International Financial Statement Analysis 2nd Edition Thomas R. Robinson, Elaine Henry, Wendy L. Pirie, Michael A. Broihahn, Anthony T. Cope - Solutions

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26. With respect to capital market theory, correctly priced individual assets can be plotted on the:A. capital market line.B. security market line.C. capital allocation line.
25. The graph of the capital asset pricing model is the:A. capital market line.B. security market line.C. security characteristic line.
24. With respect to the capital asset pricing model, the market risk premium is:A. less than the excess market return.B. equal to the excess market return.C. greater than the excess market return.
23. With respect to the capital asset pricing model, which of the following values of beta for an asset is most likely to have an expected return for the asset that is less than the risk-free rate?A. −0.5 B. 0.0 C. 0.5
22. With respect to the capital asset pricing model, the primary determinant of expected return of an individual asset is the:A. asset’s beta.B. market risk premium.C. asset’s standard deviation.
21. With respect to capital market theory, the average beta of all assets in the market is:A. less than 1.0.B. equal to 1.0.C. greater than 1.0.
20. With respect to return-generating models, which of the following statements is most accurate? Return-generating models are used to directly estimate the:A. expected return of a security.B. weights of securities in a portfolio.C. parameters of the capital market line.
19. With respect to return-generating models, the slope term of the market model is an estimate of the asset’s:A. total risk.B. systematic risk.C. nonsystematic risk.
18. With respect to return-generating models, the intercept term of the market model is the asset’s estimated:A. beta.B. alpha.C. variance.
17. Which security has the least amount of market risk?A. Security 1.B. Security 2.C. Security 3.
16. Which security has the highest beta measure?A. Security 1.B. Security 2.C. Security 3.
15. Which security has the highest total risk?A. Security 1.B. Security 2.C. Security 3.
14. The sum of an asset’s systematic variance and its nonsystematic variance of returns is equal to the asset’s:A. beta.B. total risk.C. total variance.
13. With respect to the pricing of risk in capital market theory, which of the following statements is most accurate?A. All risk is priced.B. Systematic risk is priced.C. Nonsystematic risk is priced.
12. Which of the following events is most likely an example of nonsystematic risk?A. A decline in interest rates.B. The resignation of chief executive officer.C. An increase in the value of the US dollar.
11. Which of the following types of risk is most likely avoided by forming a diversified portfolio?A. Total risk.B. Systematic risk.C. Nonsystematic risk.
10. With respect to the capital market line, a portfolio on the CML with returns less than the returns on the market portfolio represents a(n):A. lending portfolio.B. borrowing portfolio.C. unachievable portfolio.
9. A portfolio on the capital market line with returns greater than the returns on the market portfolio represents a(n):A. lending portfolio.B. borrowing portfolio.C. unachievable portfolio.
8. Relative to portfolios on the CML, any portfolio that plots above the CML is considered:A. inferior.B. inefficient.C. unachievable.
7. With respect to capital market theory, the optimal risky portfolio:A. is the market portfolio.B. has the highest expected return.C. has the lowest expected variance.
6. Which of the following statements most accurately defines the market portfolio in capital market theory? The market portfolio consists of all:A. risky assets.B. tradable assets.C. investable assets.
5. The capital market line (CML) is the graph of the risk and return of portfolio combinations consisting of the risk-free asset and:A. any risky portfolio.B. the market portfolio.C. the leveraged portfolio.
4. Highly risk-averse investors will most likely invest the majority of their wealth in:A. risky assets.B. risk-free assets.C. the optimal risky portfolio.
3. With respect to capital market theory, an investor’s optimal portfolio is the combination of a risk-free asset and a risky asset with the highest:A. expected return.B. indifference curve.C. capital allocation line slope.
2. The portfolio of a risk-free asset and a risky asset has a better risk-return tradeoff than investing in only one asset type because the correlation between the risk-free asset and the risky asset is equal to:A. −1.0.B. 0.0.C. 1.0.
