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In one year, a security market index has the following quarterly price returns:
First quarter 3% , Second quarter 4% , Third quarter -2% , Fourth quarter 5% . The price
return for the year is closest to:
A) 10.2%. B) 9.9%. C) 10.0%
An index provider maintains a price index and a total return index for the same 40 stocks.
Assuming both indexes begin the year with the same value, the total return index at the end
of the year will be:
A) greater than the price index.
B) less than the price index if the price index increases and greater than the price index if the
price index decreases.
C) equal to the price index if the constituent stocks do not pay dividends.
The value of a security market index at the end of December is 1,200. The index returns for
the next six months are:
Month
Return
Answer
Jan
3.89%
Feb
8.76%
A
Mar
-4.74%
B
Apr
6.88%
C
May
-5.39%
Jun
-8.12%
The target market for a security market index is best described as the:
A) consumers who will purchase the licensing rights for the index.
B) securities that are included in the index.
C) market or segment the index is designed to measure.
Which of the following weighting schemes will produce a downward bias on the index due to
the occurrence of stock splits by firms in the index?
A) Price-weighted series. B) Market-cap weighted series. C) Equal weighted price indicator
series.
Which of the following statements best describes the investment assumption used to calculate
an equal weighted price indicator series?
A) An equal number of shares of each stock are used in the index.
B) An equal dollar investment is made in each stock in the index.
C) A proportionate market value investment is made for each stock in the index.
Which of the following statements about indexes is CORRECT?
A) A market weighted series must adjust the denominator to reflect stock splits in the sample
over time.
B) An equal weighted index assumes a proportionate market value investment in each
company in the index.
C) A price-weighted index assumes an equal number of shares (one of each stock)
represented in the index.
With regard to stock market indexes, it is least likely that:
A) a market-cap weighted index must be adjusted for stock splits but not for dividends.

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B) the use of price weighting versus market value weighting produces a downward bias on
the index.
C) buying 100 shares of each stock in a price-weighted index will result in a portfolio that
tracks the index quite well.
The providers of the Smith 30 Stock Index remove Jones Company from the index because it
has been acquired by another firm, and replace it with Johnson Company. This change in the
index is best described as an example of:
A) rebalancing. B) redefinition. C) reconstitution.
An equity index comprised of value stocks, identified by their price-to-earnings ratios, is best
described as a:
A) style index. B) sector index. C) fundamental weighted index.
Which of the following is NOT a reason bond market indexes are more difficult to create
than stock market indexes?
A) The universe of bonds is much broader than that of stocks.
B) Bond deviations tend to be relatively constant.
C) There is a lack of continuous trade data available for bonds.
Voluntary reporting of performance by hedge fund managers leads to:
A) an upward bias in hedge fund index returns.
B) a downward bias in hedge fund index returns.
C) no appreciable bias in hedge fund index returns.
Equal weighting is the most common weighting methodology for indexes of which of the
following types of assets?
A) Hedge funds. B) Equities. C) Fixed income securities.
An analyst gathered the following information about a company:
The stock is currently trading at $31.00 per share.
Estimated growth rate for the next three years is 25%.
Beginning in the year 4, the growth rate is expected to decline and stabilize at 8%.
The required return for this type of company is estimated at 15%.
The dividend in year 1 is estimated at $2.00.
The stock is undervalued by approximately:
A) $15.70. B) $0.00. C) $6.40.
An equity valuation model that values a firm based on the market value of its outstanding
debt and equity securities, relative to a firm fundamental, is a(n):
A) enterprise value model. B) asset-based model. C) market multiple model.
Witronix is a rapidly growing U.S. company that has increased free cash flow to equity and
dividends at an average rate of 25% per year for the last four years. The present value model
that is most appropriate for estimating the value of this company is a:
A) multistage dividend discount model. B) Gordon growth model. C) single stage free cash
flow to equity model.
The yield on a companys 7.5%, $50 par preferred stock is 6%. The value of the preferred
stock is closest to:
A) $12.50. B) $50.00. C) $62.50.

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One advantage of price/sales (P/S) multiples over price to earnings (P/E) and price-to-book
value (PBV) multiples is that:
A) P/S can be used for distressed firms. B) P/S is easier to calculate.
C) Regression shows a strong relationship between stock prices and sales.
An analyst studying Albion Industries determines that the average EV/EBITDA ratio for
Albions industry is 10. The analyst obtains the following information from Albions
financial statements:
EBITDA = 11,000,000
Market value of debt = 30,000,000
Cash = 1,000,000
Based on the industrys average enterprise value multiple, what is the equity value of Albion
Industries?
A) 110,000,000. B) 80,000,000. C) 81,000,000.
Given the following information, compute price/book value.
Book value of assets = $550,000 Total sales = $200,000 Net income = $20,000 Dividend
payout ratio = 30% Operating cash flow = $40,000 Price per share = $100 Shares outstanding
= 1000 Book value of liabilities = $500,000
A) 5.5X. B) 2.0X. C) 2.5X.
All else equal, a firm will have a higher Price-to-Earnings (P/E) multiple if:
A) the stocks beta is lower. B) return on equity (ROE) is lower. C) retention ratio is higher.
If a company has a "0" earnings retention rate, the firm's P/E ratio will equal:
A) k + g B) 1 / k C) D/P + g
A firm has a profit margin of 10%, an asset turnover of 1.2, an equity multiplier of 1.3, and
an earnings retention ratio of 0.5. What is the firm's internal growth rate?
A) 6.7%. B) 7.8%. C) 4.5%
Company B paid a $1.00 dividend per share last year and is expected to continue to pay out
40% of its earnings as dividends for the foreseeable future. If the firm is expected to earn a
10% return on equity in the future, and if an investor requires a 12% return on the stock, the
stocks value is closest to:
A) $12.50. B) $17.67. C) $16.67
Bybee is expected to have a temporary supernormal growth period and then level off to a
normal, sustainable growth rate forever. The supernormal growth is expected to be 25
percent for 2 years, 20 percent for one year and then level off to a normal growth rate of 8
percent forever. The market requires a 14 percent return on the company and the company
last paid a $2.00 dividend. What would the market be willing to pay for the stock today?
A) $67.50. B) $52.68. C) $47.09.