IIM Ahmedabad presents STOCK MANIAC (Qualifier Round)

Question (1):

(I) A share of common stock in a firm represents an ownership interest in that firm. (II) A share of preferred stock is as much like a bond as it is like common stock.

Answer (1):
  • (I) is true, (II) false.
  • (I) is false, (II) true.
  • Both are true.
  • Both are false.
Question (2):

The most active stock exchange in the world is the

Answer (2):
  • Nikkei Stock Exchange.
  • London Stock Exchange.
  • Shanghai Stock Exchange.
  • New York Stock Exchange.
Question (3):

A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor’s valuation of this stock if she expects it to be selling for $30 in one year and requires 15 percent return on equity investments?

Answer (3):
  • $30.24
  • $26.30
  • $26.09
  • $27.74
Question (4):

Which of the following is not an element of the Gordon growth model of stock valuation?

Answer (4):
  • the stock's most recent dividend paid.
  • the expected constant growth rate of dividends.
  • the required return on investments in equity.
  • the stock's expected future price.
Question (5):

According to the Gordon growth model, what is an investor’s valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor’s required return is 11 percent?

Answer (5):
  • $110
  • $100
  • $11
  • $10
  • $5.24
Question (6):

The PE ratio approach to valuing stock is especially useful for valuing

Answer (6):
  • privately held firms.
  • firms that don't pay dividends.
  • both (a) and (b).
  • neither (a) nor (b).
Question (7):

A weakness of the PE approach to valuing stock is that it is

Answer (7):
  • difficult to estimate the constant growth rate of a firm's dividends.
  • difficult to estimate the required return on equity.
  • difficult to predict how much a firm will pay in dividends.
  • based on industry averages rather than firm-specific factors.
Question (8):

The main cause of fluctuations in stock prices is changes in

Answer (8):
  • tax laws.
  • errors in technical stock analysis.
  • daily trading volume in stock markets.
  • information available to investors.
  • total household wealth in the economy.
Question (9):

Which of the following statements about trading operations in an organized exchange are correct?

Answer (9):
  • Floor traders all deal in a wide variety of stocks.
  • In most trades, specialists match buy and sell orders.
  • In most trades, specialists buy for or sell from their own inventories.
  • The SuperDOT system is used to expedite large trades of over 100,000 shares.
Question (10):

A firm is expected to pay a dividend of $1.00 next year and the dividend is expected to grow at a constant rate of 4 percent over time. Some investors have required returns on investments in equity of 12 percent, some 10 percent, and some 8 percent. The market price of this firm’s stock will be slightly above

Answer (10):
  • $25
  • $18
  • $16.67
  • $12.50
Question (11):

The presence of _________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.

Answer (11):
  • noncollateralized risk
  • free-riding
  • asymmetric information
  • costly state verification
Question (12):

Common stock is the riskiest corporate security, followed by preferred stock and then bonds.

Answer (12):
  • True
  • False
Question (13):

A company’s $100 par perpetual preferred stock has a dividend rate of 7 percent and a required rate of return of 11 percent. The company’s earnings are expected to grow at a constant rate of 3 percent per year. If the market price per share for the preferred stock is $75, the preferred stock is most appropriately described as being:

Answer (13):
  • overvalued by $11.36.
  • undervalued by $15.13.
  • undervalued by $36.36.
  • overvalued by $23.26.
Question (14):

An analyst gathers the following information about two companies for the year ending 31 December 2008:

Which of the following best describes the expected growth rate of Company 1? The expected growth rate of Company 1 compared to Company 2 is:

Question Image
Answer (14):
  • lower.
  • greater.
  • the same.
Question (15):

Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers “make a market” by

Answer (15):
  • buying stocks for inventory when investors want to sell.
  • selling stocks from inventory when investors want to buy.
  • doing both of the above.
  • doing neither of the above.
Question (16):

Which of the following is not an advantage of Electronic Communications Networks (ECNs)?

