Solutions + Lecture Notes

Solutions + Lecture Notes - FINS3641: SECURITY ANALYSIS AND...

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FINS3641 Tutorial Solutions: Peter Andersen, Eileen Kang FINS3641: Security Analysis and Valuation- Week 2 Solutions 1 FINS3641: S ECURITY A NALYSIS AND V ALUATION Week 2 Solutions CHAPTER I —MC QUESTION #1 The value of an investment is: a) The present value of the cash flows on the investment b) Determined by investor perceptions about it c) Determined by demand and supply d) Often a subjective estimate, coloured by the bias of the analyst e) All of the above CHAPTER I —MC QUESTION #2 There are many who claim that value is based on investor perceptions, and perceptions alone, and that cash flows and earnings don’t matter. This argument is flawed because: a) Value is determined by earnings and cash flows, and investor perceptions do not matter b) Perceptions do matter, but they can change. Value must be based on something more stable. c) Investors are irrational. Therefore, their perceptions should not determine value. d) Value is determined by investor perceptions, but it is also determined by the underlying earnings and cash flows. Perceptions must be based on reality. CHAPTER I —MC QUESTION #3 You use a valuation model to arrive at a value of $15 for a stock. The market price of the stock is $25. The difference may be explained by: a) A market inefficiency; the market is overvaluing the stock b) The use of the wrong valuation model to value the stock c) Errors in the inputs to the valuation model d) All of the above
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Solutions + Lecture Notes - FINS3641: SECURITY ANALYSIS AND...

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