Question 86

Is the market’s ability to produce informationally efficient prices limited by the existence of transactions costs or by the risks associated with arbitrage strategies?

       Transactions costs  Risks

A)    Yes
              No

B)   Yes
              Yes

C)   No              Yes

D)   No            No

Question 87

An industry has the following characteristics:

• Sales growth is above the average growth rate of the economy.

• Profit margins have been high but are beginning to decline.

• New competitors are entering the market.

This industry is most likely in which phase of its life cycle?

A)    Stabilization and market maturity.

B)   Rapid accelerating growth.

C)   Pioneering.

D)   Mature growth.

Question 88

The stock of Universal Inc. is priced at $37 today and will pay a dividend of $2 one year from today. An analyst states that he believes Universal is currently undervalued by $3 per share, based on the infinite period constant-growth dividend discount model and a required rate of return of 12%. The analyst believes the stock will have a constant dividend growth rate of:

A)    6%.

B)   8%.

C)   7%.

D)   9%.

Question 89

A securities market exhibits internal efficiency if it offers:

A)    timely and accurate information on the price and volume of past transactions.

B)   marketability and price continuity.

C)   prices that respond rapidly to new information.

D)   low transaction costs.

Question 90

The required rate of return used in the dividend discount model is least likely to be affected by a change in the:

A)    real risk-free rate of return.

B)   premium that compensates investors for risk.

C)   growth rate of earnings and dividends.

D)   expected rate of inflation.

[此贴子已经被作者于2008-11-8 13:30:39编辑过]

Question 86

Is the market’s ability to produce informationally efficient prices limited by the existence of transactions costs or by the risks associated with arbitrage strategies?

       Transactions costs  Risks

A)    Yes            No

B)   Yes            Yes

C)   No              Yes

D)   No            No

The correct answer was B) Yes             Yes

Transactions costs limit the market’s ability to produce fully efficient prices because trades will not take place if they cost more to implement than they profit from the mispricing. The ability of arbitrage trading to bring about fully efficient prices is limited because arbitrage trading involves risks specific to each of the overvalued or undervalued securities being traded.

This question tested from Session 13, Reading 55, LOS a

Question 87

An industry has the following characteristics:

• Sales growth is above the average growth rate of the economy.

• Profit margins have been high but are beginning to decline.

• New competitors are entering the market.

This industry is most likely in which phase of its life cycle?

A)    Stabilization and market maturity.

B)   Rapid accelerating growth.

C)   Pioneering.

D)   Mature growth.

The correct answer was D) Mature growth.

The mature growth phase is characterized by sales growth that is still above normal but not accelerating. Profit margins start to decline as competitors enter the market.

This question tested from Session 14, Reading 58, LOS c

Question 88

The stock of Universal Inc. is priced at $37 today and will pay a dividend of $2 one year from today. An analyst states that he believes Universal is currently undervalued by $3 per share, based on the infinite period constant-growth dividend discount model and a required rate of return of 12%. The analyst believes the stock will have a constant dividend growth rate of:

A)    6%.

B)   8%.

C)   7%.

D)   9%.

The correct answer was C) 7%.

The analyst believes the value of the stock today is $37 + $3 = $40. Using the infinite-period dividend discount model, $40 = $2 / (0.12 − g). Solving for the growth rate, g = 0.07 = 7%.

This question tested from Session 14, Reading 60, LOS b, (Part 2)

Question 89

A securities market exhibits internal efficiency if it offers:

A)    timely and accurate information on the price and volume of past transactions.

B)   marketability and price continuity.

C)   prices that respond rapidly to new information.

D)   low transaction costs.

The correct answer was D) low transaction costs.

Internal efficiency refers to low transactions costs in a securities market. External efficiency means prices change rapidly to reflect new information without predictable bias.

This question tested from Session 13, Reading 52, LOS a

Question 90

The required rate of return used in the dividend discount model is least likely to be affected by a change in the:

A)    real risk-free rate of return.

B)   premium that compensates investors for risk.

C)   growth rate of earnings and dividends.

D)   expected rate of inflation.

The correct answer was C) growth rate of earnings and dividends.

The expected growth rate in dividends is an input into the dividend discount model, but the real risk-free rate, the inflation rate and the risk premium are the components of the required rate of return.

This question tested from Session 14, Reading 60, LOS f

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