Final Exam sample

Final Exam sample - SAMPLE FINAL QUESTIONS William L Silber...

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SAMPLE FINAL QUESTIONS William L. Silber HOW TO PREPARE FOR THE FINAL: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below, make certain that you know WHY the wrong answers are wrong in addition to knowing the correct answer. 4. Before answering a question try to identify the framework or model or picture or equation from our classroom discussion (or from the homeworks) that are relevant to the question. 5. Change a word or phrase in the question and then discuss whether and how the correct answer changes. 6. Take all questions seriously AND think before you answer. 7. Avoid the same mistakes you made on the mid-term. EASY QUESTIONS: 1. Assume next year's dividends are \$3.00 per share and they are expected to grow at 4 percent per year. If the risk adjusted discount rate is 7 percent, then the constant rate of growth model implies a stock price of: (a) 80 (b) 90 (c) 100 (d) 110 2 Assuming the CAPM holds, the most appropriate discount rate to use in valuing a project to double the size of an all-equity firm’s main factory is: (a) the risk free rate plus the company's beta times (R M -R F ) . (b) the risk free rate plus the standard deviation of the project’s returns (c) the internal rate of return on the project (d) the risk free rate plus the company’s beta 3. A bond's duration is higher when (a) The coupon rate is higher (b) The coupon rate is lower (c) Yield to maturity is higher (d) None of the above 4. If the one year spot rate is 4% and the forward rates for years 2, 3, 4, 5 are 5%, 7%, 8%, and 6%, respectively, then today’s interest rate on a five-year bond should be

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a. 4% b. 5% c. 6% d. 7% e. 8% 5. The Dividend Discount Model (DDM) a. is a valuation model only for companies that have paid dividends b. is a dividend distribution model used by corporate managers for dividend decisions c. is a valuation model for new issues only d. accounts for risk by discounting with a risk adjusted discount rate e. a and d 6. The efficient market hypothesis says (a) No one can ever beat the market over a ten year period (b) Insider trading should be illegal (c) Everyone should hold the same portfolio (d) None of the above 7. According to the liquidity premium theory, an upward sloping yield implies (a) Short-term rates are expected to rise (b) Long-term rates are expected to rise (c) Short-term rates are definitely not expected to decline (d) You cannot tell 8. A coupon bond that pays interest of \$100 annually has a par value of \$1,000, matures in 5 years, and is selling today at a \$72 discount from par value. The yield to maturity on this bond is a) 6.00% b) 8.33% c) 10.39% d) 12.00% e) 60.00% 9. Comparing a long put position with a short call position reveals the following common element: (a) both positions have rights but no obligations
(b) both positions benefit from an increase in interest rates (c) both positions will lose money if the price of the underlying remains unchanged (d) both positions are potential sellers of the underlying asset 10. If corporate insiders who buy stock in their companies earn the same risk adjusted return as

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Final Exam sample - SAMPLE FINAL QUESTIONS William L Silber...

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