiple

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