Problem 1: A firm has net income of $188.400 and total equity of 1.2 million. There are 220,000 shares of stock outstanding at a price per share of $14.80. What is the firm's price-earnings ratio?
Problem 2: Alco Metals just sold 2.7 million shares through an IPO offering. The shares were offered at $21 a share and all shares were sold. The firm received a total of $60,385,500 for this issue. What was the spread?
Problem 3: Wilderness Adventures has earnings per share of $2.35 and dividends per share of $1.10. The total equity of the firm is $945,000. There are 30,000 shares of stock outstanding. What is the sustainable rate of growth?
Problem 4: PT Boats plans to pay a $2.40 a share dividend at the end of each of the next 2 years. At the end of year 3, it will pay a final liquidating dividend of $12 a share. After that, the company plans to close its doors permanently. What is the current value of this stock at a discount rate of 16 percent?
Problem 5: A best efforts IPO underwriting consisted of 2.2 million shares at an offer price of $17 a share. The underwriter's fee was set at 6.65 percent. How many shares were sold if the issuer received $31,926,260.10?
Problem 6: Blue Water Tours just paid an annual dividend of $0.72 a share. The firm has a policy of increasing the dividend by 3.0 percent annually. What is the current value of this stock at a discount rate of 11.7 percent?
Problem 7: Assume the DJIA closed at 12,487 last night. The divisor is 0.123017848. Assume that 29 of the stocks in the index were unchanged today. One stock increased in value from $54.80 a share yesterday to $57.90 a share today. What is the DJIA index value at the close of trading today?
Problem 8: The Back Room just paid an annual dividend of $1.65 a share. The firm expects to pay dividends forever and to increase the dividend by 3 percent annually. What is the expected value of this stock five years from now if the discount rate is 14 percent?
Problem 9: DT Industries stock is valued at $9.60 a share. The firm pays annual dividends at an increasing rate of 2 percent annually. Next year's dividend will be $1.50 per share. What is the required return on this stock?
Problem 10: Roy's Markets has net income of $164,000. The firm has 200,000 shares of common stock outstanding. The dividend for this year is $0.61 per share. What is the retention ratio?
Problem 11: Art Supplies has a net income of $148,500. The firm has $1.15 million in assets and $450,000 in liabilities. What is the return on equity?
Problem 12: Lantern Corporation reported net income of $55 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $5 million. Free cash flow is expected to grow at a rate of 4.5% for the foreseeable future. Lantern faces a 40% tax rate and has a 0.45 debt to equity ratio with $185 million (market value) in debt outstanding. Lantern's equity beta is 1.3, the risk-free rate is currently 5% and the market risk premium is estimated to be 6.5%. What is the current total value of Lantern's equity (in millions)?
Problem 13: Which one of the following is the basis for prospect theory?
A. Investors react differently to prospective gains and losses.
B. Investors make cognitive errors.
C. Some investors are irrational.
D. Investors react differently depending on the day of the week.
E. Investors suffer from money illusion.
Problem 14: Which one of the following defines frame dependence?
A. Investors react differently to prospective gains and losses.
B. Investors tend to make more cognitive errors when they view investing as gambling.
C. Investors tend to be more irrational in bear markets than in bull markets.
D. Investors react differently depending on how an opportunity is presented.
E. Investors suffer from money illusion in bull markets but not in bear markets.
Problem 15: Representativeness heuristic is best explained as:
A. the process of assuming events are random even when they are not.
B. the creation of patterns in planned events.
C. concluding that casual factors cause random events when in fact they do not.
D. believing that random events that occur in clusters are truly random.
E. overconfidence in one's own skills as an investor.
Problem 16: Mental accounting is the process of associating a stock with its:
A. prior day's market value.
B. expected value.
C. desired value.
D. purchase price.
E. lowest value.
Problem 17: Loss aversion is defined as:
A. the inability to mentally acknowledge a loss on a security.
B. selling any security for less than the price paid to acquire it.
C. selling a security as soon as it has increased significantly in value.
D. the reluctance to sell a security after it has decreased in value.
E. the tendency to quickly sell any investment that has decreased in value.
Problem 18: The belief that information you hold is superior to information held by other investors best describes:
A. over-confidence
B. the snakebite effect
C. the illusion of knowledge
D. the clustering illusion
E. loss aversion
Problem 19: An unwillingness to take a risk after a loss describes:
A. over-confidence
B. the snakebite effect
C. the illusion of knowledge
D. the clustering illusion
E. loss aversion
Problem 20: Which one of the following is the tendency to believe that random events that occur in clusters are not really random?
A. clustering illusion
B. sequential clustering
C. random grouping
D. representativeness heuristic
E. gambler's fallacy
Problem 21: According to the concept of house money, individual investors are most apt to do which one of the following?
A. take more risks with their initial investment than with the gains on that investment
B. value money differently depending upon its source
C. treat paper profits the same as initial cash investments
D. apply the same level of risk-aversion to all investments
E. place high value on paper profits but low value on paper losses