1. The line depicting the total risk and expected return of portfolio combinations of a risk-free asset and any risky asset is the:A. security market line.B. capital allocation line.C. security characteristic line.
calculate and interpret the Sharpe ratio, Treynor ratio, M2, and Jensen’s alpha
describe and demonstrate applications of the CAPM and the SML
calculate and interpret the expected return of an asset using the CAPM
explain the capital asset pricing model (CAPM), including its assumptions, and the security market line (SML)
calculate and interpret beta
explain return generating models (including the market model) and their uses
explain systematic and nonsystematic risk, including why an investor should not expect to receive additional return for bearing nonsystematic risk
explain the capital allocation line (CAL) and the capital market line(CML)
describe the implications of combining a risk-free asset with a portfolio of risky assets
30. With respect to the mean–variance theory, the optimal portfolio is determined by each individual investor’s:A. risk-free rate.B. borrowing rate.C. risk preference.
29. Compared to the efficient frontier of risky assets, the dominant capital allocation line has higher rates of return for levels of risk greater than the optimal risky portfolio because of the investor’s ability to:A. lend at the risk-free rate.B. borrow at the risk-free rate.C. purchase the
28. The dominant capital allocation line is the combination of the risk-free asset and the:A. optimal risky portfolio.B. levered portfolio of risky assets.C. global minimum-variance portfolio.
27. The set of portfolios on the minimum-variance frontier that dominates all sets of portfolios below the global minimum-variance portfolio is the:A. capital allocation line.B. Markowitz efficient frontier.C. set of optimal risky portfolios.
26. The portfolio on the minimum-variance frontier with the lowest standard deviation is:A. unattainable.B. the optimal risky portfolio.C. the global minimum-variance portfolio.
25. Which of the following statements is least accurate? The efficient frontier is the set of all attainable risky assets with the:A. highest expected return for a given level of risk.B. lowest amount of risk for a given level of return.C. highest expected return relative to the risk-free rate.
24. The correlation between assets in a two-asset portfolio increases during a market decline. If there is no change in the proportion of each asset held in the portfolio or the expected standard deviation of the individual assets, the volatility of the portfolio is most likely to:A. increase.B.
23. With respect to an equally weighted portfolio made up of a large number of assets, which of the following contributes the most to the volatility of the portfolio?A. Average variance of the individual assets.B. Standard deviation of the individual assets.C. Average covariance between all pairs
22. As the number of assets in an equally-weighted portfolio increases, the contribution of each individual asset’s variance to the volatility of the portfolio:A. increases.B. decreases.C. remains the same.
21. If the analyst constructs two-asset portfolios that are equally weighted, which pair of assets provides the least amount of risk reduction?A. Asset 1 and Asset 2.B. Asset 1 and Asset 3.C. Asset 2 and Asset 3.
20. If the analyst constructs two-asset portfolios that are equally-weighted, which pair of assets has the lowest expected standard deviation?A. Asset 1 and Asset 2.B. Asset 1 and Asset 3.C. Asset 2 and Asset 3.
19. If the two securities are uncorrelated, the expected standard deviation of an equal-weighted portfolio is closest to:A. 14.00%.B. 14.14%.C. 20.00%.
18. If the correlation of returns between the two securities is −0.15, the expected standard deviation of an equal-weighted portfolio is closest to:A. 13.04%.B. 13.60%.C. 13.87%.
17. If the portfolio of the two securities has an expected return of 15%, the proportion invested in Security 1 is:A. 25%.B. 50%.C. 75%.
16. If the standard deviation of the portfolio is 14.40%, the covariance between the two securities is equal to:A. 0.0006.B. 0.0240.C. 1.0000.
15. If the standard deviation of the portfolio is 14.40%, the correlation between the two securities is equal to:A. −1.0.B. 0.0.C. 1.0.
14. A portfolio manager creates the following portfolio:Security Security Weight (%)Expected Standard Deviation(%)1 30 20 2 70 12 If the covariance of returns between the two securities is −0.0240, the expected standard deviation of the portfolio is closest to:A. 2.4%.B. 7.5%.C. 9.2%.
13. A portfolio manager creates the following portfolio:Security Security Weight (%)Expected Standard Deviation(%)1 30 20 2 70 12 If the correlation of returns between the two securities is 0.40, the expected standard deviation of the portfolio is closest to:A. 10.7%.B. 11.3%.C. 12.1%.
12. With respect to capital market theory, which of the following asset characteristics is least likely to impact the variance of an investor’s equally weighted portfolio?A. Return on the asset.B. Standard deviation of the asset.C. Covariances of the asset with the other assets in the portfolio.