Answer (16):
  • All unfilled orders are available for review by ECN traders.
  • Transactions costs are lower for ECN trades.
  • Trades are made and confirmed faster.
  • ECNs work well for thinly traded stocks.
Question (17):

Compared to investors with long investment time horizons, investors with short investment time horizons most likely require:

Answer (17):
  • less liquidity and less emphasis on capital appreciation.
  • more liquidity and less emphasis on capital appreciation.
  • less liquidity and greater emphasis on capital appreciation.
Question (18):

Which of the following statements regarding the Markowitz efficient frontier is least likely to be correct? The optimal portfolio for:

Answer (18):
  • an investor is the portfolio that lies on the efficient frontier and provides her with the greatest level of utility.
  • an investor is found at the point of tangency between the efficient frontier and an investor's highest utility curve.
  • a more risk-averse investor will lie inside the efficient frontier but will lie outside the efficient frontier for a less risk-averse investor.
Question (19):

Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price of Auto Zone stock if the retailer’s earnings per share are projected to be $1.85?

Answer (19):
  • $21.85
  • $37
  • $10.81
  • $9.25
Question (20):

(I) The market price of a security at a given time is the highest value any investor puts on the security. (II) Superior information about a security increases its value by reducing its risk.

Answer (20):
  • (I) is true, (II) is false.
  • (I) is false, (II) is true.
  • Both are true.
  • Both are false.
Question (21):

A company currently has a debt-to-equity ratio of 1.25. Common shareholder’s equity is $4,000,000, consisting of 1.5 million shares outstanding with a current price of $28/share. Part of the company’s debt currently outstanding is $1,000,000 of convertible bonds. Each $1,000 par value bond can be converted into 50 common shares at any time during the next three years. The coupon rate on the bonds is 6 percent with interest paid annually. If all convertible bonds are converted, the company’s debt-capital ratio is closest to:

Answer (21):
  • 42.5%.
  • 44.4%.
  • 80.0%.
Question (22):

The 2001 terrorist attacks and the Enron financial scandal caused anticipated dividend growth to _________, investors’ required return on equity to _________, and stock prices to _________.

Answer (22):
  • decreases; increase; decrease
  • decrease; increase; increase
  • increase; decrease; decrease
  • increase; decrease; increase
Question (23):

A stock’s market value will be higher the higher is the investor’s required rate of return.

Answer (23):
  • True
  • False
Question (24):

A stock’s market value will be higher the higher is its expected dividend stream.

Answer (24):
  • True
  • False
Question (25):

Stock values computed by valuation models may differ from actual market prices because it is difficult to

Answer (25):
  • estimate future dividend growth rates.
  • estimate the risk of a stock.
  • forecast a stock's future dividends.
  • all of the above are true.
Question (26):

Holding other things constant, a stock’s value will be highest if its most recent dividend is

Answer (26):
  • $2.00
  • $5.00
  • $0.50
  • $1.00
Question (27):

A company has just issued $5 million of mandatory redeemable preferred shares with a par value of $100 per share and a 7 percent dividend. The issue matures in 5 years. Which of the following statements is least likely correct? The company’s:

Answer (27):
  • debt/total capital ratio will improve.
  • interest coverage ratio will deteriorate.
  • preferred shareholders will rank below debt holders should the company file for bankruptcy.
Question (28):

In the generalized dividend valuation model a stock’s value depend only on

Answer (28):
  • its future dividend payments and its future price.
  • its future dividend payments and the required return on equity.
  • its future price and the required return on investments on equity.
  • its future dividend payments.
Question (29):

In the one-period valuation model, a stock’s value falls if the _________ rises.

Answer (29):
  • dividend
  • expected future price
  • required return on equity
  • current price
Question (30):

In the one-period valuation model, a stock’s value will be higher

Answer (30):
  • the higher is its expected future price.
  • the lower is its dividend.
  • the higher is the required return on investments in equity.
  • all of the above.
Question (31):

A stock currently sells for $30 per share and pays $1.00 per year in dividends. What is an investor’s valuation of this stock if he expects it to be selling for $37 in one year and requires 12 percent return on equity investments?

Answer (31):
  • $38
  • $33.50
  • $34.50
  • $33.93
Question (32):

Preferred stockholders hold a claim on assets that has priority over the claims of

Answer (32):
  • both common stockholders and bondholders.
  • neither common stockholders nor bondholders.
  • common stockholders, but after that of bondholders.
  • bondholders, but after that of common stockholders.
Question (33):

(I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders, but after that of bondholders. (II) Firms issue preferred stock in far greater amounts than common stock.

