Sample Final Exam – IA 25503 Question 1. On February 1, you bought 100 shares of stock in the ABX Corporation for $34 a share and a year later you sold it for $39 a share. During the year, you received a cash dividend of $1.50 a share. What are the HPR and HPY on this ABX stock investment? HPR = 1.25; HPY = 25%HPR = 1.16; HPY = 16%HPR = 1.19; HPY = 19%HPR = 1.36; HPY = 36% Question 2. On August 15, you purchased 100 shares of stock in the XYZ Company at $65 a share and a year later you sold it for $61 a share. During the year, you received dividends of $3 a share. What are the HPR and HPY on your investment in XYZ? HPR = 0.985; HPY = 98.5%HPR = -0.985; HPY = -98.5%HPR = 0.985; HPY = -1.5%HPR = 1.12; HPY = 12% Question 3. During the past five years, you owned Stock A and Stock B that had the following annual rates of return: YearStock AStock B10.190.0820.080.033-0.12-0.094-0.030.0250.150.04 What is the standard deviation of the annual rate of return for Stock A and Stock B? Stock A = 0.06; Stock B = 0.15Stock A = 0.11; Stock B = 0.06Stock A = 0.06; Stock B = 0.11Stock A = 0.11; Stock B = 0.01 Question 4. You have been asked to estimate the beta of General Electric that has four primary divisions with the following characteristics: DivisionSegment-average Unlevered Beta (Peer Firms)Market ValueAviation1.25$12 billionEnergy Infrastructure1.41$18 billionPower and Water0.58$ 9 billionOil & Gas1.31$11 billion What is the fundamental unlevered beta of General Electric based on the above information? 1.141.201.281.35 Question 5. You read in the Australian Financial Review that the implied equity risk premium has decreased overnight from 6.3% to 5.8%. If the 10-year Australian Government bond yield is currently trading at 0.85%, which of the following statements is more likely to be correct? a.The cost of debt is higher than the risk-free rateb.Investors’ risk tolerance has increasedc.The beta of the market has decreasedd.The SML has a steeper slope Question 6. The latest return on equity (ROE), return on sales (ROS), and total asset turnover (TATO) of CBRE Ltd. are as follows: 201820192020ROE22%16%6%TATO2.01.61.0ROS5%4%2% Based on the above information from 2018 to 2020, we can conclude that the financial leverage (FL) of CBRE Ltd.: has increased.has remained stablehas decreasedcannot be determined based on the above information Question 7. BHP Ltd. is expected to maintain its dividend payout ratio of 70% in the long term. The latest earnings per share (EPS) announced by the company were $2.05. Earnings are expected to grow at a constant rate of 1% per year. The current risk-free rate is 1%, the implied equity risk premium is 6.0%, and the estimated levered beta of BHP is 0.85. If BHP is currently trading in the market at a P/E of 18.5, which of the following statements is correct: The firm is undervaluedThe firm is overvaluedThe firm is correctly pricedMore information is needed Question 8. What is the best explanation for an increase in the total asset utilisation (or efficiency) of a firm? There is an increase in days’ inventory held (DIH) from 26 days to 40 days.There is an increase in days’ sales outstanding (DSO) from 40 days to 45 days.There is an increase in payables payment period (PPP) from 60 days to 70 days.There is an increase in the operating cash conversion cycle (or net operating cycle) from 6 days to 15 days. Question 9. In relative valuation, an inconsistency between a share’s P/E ratio and the payout ratio can be attributed to all of the following, EXCEPT: A major difference in the earnings growth rate.A major difference in the return on equity (ROE).A major difference in the systematic risk (i.e., beta)A major difference in firm’s geographic scope of operations. Question 10. Which of the following situations is more likely to cause high bargaining power of buyers? Buyers have very high brand loyalty and face high costs of changing suppliers.There are few buyers in number and they are highly concentrated.Buyers are price insensitive.Buyers can threaten to integrate forward. Question 11. Which of the following situations is more likely to lower the bargaining power of suppliers? Suppliers have unique expertise and technology to produce the goods.Buyers do not make up a significant portion of the suppliers’ sales.Suppliers face a credible threat from substitute products.Suppliers can credibly threaten to integrate forward. Question 12. Consider the information below about the following three stocks: Amethyst, Sapphire and Tanzanite. AmethystSapphireTanzaniteMarket Price$26$16$10Number of Shares4203Cash$10$65$22Debt (market value)$10$40$15EBITDA$16$30$18 Based on the information above, you can