mouse123

Which of the following is a disadvantage to using the comparables approach to valuing investments in closely held companies?

A) Cost to replace assets may not reflect current value.

B) It is difficult to determine the appropriate discount rate.

C) The benchmark value used may be mispriced or difficult to establish.

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A discount rate and an estimate of future income are both variables used in the income approach. The cost to replace a company’s asset is a factor when using the cost approach. The benchmark value used in the comparable may be mispriced or difficult to establish if no comparable companies have been sold recently.

mouse123

The securities of companies that are either close to bankruptcy or have already filed for bankruptcy protection are called:

A) inactively traded securities.

B) discount securities.

C) distressed securities.

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Inactively traded securities are infrequently traded, but the name “inactively traded” does not imply anything about the financial condition of the company. “Discount” is a description that may be applied to any of number of investment vehicles available. Distressed securities are the securities of companies in the midst of financial difficulties.

mouse123

Investing in distressed securities is most similar to investing in which of the following asset classes?

A) Venture capital.

B) Exchange-traded funds.

C) Hedge funds.

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Investing in distressed securities is similar to venture capital investing because both strategies seek an equity position in a company that is eventually successful. Both are illiquid investments with long time horizons.

mouse123

A typical distressed security investment strategy would involve purchasing:

A) the debt of a distressed company, allowing the company to utilize the infusion of capital to avoid bankruptcy.

B) the debt of a struggling company, with the goal of ending up with an equity position in the reorganized company.

C) a controlling equity position in a company experiencing financial difficulties and replacing management with a team of turnaround specialists.

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A typical strategy is to invest in the debt of a company, continue to hold the position throughout the bankruptcy negotiations, and ultimately end up with equity in the new, revitalized operation.

mouse123

Investing in distressed securities and venture capital investing are similar in all of the following ways EXCEPT:

A) illiquid investments.

B) heavy involvement by investors.

C) a large investment requirement.

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Only venture capital requires a large investment. Both remaining choices are true of both investing in distressed securities and investing in venture capital.

mouse123

In periods of rising inflation, commodities can act as a hedge to a portfolio of stocks and bonds because the:

A) commodities will typically appreciate in price while the prices of the stocks and bonds may decline.

B) commodities will not be affected by a rise in inflation.

C) commodities can provide current income to offset any price decreases in the stocks and bonds.

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In a period of rising inflation, the prices of commodities tend to go up, while the prices of stocks and bonds often tend to go down. Thus, the commodities position will act as an inflation hedge for the stock and bond portfolio.

mouse123

All of the following are examples of commodity-linked equities EXCEPT:

A) a gold mining company.

B) an oil and gas exploration company.

C) a supermarket operating company.

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The stocks of a gold mining company and an oil and gas exploration company are highly correlated with commodities prices, because their values are closely linked to the price of the commodities they produce. A supermarket chain will be more diversified, and many other factors will contribute to the value of the company.

mouse123

Commodity-linked securities may be appropriate for investors:

A) seeking speculative profits in the commodities market.

B) seeking investments that are negatively correlated with inflation.

C) prohibited from owning physical assets.

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Commodity-linked securities are not derivatives, though their performance is linked to some commodity price. Commodity-linked securities are positively correlated with inflation. Commodity-linked securities are an appropriate investment for those who are prohibited from directly owning real assets such as commodities, but wish to participate in the market.

mouse123

While discussing the role of commodities as a vehicle for investment, a commentator makes the following statements:
Statement 1: During economic expansions, increasing supply tends to reduce the price of commodities.
Statement 2: Investing in commodities can give the investor exposure to fluctuations in production and consumption.
Are these two statements CORRECT?

Statement 1

Statement 2

A) Correct Correct

B) Incorrect Correct

C) Incorrect Incorrect

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Statement 1 is incorrect. During expansions, increasing demand for finished goods causes an increase in demand for the commodities needed to produce them, resulting in higher prices for commodities. Statement 2 is correct. Commodities can give an investor exposure to the economy’s production and consumption growth, with swings in commodity prices likely to be larger than changes in finished goods prices.

mouse123

Money managers and individual investors can indirectly participate in the commodities market through all of the following investment vehicles EXCEPT:

A) futures contracts.

B) trading commodities in small denominations.

C) stocks of companies producing a commodity.

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Trading the commodities themselves is direct participation. Investors can participate indirectly though futures contracts or certain commodity-linked equities.