Equity Valuation Final Exam
Course Introduction
Equity Valuation is a comprehensive course designed to equip students with the theoretical foundations and practical tools necessary to assess the value of publicly-traded and privately-held companies. The course covers a variety of valuation methods, including discounted cash flow (DCF) analysis, relative valuation using market multiples, and asset-based approaches. Students will learn to analyze financial statements, assess risk factors, and incorporate macroeconomic and industry trends into their valuation assessments. Through case studies and real-world data, participants will develop skills in constructing and critiquing valuation models, interpreting results, and understanding the implications for investment decision-making, mergers and acquisitions, and corporate strategy.
Recommended Textbook
Fundamentals of Investments Valuation and Management 7th Edition by Bradford Jordan
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20 Chapters
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Page 2
Chapter 1: A Brief History of Risk and Return
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Sample Questions
Q1) The risk-free rate is:
A)another term for the dividend yield.
B)defined as the increase in the value of a share of stock over time.
C)the rate of return earned on an investment in a firm that you personally own.
D)defined as the total of the capital gains yield plus the dividend yield.
E)the rate of return on a riskless investment.
Answer: E
Q2) You have owned a stock for seven years.The geometric average return on this investment for those seven years is positive even though the annual rates of return have varied significantly.Given this,you know the arithmetic average return for the period is:
A)positive but less than the geometric average return.
B)less than the geometric return and could be negative, zero, or positive.
C)equal to the geometric average return.
D)either equal to or greater than the geometric average return.
E)greater than the geometric average return.
Answer: E
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3
Chapter 2: The Investment Process
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Sample Questions
Q1) Suzette recently purchased 300 shares of Nu Electronics stock for $4.40 a share.Her broker required a cash payment of $1,320,plus trading costs,for the purchase.What is the initial margin requirement on this stock?
A)70 percent
B)75 percent
C)80 percent
D)90 percent
E)100 percent
Answer: E
Q2) An investor who has a resource constraint:
A)pays no income taxes.
B)has insufficient funds to purchase a security.
C)has a relatively high marginal tax rate.
D)has only one source of income.
E)will only invest in socially acceptable securities.
Answer: B
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Page 4
Chapter 3: Overview of Security Types
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Sample Questions
Q1) What was yesterday's closing price on the Beta Movers bond?
A)$1,020.13
B)$1,033.54
C)$1,044.07
D)$1,053.54
E)$1,054.07
Answer: B
Q2) Money market instruments:
A)tend to be illiquid.
B)are generally sold in small denominations.
C)cannot be resold.
D)may be sold on a discount basis.
E)are quoted in terms of a spread.
Answer: D
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5
Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) Which of the following can you do with an ETF that you cannot do with an open-end fund?
I.sell at mid-day prices
II.short sell
III.buy options on them
IV.resell
A)I and III only
B)II and III only
C)III and IV only
D)I, II, and III only
E)I, II, III, and IV
Q2) The High Growth Technology Fund has an NAV of $51.06 and a 4.4 percent front-end load.What is the offering price?
A)$50.84
B)$51.36
C)$53.41
D)$54.53
E)$55.81
Q3) Which type of investor is most apt to purchase municipal bond funds and why?
Q4) What are the primary differences between an ETF and an ETN?
Page 6
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Chapter 5: The Stock Market
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Sample Questions
Q1) The party who serves as a dealer for a few securities on an exchange floor and is obligated to maintain an orderly market for those securities is called a:
A)floor trader.
B)designated market maker.
C)floor broker.
D)member.
E)house broker.
Q2) Lucas wants to sell 9,000 shares of stock and places a market order.The floor broker is unable to arrange the sale with another floor broker so the specialist agrees to "stop" the stock.What has the specialist agreed to do?
A)cancel the order
B)place the order into the order book to hold until an order to buy 9,000 shares is received
C)purchase the shares if no other buyer is readily available
D)sell the shares to the next available buyer regardless of the price received
E)sell the shares at the end of the trading day at the best price available at that time
Q3) Describe the primary advantage and disadvantage of a limit sell order.