conclude that Amethyst, which is currently trading at a market price of $26, is: Overvalued by 17%Undervalued by 17%Overvalued by 25%Undervalued by 25% Question 13. In the soft drink (or beverage) industry, net profit margins are high because: Brand recognition is not a credible deterrent to potential new entrants;Individual consumers tend to exhibit relatively high price sensitivity;Incumbent firms are likely to be dependent on few suppliers of raw materials;Suppliers provide raw materials that are not sufficiently unique. Question 14. Which of the following statements is correct? A stock is most likely overvalued if its intrinsic value exceeds the market value;A stock is most likely undervalued if its intrinsic value is less than the market value;An analyst is most likely to recommend buying a stock if the market value of the stock is greater than its intrinsic value;An analyst is most likely to recommend selling a stock if the market value of the stock is greater than its intrinsic value. Question 15. Which of the following reflects one of the approaches to fundamental analysis? Estimation of fundamental betasDiscounted cash flow valuationAsset allocationSecurity selection Question 16. Why is the dividend discount model not necessarily an appropriate model to estimate the intrinsic value of high-growth stocks? Because earnings are very stable;Because dividends are volatile through time;Because share buy backs are very uncommon among Australian firms;Because dividends are not always a good measure of free cash flows. Question 17. What stable growth rate is a reasonable growth rate to justify the use of the single-stage model when estimating the intrinsic value of a stock? The stable growth rate should be equal to zero;The stable growth rate should be higher than the inflation rate;The stable growth rate should be lower than the expected growth rate of the economy;The growth rate must remain constant from one year to the next. Question 18. Most of the variability of the investment returns of an investment portfolio is explained by: Security selection decisions;Investment style decisions;Asset allocation decisions;Market timing decisions Question 19. Consider the following financial information about stock XYZ: Stage 1: High Growth Stage (3 years)Stage 2: Stable Growth StageHigh growth rate:20%Stable growth rate:2%Net Income$500mCost of equity10%CAPEX$200mDep.$40mΔNCWC$50mDebt/Capital20%Number of shares100m Using a two-stage model, the estimated target price of this firm is equal to: A. $41 B. $67 C. $78 D. $95 Question 20. Consider the following financial information about stock NEA: High Growth Stage (2 years)Stable Growth Stageg10%g3%EBIT(1-T)$500mWACC10%CAPEX-$350mDep.$100mΔNCWC-$200mMarket Value of Debt$10,000mCash$8,800mNumber of shares1,000m Using a two-stage model, the estimated target price of this firm is equal to: A. $3 B. $7 C. $12 D. $18 Question 21. A coupon bond that pays interest annually has a par value of $1,000, was matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be ________. A) $856.04 B) $891.86 C) $926.47 D) $1,000 Question 22. You want to evaluate three mutual funds using the information ratio measure for performance evaluation. The risk-free return during the sample period is 6%, and the average return on the market portfolio is 19%. The average returns, residual standard deviations, and betas for the three funds are given below. Average ReturnResidual Standard DeviationBetaFund A20%4.00%0.8Fund B21%1.25%1.0Fund C23%1.20%1.2 The fund with the highest information ratio measure is A) Fund A. B) Fund B. C) Fund C. D) Funds A and B (tied for highest). Question 23. In a particular year, the Fidelity Fund earned a return of 15% by making the following investments in the following asset classes: WeightReturnBonds10%6%Stocks90%16% The return on a bogey portfolio was 10%, calculated from the following information. WeightReturnBonds (Barclays Bond Index)50%5%Stocks (S&P500 Index)50%15% What are the contributions of asset allocation and security selection across markets to the Fidelity Fund’s total excess return? Asset allocation = 2%; Security Selection = 3%Asset allocation = 3%; Security Selection = 2%Asset allocation = 4%; Security Selection = 1%Asset allocation = 5%; Security Selection = 0% Question 24. A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.) A) $13.21 B) $12.57 C) $15.44 D) $16.32 Question 25. A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher Effective Annual Rate (EAR) than an equivalent annual payment bond III. Sell for less than its conversion value Which of the following answers is correct? I and II onlyI and III onlyII and III onlyI, II, and III
