CSC TEST 1 - WINTER 2014

FIN 2356

PREPARED BY:
Ildebrando A de A Lucas

PLEASE PRINT FULL NAME__________________________________________________________________________________

YOU HAVE EXACTLY 1.50 HOURS TO COMPLETE THE ENTIRE TEST OF 70 QUESTIONS

TOTAL OUT OF 70
MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.

1) The Capital Structure is; 1)

A) All owners' equity, and short term debt restricted to loans or issues of debt only and long
term debt
B) All owners' equity and long term debt
C) All owners' equity
D) All owners' equity and short term debt

2) You are looking to invest short term in order to quickly make a quick gain and in a 2)
speculative company -ABC. Below, you will find the latest info on the company:
52 Weeks High 52 Weeks Low Stock High Low Close Volume (100) Change
$0.55 $0.05 ABC $0.39 $0.11 $0.11 2 0.0

If you are looking at the aforesaid table, and you were trying to provide some advice to
your client, what type of risk would you be looking for prior to investing in this
speculative company?
A) Interest rate risk B) Political risk
C) Liquidity risk D) Default risk

3) A support level is indicative of: 3)

A) Supply is high for the stock
B) Demand is high for the stock
C) The price level remains constant
D) The price falls below the resistence level

4) If you invest in a defensive industry, what would you expect the Beta to be? 4)
A) Less than 0 B) Lower than 1 but above 0
C) Higher than 5 D) Between 1 and 3

5) What is the risk in which an investor will not be able to buy or sell a security quickly? 5)
A) Systematic risk B) Non-systematic risk
C) Liquidity risk D) Management risk

6) Brando’s portfolio of $200,000 has an asset mix of 20% cash, 50% fixed income and 30% 6)
equities. If he increases his cash by 15% and his equity by 25% more and thereafter, he
decides that his asset mix should be the same as his original portfolio. What would he
need to do?
A) Decrease cash by $1,800, increase fixed income by $10,500 and decrease equities by
$8,700
B) Increase cash by $1,800, increase fixed income by $10,500 and decrease equities by
$8,700
C) Decrease cash by $1,800, increase fixed income by $10,500 and increase equities by
$8,700
D) Decrease cash by $1,800, decrease fixed income by $10,500 and increase equities by
$8,700

7) Investment assets can be grouped into Three Main Asset Classes; 7)

A) Cash and Cash Equivalent, Fixed Income and Equity Securities
B) Cash and Cash Equivalent, Options and Equity Securities
C) Cash and Cash Equivalent, Options and Fixed Income
D) Cash and Cash Equivalent, Derivatives and Fixed Income

8) If you have a head and shoulder pattern, it indicates; 8)

A) The price will stay the same since the moving average is well below the actual price
B) The price should fall in the near future once it breaks through moving average line
C) The price will stay the same since the moving average is well above the actual price
D) The price should rise in the near future once it breaks through moving average line

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 9) Abraham has the following portfolio: 9)
Securities Market Value Expected Returns
BCE $10,000 12%
MIT $15,000 -7% Negative
2YZ $25,000 9%
Find the Expected Return on this portfolio?
A) 4.2% B) 8.4% C) 4.8% D) 9%

10) An IA had estimated that the market could rise to a maximum of 8% and perhaps see a 10)
minimum gain of 3%. Using a recent dividend yield of 2% of the TSX ETF (Exchange
Trade Fund), what would be the range of expected return on equity?
A) 1% to 5% B) 5% to 6% C) 5% to 10% D) 1% to 10%

11) If company Today Inc. pays annual dividends of $1.98 per common share. What impact 11)
will a fall on share price have on the dividend yield ratio?
A) The dividend yield ratio will rise B) None of the above
C) The dividend yield ratio will not change D) The dividend yield ratio will fall

12) What Can we say about the relationship between P/E levels of stocks and the rate of 12)
Inflation?
A) P/E levels have shown little relationship with inflation rates
B) P/E levels have no relationship with the rate of inflation
C) P/E levels have been inversely related to the rate of inflation
D) P/E levels and inflation rates are positively related

13) If an industry has a Beta of less than 1.0 versus the market, which industry would it most 13)
likely be?
A) Telecommunication B) Manufacturing
C) Aviation D) Utility

14) What does "ex-post" rate of return measures? 14)

A) The ongoing forward return B) The after the fact return
C) The current return less inflation D) The compound return

15) Everyone agrees that diversification is imperative if it does indeed lower the overall risk 15)
in a portfolio. But, is it possible that a portfolio has too many assets and will it help to
lower risk or improve returns?
A) Yes, since the incremental decrease in returns will be greater than normal diversification
B) No, since over-diversification will increase risk
C) Yes, since the incremental increase in returns will be negligeable
D) No, since over-diversification will decrease returns

16) What type of risk cannot be diversified in either equity or debt securities; 16)
A) Default risk B) Systematic risk
C) Non-systematic risk D) Index risk

17) The yield curve helps to determnies future interest rates for investments purposes. If 17)
you purchased a bond today,
A) A bond with a higher coupon rate will see its price drop less than a bond with lower
coupon rate
B) One year later, the price of the bond will rise if interest rates drop.
C) An inverse yield curve will have higher interest rates in the near term than long term
D) All of the above

18) One of the results of high inflation is: 18)

A) Commodity prices are neutral
B) Much more goods are available in the market place at a cheaper price
C) Erosion of the standard of living
D) Higher standard of living

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19) If
you suggest to your client to invest in a Balanced Portfolio with a much higher mix in 19)
Equities, what type of client do you have?
A) Someone young, or a single professional
B) Married blue collar professional with young children
C) Retired couple
D) Semi-retired couple with lots of cash