Q4) Describe some of the recent changes in the structure and operations of the NYSE.
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Page 7
Chapter 6: Common Stock Valuation
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Sample Questions
Q1) Ultra Fine Furnishings is in the process of selling its peripheral businesses and focusing on its upscale clients.In conjunction with this reorganization,the dividend will be decreased by 10 percent for the next three years.After that,the dividend will resume increasing at an annual rate of 5 percent.The required return on this stock is 14 percent and the last dividend paid was $2.40 a share.What is one share of this stock worth today?
A)$17.34
B)$18.08
C)$18.35
D)$19.68
E)$20.72
Q2) Dennison Mfg.pays annual dividends.For the past six years,the firm has paid dividends of $1.10,$1.12,$1.25,$1.28,$1.30,and $1.40,respectively.What is the geometric average dividend growth rate for this time period?
A)3.51 percent
B)4.10 percent
C)4.94 percent
D)5.07 percent
E)6.03 percent
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Page 8
Chapter 7: Stock Price Behavior and Market Efficiency
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Sample Questions
Q1) Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern?
A)deviated pattern
B)dispersed flow
C)efficient movement
D)overreaction and correction
E)random walk
Q2) Arbitrage traders:
A)tend to be well-capitalized.
B)tend to be irrational investors.
C)are dominated by irrational investors in an efficient market.
D)lower the efficiency level of a market.
E)sell only relatively inexpensive stocks.
Q3) Immediately following the Crash of 1987,the stock market:
A)remained in a slump for five years.
B)remained flat for an extended period of time.
C)had one of the biggest short-term gains ever.
D)began a very slow and choppy recovery.
E)began a very slow and smooth recovery.
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Chapter 8: Behavioral Finance and the Psychology of Investing
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Sample Questions
Q1) Which of the following are bullish indicators?
I.flat advance/decline line
II.breakout of a support level
III.Arms ratio of .38
IV.heavy advancing volume
A)I and II only
B)III and IV only
C)I and III only
D)II and III only
E)I and IV only
Q2) A survey of 64 of your fellow classmates determines that 19 of them are bullish on the market while the remainder is bearish.What is the market sentiment index for this group of individuals?
A).28
B).33
C).44
D).58
E).70
Q3) Explain the basics of prospect theory and provide an example that illustrates this theory.
Page 10
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Chapter 9: Interest Rates
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Sample Questions
Q1) Which one of the following rates is the rate a commercial bank must pay the Federal Reserve to borrow reserves overnight?
A)discount
B)Fed funds
C)financial overnight
D)daily
E)institutional
Q2) Assume that a large corporation,such as General Electric,needs money in the short-term.Which one of the following securities is that corporation most likely to issue to meet this need?
A)commercial paper
B)prime rate loan
C)corporate bond
D)secured bill
E)banker's acceptance
Q3) Write a short paragraph comparing a bank discount rate to a bond equivalent rate.
Q4) Identify and describe four of the six components of nominal interest rates as supported by modern term structure theory.
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11
Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) Which one of the following is the correct definition of a coupon rate?
A)semi-annual interest payment/par value
B)annual interest/par value
C)annual interest/market value
D)semi-annual coupon/bond price
E)annual coupon/bond price
Q2) Which one of the following statements is correct?
A)Investors know the rate of return they will earn with certainty provided they hold bonds until they mature.
B)Reinvestment risk causes realized yields to differ from promised yields.
C)Realized yields generally equal promised yields as long as a bond is not called.
D)Redeeming a bond early helps ensure an investor earns the promised yield.
E)Realized yields cannot exceed promised yields.
Q3) Which one of the following will occur if a bond's discount rate is lowered?
A)market price will increase
B)coupon payment amount will decrease
C)current yield will increase
D)call premium will increase
E)coupon rate will decrease
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Page 12
Chapter 11: Diversification and Risky Asset Allocation
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Sample Questions
Q1) What is the extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset called?
