Question 1

If interest rates increase due to inflation, but expected cash flows to a firm do not change, then you would expect stock prices to

Accepted Answer

A) Rise. 
B) Rise and then decline. 
C) Remain unchanged. 
D) Decline. 
E) None of the above. 
A) Rise. 
B) Rise and then decline. 
C) Remain unchanged. 
D) Decline. 
E) None of the above.

Question 2

The dividend payout ratio for the aggregate market is 65 percent, the required rate of return is 12 percent, and the expected growth rate for dividends is 6 percent. Compute the current earnings multiple.

Accepted Answer

A) 5.41 
B) 16.25 
C) 6.25 
D) 10.83 
E) None of the above 
A) 5.41 
B) 16.25 
C) 6.25 
D) 10.83 
E) None of the above

Question 3

Which of the following statements concerning asset allocation is false?

Accepted Answer

A) Diversification across international boundaries can improve risk-adjusted portfolio returns. 
B) Economies expected to grow at an above-average rate with above-average profit growth should be considered as candidates to overweight in a global portfolio. 
C) Severe currency blockages should not impact global diversification selections. 
D) Portfolio allocation among asset classes may provide higher portfolio returns while lowering portfolio risk levels. 
E) None of the above (that is, all statements are true). 
A) Diversification across international boundaries can improve risk-adjusted portfolio returns. 
B) Economies expected to grow at an above-average rate with above-average profit growth should be considered as candidates to overweight in a global portfolio. 
C) Severe currency blockages should not impact global diversification selections. 
D) Portfolio allocation among asset classes may provide higher portfolio returns while lowering portfolio risk levels. 
E) None of the above (that is, all statements are true).

Question 4

Exhibit 12.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information that you propose to use to obtain an estimate of year 2004 EPS for the MacLog Company. $$\begin{array} { l r r } 
& \text { Year } 2003& \begin{array} { r } 
\text { Estimated } \
\text { Year 2004 }
\end{array} \
\hline \text { GDP } & 11,000 \text { Billion } \
\text { GDP growth } && 3.5 \%\
\text { Sales per share} &\$ 800 \
\text { Operating profit margin}&12 \% \\text { Depreciation/Fixed Assets } && 14 \% \
\text { Fixed asset turnover } && 2 \
\text { Interest rate } && 3.5 \% \
\text { Total asset turnover } && 0.7 \
\text { Debt/Total assets } && 45 \% \
\text { Tax rate } && 36 \%\
\end{array}$$ In addition a regression analysis indicates the following relationship between growth in sales per share for MacLog and GDP growth is
%$\Delta$ Sales per share = 0.015 + 0.75(%$\Delta$GDP)
-Refer to Exhibit 12.6. Estimate the firm's growth rate in sales per share.

Accepted Answer

A) 1.5% 
B) 2% 
C) 2.16% 
D) 4.13% 
E) 3.73% 
A) 1.5% 
B) 2% 
C) 2.16% 
D) 4.13% 
E) 3.73%

Question 5

Exhibit 12.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent.
-Refer to Exhibit 12.9. Starting with the initial conditions, you expect the retention ratio to be constant, the rate of inflation to increase by 2 percent, and the growth rate to increase by 1 percent. What is the expected P/E?

Accepted Answer

A) 4.44 
B) 5.00 
C) 5.71 
D) 6.67 
E) 8.00 
A) 4.44 
B) 5.00 
C) 5.71 
D) 6.67 
E) 8.00

Question 6

Which of the following is not normally associated with cyclical indicators?

Accepted Answer

A) The Securities and Exchange Commission (SE
C)  
B) The National Bureau of Economic Research (NBER) 
C) Business Week 
D) Center for International Business Cycle Research (CIBCR) 
E) All of the above 
A) The Securities and Exchange Commission (SE
C)  
B) The National Bureau of Economic Research (NBER) 
C) Business Week 
D) Center for International Business Cycle Research (CIBCR) 
E) All of the above

Question 7

Exhibit 12.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 65 percent when the rate on long-term government bonds falls to 8 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.
-Refer to Exhibit 12.1. To what price will the market rise if the earnings expectation is $22.00 per share?

