2CEXAM Mock Question

IIQE Paper 5

18-May-20
13:05:21
1 Which of the following statement is correct regarding standard deviation? Topic 2
I. There is no relationship between standard deviation and variance.
II. The larger the standard deviation, the return of security clusters more tightly around the mean.
III. Standard deviation is a standardized number to accurately measure the risk of asset.
IV. Standard deviation effectively measures all of the risks investors actually face.
A I Chapter 1

B III Section 5(b)

C II, III, IV QID 1875

D I, III, IV Ans B Hot

Exp There is the risk that an investment’s actual return will be different from its expected return. The risk of an
investment, or a portfolio, can be measured by the variance and the standard deviation, taken as the
square root of the variance. The greater the variance (and standard deviation), the greater the level of risk
for the security.
2 Fund A has the following performance in different situations: The probability of 10% is 0.2. The probability Topic 2
of 15% is 0.4. The probability of 20% is 0.4. The expected return of fund A is?
A 10% Chapter 1

B 16% Section 5(b)

C 20% QID 1855

D 15% Ans B Hot

Exp 10% x 0.2 = 0.02

15%x 0.4 = 0.06
20% x 0.4 = 0.08

Expected Value = 0.02+0.06+0.08=16%

3 The indicator which can be used to approximate the price change of debt security in a 1% change in Topic 2
interest rate is called:
A risk premium. Chapter 1

B earnings yield. Section 5(b)(iv)

C duration. QID 1882

D time-to-maturity of bond. Ans C Hot

Exp Duration approximates to the percentage bond price change that results from a 1% change in interest
rates.

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 4 Duration measures: Topic 2

A the sensitivity of bond yield with respect to interest rate changes. Chapter 1

B the sensitivity of bond price with respect to interest rate changes Section 5(b)(iv)

C the sensitivity of coupons with respect to interest rate changes QID 1881

D the sensitivity of bond risk with respect to interest rate changes Ans B Hot

Exp Duration measures the sensitivity of securities to changes in interest rates, by taking into account the
maturity date and the coupon cash flows. It approximates to the percentage bond price change that
results from a 1% change in interest rates. It also measures the average number of years it takes for the
discounted cash flow to be returned to an investor.
5 Which of the following statement is correct regarding duration? Topic 2

A Duration also reflects the sensitivity of bond price to changes in coupons. Chapter 1

B The shorter the duration, the faster the investor collects principal invested. Section 5(b)(iv)

C The shorter the duration, the slower the investor collects principal invested. QID 1880

D The longer the duration, the faster the investor collects principal invested. Ans B Hot

Exp Duration measures the sensitivity of securities to changes in interest rates, by taking into account the
maturity date and the coupon cash flows. It also measures the average number of years it takes for the
discounted cash flow to be returned to an investor. Generally, the further along the yield curve of an
investment, the longer the duration of the investment. The short-term bond has shorter duration and the
investor collects principal invested more quickly.
6 Conservative investors are more likely to invest in: Topic 2
share A: a standard deviation of 15% and a return of 12%
share B: a standard deviation of 15% and a return of 14%
A share A since the risks are lower. Chapter 1

B share B since the returns are higher. Section 5(b)

C share A since lower returns mean lower risks. QID 1879

D share B since the returns are higher under the same risks. Ans C Hot

Exp The standard deviation is a way to measure risks. A higher standard deviation means higher risks.
Therefore, under the same risks, the returns of share B are higher. So we choose B.
7 Which of the following is correct regarding standard deviation? Topic 2
I. There is no relationship between standard deviation and variance.
II. The higher the standard deviation, the closer-distributed the returns of securities.
III. Standard deviation is a standardized indicator to measure the risks of assets.
IV. Standard deviation is an effective way to measure all kinds of risks investors face.
A I Chapter 1

B III Section 5(b)

C II, III, IV QID 1876

D I, III, IV Ans B Hot

Exp Standard deviation and variance can be used to measure the risk of an investment. The higher the
standard deviation and variance, the bigger the risk. However, they can only be used to measure part of
the market risk rather than all of the risks.

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 8 According to the following number, what can we conclude? The expected return and standard deviation of Topic 2
stock portfolio A are 10% and 5% respectively. The expected return and standard deviation of stock
portfolio B are 20% and 2% respectively.
A Stock portfolio A is superior to stock portfolio B because its standard deviation is lower. Chapter 1

B Stock portfolio B is superior to stock portfolio A because its expected return is higher. Section 5(b)

C Stock portfolio B is superior to stock portfolio A because its standard deviation is higher. QID 1874

D Stock portfolio A is superior to stock portfolio B because its market risk is lower. Ans B Hot

Exp Compared to security A, security B has a higher risk for a greater expected return.
9 The higher the variance and standard deviation, Topic 2

A the larger the market risk of securities. Chapter 1

B the larger the credit risk of securities. Section 5(b)

C the larger the liquidity risk of securities. QID 1873

D the larger the operation risk of securities. Ans A Hot

Exp 投資的實際回報未必與預期回報相同。利用方差及標準差（方差的平方根）可計算一 項投資或

投資組合的風險。方差及標準差越大，有關證券的風險就越高。
10 The most common way to measure the risk of investment return is: Topic 2

A value at risk. Chapter 1

B standard deviation. Section 5(b)

C variance. QID 1872

D gaps. Ans B Hot

Exp There is the risk that an investment’s actual return will be different from its expected return. The risk of an
investment, or a portfolio, can be measured by the variance and the standard deviation, taken as the
square root of the variance.
11 What is the instrument to measure market risk and show daily loss limit? Topic 2

A standard deviation Chapter 1

B Value at Risk Section 5(b)

C Variance QID 1871

D Stress test Ans B Hot

Exp The instrument to measure market risk and show daily loss limit is value at risk.
12 Value at risk(Vary) is commonly used as: Topic 2

A arbitrage. Chapter 1

B risk management. Section 5(b)

C trend analysis. QID 1870

D computing premiums. Ans B Hot

Exp Vary is a popular method for aggregating risk across an institution and measuring it.

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 13 Kaohsiung securities states that at a 90% confidence level its portfolio has a daily Vary of one million, Topic 2
indicating in normal market conditions, the probability of daily loss of more than one million is:
A 5% Chapter 1

B 10% Section 5(b)

C 90% QID 1869

D 20% Ans A Hot

Exp At a 90% confidence level its portfolio has a daily Vary of one million. This means there is 10% probability
of daily profit and loss of more than one million is 10% in total.
In the normal distribution curve, the probability of daily loss of more than one million is 5%.
14 Following is the return distribution of securities A and B in one year: Topic 2
Security A
condition probability return
1 1/4 -10%
2 1/2 -20%
3 1/4 20%
Calculate the standard deviation of security A?
A 26.875% Chapter 1

B 16.396% Section 5(b)

C 17% QID 1860

D 41.23% Ans B Hot

Exp Expected return = (-10% x 0.25) + (-20% x 0.5) + (20% x 0.25) = -7.5%

The variance = 0.25(-10%+ 7.5%)^2 + 0.5(-20% +7.5%)^2 + 0.25(20% + 7.5%)^2 = 0.000156 + 0.007813 +
0.018906= 0.026875

Standard deviation = 16.39%

15 Standard deviation is: Topic 2

A a way of measuring return, representing the relationship between expected risk and average return. Chapter 1

B a way of measuring risk, representing the relationship between expected return and average return. Section 5(b)

C a way of measuring return, representing the relationship between expected return and average return. QID 1856

D a way of measuring risk, representing the relationship between expected risk and average return. Ans A Hot

Exp Applied to the investment, the standard deviation can be used as an indicator of the stability of the
portfolio. The higher the standard deviation value, the larger gap between return and the average value.
This mean the return is more instable and risky. On the contrary, the smaller the standard deviation, the
more stable the return and the risk is also smaller.

