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FINC 340 FINAL EXAM SOLUTIONS

FINC 340 FINAL EXAM SOLUTIONS

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Quiz Number

Question

Answer

1

A company has paid $2 per share in dividends for the past several years and plans to continue to do so indefinitely. If an investor’s required return is 13%, what is the most she should pay for a share of this firm’s stock?
 
A:        $15.38
B:         $20.00
C:         $22.60
D:         $26.13
E:         $65.00
 

 
 

2

Bond mutual funds offer the following advantages over direct investment in bonds EXCEPT:
 
A:  Better diversification
B:   Transaction cost economies
C:   Buy and sell individual bonds at individual investor’s discretion
D:   Reinvestment of intermediate cash flows
E:   Better liquidity
 

3

A $1,000 par value bond with a 5% coupon that pays interest semiannually and matures in 2 ½ years and has a current price of $977. What is the annualized yield to maturity?
 
A:        3.0%
B:         4.0%
C:         5.0%
D:         6.0%
E:         7.0%
 

 
 

4

An immunization strategy protects a portfolio from:
 
A:        Interest rate risk
B:         Default risk
C:         Liquidity risk
D:         Prepayment risk
E:         Event risk
 
 

5

Market multiple methods include valuations based on all of the following EXCEPT:
 
A:        Price/earnings
B:         Price/free cash flow
C:         Price/dividends
D:         Price/sales
E:         All of the above are acceptable market multiples
 

6

Factors that should be considered in taking a stock option position include:
 
A:  The dividend paid on the underlying stock
B:   The volatility of the underlying stock
C:   The time to expiration
D:   The anticipated direction of market movement
E:   All of the above are relevant factors in the option decision
 
 

 
 

7

A three-year project costs $50,000 and returns $20,000 the first year, $30,000 the second year, and $25,000 the third year. If the required return is 10.0%, what is the Net Present Value (NPV)?
 
A:        $11,758
B:         $12,547
C:         $25,000
D:         $61,758
E:         $62,547
 

8

Disadvantages of investing in the futures market include all of the following EXCEPT:
 
A:  Market is extremely volatile
B:   Daily mark-to-market
C:   Clearinghouse
D:   Possibility of frequent margin calls
E:   Possibility of losing more than the original investment
 
 

 
 

9

A portfolio has a standard deviation of 22%. If the risk-free rate is 3.5%, the expected return on the market portfolio is 12%, and the standard deviation of the market portfolio is 25%, what is the required return on the market portfolio?
 
A:        7.48%
B:         10.98%
C:         12.00%
D:         13.16%
E:         14.06%
 

10

Factors that should be considered in the purchase of a stock includes all of the following EXCEPT:
 
A:  Dividend
B:   Growth potential
C:   Quality of firm’s management
D:   Coupon rate on the firm’s bonds
E:   Price
 


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