Accepted Answer

A) $183.26 
B) $132.41 
C) $198.66 
D) $71.28 
E) $14.30 
A) $183.26 
B) $132.41 
C) $198.66 
D) $71.28 
E) $14.30

Question 8

Aggregate return on equity increases as

Accepted Answer

A) Profit margins increase. 
B) Total asset turnover increases. 
C) Financial leverage increases. 
D) Equity turnover decreases. 
E) All of the above. 
A) Profit margins increase. 
B) Total asset turnover increases. 
C) Financial leverage increases. 
D) Equity turnover decreases. 
E) All of the above.

Question 9

Exhibit 12.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 45 percent when the rate on long term government bonds falls to 9 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 16 percent return. The return on equity will be 14 percent.
-Refer to Exhibit 12.4. What is your expectation of the market P/E ratio?

Accepted Answer

A) 5.42 
B) 7.14 
C) 6.63 
D) 6.25 
E) 5.11 
A) 5.42 
B) 7.14 
C) 6.63 
D) 6.25 
E) 5.11

Question 10

The growth rate (g) of dividends is affected by all of the following except

Accepted Answer

A) Required return 
B) Retention rate 
C) Total asset turnover 
D) Financial leverage 
E) Net profit margin 
A) Required return 
B) Retention rate 
C) Total asset turnover 
D) Financial leverage 
E) Net profit margin

Question 11

Estimating net profit margin directly is difficult because it is so volatile.

Accepted Answer

A) True 
 B)False

Question 12

Changes in the dividend payout ratio are positively related to changes in the retention rate.

Accepted Answer

A) True 
 B)False

Question 13

An increase in the required rate of return k will increase the P/E ratio.

Accepted Answer

A) True 
 B)False

Question 14

An examination of the relationship between stock prices and the economy has shown that the relationship is

Accepted Answer

A) Weak, and that stock prices turn after the economy does. 
B) Nonexistent. 
C) Strong, and that stock prices turn after the economy does. 
D) Strong, and that stock prices turn before the economy does. 
E) Weak, and that stock prices turn before the economy does. 
A) Weak, and that stock prices turn after the economy does. 
B) Nonexistent. 
C) Strong, and that stock prices turn after the economy does. 
D) Strong, and that stock prices turn before the economy does. 
E) Weak, and that stock prices turn before the economy does.

Question 15

Exhibit 12.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent.
-Refer to Exhibit 12.9. If the payout ratio changes to 50 percent, but there are no other changes, what will be the new P/E?

Accepted Answer

A) 3.25 
B) 4.16 
C) 5.75 
D) 6.25 
E) 7.67 
A) 3.25 
B) 4.16 
C) 5.75 
D) 6.25 
E) 7.67

Question 16

Diffusion indexes indicate the spread in interest rates between major economies.

Accepted Answer

A) True 
 B)False

Question 17

Exhibit 12.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information that you propose to use to obtain an estimate of year 2004 EPS for the MacLog Company. $$\begin{array} { l r r } 
& \text { Year } 2003& \begin{array} { r } 
\text { Estimated } \
\text { Year 2004 }
\end{array} \
\hline \text { GDP } & 11,000 \text { Billion } \
\text { GDP growth } && 3.5 \%\
\text { Sales per share} &\$ 800 \
\text { Operating profit margin}&12 \% \\text { Depreciation/Fixed Assets } && 14 \% \
\text { Fixed asset turnover } && 2 \
\text { Interest rate } && 3.5 \% \
\text { Total asset turnover } && 0.7 \
\text { Debt/Total assets } && 45 \% \
\text { Tax rate } && 36 \%\
\end{array}$$ In addition a regression analysis indicates the following relationship between growth in sales per share for MacLog and GDP growth is
%$\Delta$ Sales per share = 0.015 + 0.75(%$\Delta$GDP)
-Refer to Exhibit 12.6. Calculate the firm's EPS for the year 2004.

