Investments Exam 2 Solution

October 22, 2009

1. A fee that is charged at the time mutual fund shares are purchased by an investor is
called:
A. contingent deferred sales charge.
B. 12b-1 fee.
C. back-end load.
D. front-end load.
E. issuance charge.
2.

Money market mutual funds do which one of the following?

A. offer a guaranteed rate of return
B. invest in securities that mature in 90 days or less
C. provide a risk-free means of investing
D. invest only in government bonds
E. trade for $10 a share

3. You recently purchased a fund at a price of $39.97 per share. The NAV at the time of
purchase was $40.67. You must have purchased a(n) _____ fund.
A. closed-end
B. global
C. bond
D. index
E. asset allocation
4. An ETF is best described as:
A. an index fund that trades like a closed-end fund.
B. a closed-end fund that trades like a stock.
C. a sector fund that trades like a bond.
D. an index fund that trades only at the end of each day.
E. an international fund that trades like a domestic stock.

5. Which one of the following statements related to stock indexes is correct?

A. The index divisor increases in value whenever a stock in the index undergoes a stock
split.
B. A value-weighted index includes both dividends and capital gains.
C. The S&P 500 index is value-weighted.
D. The DJIA is value-weighted.
E. Index staleness is more apt to be a problem for the DJIA than for the Wilshire 5000.
6. A mutual fund has an NAV of $11.39 with 268,300 shares outstanding. What is the
value of the fund's assets if it has $211,400 in liabilities?
A. $2,844,537
B. $2,911,018
C. $3,055,937
D. $3,187,019
E. $3,267,337
Assets = $11.39 x 268,300 + $211,400 = $3,267,337
7. The Market Stability Fund owns the following stocks:

The fund has no liabilities and has 57,600 shares outstanding. What is the NAV?
A. $14.72
B. $14.88
C. $15.47
D. $15.95
E. $16.03
NAV = [(8,400 x $58) + (6,900 x $37) + (4,100 x $43)] / 57,600 = $15.95

8. The Stone Wall Fund has an offer price of $32.90 and a front-end load of 3.5 percent.
What is the net asset value?
A. $31.68
B. $31.75
C. $31.79
D. $32.90
E. $34.05
NAV = $32.90 x (1 - .035) = $31.75
9. The High Growth Technology Fund has an NAV of $54.08 and a 6 percent front-end
load. What is the offering price?
A. $50.84
B. $51.36
C. $57.32
D. $57.53
E. $57.81
Offering price = $54.08 / (1 - .06) = $57.53
10. One year ago, Allison purchased 250 shares of a mutual fund which has a front-end
load of 5.75 percent. The NAV at the time of purchase was $40. Today, the NAV is $42.
There were no fund distributions this past year. What is Allison's rate of return for the
year?
A. -1.10 percent
B. -1.04 percent
C. 4.71 percent
D. 4.76 percent
E. 5.00 percent
Purchase price = $40 / (1 - .0575) = $42.44
Rate of return = ($42 - $42.44) / $42.44 = -1.04 percent
11. Which one of the following is the federal agency which regulates the financial markets
in the U.S.?

A. Treasury Department
B. National Association of Securities Dealers
C. Over the Counter Commission
D. Federal Reserve
E. Securities and Exchange Commission
12. You want to sell shares of stock at the current price. Which type of order should you
place?
A. limit
B. post
C. market
D. short
E. stop
13. An index consists of the following securities and has an index divisor of 3.0. What is
the price- weighted index return?

