Question

1) An analyst determines that IBM’s intrinsic value is $190.  The market price of IBM’s stock is $204.25.  

            a.  the stock is underpriced

            b.  the stock is efficiently priced

            c.  the stock is overpriced

            d.  the stock is in equilibrium

2)Ratios that attempt to measure a company’s stock market performance are

            a. asset management ratios

            b. debt management ratios

            c. liquidity ratios

            d. market value ratios

3)A ten-year ordinary annuity has a present value of $4,225. Given an interest rate of 5%, what would be its present value as an annuity due?

            a. $2,113

            b. $4,024

            c. $4,436

            d. $4,563

4) When a company issues common stock to the public, the company usually uses what type of financial institution?

            a.  limited liability corporation

            b.  investment bank

            c.  initial public offering

            d.  hedge fund

Answer 1

1. )   Answer is c

An Intrinsic value is the true value of the stock but it may differ from the current market price due to various demand situation and maket participant perception about the company's stock. Here the  IBM’s intrinsic value is $190 but market price of IBM’s stock is $204.25, Which shows that the Stock of IBM is currently Overpriced and should be sold.

Intrinsic value > Market price => Stock is Underpriced

Intrinsic value < Market price => Stock is Overpriced

Intrinsic value =  Market price => Stock is Correctly Priced or equilibrium

2.) Answer is d

• Market value ratios tells us about the current stock performance of a company's stock and helps to measure if the stock is underpriced or overpriced. For Example - Book value/share, EPS
• Asset mangement ratio tells us about How effectively company is using its assets to generate revenue. for example Asset turnover ratio
• Debt management ratio explains the capability of a company to repay its long term debt . for example Debt / equity ratio
• Liquidity Ratios tells us about the short term liquidity position of the company which means if the company is having enough current assets to cover its current liability. For example Cuurent ratio , quick ratio

3.) Answer is c

First we need to calculate the annuity payment by using the formula

PV = A /r * { 1 - (1+r)-n }

Where

PV = Present value = $4225

A = Annuity payment

r = Interest rate = 0.05

Now put all the values

4225 = A / 0.05 * { 1 - ( 1+0.05)-10 }

4225 = A /0.05 * ( 1 - 0.6139)

(4225 * 0.05) / 0.3860 = A

$ 547.27 = A

Now that we have got the annuity payment we will use to find present value of annuity due

PV of Annuity Due = A + A /r * { 1 - (1+r)-(n-1) }

= 547.27 + 547.27/ 0.05 * {1 - (1 + 0.05)-(10 - 1) }

= 547.27 + 10945.4 { 1 - 0.64460 }

= 547.27 + (10945.4 * 0.35539)

= 547.27 + 3889.8

PV of Annuity Due  = 4436.27

4 .) Answer is b

When company issues common stock to the public for the first time it is know as Initial Public Offering (IPO) therefore IPO is a process not financial institution. The process of IPO starts by hiring investment bank which act as a advisory to the company and provides services such as Underwriting.

hedge fund and LLC has no role in issuing of shares of a company