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 16 The probability of the expected return of security A between -10% to +10% is 80%. If the expected return of Topic 2
security A is normally distributed, what's the probability that the expected return of security A is lower
than -10% or higher than +10%?
A 5% Chapter 1

B 10% Section 5(b)

C 20% QID 1878

D 0% Ans B Hot

Exp The "or" in the question is the point. The probability of the expected return of security A between -10% to
+10% is 80%. It means that the probability that the expected return of security A is lower than -10% and
higher than +10% is 1 - 80% = 20%. Because security A is normally-distributed, the probability of lower
than -10% or higher than +10% is the same. Thus, the probability that the expected return of security A is
lower than -10% or higher than +10% is 20%/2 = 10%.
17 Value at risk(Vary) is to measure: Topic 2

A the maximum expected gain at specified time interval in volatile market condition. Chapter 1

B the maximum expected loss at specified time interval in volatile market condition. Section 5(b)

C the maximum expected gain at specified time interval in normal market condition. QID 1868

D the maximum expected loss at specified time interval in normal market condition. Ans D Hot

Exp Vary is a popular method for aggregating risk across an institution and measuring it. It is a distribution-
free metric (meaning that it does not depend on assumptions about the probability distribution) and is
used to calculate, at specified confidence levels, the likely change in value of a portfolio of securities as a
result of changes in market conditions. It is based on a statistical analysis of historical market prices,
trends, correlations and volatilities.
18 For measuring the risk of portfolios, Topic 2

A the larger the standard deviation, the lower the level of risk. Chapter 1

B the larger the standard deviation, the higher the level of risk. Section 5(b)

C the lower the standard deviation, the higher the level of risk. QID 1858

D there is no relation between standard deviation and risk. Ans B Hot

Exp There is the risk that an investment’s actual return will be different from its expected return. The risk of an
investment, or a portfolio, can be measured by the variance and the standard deviation, taken as the
square root of the variance. The greater the variance (and standard deviation), the greater the level of risk
for the security.

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 19 Following is the return distribution of securities A and B in one year: Topic 2
Security A Security B
condition probability return return
1 1/4 -10% -20%
2 1/2 -20% -40%
3 1/4 20% 60%
Calculate the standard deviation of security B?
A 26.875% Chapter 1

B 16.396% Section 5(b)

C 17% QID 1859

D 41.23% Ans D Hot

Exp Expected return = (-20% x 0.25) + (-40% x 0.5) + (60% x 0.25) = -10%

The variance = 0.25(-20%+ 10%)^2 + 0.5(-40% +10%)^2 + 0.25(60% + 10%)^2 =0.0025 + 0.045 + 0.123 = 0.17

Standard deviation = 41.23%

20 For measuring the risk of portfolios, Topic 2

A the larger the variance, the lower the level of risk. Chapter 1

B the larger the variance, the higher the level of risk. Section 5(b)

C the lower the variance, the higher the level of risk. QID 1857

D there is no relation between variance and risk. Ans B Hot

Exp There is the risk that an investment’s actual return will be different from its expected return. The risk of an
investment, or a portfolio, can be measured by the variance and the standard deviation, taken as the
square root of the variance. The greater the variance (and standard deviation), the greater the level of risk
for the security.
21 Followings are the expected return of four kinds of portfolios. Which one has the lowest risk? Topic 2

A Spring fund: expected return ranges from 5%~20% Chapter 1

B Summer fund: expected return ranges from -3% ~ -20% Section 5(b)

C Autumn fund: expected return ranges from 1%~20% QID 1861

D Winter fund: expected return ranges from -60% to 0% Ans A Hot

Exp The expected return ranges of Autumn fund is the smallest. This represents its return distribution is more
concentrated than others and its flotation is therefore less.
22 Which of the following portfolio has the lowest risk? Topic 2

A Spring fund Chapter 1

expected return of 5%-20%
B Summer fund Section 5(b)
expected return of -3%-20%
C Fall fund QID 1862
expected return of 1%-20%
D Winter fund Ans A Hot
Expected return of -60-0%
Exp The returns of Spring fund has the lowest range (20%-5%=15%), representing a more closely-distributed
returns. Thus there is lower volatility and lowest risk.

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 23 Which of the following is correct regarding sharp ratio? Topic 2

A If the sharp ratio of portfolio is bigger than that of market portfolio, it means that the performance of that Chapter 1
portfolio is better than the market.
B If the sharp ratio of portfolio is lower than that of market portfolio, it means that the performance of that Section 5(b)
portfolio is better than the market.
C If the sharp ratio of portfolio is the same as that of market portfolio, it means that the performance of that QID 1864
portfolio is the best.
D If the sharp ratio of portfolio is the same as that of market portfolio, it means that the performance of that Ans A Hot
portfolio is the worst.
Exp If the sharp ratio of portfolio is lower than that of market portfolio,, it means that under the same risks,
portfolio performs better than markets.
24 Assets Returns Standard Deviation Topic 2
Risk-free rate 0.1 0
Market portfolio 0.2 0.05
Securities A 0.15 0.01
Securities B 0.50 0.30
Securities C 0.20 0.20
What is the sharp ratio of securities A?
A 5 Chapter 1

B 1.33 Section 5(b)

C 1 QID 1865

D 2 Ans A Hot

Exp (0.15 - 0.1) / 0.01 = 5

25 Assets Returns Topic 2
Risk-free rate 0.1
Market Portfolio 0.2
Securities A 0.15
Securities B 0.50
Securities C 0.20

Standard deviation
Risk-free rate: 0
Market Portfolio: 0.05
Securities A : 0.01
Securities B: 0.30
Securities C: 0.20
Which of the securities or combination is the best based on sharp ratio?
A Market portfolio Chapter 1

B Securities A Section 5(b)

C Securities B QID 1866

D Securities C Ans B Hot

Exp Sharpe ratio:

Market portfolio: (0.2 - 0.1) / 0.05 = 2
Securities A: (0.15 - 0.1) / 0.01 = 5
Securities B: (0.5 - 0.1) / 0.3 = 1.3
Securities C: (0.2 - 0.1) / 0.2 = 0.5

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 26 A stock portfolio has a value at risk of HKD 50 million at a 95% confidence level. It means that: Topic 2

A in trading days, the possibility of losing or gaining over HKD 50 million is 5% in total. Chapter 1

B in trading days, the possibility of losing or gaining over HKD 50 million is 5% each. Section 5(b)

C in trading days, the possibility of losing or gaining over HKD 50 million is 95% in total. QID 1867

D in 95% of trading days, it will lose or gain over HKD 50 million. Ans A Hot

Exp If Vary is measured for a confidence level of 95%, Vary indicates the maximum daily loss likely to occur at
a 95% confidence level. As a result, it is possible to say that the Vary amount is only likely to be exceeded
on five day out of the next 95 (losing or gaining over HKD 50 million).
27 Vitamilk just issued 100 bonds with a face value of USD$200 thousands, a coupon rate of 5%, a 5-year time- Topic 3
to-maturity and semi-annual coupon payment. What is the coupon rate if buying it now?
A 2.5% Chapter 2

B 5% Section 4

C 10% QID 1895

D 20% Ans B Hot

Exp Coupon rate is 5%. Thus, the coupon rate is 5% when buying it anytime.
28 Which of the following statement is correct regarding coupons? Topic 3
I. Coupons of fixed-rate bonds are unchangeable.
II. Coupons can be floating or fixed.
III. At the time of bond issuance, coupon rate equals earnings yield.
IV. Coupons of floating-rate bond are based on a specific reference rate.
A I, II, III Chapter 2

B I, II, IV Section 4

C II, III, IV QID 1889

D I, II, III, IV Ans D Hot

Exp Fixed rate bonds means the interest payment or coupon on a fixed rate bond remains constant throughout
the life of the bond. Bonds can be categorized as Fixed rate bonds; Floating rate bonds; Zero coupon
bonds. Floating rate bonds means the interest payment or coupon of a floating rate bond is based on a
reference rate, e.g. HIBOR. The interest rate is reset at regular intervals in line with changes in the
economic environment.
29 Vitamilk company has issued a bond with a face value of $1,000, a semi-annual interest payment, 6% Topic 3
coupon rate, and 10 years time-to-maturity. How much interest will be paid per time?
A $60 Chapter 2

B $600 Section 4

C $30 QID 1893

D $300 Ans C Hot

Exp Interest rate for each semi-annual interest payment = (6%/2)

Thus, Interest will be paid per time:

1000 x (6%/2) = 30

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 30 Which of the following debt security does not have coupons? Topic 3

A Corporate bonds Chapter 2

B Fixed-rate bonds Section 4

C Floating-rate bonds QID 1891

D Zero-coupon bonds Ans D Hot

Exp Zero coupon bonds: no regular interest is paid during the life of a zero coupon bond. Principal is paid at
maturity. Zero-coupon bonds are issued at a discount to the face value.
31 Which of the following statement is correct regarding zero-coupon bond? Topic 3

A Zero-coupon bonds are issued at discount. Chapter 2

B Zero-coupon bond pays no interest. Therefore, it pays additional shares when it matures. Section 4

C Zero-coupon bond is not interest-accumulated but pays interest daily. QID 1890

D Zero-coupon bond doesn't have a fixed maturity date. Ans A Hot

Exp Zero-coupon bonds are issued at a discount to the face value.