A. 5.43 percent
B. 5.67 percent
C. 6.78 percent
D. 6.91 percent
E. 7.03 percent
Price-weighted index = {[($19 + $11 + $33) / 3] - [($17 + $14 + $28) / 3]} / [($17 + $14 + $28) /
3] = 6.78 percent

14. An index consists of the following securities. What is the value-weighted index return?

A. 11.67 percent
B. 13.03 percent
C. 13.49 percent
D. 16.82 percent
E. 17.49 percent
Beginning value = (5,000 x 21) + (2,000 x 39) = 183,000
Ending value = (5,000 x 27) + (2,000 x 40) = 215,000
Return = (215,000 - 183,000) / 183,000 = 17.49 percent
15. PT Boats plans to pay a $2.40 a share dividend at the end of each of the next 2 years. At the
end of year 3, it will pay a final liquidating dividend of $10 a share. After that, the company
plans to close its doors permanently. What is the current value of this stock at a discount rate of
16 percent?
A. $9.89
B. $10.26
C. $11.28
D. $12.47
E. $14.80

16. Lakeside Sheet Metal is downsizing and plans on completely closing 3 years from now. The
firm's liquidation plan calls for annual dividends of $2, $4, and $40 over the next 3 years,
respectively. What is the current value of this stock given a discount rate of 14 percent?
A. $26.94
B. $27.16
C. $28.47
D. $31.83
E. $36.29

17. Barn Wood Interiors announced today that it is going out of business. As of today, no more
regular dividends will be paid. The firm will, however, pay two liquidating dividends. The first
will be paid one year from now in the amount of $14 a share. The second and final payment will
be paid two years from now at an estimated $38 a share. What is the value of this stock today at a
discount rate of 18.7 percent?
A. $38.76
B. $39.03
C. $41.41
D. $43.78
E. $46.01

18. Blue Water Tours just paid an annual dividend of $0.72 a share. The firm has a policy of
increasing the dividend by 3.5 percent annually. What is the current value of this stock at a
discount rate of 11.7 percent?
A. $8.67
B. $8.78
C. $8.91
D. $9.02
E. $9.09

19. Periscope Adventures last annual dividend was $0.63 a share. The firm will increase the
dividend by 7 percent for the next 4 years and thereafter increase the dividend by 4 percent
annually. What is this stock worth today if the required return is 11 percent?
A. $10.38
B. $11.06
C. $11.30
D. $13.97
E. $14.08

20. Wilderness Adventures has earnings per share of $2.46 and dividends per share of $1.10.
The total equity of the firm is $945,000. There are 30,000 shares of stock outstanding.
What is the sustainable rate of growth?
A. 1.14 percent
B. 1.31 percent
C. 3.90 percent
D. 4.32 percent
E. 5.73 percent
Sustainable growth rate = [($2.46 x 30,000) / $945,000] x [1 - ($1.10 / $2.46)] = 4.32 percent

21. Best Value Outlet recently announced that it intends to pay dividends of $0.40, $0.60,
$0.75, and $1.00 per share over the next four years, respectively. After that, the plan is to
increase the dividend by 3.5 percent annually. What is the current value of this stock if
the applicable discount rate is 13.5 percent?
A. $6.44
B. $7.83
C. $8.17
D. $9.55
E. $13.10

22. Leslie Apparel has a current book value per share of $5.86 and current earnings per share of
$1.13. The required return is 14 percent and the expected earnings growth rate is 4.5 percent.
What is one share of this stock worth today?
A. $7.44
B. $7.77
C. $8.56
D. $9.65
E. $10.58

23. The Retail Box has an historical P/CF ratio of 21.5. The current CFPS is $1.42 and the
projected CFPS growth rate is 5.6 percent. The current EPS is $1.02. What is the expected price
of this stock one year from now?
A. $30.53
B. $32.24
C. $32.88
D. $34.11
E. $34.20
Expected price = $1.42 x (1 + .056) x 21.5 = $32.24

24. A firm has a current book value per share of $21.10 and a market price per share of $37.57.
Next year's earnings are expected to be $5.60 per share and the expected earnings growth rate is
2.5 percent. What is the required rate of return on this stock?
A. 14 percent
B. 15 percent
C. 16 percent
D. 17 percent
E. 18 percent

25. Historically, Jones Trucking has had a P/E ratio of 14.6. The firm has current net income of
$62,000 with 80,000 shares of stock outstanding. The EPS growth rate is 4.7 percent. What is the
expected price of this stock one year from now?
A. $11.32
B. $11.85
C. $12.41
D. $15.38
E. $16.10
Expected price = ($62,000 / 80,000) x (1 + .047) x 14.6 = $11.85