11. Two individual investors with different levels of risk aversion will have optimal portfolios that are:A. below the capital allocation line.B. on the capital allocation line.C. above the capital allocation line.
10. With respect to the mean–variance portfolio theory, the capital allocation line, CAL, is the combination of the risk-free asset and a portfolio of all:A. risky assets.B. equity securities.C. feasible investments.
9. If an investor’s utility function is expressed as U = E (r) − _ 21 A σ 2 and the measure for risk aversion has a value of 4, the risk-averse investor is most likely to choose:A. Investment 1.B. Investment 2.C. Investment 3.
8. If an investor’s utility function is expressed as U = E(r ) − _12 A σ 2 and the measure for risk aversion has a value of 2, the risk-averse investor is most likely to choose:A. Investment 1.B. Investment 2.C. Investment 3.
7. If an investor’s utility function is expressed as U = E (r) − _ 21 A σ 2 and the measure for risk aversion has a value of −2, the risk-seeking investor is most likely to choose:A. Investment 2.B. Investment 3.C. Investment 4.
6. A risk-neutral investor is most likely to choose:A. Investment 1.B. Investment 2.C. Investment 3.
5. With respect to an investor’s utility function expressed as: U = E (r) − _21 A σ 2 , which of the following values for the measure for risk aversion has the least amount of risk aversion?A. −4.B. 0.C. 4.
4. With respect to utility theory, the most risk-averse investor will have an indifference curve with the:A. most convexity.B. smallest intercept value.C. greatest slope coefficient.
3. With respect to risk-averse investors, a risk-free asset will generate a numerical utility that is:A. the same for all individuals.B. positive for risk-averse investors.C. equal to zero for risk seeking investors.
2. Evidence of risk aversion is best illustrated by a risk–return relationship that is:A. negative.B. neutral.C. positive.
1. With respect to trading costs, liquidity is least likely to impact the:A. stock price.B. bid–ask spreads.C. brokerage commissions.
19. Boeing Company (NYSE: BA) has a current stock price of $49.86. It also has a P/B of 3.57 and book value per share of $13.97. Assume that the single-stage growth model is appropriate for valuing BA. Boeing’s beta is 0.80, the risk-free rate is 5.00 percent, and the equity risk premium is 5.50
18. Shunichi Kobayashi is valuing United Parcel Service (NYSE: UPS). Kobayashi has made the following assumptions:• Book value per share is estimated at $9.62 on December 31, 2001.• EPS will be 22 percent of the beginning book value per share for the next eight years.• Cash dividends paid
17. Having completed the revised analysis, which gives TSM greater credit for its patented technology, the analyst realizes that the changes warrant an additional adjustment.Although she generally employs a 20-year time frame when implementing the multistage residual income model, she believes that
16. In the above analysis, the analyst uses the multistage residual income model and assumes that TSM’s ROE will fade toward the cost of equity capital after 2022. How would her conclusion about TSM’s valuation change if she believed that the persistence parameter for this company should be
15. Use the following inputs and the finite horizon form of the residual income model to compute the value of Southern Trust Bank (STB) shares as of December 31, 2001:• ROE will continue at 15 percent for the next five years (and 10 percent thereafter)with all earnings reinvested (no dividends
14. Dayton Manufactured Homes (DMH) builds prefabricated homes and mobile homes.Both favorable demographics and the likelihood of slow, steady increases in market share should enable DMH to maintain its ROE of 15 percent and growth rate of 10 percent over time. DMH has a book value of $30 per share
13. Retail fund manager Seymour Simms is considering the purchase of shares in upstart retailer Hot Topic Stores (HTS). The current book value of HTS is $20 per share, and its market price is $35. Simms expects long-term ROE to be 18 percent, long-term growth to be 10 percent, and cost of equity to
12. Lendex Electronics (LE) has had a great deal of turnover of top management for several years and was not followed by analysts during this period of turmoil. Because the company’s performance has been improving steadily for the past three years, technology analyst Steve Kent recently
11. Foodsco Incorporated (FI), a leading distributor of food products and materials to restaurants and other institutions, has a remarkably steady track record in terms of both return on equity and growth. At year-end 2000, FI had a book value of $30 per share.For the foreseeable future, you expect