Accepted Answer

A) $15.25 
B) $14.66 
C) $17.25 
D) $12.56 
E) $18.57 
A) $15.25 
B) $14.66 
C) $17.25 
D) $12.56 
E) $18.57

Question 18

If, for the S&P Industrials Index, the profit margin was 0.30 and the equity turnover ratio was 11, the ROE would be:

Accepted Answer

A) 0.033% 
B) 3.300% 
C) 33.00% 
D) 36.70% 
E) 333.00% 
A) 0.033% 
B) 3.300% 
C) 33.00% 
D) 36.70% 
E) 333.00%

Question 19

Exhibit 12.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 75 percent when the rate on long-term government bonds falls to 8 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.
-Refer to Exhibit 12.2. What is the expected sustainable growth rate?

Accepted Answer

A) 9.0% 
B) 7.2% 
C) 6.0% 
D) 3.0% 
E) 3.6% 
A) 9.0% 
B) 7.2% 
C) 6.0% 
D) 3.0% 
E) 3.6%

Question 20

The National Bureau of Economic Research (NBER) has derived the following indicator series in order to monitor business cycles.

Accepted Answer

A) M2, leading, and lagging. 
B) Leading, coincident, and consumer expectations. 
C) Leading, coincident, and lagging. 
D) Leading, coincident, and M2. 
E) Consumer expectations, leading, and lagging. 
A) M2, leading, and lagging. 
B) Leading, coincident, and consumer expectations. 
C) Leading, coincident, and lagging. 
D) Leading, coincident, and M2. 
E) Consumer expectations, leading, and lagging.

If interest rates increase due to inflation, but expected cash flows to a firm do not change, then you would expect stock prices to

The dividend payout ratio for the aggregate market is 65 percent, the required rate of return is 12 percent, and the expected growth rate for dividends is 6 percent. Compute the current earnings multiple.

Which of the following statements concerning asset allocation is false?

Which of the following is not normally associated with cyclical indicators?

Aggregate return on equity increases as

The growth rate (g) of dividends is affected by all of the following except

Estimating net profit margin directly is difficult because it is so volatile.

Changes in the dividend payout ratio are positively related to changes in the retention rate.

An increase in the required rate of return k will increase the P/E ratio.

An examination of the relationship between stock prices and the economy has shown that the relationship is

Diffusion indexes indicate the spread in interest rates between major economies.

If, for the S&P Industrials Index, the profit margin was 0.30 and the equity turnover ratio was 11, the ROE would be:

The National Bureau of Economic Research (NBER) has derived the following indicator series in order to monitor business cycles.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 12: Macroanalysis and Microvaluation of the Stock Market

If interest rates increase due to inflation, but expected cash flows to a firm do not change, then you would expect stock prices to

The dividend payout ratio for the aggregate market is 65 percent, the required rate of return is 12 percent, and the expected growth rate for dividends is 6 percent. Compute the current earnings multiple.

Which of the following statements concerning asset allocation is false?

Which of the following is not normally associated with cyclical indicators?

Aggregate return on equity increases as

The growth rate (g) of dividends is affected by all of the following except

Estimating net profit margin directly is difficult because it is so volatile.

Changes in the dividend payout ratio are positively related to changes in the retention rate.

An increase in the required rate of return k will increase the P/E ratio.

An examination of the relationship between stock prices and the economy has shown that the relationship is

Diffusion indexes indicate the spread in interest rates between major economies.

If, for the S&P Industrials Index, the profit margin was 0.30 and the equity turnover ratio was 11, the ROE would be:

The National Bureau of Economic Research (NBER) has derived the following indicator series in order to monitor business cycles.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters