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Practice Questions for Final Exam with Solution - Investments | FIR 3710, Exams of Investment Theory

Material Type: Exam; Class: Investments; Subject: FIR Finance/Ins/Real Estate; University: University of Memphis; Term: Fall 2003;

Typology: Exams

Pre 2010

Uploaded on 07/28/2009

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Practice Questions for Final Exam
FIR 3710
Fall 2003
1. If a firm issues no new equity, book value will _______________________.
A) decrease each year by the amount of retained earnings
B) decrease each year by the amount of retained earnings minus depreciation on fixed
assets
C) increase each year by the amount of retained earnings
D) increase each year by the amount of retained earnings plus depreciation on fixed
assets
2. A firm has a ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is
__________.
A) 8.40
B) 11.90
C) 17.62
D) 47.60
3. 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%
4. Riskier firms tend to have P/E ratios that are _________ the P/E ratios of less risky firms.
A) higher than
B) equal to
C) lower than
D) There is not necessarily any linkage between risk and P/E ratios
5. __________ is equal to (common shareholders' equity/common shares outstanding).
A) book value per share
B) liquidation value per share
C) market value per share
D) Tobin's Q
6. Assuming all other factors remain unchanged, __________ would increase a firm's price/
earnings ratio.
A) an increase in the dividend payout ratio
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Practice Questions for Final Exam FIR 3710 Fall 2003

  1. If a firm issues no new equity, book value will _______________________. A) decrease each year by the amount of retained earnings B) decrease each year by the amount of retained earnings minus depreciation on fixed assets C) increase each year by the amount of retained earnings D) increase each year by the amount of retained earnings plus depreciation on fixed assets
  2. A firm has a ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is __________. A) 8. B) 11. C) 17. D) 47.
  3. 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%
  4. Riskier firms tend to have P/E ratios that are _________ the P/E ratios of less risky firms. A) higher than B) equal to C) lower than D) There is not necessarily any linkage between risk and P/E ratios
  5. __________ is equal to (common shareholders' equity/common shares outstanding). A) book value per share B) liquidation value per share C) market value per share D) Tobin's Q
  6. Assuming all other factors remain unchanged, __________ would increase a firm's price/ earnings ratio. A) an increase in the dividend payout ratio

B) a reduction in investor risk aversion C) an expected increase in the level of inflation D) an increase in the yield on treasury bills

  1. If the interest rate on debt is higher than the ROA, then a firm will __________ if it increases the use of debt in its capital structure. A) decrease its ROE B) increase its ROE C) not change its ROE D) change its ROE in an indeterminable manner
  2. 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
  3. 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) $ B) $ C) $ D) $
  4. 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 70%, its intrinsic value should be __________. A) $20. B) $69. C) $128. D) $150.
  5. If a firm has a market-to-book-value ratio that is equivalent to the industry average and an ROE that is less than the industry average, it implies __________. A) the firm has a higher P/E ratio than other firms in the industry B) the firm is more likely to avoid insolvency in the short run than other firms in the industry C) the firm is more profitable than other firms in the industry

D) $34.

  1. A firm has a (net profit / pretax profit) ratio of 0.6, a leverage ratio of 1.5, a (pretax profit / EBIT) of 0.7, an asset turnover ratio of 4, a current ratio of 2, and a return on sales ratio of 6%. Its ROE is __________. A) 7.56% B) 15.12% C) 20.16% D) 30.24%
  2. All else the same, a higher plowback ratio means a(n) _______ P/E ratio. A) higher B) lower C) unchanged D) unable to determine

Answer Key

  1. C
  2. B
  3. D
  4. C
  5. A
  6. B
  7. A
  8. A
  9. B
  10. C
  11. A
  12. C
  13. D
  14. B
  15. D
  16. B
  17. B
  18. D