Question

22. Which of the following is likely to have the highest beta factor?

a. a pet food manufacturer

b. a utility company

c. the market portfolio

d. a construction company

23. A normal investment project has an NPV of +$420,000 when discounted using a discount rate of 10% and an NPV of -$267,000 when using a discount rate of 20%. What is the IRR when calculated using the linear interpolation method?

a. 37.5%

b. 16.1%

c. 20.6%

d. 0%

24. What happens to an expected portfolio return with a beta of 1.9 if the market risk premium reduces from 8% to 6%?

a. It decreases by 2%

b. It decreases by 0.1%

c. It increases by 3.9%

d. It decreases by 3.8%

26. Which of the following statements regarding technical analysts (TA), fundamental analysts (FA) and stock market efficiency is true?

a. TA’s believe that the stock market is weak-form efficient

b. TA’s believe that the stock market is not efficient at any level

c. FA’s believe that the stock market is semi-strong form efficient

d. FA’s believe that the stock market is strong form efficient

27. A company decides to issue some bonds in order to raise the funds required to expand their production facilities. This is an example of:

a. a financing decision only

b. an investment decision only

c. a capital budgeting decision only

d. both an investment decision and a financing decision

28. Fill in the blanks in this statement: ‘Shares issued via an initial public offering (IPO) are issued in the __________ market. Shares traded between investors via a stock exchange are traded in the __________market’.

a   secondary; primary

b. primary; over-the-counter

c. primary; secondary

d. primary; fixed income

29. If it is possible to make money by trading on the basis of new publicly available information, which of the following statements is most accurate concerning the efficient market hypothesis?

a. The market is strong-form efficient

b. The market is semi-strong form efficient

c. The market is weak form efficient at best

d. The market is not efficient at any level

Answer 1

22).

Option d. a construction company

Among the given options, construction company is more susceptible to market factors and systematic risk

23).

Option b. 16.1%

As NPV is positive at 10% and negative at 20%, it will be 0 at a discount rate which lies between 10% and 20%. IRR is the rate at which NPV is 0. So, among the options, it should be 16.1%

24).

Option d. It decreases by 3.8%

expected portfolio return is rf+Beta*market risk premium. Given Beta is 1.9 and market risk premium decreases by 2%. So, expected return decreases by 1.9*2%= 3.8%

26).

Option b. TA's believe that the stock market is not efficient at any level

Technical analysts uses past information to predict future prices. So theh believe it is not efficient at any level.

27).

Option d. Both an investment decision and a financing decision

28).

Option c. primary;secondary

IPO trades in primary market and subsequently shares trade via stock exchanges in secondary market

29).

Option c. The market is weak form efficient at best

Semi strong efficiency states that it is not possible to trade publicly traded information. As it is given that it is possible to trade publicly traded informatio, market is not semi strong. It is weak form efficient at best