32 Last year, Vitamilk issued a bond with a face value of USD$10 million, a coupon rate of 7%, a time-to- Topic 3
maturity of 3 years and a semi-annual interest payment. Vitamilk has a stable financial position with a
good record better than most of the companies in the market. If the earnings yield of other companies of
the same time-to-maturity in the market is 6%, what is the earnings yield of Vitamilk bond?
A Higher than 6% Chapter 2

B Approximately the same as 6% Section 4

C Lower than 6% QID 1897

D It can not be judged. Ans C Hot

Exp The credit risk for Vitamilk bond is lower than other companies and thus it has lower yield.
33 A zero-coupon bond A is ready to be issued with a three-year maturity, a face value of $100 and an Topic 3
earnings yield of 5%. What is the coupon rate?
A 5% Chapter 2

B 10% Section 4

C 15% QID 1883

D 0% Ans D Hot

Exp Zero coupon debt securities are discount securities that do not involve any interest payments (coupon)
throughout their life.
34 Vitamilk just issued 100 bonds with a face value of USD$200 thousands, a coupon rate of 5%, a 5-year time- Topic 3
to-maturity and semi-annual coupon payment. What is the coupon rate if the price of the bond is
USD190,000?
A Higher than 5% Chapter 2

B Equal to 5% Section 4

C Lower than 5% QID 1896

D It can not be judged. Ans B Hot

Exp Coupon rate is 5%. Thus, the coupon rate is 5% when buying it anytime.

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 35 A fixed-rate bond A is ready to be issued with a three-year maturity, a face value of $100 and a coupon rate Topic 3
of 5%. What is the issuing price?
A $85 Chapter 2

B $115 Section 4

C $100 QID 1884

D $110.4 Ans C Hot

Exp The issuing price of fixed-rate bond, which means principal, is face value.
36 There is a bond with a face value of $50,000 and 5% coupon paid semi-annually. If there is one year left to Topic 3
maturity and the yield is 3.8%, the market price of this bond is?
A $49532 Chapter 2

B $50578 Section 6(d)

C $51134 QID 1899

D $50583 Ans D Hot

Exp Time to maturity = 1 year

Coupon payment = 50,000 × (5 %/2) = 1,250

P =1250/(1+3.8%/2)+51250/(1+3.8%/2)^2
37 Investor Mr. Lui intends to buy Vitamilk bond. Vitamilk bond deliver coupon once a year. The nominal Topic 3
value is $ 100,000, the coupon rate is 5% and the yield is 7%. The last dividend is paid 3 months earlier.
The market price of Vitamilk bond is $ 85000. If Mr. Lui buy bonds at the clean price now, how much
should he pay?
A $85000 Chapter 2

B $86750 Section 6(d)

C $88500 QID 1900

D $86232 Ans A Hot

Exp The clean price of a bond is the quoted price or purchase price of the bond. Since the market price of the
bond is $85000, Mr. Lui needs to pay 85000 if he wants to buy the bond now.
38 Investor Mr. Lui intends to buy Vitamilk bond. Vitamilk bond deliver coupon once a year. The nominal Topic 3
value is $ 100,000, the coupon rate is 5% and the yield is 7%. The last dividend is paid 3 months earlier.
The market price of Vitamilk bond is $ 85000. If Mr. Lui buy bonds at the dirty price now, how much should
he pay?
A $85000 Chapter 2

B $86750 Section 6(d)

C $88500 QID 1901

D $86232 Ans D Hot

Exp The dirty price is the clean

price plus the accrued interest. The clean price of a bond is the quoted price or purchase price of the bon
and that is $85000.
Accrued interest: 100000 x 90/365 x 0.05=$1232
Thus, the dirty price: $1232+$85000 = $86232

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 39 Last year, Vitamilk issued a bond with a face value of USD$10 million, a coupon rate of 7%, a time-to- Topic 3
maturity of 3 years and a semi-annual interest payment. Vitamilk has a stable financial position with a
good record better than most of the companies in the market. If the earnings yield of other companies of
the same time-to-maturity in the market is 6%, what does the price of Vitamilk bond supposed to be?
A Higher than face value Chapter 2

B The same as face value Section 6(d)

C Lower than face value QID 1898

D It can not be judged. Ans A Hot

Exp The credit risk for Vitamilk bond is lower than other companies and thus it has lower yield. The lower the
yield, the higher the price.
40 Vitamilk bond has a 5-year time-to-maturity with a coupon rate of 6% whose interest can be reinvested Topic 3
continuously with a 6% return. What is the future value if investing $20,000 now?
A $26000 Chapter 2

B $26764 Section 6(d)

C $6764 QID 1885

D $21250 Ans B Hot

Exp Future value:

20000(1x0.06)^5
=26764

Thus, the future value is $26,764.

41 Assume the face value of ten-year bond is HKD200 thousand with a coupon rate of 5% and the market Topic 3
interest rate(discount rate) of similar bonds is 7%. What is the reasonable price of this bond?
A $864273.284 Chapter 2

B $859528.375 Section 6(d)

C $171905.674 QID 1894

D $165426.289 Ans C Hot

Exp Time to maturity = 10年

Coupon payment = 200,000 × 5 % = 10,000
P = [10000/(1+7%)^1]+ [10000/(1+7%)^2]+ [10000/(1+7%)^3]+ [10000/(1+7%)^4]+ [10000/(1+7%)^5]+
[10000/(1+7%)^6]+ [10000/(1+7%)^7]+ [10000/(1+7%)^8]+ [10000/(1+7%)^9]+ [10000+200000/(1+7%)^10]
= 171905.674

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 42 Ms. Yu wanted to get married and forced his conservative boyfriend Mr. Zhou to invest. Mr. Zhou had a Topic 3
deposit of HK$500,000 now. Mr. GAO, an obliging bank clerk recommended Mr. Zhou to buy a high risk
bond of a Chinese company with a coupon rate of 30% paying interest semi-annually which can be
reinvested with the same coupon rate. How much can Mr. Zhou have five years later if he invests
HK$500,000 and upcoming interests in this bond?
A $2124865 Chapter 2

B $2022779 Section 6(d)

C $2324621 QID 1888

D $1250000 Ans B Hot

Exp 500000[(1+(0.3/2)^(5x2)]= 2022778.868

Mr. Zhou will have $2,022,779 after 5 years.

43 Ms. Yu wanted to get married and forced his conservative boyfriend Mr. Zhou to invest. Mr. Zhou had a Topic 3
deposit of HK$500,000 now. Mr. GAO, an obliging bank clerk recommended Mr. Zhou to buy a high risk
bond of a Chinese company with a coupon rate of 30% paying interest annually which can be reinvested
with the same coupon rate. How much can Mr. Zhou have five years later if he invests HK$500,000 and
upcoming interests in this bond?
A $1856465 Chapter 2

B $1500000 Section 6(d)

C $500000 QID 1886

D $1356465 Ans A Hot

Exp 500000(1+0.3)^5 = 1856465

Mr. Zhou will have $1,856,465 after 5 years.

44 Ms. Yu wanted to get married and forced his conservative boyfriend Mr. Zhou to invest. Mr. Zhou had a Topic 3
deposit of HK$500,000 now. Mr. GAO, an obliging bank clerk recommended Mr. Zhou to buy a high risk
bond of a Chinese company with a coupon rate of 30% paying interest annually which can be reinvested
with the same coupon rate. How much interests can Mr. Zhou have five years later if he invests
HK$500,000 and upcoming interests in this bond?
A $1856465 Chapter 2

B $1500000 Section 6(d)

C $500000 QID 1887

D $1356465 Ans D Hot

Exp 1856465-500000 = 1,356,465

Mr. Zhou will have $1,856,465 after 5 years.