A)efficient return
B)correlated value
C)risk premium
D)expected return
E)realized return
Q2) You own a stock that will produce varying rates of return based upon the state of the economy.Which one of the following will measure the risk associated with owning that stock?
A)weighted average return given the multiple states of the economy
B)rate of return for a given economic state
C)variance of the returns given the multiple states of the economy
D)correlation between the returns give the various states of the economy
E)correlation of the weighted average return as compared to the market
Q3) Explain the primary goal of portfolio diversification as it relates to asset allocation and correlation.
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13
Chapter 12: Return, Risk, and the Security Market Line
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Sample Questions
Q1) What is the beta of an average asset?
A)0
B)> 0 but < 1
C)< 1
D)1
E)> 1
Q2) The security market line depicts the graphical relationship between which two of the following?
I.expected return
II.surprise return
III.systematic risk
IV.unsystematic risk
A)I and III
B)I and IV
C)II and III
D)II and IV
E)none of these
Q3) Explain the relationship between the security market line and market efficiency.
Q4) Identify and describe each of the three components of a security's expected return according to the capital asset pricing model.
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Chapter 13: Performance Evaluation and Risk Management
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Sample Questions
Q1) You are comparing three securities and discover they all have identical Treynor ratios.Given this information,which one of the following must be true regarding these three securities?
A)They have identical betas.
B)They have the same rates of return.
C)They earn identical rewards per unit of total risk.
D)They earn identical rewards per unit of systematic risk.
E)They have identical Sharpe ratios also.
Q2) A stock has a return of 16.18 percent and a beta of 1.47.The market return is 10.65 percent and the risk-free rate is 3.20 percent.What is the Jensen-Treynor alpha of this stock?
A)-1.12 percent
B)-0.17 percent
C)0.66 percent
D)1.38 percent
E)1.59 percent
Q3) Explain the similarities and differences between the Sharpe and Treynor ratios.Also,explain the most appropriate application for each.
Q4) Explain a key advantage and a key disadvantage of Jensen's alpha.
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Chapter 14: Futures Contracts
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Sample Questions
Q1) Sugar is currently selling for $0.201 a pound while the 6-month futures price is $0.208.You take a long position in the 6-month sugar futures.Which one of the following prices would cause you the greatest loss if that price turns out to be the actual price of sugar per pound 6 months from now?
A)$0.198
B)$0.201
C)$0.205
D)$0.208
E)$0.211
Q2) Futures contracts exist for which of the following?
I.pork bellies
II.S&P 500 index
III.Eurodollars
IV.cocoa
A)I and IV only
B)II and III only
C)I, II, and IV only
D)I, III, and IV only
E)I, II, III, and IV
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Page 16
Chapter 15: Stock Options
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Sample Questions
Q1) Which one of the following is a bear call spread?
A)buying a $20 call and selling a $25 call on the same stock
B)selling a $20 call and buying a $20 call on the same stock
C)buying a $20 call and selling a $15 call on the same stock
D)selling a $20 call and buying a $25 put
E)buying a $20 call and selling a $25 put
Q2) Which one of the following combinations creates an in-the-money option?
A)underlying stock price is less than the strike price of a call
B)underlying stock price is $18 and the put has an exercise price of $15
C)underlying stock price is $22 and the call has an exercise price of $25
D)put strike price exceeds the underlying stock price
E)put price is equal to the call price
Q3) Kim Lee purchased 6 put option contracts on Eastern Imports stock at a strike price of $47.50.The option premium was $0.65.At expiration,the stock was valued at $44.90 a share.What is her percentage return?
A)-100 percent
B)0 percent
C)5.47 percent
D)32.82 percent
E)300 percent
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Chapter 16: Option Valuation
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Sample Questions
Q1) You own 1,800 shares of Textile stock which is currently valued at $62 a share.The $65 put has a premium of $4.26 and a put delta of -.60.What position should you take in $65 put contracts to hedge your stock against a $1 decrease in price?