10. Simonson Investment Trust International (SITI) is expected to earn $4.00, $5.00, and$8.00 for the next three years. SITI will pay annual dividends of $2.00, $2.50, and $20.50 in each of these years. The last dividend includes the liquidating payment to shareholders at the end of Year 3 when the
9. Notable Books (NB) is a family-controlled company that dominates the retail book market. NB has book value of $10 per share, is expected to earn $2.00 forever, and pays out all of its earnings as dividends. Its required return on equity is 12.5 percent. Place a value on the stock of NB using the
8. Protected Steel Corporation (PSC) has a book value of $6 per share. PSC is expected to earn $0.60 per share forever and pays out all of its earnings as dividends. The required rate of return on PSC’s equity is 12 percent. Calculate the value of the stock using the following:A. Dividend
7. (Adapted from 2000 CFA Level II exam) Jim Martin is using economic value added(EVA) and market value added (MVA) to measure the performance of Sundanci. Martin uses the fiscal 2000 information below for his analysis.• Adjusted net operating profit after tax (NOPAT) is $100 million.• Total
6. Calculate the economic value added (EVA) or residual income, as requested, for each of the following:A. NOPAT = $100 Beginning book value of debt = $200 Beginning book value of equity = $300 WACC = 11 percent Calculate EVA.B. Net income = ¤5.00 Dividends = ¤1.00 Beginning book value of equity
5. In 2002, Smithson-Williams Investments (SWI) achieved an operating profit after taxes of ¤10 million on total assets of ¤100 million. Half of its assets were financed with debt with a pretax cost of 9 percent. Its cost of equity capital is 12 percent, and its tax rate is 40 percent. Did SWI
4. Because New Market Products (NMP) markets consumer staples, it is able to make use of considerable debt in its capital structure; specifically, 90 percent of the company’s total assets of $450,000,000 are financed with debt capital. Its cost of debt is 8 percent before taxes, and its cost of
3. Palmetto Steel, Inc. (PSI), maintains a dividend payout ratio of 80 percent because of its limited opportunities for expansion. Its return on equity is 15 percent. The required rate of return on PSI equity is 12 percent, and its long-term growth rate is 3 percent.Compute the justified P/B based
2. Using the following information, estimate the intrinsic value of VIM’s common stock using the residual income model:• VIM had total assets of $3,000,000, financed with twice as much debt capital as equity capital.• VIM’s pretax cost of debt is 6 percent and cost of equity capital is 10
1. Based on the following information, determine whether Vertically Integrated Manufacturing(VIM) earned any residual income for its shareholders in 2001:• VIM had total assets of $3,000,000, financed with twice as much debt capital as equity capital.• VIM’s pretax cost of debt is 6 percent
• Calculate the intrinsic value of a share of common stock using a multistage residual income model, given the required rate of return, forecasted earnings per share over a finite horizon, and forecasted continuing residual earnings.
• Justify an estimate of continuing residual income at the earnings forecast horizon given company and industry prospects.
• Define continuing residual income and list the common assumptions regarding continuing residual income.
• Calculate an implied growth rate in residual income given the market price-to-book ratio and an estimate of the required rate of return on equity.
• Discuss the major accounting issues in applying residual income models.
• Explain the relationship of the residual income model to the dividend discount and free cash flow to equity models.
• Explain the relationship between the justified price-to-book ratio and residual income.
• Identify and discuss the fundamental determinants or drivers of residual income.
• Justify the selection of the residual income model for equity valuation, given characteristics of the company being valued.
• Discuss the strengths and weaknesses of the residual income model.
• Contrast the recognition of value in the residual income model to value recognition in other present value models.
• Calculate the intrinsic value of a share of common stock using the residual income model.
• Calculate future values of residual income given current book value, earnings growth estimates, and an assumed dividend payout ratio.
• Discuss the uses of residual income models.
• Describe alternative measures of residual earnings, such as economic value added.
Define and calculate residual income.

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International Financial Statement Analysis 2nd Edition Thomas R. Robinson, Elaine Henry, Wendy L. Pirie, Michael A. Broihahn, Anthony T. Cope - Solutions

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