45 A bond has a coupon rate of 4% and a yield of 3%. This means that: Topic 3

A the long-term interest rate is going to rise. Chapter 2

B the long-term interest rate is going to decrease. Section 7

C the bond is currently trading at a premium. QID 1903

D the bond is currently trading at a discount. Ans C Hot

Exp coupon rate > yield. The bond is currently trading at a premium.

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 46 If the quick ratio of Vitamilk this year is greater than that of last year, this reflects Topic 3

A The company's current assets must have increased Chapter 3

B The company's current liabilities must have decreased Section (c)(i)

C The liquidity of the company has deteriorated QID 1943

D The company's liquidity situation has be improved Ans D Hot

Exp The quick ratio removes inventories from the current assets and provides a more accurate measure of a
company's liquidity, as some assets are more liquid than others. Quick ratio = current assets - inventories
/ current liabilities. Thus, the current asset increased when the quick ratio is greater.
47 Why is subscription price lower than stock price? Topic 3

A Because companies offer rights issue only when they encounter serious financial problem, having a dim Chapter 3
future, therefore having a subscription price lower than stock market price.
B Because shares obtained from rights issue can only be transferred to existing shareholders. Therefore Section 2(d)
they are less liquid than ordinary shares, having a subscription price lower than stock market price.
C Because shares obtained from rights issue cannot be held for more than a specified period of time. QID 1906
Therefore they have limited dividend income, having a subscription price lower than stock market price.
D Because if subscription price is higher than stock market price, investors will buy shares directly from the Ans D Hot
market rather than buying shares from rights issue, making the company unable to raise capital. Therefore
subscription price is lower than stock market price.
Exp In order to raise fund effectively, a rights issue is generally perceived as an opportunity for current
shareholders to purchase shares more cheaply than on the stock market, since the subscription price is
always set at a level lower than the market price. in order to raise fund effectively.
48 Listed company Vitamilk just offered a 1-for-4 rights issue with a subscription price of $5. Assume retail Topic 3
investor Mr. Liao has 3,000 shares of Vitamilk. How many shares can Mr. Liao get in this rights issue?
A 3,000 shares Chapter 3

B 12,000 shares Section 2(d)

C 750 shares QID 1918

D 500 shares Ans C Hot

Exp 3000/ 4 = 750

Mr. Liao can get 750 shares.

49 Subscription price is generally: Topic 3

A higher than market price. Chapter 3

B lower than market price. Section 2(d)

C approximately the same as the market price. QID 1919

D set by the Stock Exchange of Hong Kong Limited(SEHK). Ans B Hot

Exp A rights issue is generally perceived as an opportunity for current shareholders to purchase shares more
cheaply than on the stock market, since the subscription price is always set at a level lower than the
market price.

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 50 Which of the following statements is correct regarding bonus issue and rights issue? Topic 3

A Bonus issue is a way of raising capital. Chapter 3

B Both bonus issue and rights issue will not drive the stock price down. Section 2(d)

C Both bonus issue and rights issue will increase the number of shareholders. QID 1917

D Both bonus issue and rights issue issue new shares and increase the number of shares outstanding. Ans D Hot

Exp A rights issue represents a new share issue offered to existing shareholders. Bonus issues is given to
shareholders without any conditions.
51 What is the main difference between bonus issue and rights issue? Topic 3

A Bonus issue will dilute the price per share whereas rights issue will not. Chapter 3

B Bonus issue will not issue new shares whereas rights issue will. Section 2(d)

C Bonus issue cannot be used to raise capital whereas rights issue can. QID 1916

D Bonus issue is offered to the public whereas rights issue is only offered to existing shareholders. Ans C Hot

Exp Bonus issues are similar to rights issues except that they are given to shareholders without any
conditions.
52 Listed company Vitamilk is just offering a 1-for-4 rights issue with a subscription price of $5. The current Topic 3
stock price is $6. What is it's theoretically ex-rights price?
A $5 Chapter 3

B $5.2 Section 2(d)

C $5.8 QID 1915

D $6 Ans C Hot

Exp (4 x 6 + 5 x 1) / (1+4) =5.8

The theoretically ex-rights price is $5.8

53 Vitamilk company is offering a 1-for-1 rights issue with a subscription price of $1. Its market price is $2. Topic 3
Which of the following is correct?
A After the rights issues, stock price decreases and shareholders' equity increases. Chapter 3

B After the rights issues, stock price increases and shareholders' equity increases. Section 2(d)

C After the rights issues, stock price increases and shareholders' equity is unchanged. QID 1913

D After the rights issues, stock price decreases and shareholders' equity is unchanged. Ans A Hot

Exp A rights issue represents a new share issue offered to existing shareholders. Since the number of shares
increases, shareholders' equity increases. Since the subscription price is always set at a level lower than
the market price, stock price decreases after the issuing of new discounted shares.
54 Vitamilk company is offering a 1-for-1 rights issue with a subscription price of $1. Its market price is $2. Topic 3
What is the ex-right price?
A $1 Chapter 3

B $1.5 Section 2(d)

C $2 QID 1907

D $3 Ans B Hot

Exp [(2x1)+(1x1)]/(1+1)= 1.5

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 55 British Construction Bank is offering a 1-for-5 rights issue with a subscription price of $8.00. Miss Yu has Topic 3
10,000 shares of British Construction Bank. How many shares can Miss Yu buy by this rights issue?
A 10000 Chapter 3

B 5000 Section 2(d)

C 1000 QID 1905

D 2000 Ans D Hot

Exp 10000 shares/5=2000 shares

56 British Construction Bank is offering a 1-for-5 rights issue with a subscription price of $8.00. The stock Topic 3
price is $10 now. What is it's theoretically ex-rights price?
A $8 Chapter 3

B $58 Section 2(d)

C $9.67 QID 1904

D $10 Ans C Hot

Exp [(10x5)+(8x1)]/(5+1)= 9.67

57 What's in common between rights issues and bonus issues? Topic 3
I. will dilute per share value
II. increase shares outstanding
III. can raise funds
IV. increase the number of shareholders
A I, II Chapter 3

B I, III Section 2(d)

C II, III QID 1921

D II, IV Ans A Hot

Exp A rights issue and bonus issues represent a new share issue offered to existing shareholders. Thus, the
net effect for the shareholder is to increase the number of shares owned and reduce the price per share
proportionately.
58 Which of the following statements is correct regarding the difference between bonus issues and rights Topic 3
issues?
I. Bonus issues are given to shareholders without any conditions.
II. Existing shareholders have to buy the rights for rights issues.
III. Shareholders can choose whether to participate in rights issues.
IV. Rights issues can be used to raise money for companies.
A I, II Chapter 3

B I, IV Section 2(d)

C II, III QID 1908

D I, III, IV Ans D Hot

Exp Shareholders can choose whether to participate in rights issues. If a shareholder decides not to take up
the rights, they lapse. Bonus issues are similar to rights issues except that they are given to shareholders
without any conditions while rights issues can be used to raise money for companies.