Answer (33):
  • (I) is true, (II) false.
  • (I) is false, (II) true.
  • Both are true.
  • Both are false.
Question (34):

In order to obtain an income of Rs. 650 from 10% stock at Rs. 96, one must make an investment of:

Answer (34):
  • 3100
  • 6240
  • 6500
  • 9600
Question (35):

A man bought 20 shares of Rs. 50 at 5 discount, the rate of dividend being 13 . The rate of interest obtained is

Answer (35):
  • 12.5%
  • 15%
  • 13.5%
  • 16.67%
Question (36):

The market value of a 10.5% stock, in which an income of Rs. 756 is derived by investing Rs. 9000, brokerage being %, is:

Answer (36):
  • 108.25
  • 112.20
  • 124.75
  • 125.25
Question (37):

Sakshi invests a part of Rs. 12,000 in 12% stock at Rs. 120 and the remainder in 15% stock at Rs. 125. If his total dividend per annum is Rs. 1360, how much does he invest in 12% stock at Rs. 120?

Answer (37):
  • 4000
  • 4500
  • 5500
  • 6000
Question (38):

Rs. 9800 are invested partly in 9% stock at 75 and 10% stock at 80 to have equal amount of incomes. The investment in 9% stock is:

Answer (38):
  • 4800
  • 5000
  • 5400
  • 5600
Question (39):

Which of the following statements about basis risk is incorrect?

Answer (39):
  • An airline company hedging exposure to a rise in jet fuel prices with heating oil futures contracts may face basis risk.
  • Choices left to the seller about the physical settlement of the futures contract in terms of grade of the commodity, location, chemical attributes may result in basis risk.
  • Basis risk exists when futures and spot prices change by the same amount over time and converge at maturity of the futures contract.
  • Basis risk is zero when variances of both the futures and spot process are identical and the correlation coefficient between spot and futures prices is equal to one.
Question (40):

An analyst is doing a study on the effect on option prices of changes in the price of the underlying asset. The analyst wants to find out when the deltas of calls and puts are most sensitive to changes in the price of the underlying. Assume that the options are European and that the Black-Scholes formula holds. An increase in the price of the underlying has the largest absolute value impact on delta for:

Answer (40):
  • Deep in-the-money calls and deep out-of-the-money puts.
  • Deep in-the-money puts and calls.
  • Deep out-of-the-money puts and calls.
  • At-the-money puts and calls.
Question (41):

Suppose that the market price of Company X is $45 per share and that of Company Y is $30. If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be:

Answer (41):
  • 0.667
  • 1.0
  • 1.125
  • 1.5
Question (42):

Interest rates are important to financial institutions since an interest rate increase _________ the cost of acquiring funds and _________ the income from assets.

Answer (42):
  • decreases; decreases
  • increases; increases
  • decreases; increases
  • increases; decreases
Question (43):

Which of the following can be described as involving direct finance?

Answer (43):
  • A corporation's stock is traded in an over-the-counter market.
  • A corporation buys commercial paper issued by another corporation.
  • A pension fund manager buys commercial paper from the issuing corporation.
  • Both (a) and (b) of the above.
  • Both (b) and (c) of the above.
Question (44):

In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called

Answer (44):
  • comparative informational disadvantage.
  • asymmetric information.
  • variant information.
  • caveat venditor.
Question (45):

Which of the following is not an objective of the SEBI?

Answer (45):
  • maintain integrity of the securities markets
  • advise investors about which particular stocks are good buys
  • require firms to provide specific information to investors
  • regulate major participants in securities markets
Question (46):

The SEC requires firms to submit various documents to increase the flow of information to investors but does not verify the accuracy of that information.

Answer (46):
  • True
  • False
Question (47):

The Gordon growth model assumes that a stock’s dividend grows at a constant rate forever.

Answer (47):
  • True
  • False
Question (48):

Holding other things constant, a stock’s value will be highest if the investor’s required return on investments in equity is

Answer (48):
  • 20%
  • 15%
  • 10%
  • 5%
Question (49):

A basic principle of finance is that the value of any investment is

Answer (49):
  • the present value of all future net cash flows generated by the investment.
  • the undiscounted sum of all future net cash flows generated by the investment.
  • unrelated to the future net cash flows generated by the investment.
  • unrelated to the degree of risk associated with the future net cash flows generated by the investment.
Question (50):

The term structure of interest rates is

Answer (50):
  • the relationship among interest rates of different bonds with the same maturity.
  • the structure of how interest rates move over time.
  • the relationship among the terms to maturity of different bonds.
  • the relationship among interest rates on bonds with different maturities.