A)buy 3 contracts
B)buy 30 contracts
C)buy 300 contracts
D)write 3 contracts
E)write 30 contracts
Q2) A stock with a current price of $18 will either move up by a factor of 1.2 or down by a factor of .9 each period over the next two periods.The risk-free rate of interest is 4.5 percent.What is the current value of a call option with a strike price of $20?
A)$1.02
B)$1.08
C)$1.17
D)$1.21
E)$1.27
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Chapter 17: Projecting Cash Flow and Earnings
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Sample Questions
Q1) Last year,a firm had net income of $62,000 on sales of $595,000.The projected sales for next year are $654,500.Assume the firm uses the percentage of sales method for pro forma statements.What is the projected net income?
A)$59,500
B)$65,500
C)$68,200
D)$71,500
E)$71,900
Q2) For the year,Widgets Manufacturing,Inc.increased its current accounts by $52,000,decreased its current liabilities by $38,000,and decreased its fixed assets by $31,000.What is the investment cash flow for the year?
A)-$31,000
B)-$12,000
C)$19,000
D)$31,000
E)$48,000
Q3) What value does the Statement of Cash Flows add to the financial statements of a firm?
Q4) Why is the expected rate of sales growth so critical to pro forma statements?
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Chapter 18: Corporate and Government Bonds
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Sample Questions
Q1) Which of the following features would you expect a plain vanilla bond to have?
I.semi-annual coupon payments
II.$1,000 face value
III.stated maturity date
IV.multiple bonds within one issue
A)I and II only
B)II and III only
C)II, III, and IV only
D)I, II, and III only
E)I, II, III, and IV
Q2) Which one of the following is a taxable municipal bond used to finance a facility used by a private business?
A)private activity bond
B)private revenue bond
C)private corporate bond
D)private agency bond
E)private income bond
Q3) Why would an investor prefer a TIPS which offers a lower coupon rate over a comparable T-note with a higher coupon rate?
Q4) How is the minimal value for a convertible bond determined?
Page 20
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Chapter 19: Global Economic Activity and Industry Analysis
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Sample Questions
Q1) You invest $150,000 in Japan at a starting exchange rate of 100.20×/$.Your Japanese investment gains 6 percent,and the ending exchange rate is 101.35×/$.What is your total return on this investment?
A)3.90%
B)4.10%
C)4.60%
D)4.80%
E)5.00%
Q2) Assume the inflation rate in 2012 is 1.3 percent.If the nominal GDP grew 3.5 percent and nominal wages grew 2.6 percent,what are the approximate real growth rates of GDP and wages?
A)2.00%; 0.80%
B)3.05%; 0.90%
C)2.10%; 1.10%
D)2.20%; 1.20%
E)2.20%; 1.30%
Q3) Briefly outline and discuss Porter's Five Forces and their use.
Q4) Explain the three tiers of "top-down analysis".
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Chapter 20: Mortgage-Backed Securities
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Sample Questions
Q1) What are the securities which are created by splitting the cash flows from mortgage pools according to specific allocation rules called?
A)collateralized mortgage obligations
B)collateralized housing bonds
C)mortgage amortized strips
D)pooled mortgage obligations
E)secured mortgage strips
Q2) FHLMC and FNMA are government-sponsored enterprises charged with which one of the following duties?
A)providing home mortgages directly to homeowners
B)purchasing only defaulted mortgages from banking institutions
C)guaranteeing mortgages with the full faith and credit of the U.S. government
D)providing guarantees equal to GNMA's to the home mortgage market
E)promoting liquidity in the home mortgage market
Q3) The greater the prepayment rate for a mortgage pool,the:
A)slower the payments to the holders of the bonds supported by the pool.
B)greater the decline in the bond principal for bonds supported by the pool.
C)longer the age of the mortgages held in the underlying pool.
D)lower the PSA benchmark rate.
E)greater the default risk.
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