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 59 What is the similarity between rights issue and bonus issue? Topic 3
I. Rights issue and bonus issue will both increase the shares of the company.
II. Rights issue and bonus issue will both dilute the equity of current shareholders.
III. Rights issue and bonus issue will both dilute the equity per share.
IV. Rights issue and bonus issue can both raise funds for companies.
A I, II Chapter 3

B I, III Section 2(d)

C II, III QID 1923

D II, IV Ans B Hot

Exp Rights issue and bonus issue will both increase the shares of the company, thus diluting current equity
per share. The bonus issue is different from rights issue which will not dilute current shareholders' equity,
because all the current shareholders don't have to pay anything to get the bonus shares. With respect to
the rights issue, it depends on whether the shareholder wants to participate the rights issue or not.
Shareholders who don't participate in rights issue will be diluted. Bonus issue doesn't raise funds for
companies. but the rights issue does.
60 Which of the following events is certain to happen if Vitamilk company offers bonus issues to its Topic 3
shareholders?
A Shares issued increase. Chapter 3

B Income of shareholders increase. Section 4

C Shares issued decrease. QID 1909

D Assets of the company increase. Ans A Hot

Exp Bonus issues means a “free” issue of new shares to a company’s shareholders, proportional to their
shareholding. Thus, shares issued will increase.
61 A company is making a 1-for-4 bonus share issue. The stock price before issue is $2. The stock price after Topic 3
issue is most likely to be:
A $1.6 Chapter 3

B $2 Section 4

C $2.4 QID 1922

D $2.5 Ans A Hot

Exp Number of shares before issue = 4

Value of shares before issue = HKD 8 (i.e.4 × HKD2 )
Bonus issue entitlement = 1
Total number of shares after issue = 5
Price per share after issue = HKD1.6 (HKD 8 divided by 5)
62 Vitamilk offers a 1-for-10 bonus issue. The share price is $10 before the bonus issue. What effect will the Topic 3
company and shareholders not have after the bonus issue?
A Shares outstanding increase. Chapter 3

B The number of shareholders increase. Section 4

C The share price decreases. QID 1920

D Earnings per share decreases. Ans B Hot

Exp Bonus issues are given to existing shareholders without any conditions. Thus, the number of
shareholders remain unchanged after the bonus issuance.

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 63 Vitamilk offers a 1-for-10 bonus issue. The share price is $10 before the bonus issue. What effect will the Topic 3
company and shareholders not have after the bonus issue?
A Shares outstanding increase. Chapter 3

B The share price decreases. Section 4

C Earnings per share decreases. QID 1933

D Dividend yield increases. Ans D Hot

Exp A 1-for-10 bonus issuance is equal to 10% dividend yield.

64 Vitamilk offers a 1-for-10 bonus issue. The share price is $10 before the bonus issue. What effect will the Topic 3
company and shareholders not have after the bonus issue?
A Shares outstanding increase. Chapter 3

B The number of shareholders increase. Section 4

C The share price decreases. QID 1932

D Earnings per share decreases. Ans B Hot

Exp Bonus issues are given to existing shareholders without any conditions. Thus, the number of
shareholders remain unchanged after the bonus issuance.
65 Vitamilk offers a 1-for-10 bonus issue. The stock price before bonus issue is $10. What is the stock price Topic 3
of Vitamilk after the bonus issue?
A $9.09 Chapter 3

B $10 Section 4

C $11.1 QID 1930

D $100 Ans A Hot

Exp (10X10)/(10+1) = 9.09

The stock price of Vitamilk after the bonus issue is $ 9.09.

66 Mr. Liao has 6,000 shares of Vitamilk stocks. Vitamilk company is offering a 2-for-3 bonus issues. How Topic 3
many bonus shares will Mr. Liao get?
A 6000 Chapter 3

B 4000 Section 4

C 2000 QID 1910

D 10000 Ans B Hot

Exp (6000x2)/3=4000 shares

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 67 Mr. Liao has 6,000 shares of Vitamilk stocks. Vitamilk company is offering a 2-for-3 bonus issues. How Topic 3
many shares will Mr. Liao have in total after the bonus issues?
A 6000 Chapter 3

B 4000 Section 4

C 2000 QID 1911

D 10000 Ans D Hot

Exp Bonus shares will Mr. Liao get:

(6000x2)/3=4000 shares

Mr. Liao's holding:

6000+4000=10000 shares
68 Vitamilk company is offering a 2-for-3 bonus issues to its existing shareholders. Which of the following is Topic 3
correct?
A After the bonus issues, stock price decreases and shareholders' equity increases. Chapter 3

B After the bonus issues, stock price increases and shareholders' equity increases. Section 4

C After the bonus issues, stock price increases and shareholders' equity is unchanged. QID 1912

D After the bonus issues, stock price decreases and shareholders' equity is unchanged. Ans D Hot

Exp The net effect of the bonus issue for the shareholder is to increase the number of shares owned and
reduce the price per share proportionately.
69 Vitamilk company is offering a 2-for-3 bonus issues to its existing shareholders. After the bonus issues, Topic 3
dividend per share decreases by 20%. Which of the following is correct?
A Total dividend received will increase. Chapter 3

B Total dividend received will remain the same. Section 4

C Total dividend received will decrease. QID 1914

D Earnings per share will decrease. Ans A Hot

Exp The number of shares increases 60% while the dividend per share decreases by 20% only. Thus, total
dividend received will increase.
70 Vitamilk company is offering a 2-for-3 bonus issues to its existing shareholders. After the bonus issues, Topic 3
dividend per share decreases by 20%. Which of the following is correct?
A Total dividend received will increase. Chapter 3

B Total dividend received will remain the same. Section 4

C Total dividend received will decrease. QID 1928

D Earnings per share will decrease. Ans A Hot

Exp The number of shares increases 60% while the dividend per share decreases by 20% only. Thus, total
dividend received will increase.

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 71 Vitamilk company is offering a 2-for-3 bonus issues to its existing shareholders. Which of the following is Topic 3
correct?
A After the bonus issues, stock price decreases and shareholders' equity increases. Chapter 3

B After the bonus issues, stock price increases and shareholders' equity increases. Section 4

C After the bonus issues, stock price increases and shareholders' equity is unchanged. QID 1927

D After the bonus issues, stock price decreases and shareholders' equity is unchanged. Ans D Hot

Exp The net effect of the bonus issue for the shareholder is to increase the number of shares owned and
reduce the price per share proportionately.
72 Mr. Liao has 6,000 shares of Vitamilk stocks. Vitamilk company is offering a 2-for-3 bonus issues. How Topic 3
many shares will Mr. Liao have in total after the bonus issues?
A 6000 Chapter 3

B 4000 Section 4

C 2000 QID 1926

D 10000 Ans D Hot

Exp Bonus shares will Mr. Liao get:

(6000x2)/3=4000 shares

Mr. Liao's holding:

6000+4000=10000 shares
73 Mr. Liao has 6,000 shares of Vitamilk stocks. Vitamilk company is offering a 2-for-3 bonus issues. How Topic 3
many bonus shares will Mr. Liao get?
A 6000 Chapter 3

B 4000 Section 4

C 2000 QID 1925

D 10000 Ans B Hot

Exp (6000x2)/3=4000 shares

74 Assume retail investor Mr. Liao holds 3,000 shares of Vitamilk and Vitamilk offers a 1-for-10 bonus issue. Topic 3
How many shares does Mr. Liao have in total after the bonus issue?
A 300 shares Chapter 3

B 3,100 shares Section 4

C 3,300 shares QID 1929

D 3,000 shares Ans C Hot

Exp 3000 x (1+10%) = 3,300

Mr. Liao have 3,300 shares in total after the bonus issue.

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 75 Vitamilk offers a 1-for-10 bonus issue. The stock price before bonus issue is $10. What's the impact on the Topic 3
company and shareholder after the bonus issue?
A Stock price rises 9.1% and equity rises 9.1%. Chapter 3

B Stock price decreases 9.1% and equity decreases 9.1%. Section 4

C Stock price decreases 9.1% and equity is unchanged. QID 1931

D Stock price increases 9.1% and equity is unchanged. Ans C Hot

Exp Bonus issuance does not affect the equity. The stock price drops(10/11=) 9.09%.
76 Which of the following way can not raise equity capital? Topic 3

A Initial public offering Chapter 3

B Rights issue Section 4

C Private placement QID 1924

D Bonus issue Ans D Hot

Exp Bonus issues are given to shareholders without any conditions and it does not involve financing.
77 Vitamilk is a Hong Kong-listed beverage maker with a total number of issued shares of 1,000,000 shares. Topic 3
Profit attributable to shareholders of Vitamilk was $ 2 million in 2014 and the company used 0% of the
profit attributable to shareholders to pay dividends. What is the earnings per share of Vitamilk in 2014?
A $0 Chapter 3

B $1 Section 9(c)(ii)

C $2 QID 1960

D $4 Ans C Hot

Exp 每股盈利=股東應佔盈利/股數

$2000000/1000000=$2

每股盈利是$2
78 Vitamilk is a Hong Kong-listed beverage maker with a total number of issued shares of 1,000,000 shares. Topic 3
Profit attributable to shareholders of Vitamilk was $8000000 in 2014 and the company used 100% of the
profit attributable to shareholders to pay dividends. What is the P/E of Vitamilk in 2014 if the stock price is
$40?
A 5 Chapter 3

