Review for Exam 3 - UMass D

Review for Exam 3

Instructions: Please read carefully ? The exam will have 25 multiple choice questions and 5 work problems. ? Questions in the multiple choice section will be either concept or calculation questions. The calculation questions will be similar to those in the homework and review. However, the concept questions will be related to any topic we have covered in the class. The concept questions in the review are only some sample questions. You should NOT study only topics in the review. ? For the work problems, you need to solve the problems without knowing the possible answers. The questions will be similar to those in the homework and the review except that the possible solutions are not given. ? You can bring a formula sheet to the exam. ? Final Exams for Classes Meeting Tu-Th at 3:30pm Tuesday, May 19 11:30 AM - 2:30 PM

Chapter 11

1. Assume the U.S. government was to decide to increase its budget deficit. This will cause __________ to increase. A) interest rates B) the output of the economy C) both a and b D) neither a nor b

2. A big increase in government spending is an example of __________. A) a demand shock B) a supply shock C) an unsurprising shock D) none of the above

3. If you expect a larger interest rate increase than other market participants do, you would A) buy long-term bonds B) buy short-term bonds C) buy long-term government bonds only D) buy short-term government bonds only

4. Which of the following would not be considered a supply shock? A) a change in the price of imported oil B) frost damage to the orange crop C) a change in the level of education of the average worker D) an increase in the level of government spending

5. A trough is __________. A) a transition from an expansion in the business cycle to the start of a contraction B) a transition from a contraction in the business cycle to the start of an expansion C) only something used by farmers to feed pigs and is not a term in investments D) none of the above

6. The ___ stage of the business cycle would be a good time to invest in firms engaged in natural resource extraction and processing such as minerals and petroleum. A) Peak B) Contraction C) Trough D) Expansion

7. __________ the ratio of the number of people classified as unemployed to the total labor force.

A) The capacity utilization rate is B) The participation rate is C) The unemployment rate is D) None of the above are

8. An analyst starts by examining the broad economic environment and then considers the implications of the outside environment on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called __________ analysis. A) bottom-up B) outside-inside C) top-down D) upside-down

Chapter 12

9. __________ is defined as the present value of all cash proceeds to the investor in the stock. A) dividend payout ratio B) intrinsic value C) market capitalization rate D) plow-back ratio

10. __________ are analysts who use information concerning current and prospective profitability of a company to assess its fair market value. A) credit analysts B) fundamental analysts C) systems analysts D) technical analysts

11. You wish to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant growth DDM, the intrinsic value of stock A __________. A) will be higher than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) more information is necessary to Answer this question

12. The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12% and its expected EPS is $5.00. If the firm's plow-

back ratio is 40%, its P/E ratio will be __________. A) 8.33 B) 11.54 C) 19.23 D) 50.00

13. Rose Hill Trading Company is expected to have EPS in the upcoming year of $6.00. The expected ROE is 18.0%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 60%, its growth rate of dividends should be __________. A) 2.5% B) 4.0% C) 8.4% D) 10.8%

14. Grott and Perrin, Inc. has expected earnings of $3 per share for next year. The firm's ROE is 20% and its earnings retention ratio is 70%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities? A) $20 B) $70 C) $90 D) $115

15. Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The riskfree rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock, and the constant growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84.00. Using the constant growth DDM and the CAPM, the beta of the stock is __________. A) 1.4 B) 0.9 C) 0.8 D) 0.5

16. Westsyde Tool Company is expected to pay a dividend of $2.00 in the upcoming year. The risk-free rate of return is 6% and the expected return on the market

portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.20. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is __________. A) $24.29 B) $27.39 C) $31.13 D) $34.52

17. Ace Frisbee Corporation produces a good that is very mature in their product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3.00, a dividend in year 2 of $2.00, and a dividend in year 3 of $1.00. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today. A) $13.06 B) $13.38 C) $18.25 D) $18.78

18. A firm is expected to produce $3.00 per share in earnings next year. If the firm plans to plow back 30% of those earnings at a reinvestment rate of 25%, what will be the expected growth in dividends? A) 7.50% B) 15.0% C) 25.0% D) 30.0%

19. Next year's earnings are estimated to be $5.00. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities? A) $9.09 B) $10.10 C) $11.11 D) $12,21

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