B 10 Section 9(c)(ii)

C 15 QID 1966

D 20 Ans A Hot

Exp P/E ratio = market price per share / earnings per share

P/E ratio = $40 / ($8000000/1000000) = 5

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 79 Vitamilk is a Hong Kong-listed beverage maker with a total number of issued shares of 1,000,000 shares. Topic 3
Profit attributable to shareholders of Vitamilk was $ 2 million in 2014 and the company used 100% of the
profit attributable to shareholders to pay dividends. What is the earnings per share of Vitamilk in 2014?
A $0.5 Chapter 3

B $1 Section 9(c)(ii)

C $2 QID 1959

D $4 Ans C Hot

Exp Earnings per share = profit / share attributable to shareholders

$ 2000000/1000000 = $ 2

Earnings per share are $ 2

80 Vitamilk is a Hong Kong-listed beverage maker with a total number of issued shares of 1,000,000 shares. Topic 3
Profit attributable to shareholders of Vitamilk was $4000000 in 2014 and the company used 50% of the
profit attributable to shareholders to pay dividends. What is the P/E of Vitamilk in 2014 if the stock price is
$20?
A 5 Chapter 3

B 10 Section 9(c)(ii)

C 15 QID 1965

D 20 Ans A Hot

Exp P/E ratio = market price per share / earnings per share

P/E ratio = $20 / ($4000000/1000000) = 5

81 Vitamilk's profit after tax is $1000000 this year and the shares outstanding is 1 million. This stock price of Topic 3
Vitamilk is $10 and the P/E ratio is
A 100 times Chapter 3

B 10 times Section 9(c)(ii)

C 1 times QID 1964

D Unable to calculate Ans B Hot

Exp Earnings per share = profit after tax / weighted average number of shares outstanding
Earnings per share = $1000000 / 1 million share = $1

P/E ratio = market price per share / earnings per share

P/E ratio = $10 / $1 = 10 times

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 82 Which investor is more likely to invest in which stock? Topic 3
Stock A: stock price$10; earnings per share $1; Dividend $ 0.5
Stock B: stock price $ 10; Earnings Per Share $ 2; Dividend $ 1
Stock C: stock price $ 20; Earnings Per Share $ 3. ; Dividend $ 0.5
Stock D: stock price $ 20; Earnings Per Share $ 5 ; Dividend $ 1
A Stock A Chapter 3

B Stock B Section 9(c)(ii)

C Stock C QID 1963

D Stock D Ans D Hot

Exp Value investors mainly pursue lower-PE stocks. Price-earnings ratio is the price per share / earnings per
share.

P/E ratio = market price per share / earnings per share

Stock A’s P/E = 10 / 1 = 10

Stock B’s P/E = 10 / 2 = 5
Stock C ’s P/E = 20 / 3 = 6.67
Stock D ’s P/E = 20 / 5 = 4

Thus, value investors are intended to choose stock D.

83 Which of the following stocks have the highest PE Topic 3
Stock A: stock price$10; earnings per share $1; Dividend $ 0.5
Stock B: stock price $ 10; Earnings Per Share $ 2; Dividend $ 1
Stock C: stock price $ 20; Earnings Per Share $ 3. ; Dividend $ 0.5
Stock D: stock price $ 20; Earnings Per Share $ 5 ; Dividend $ 1
A Stock A Chapter 3

B Stock B Section 9(c)(ii)

C Stock C QID 1961

D Stock D Ans A Hot

Exp The P/E ratio indicates the multiple of the current year’s earnings that must be paid to buy a share. It also
indicates if the share is relatively cheap or expensive, i.e. how many multiples of the current earnings are
required to purchase a share.

P/E ratio = market price per share / earnings per share

Stock A’s P/E = 10 / 1 = 10

Stock B’s P/E = 10 / 2 = 5
Stock C ’s P/E = 20 / 3 = 6.67
Stock D ’s P/E = 20 / 5 = 4

Thus, Stock A has the highest P/E.

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 84 Vitamilk is a Hong Kong-listed beverage maker with a total number of issued shares of 1,000,000 shares. Topic 3
Profit attributable to shareholders of Vitamilk was $2000000 in 2014 and the company used 0% of the profit
attributable to shareholders to pay dividends. What is the P/E of Vitamilk in 2014 if the stock price is $40?

A 0.5 Chapter 3

B 5 Section 9(c)(ii)

C 10 QID 1967

D 20 Ans D Hot

Exp P/E ratio = market price per share / earnings per share

P/E ratio = $40 / ($2000000/1000000) = 20

85 The dividend of Vitamilk is $ 3 this year and the expected annual dividend growth rate is 15%. Assuming Topic 3
the required rate of return is 5%, what is the share price?
A $60 Chapter 3

B $31.5 Section 9(d)

C $30 QID 1977

D $20 Ans B Hot

Exp Share price = annual dividend for this year (1+ dividend growth rate) /( required rate of return on the
share - dividend growth rate)
[1.1(1+0%)] / (10% - 0%) = 31.5
86 Which of the following stocks have the lowest PE Topic 3
Stock A: stock price$10; earnings per share $1; Dividend $ 0.5
Stock B: stock price $ 10; Earnings Per Share $ 2; Dividend $ 1
Stock C: stock price $ 20; Earnings Per Share $ 3. ; Dividend $ 0.5
Stock D: stock price $ 20; Earnings Per Share $ 5 ; Dividend $ 1
A Stock A Chapter 3

B Stock B Section 9(c)(ii)

C Stock C QID 1962

D Stock D Ans D Hot

Exp The P/E ratio indicates the multiple of the current year’s earnings that must be paid to buy a share. It also
indicates if the share is relatively cheap or expensive, i.e. how many multiples of the current earnings are
required to purchase a share.

P/E ratio = market price per share / earnings per share

Stock A’s P/E = 10 / 1 = 10

Stock B’s P/E = 10 / 2 = 5
Stock C ’s P/E = 20 / 3 = 6.67
Stock D ’s P/E = 20 / 5 = 4

Thus, Stock D has the lowest P/E.

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 87 Vitamilk's net profit is HKD $ 100 million. It has 1 billion shares outstanding and a share price of $ 2. The Topic 3
P/E ratio is
A 20 times Chapter 3

B 10 times Section 9(c)(ii)

C 2 times QID 1968

D 1 times Ans A Hot

Exp Earnings per share = profit after tax / weighted average number of shares outstanding
Earnings per share = $ 100 million / 1 billion shares outstanding = $1

P/E ratio = market price per share / earnings per share

P/E ratio = $2 / $0.1 = 20 times
88 Vitamilk's net profit is HKD $ 100 million. It has 1 billion shares outstanding and a share price of $ 1. The Topic 3
P/E ratio is
A 20 times Chapter 3

B 10 times Section 9(c)(ii)

C 2 times QID 1969

D 1 times Ans B Hot

Exp Earnings per share = profit after tax / weighted average number of shares outstanding
Earnings per share = $ 100 million / 1 billion shares outstanding = $1

P/E ratio = market price per share / earnings per share

P/E ratio = $1 / $0.1 = 10 times
89 Vitamilk is a Hong Kong-listed beverage maker with a total number of issued shares of 1,000,000 shares. Topic 3
Profit attributable to shareholders of Vitamilk was $-2000000 in 2014 and the company used 0% of the
profit attributable to shareholders to pay dividends. What is the PE of Vitamilk in 2014 if the stock price is
$40?
A 0 Chapter 3

B 5 Section 9(c)(ii)

C 10 QID 1970

D -20 Ans D Hot

Exp P/E ratio = earnings per share / market price per share

P/E ratio=( $-2000000/ 1000000)/ 40 = -20

90 Investor Ms Chen estimated Vitamilk will pay dividend of $ 2 forever and her required return on shares is Topic 3
8%. With the dividend discount model, she gets a desirable price. If Vitamilk send a $ 3 dividend, Miss
Chen uses the dividend discount model, the required return on shares is 8%, the new price is?
A $12.5 lower than the old price Chapter 3

B $12.5 higher than the old price Section 9(d)

C remains unchanged QID 1971

D $37.5higher than the old price Ans B Hot

Exp The old price = 2 / 0.08 =25

The new price = 3 / 0.08 = 37.5

37.5 - 25 = 12.5

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 91 The dividend of Vitamilk is $ 5 and the expected annual dividend growth rate is 5%. Assuming the required Topic 3
rate of return is 12%, what is the share price?
A $70.5 Chapter 3

B $72.5 Section 9(d)

C $62.5 QID 1972

D $75 Ans D Hot

Exp Share price = annual dividend for this year (1+ dividend growth rate) /( required rate of return on the
share - dividend growth rate)
[5(1+5%)] / (12% - 5%) = 75
92 The dividend of Vitamilk is $ 5 and the expected annual dividend growth rate is 5%. Assuming the required Topic 3
rate of return is 12%, what is the share price?
A $70.5 Chapter 3

B $72.5 Section 9(d)

C $62.5 QID 1973

D $75 Ans D Hot

Exp Share price = annual dividend for this year (1+ dividend growth rate) /( required rate of return on the
share - dividend growth rate)
[5(1+5%)] / (12% - 5%) = 75
93 The dividend of Vitamilk is $ 1 this year and the expected annual dividend growth rate is 5%. Assuming Topic 3
the required rate of return is 10%, what is the share price?
A $21 Chapter 3

B $105 Section 9(d)

C $10.5 QID 1974

D $210 Ans A Hot

Exp Share price = annual dividend for this year (1+ dividend growth rate) /( required rate of return on the
share - dividend growth rate)
[5(1+5%)] / (10% - 5%) = 21
94 Vitamilk's net profit is HKD $ 100 million. It has 1 billion shares outstanding and a share price of $ 2. The Topic 3
P/E ratio is
A 20 times Chapter 3

B 10 times Section 9(c)(ii)

C 2 times QID 1958

D 1 times Ans A Hot

Exp Earnings per share = profit after tax / weighted average number of shares outstanding
Earnings per share = $ 100 million / 1 billion shares outstanding = $1

P/E ratio = market price per share / earnings per share

P/E ratio = $2 / $0.1 = 20 times

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 95 The dividend of Vitamilk is $ 1 next year and the expected annual dividend growth rate is 10%. Assuming Topic 3
the required rate of return is 0%, what is the share price?
A $21 Chapter 3

B $11 Section 9(d)

C $210 QID 1976

D $110 Ans B Hot

Exp Share price = annual dividend for this year (1+ dividend growth rate) /( required rate of return on the
share - dividend growth rate)
[1.1(1+0%)] / (10% - 0%) = 11
96 The profit after tax of Pepsi is $ 3,000,000 and the interest expense is $ 6,000,000. Pepsi's return of equity is Topic 3

A 58.3% Chapter 3

B 50% Section 9(c)(ii)

C 41.7% QID 1948

D 8.3% Ans B Hot

Exp Return on equity = (profit after tax / average equity) × 100%

(3,000,000 / 6,000,000)× 100% = 50%

97 The method that assumes that Topic 3
dividends increase at a constant rate each year is
A Dividend growth model Chapter 3

B Dividend discount model Section 9(d)

C Price earnings model QID 1978

D Capital asset pricing model Ans A Hot

Exp The dividend growth model adds a more realistic dimension to the valuation model, and assumes that
dividends increase at a constant rate each year.
98 According to the dividend growth model, which of the following will not raise the stock price? Topic 3

A increase of expected dividend growth rate Chapter 3

B decrease of required return of investor decreases Section 9(d)

C increase of dividend this year QID 1979

D increase of required return of investor Ans D Hot

Exp Share price = annual dividend for this year (1+ dividend growth rate) /( required rate of return on the
share - dividend growth rate)

Required rate of return on the share is the part of denominator. The share price drops when required rate
of return increases.

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 99 The dividend of Vitamilk is $ 1 this year and the expected annual dividend growth rate is 20%. Assuming Topic 3
the required rate of return is 10%, what is the share price?
A $21 Chapter 3

B $11 Section 9(d)

C $210 QID 1975

D $110 Ans B Hot

Exp Share price = annual dividend for this year (1+ dividend growth rate) /( required rate of return on the
share - dividend growth rate)
[5(1+5%)] / (10% - 5%) = 11
100 The profit before tax of Vitamilk is $1,500,000, the interest expense is $300,000 and the equity is Topic 3
$5,000,000. Vitamilk's return of equity is
A 36% Chapter 3

B 30% Section 9(c)(ii)

C 24% QID 1945

D 6% Ans C Hot

Exp Return on equity = (profit after tax / average equity) × 100%

[($1,500,000 - 300,000) / $5,000,000] × 100% = 24%

101 Which of the following situation is not suitable to use the dividend growth model Topic 3

A When the required stock return is higher than the dividend growth rate Chapter 3

B When the dividend growth rate is higher than the required stock rate of return Section 9(d)

C When the dividend rate is higher than the required stock rate of return QID 1980

D When the required stock return is higher than the dividend growth rate Ans B Hot

Exp The dividend growth model adds a more realistic dimension to the valuation model, and assumes that
dividends increase at a constant rate each year. Thus, when the dividend growth rate is higher than the
required stock rate of return, the model cannot be used because dividends do not increase at a constant
rate each year.
102 What's the difference between current ratio and quick ratio? Topic 3

A The current ratio doesn't take inventory into account. Chapter 3

B The quick ratio doesn't take inventory into account. Section 9(c)(i)

C The current ratio doesn't take long-term debt into account. QID 1934

D The quick ratio doesn't take long-term debt into account. Ans B Hot

Exp Both the current ratio and the quick ratio doesn't take long-term debt into account. The quick ratio doesn't
take inventory into account, but the current ratio does.

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 103 The most accurate ratio that reflects the company's ability to repay current liabilities is Topic 3

A Current ratio Chapter 3

B Quick ratio Section 9(c)(i)

C Inventory turnover QID 1935

D Debtors’ turnover Ans B Hot

Exp The quick ratio removes inventories from the current assets and provides a more accurate measure of a
company's liquidity, as some assets are more liquid than others. For example, cash can be used
immediately to repay any debt. The quick ratio is more accurate since inventories are viewed as the
least liquid current assets.
104 Current ratio= Topic 3

A current assets/ Chapter 3

current liabilities
B current liabilities/current assets Section 9(c)(i)

C cash assets/ QID 1936

current liabilities
D current liabilities/cash assets Ans A Hot

Exp The current ratio shows how easy or difficult it will be for the company to repay its current liabilities.

Current ratio=current assets/

current liabilities
105 If the current ratio of Vitamilk this year is greater than that of last year, this reflects Topic 3

A The company's current assets must have increased Chapter 3

B The company's current liabilities must have decreased Section 9(c)(i)

C The liquidity of the company has deteriorated QID 1937

D The company's liquidity situation has be improved Ans D Hot

Exp The current ratio shows how easy or difficult it will be for the company to repay its current liabilities.
Current ratio=current assets/
current liabilities. Thus, the current asset increased when the current ratio is greater.
106 Vitamilk's current assets are $ 9000000, current liabilities are $ 1000000 and stock is $ 3000000. The Topic 3
current ratio should be
A 0.11 times Chapter 3

B 3 times Section 9(c)(i)

C 9 times QID 1938

D cannot be judge because of lack of data Ans C Hot

Exp Current ratio=current assets/

current liabilities

Current ratio= $9000000/$1000000 = 9 times

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 107 If the quick ratio of Vitamilk this year is greater than that of last year, this reflects Topic 3

A The company's current assets must have increased Chapter 3

B The company's current liabilities must have decreased Section 9©(i)

C The liquidity of the company has deteriorated QID 1939

D The company's liquidity situation has be improved Ans D Hot

Exp The quick ratio removes inventories from the current assets and provides a more accurate measure of a
company's liquidity, as some assets are more liquid than others. Quick ratio = current assets - inventories
/ current liabilities. Thus, the current asset increased when the quick ratio is greater.
108 If the quick ratio of Vitamilk this year is greater than that of last year, but the current assets remain Topic 3
unchanged, this might
A current liabilities have increased Chapter 3

B current liabilities have decreased Section 9(c)(i)

C inventories have increased QID 1940

D fixed liabilities have decreased Ans B Hot

Exp The quick ratio removes inventories from the current assets and provides a more accurate measure of a
company's liquidity, as some assets are more liquid than others. Quick ratio = current assets - inventories
/ current liabilities. Thus, when the quick ratio increased with unchanged current assets , this might
inventories have increased
109 Quick ratio = Topic 3

A (current assets + inventories) / current liabilities Chapter 3

B (current assets - inventories) / current liabilities Section 9(c)(i)

C (current liabilities - inventories) / current assets QID 1941

D (current liabilities + inventories) / current assets Ans B Hot

Exp The quick ratio removes inventories from the current assets and provides a more accurate measure of a
company's liquidity, as some assets are more liquid than others. Quick ratio = current assets - inventories
/ current liabilities.
110 The best indication to measure the return to shareholders is Topic 3

A Net profit margin Chapter 3

B Gross profit margin Section 9(c)(ii)

C Return on Equity (“ROE”) QID 1950

D Earnings per share (“EPS”) Ans C Hot

Exp Return on equity measures the return to shareholders. It can be used as an indication of management
expertise.

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 111 If the quick ratio of Vitamilk this year is greater than that of last year, but the current assets remain Topic 3
unchanged, this might
A current liabilities have increased Chapter 3

B current liabilities have decreased Section 9(c)(i)

C inventories have increased QID 1944

D fixed liabilities have decreased Ans B Hot

Exp The quick ratio removes inventories from the current assets and provides a more accurate measure of a
company's liquidity, as some assets are more liquid than others. Quick ratio = current assets - inventories
/ current liabilities. Thus, when the quick ratio increased with unchanged current assets , this might
inventories have increased
112 Vitamilk's net profit is HKD $ 100 million. It has 1 billion shares outstanding and a share price of $ 2. Its Topic 3
earnings per share is
A $0.1 Chapter 3

B $1 Section 9(c)(ii)

C $0.2 QID 1957

D $2 Ans A Hot

Exp Earnings per share = profit after tax / weighted average number of shares outstanding

Earnings per share = $ 100 million / 1 billion shares outstanding = $0.1

113 The profit before tax of Pepsi is $3,000,000, the interest expense is $500,000 and the equity is $6,000,000. Topic 3
Pepsi's return of equity is
A 58.3% Chapter 3

B 50% Section 9(c)(ii)

C 41.7% QID 1946

D 8.3% Ans C Hot

Exp Return on equity = (profit after tax / average equity) × 100%

[($3,000,000 - 500,000) / $6,000,000] × 100% = 41.7%

114 The profit after tax of Vitamilk is $ 1,500,000 and the interest expense is $ 5,000,000. Vitamilk's return of Topic 3
equity is
A 36% Chapter 3

B 30% Section 9(c)(ii)

C 24% QID 1947

D 6% Ans B Hot

Exp Return on equity = (profit after tax / average equity) × 100%

(1,500,000 / 5,000,000)× 100% = 30%

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 115 The profit before tax of Vitamilk is $1,500,000 and the equity is $5,000,000. The profit before tax of Pepsi is Topic 3
$ 3,000,000 and the average equity is $6,000,000. Compare with Pepsi, the return of equity of Vitamilk is
A 100% higher Chapter 3

B 20% higher Section 9(c)(ii)

C 20% lower QID 1949

D 50% lower Ans C Hot

Exp Return on equity of Vitamilk = (1,500,000 / 5,000,000)× 100% = 300%

Return on equity of Pepsi =(3,000,000 / 6,000,000)× 100% = 200%

300% -200% = 100%

116 Return on equity= Topic 3

A (profit before tax / average equity) × 100% Chapter 3

B (average equity / profit before tax) × 100% Section 9(c)(ii)

C (profit after tax / average equity) × 100% QID 1951

D (average equity / profit after tax) × 100% Ans C Hot

Exp Return on equity measures the return to shareholders. It can be used as an indication of management
expertise.

Return on equity = (profit after tax / average equity) × 100%

117 Vitamilk's after-tax profit for this year is $ 1000000. The shareholders' equity previous year and this year Topic 3
are $ 3000000 and $ 4000000 respectively. The return on equity is
A 25% Chapter 3

B 28.57% Section 9(c)(ii)

C 33% QID 1952

D 400% Ans B Hot

Exp Return on equity = (profit after tax / average equity) × 100%

Return on equity = [$1000000 /(3000000+4000000)/2]×100% = 28.57%

118 Vitamilk's after-tax profit for this year is $ 1000000. The shareholders' equity previous year and this year Topic 3
are $ 1000000 and $ 2000000 respectively. The return on equity is
A 200% Chapter 3

B 100% Section 9(c)(ii)

C 66.7% QID 1953

D 300% Ans C Hot

Exp Return on equity = (profit after tax / average equity) × 100%

Return on equity = [$1000000 /(1000000+2000000)/2]×100% = 66.7%

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 119 Vitamilk is a Hong Kong-listed beverage maker with a total number of issued shares of 1,000,000 shares. Topic 3
Profit attributable to shareholders of Vitamilk was $2000000 in 2014 and the company used 50% of the
profit attributable to shareholders to pay dividends. What is the earning per share of Vitamilk in 2014 ?
A $0.5 Chapter 3

B $1 Section 9(c)(ii)

C $2 QID 1954

D $4 Ans C Hot

Exp Earnings per share = profit after tax / weighted average number of shares outstanding

Earnings per share = $2000000 / 1000000 = 2

120 Vitamilk is a Hong Kong-listed beverage maker with a total number of issued shares of 1000000 shares. Topic 3
This year, Vitamilk was affected by the milk scandal and its revenue dropped. Also, the profit attributable
to shareholders decreased 10%, while the dividend pay-out ratio remained unchanged. The share price
was affected by the time dropped 20% over the same period last year?
I. The price-earnings ratio of Vitamilk dropped
II. The dividend yield of Vitamilk dropped
III. Vitamilk’s earnings per share dropped
IV. The price-earnings ratio of Vitamilk risen
A I, II, III Chapter 3

B I, III Section 9(c)(ii)

C I, III, IV QID 1955

D II, III, IV Ans B Hot

Exp Earnings per share = profit after tax / weighted average number of shares outstanding. Profit attributable
to shareholders dropped 10% while there was no change in share and earnings per share, thus earnings
per share decreased 10% and option III is correct. P / E = stock price / Earnings per Share. The stock price
of Vitamilk dropped 20% while the EPS drop 10% only and thus the P / E will drop. Therefore, option I is
correct and Option IV is incorrect. Dividend yield = Dividend per share, EPS decreased 10% while dividend
pay-out ratio did not change. Dividend per share decreased by 20% and share price increased by 50% So
Option II is incorrect.
121 Vitamilk is a Hong Kong-listed beverage maker with a total number of issued shares of 1000000 shares. Topic 3
This year, Vitamilk was affected by the milk scandal and its revenue dropped. Also, the profit attributable
to shareholders increased 10%, while the dividend pay-out ratio remained unchanged. The share price was
affected by the time increased 50% over the same period last year?
I. The price-earnings ratio of Vitamilk dropped
II. The dividend yield of Vitamilk dropped
III. Vitamilk’s earnings per share dropped
IV. The price-earnings ratio of Vitamilk risen
A I, II, III Chapter 3

B I, III Section 9(c)(ii)

C II, IV QID 1956

D II, III, IV Ans C Hot

Exp Earnings per share = profit after tax / weighted average number of shares outstanding. Profit attributable
to shareholders soared 10% while there was no change in share and earnings per share, thus earnings per
share will increase 10% and option III is incorrect. P / E = stock price / Earnings per Share. The stock price
of Vitamilk increased 50% while the EPS rise 10% only and thus the P / E will rise. Therefore, option I is
incorrect and Option IV is correct. Dividend yield = Dividend per share, EPS increased 10% while dividend
pay-out ratio did not change. Dividend per share increased by 10% and share price increased by 50% So
Option II is correct.

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 122 Vitamilk's current assets are $ 9000000, current liabilities are $ 1000000 and stock is $ 3000000. The quick Topic 3
ratio should be
A 5times Chapter 3

B 6times Section 9(c)(i)

C 7times QID 1942

D 9times Ans B Hot

Exp Quick ratio = current assets - inventories / current liabilities

Quick ratio = $9000000-$ 3000000/$1000000 = 6times

122

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