20) A rising operating margin but a falling pre-tax profit margin may indicate a; 20)
A) Larger amortization charges B) Larger increase in interest charges
C) Smaller amortization charges D) Larger increase in accounts payable

21) Aconvertible preferred share is not part of the fixed income, asset mix portion of a 21)
portfolio, why?
A) Convertible preferred shares do not usually have a fixed maturity date and can provide a
capital gain
B) Convertible preferred shares are not equity and therefore are a debt to the company
C) Only management can hold convertible preferred shares
D) Convertible preferred shares do not trade on exchanges

22) The risk of incurring losses resulting from an unfavorable change in exchange rates is; 22)
A) Default risk B) Interest rate risk
C) Liquidity risk D) Foreign exchange risk

23) Why would an investor keep a consistent high portion of his or her portfolio in cash or 23)
cash equivalent securities?
A) To provide continuous liquidity
B) To outperform the benchmark
C) To take advantage of investment opportunities as they arise
D) To pay ongoing portfolio expenses

24) The earnings per share of a non-leveraged company would be __________during an 24)
upswing in the business cycle relative to a levered company?
A) Lower B) None of the above
C) Same D) Higher

25) Once you have gone through the steps in the financial planning process with the clients. 25)
What is the minimum time frame that the financial plan should be checked with the
client again?
A) Monthly B) Semi-Annual C) Weekly D) Annually

26) Calculatethe expected Return E(r) of a stock with the T-bil at 1.75% and the Beta at 26)
1.75 while the expected market rate is 8%;
A) 15.3125% B) 18.8125% C) 10.025% D) 12.6875%

27) The economy, in general, is starting to grow and moving into the expansion phase and 27)
rates are starting to increase slowly. An investor decides that she wants to buy shares of
companies that will take advantage of the economic rebound therefore, she should invest
in;
A) Defensive companies B) Cyclical companies
C) Start-Up companies D) Mature companies

28) If
commodity prices increase inflation rates in Canada, what measure is most likely to 28)
happen?
A) Interest rates will fall to contain inflation
B) Interest rates will rise to contain inflation rate
C) Interest rates will rise to contain inflation rate and P/E ratios will decrease
D) Interest rates will rise to contain inflation rate and P/E ratios will increase

29) What does "ex-ante" rate of return measures? 29)

A) The return on a portfolio B) The after the fact return
C) The simple return D) The projection of expected returns

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30) Montreal Inc. reports an entreprise multiple (EM) of 5.01 while the industry (EM) is 30)
7.78. Which statement is true?
A) the industry (EM) considers the Economic Value Added (EVA) Calculations
B) Montreal Inc. is undervalued relative to the industry (EM)
C) Montreal Inc. is over valued relative to the industry (EM)
D) None of the above

31) Fundamental analysis is; 31)

A) Assessing the short, medium and long term range prospect of different industries and
companies
B) Studying interest rates, economic variables and industry for stock valuation using
computers, statistics, databases or mathematical approaches for valuation
C) Assessing the possibility that the stock market will be efficient therefore all valuations are
always correct
D) Study of historical stock prices and stock market behaviour to identify recurring patterns
in the data

32) Correlation is between; 32)

A) 1 and infinity B) -1 and 0 C) -1 and 1 D) 1 and 0

33) Which of the following ratios measures whether a company generates enough cash from 33)
its operations to cover its current liabilities?
A) Operating cash flow ratio B) Cash flow/debt ratio
C) Current ratio D) Quick ratio

34) AnIA is evaluating several companies within a single industrial sector. On what basis 34)
should the companies be categorized and evaluated?
A) Incorporation date
B) Bondholders ownership ot the company
C) Degree of risk and prospects for future growth
D) Production levels

35) What is meant by “market risk premium” in the Capital Asset Pricing Model? 35)
A) The difference between (market expected return and Beta)
B) The difference between (market expected return and the risk free rate)
C) Risk free rate + Beta times ( market expected return minus the risk free rate)
D) The difference between (risk free rate and Beta)

36) Assetmix-Cash and Cash equivalent means; 36)

A) Currency, capital market securities, CSB, GIC, long term bonds, and other cash
equivalent short term assets
B) Currency, money market securities, CSB, GIC, long term bonds, and other cash
equivalent short term assets
C) Currency, money market securities, CSB, GIC, short term bonds, and other cash
equivalent short term assets
D) Currency, capital market securities, CSB, GIC, short term bonds, and other cash
equivalent short term assets

37) Totalcurrent assets are at $1,000 while total current liabilities are at $1,200. What 37)
would you expect?
A) Debt to equity ratio is below 1
B) Working capital ratio above 1
C) Net working capital is positive
D) The company could become insolvent in the short-term

38) The three main investment objective are; 38)

A) Safety of Principal, Growth of Capital and and Liquidity
B) Safety of Principal, Income and Growth of Capital
C) Safety of Principal, Income and Tax Minimization
D) Safety of Principal, Income and Liquidity

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39) Acompany may be unprofitable at first and may have negative cash flows therefore it is 39)
classified as a;
A) Declining Industry B) Mature Industry
C) Emerging Industry D) Growth Industry

40) What is meant by "non controlling interet" in an income statement? 40)

A) Assets that are controlled by the company
B) Expenses account for interest paid
C) Percentage of non-ownership in a subsidiary
D) Percentage of ownership in a subsidiary

41) To Calculate the Beta for a Portfolio, you must use? 41)
A) Sum of all Betas divided by total amount of Betas
B) Sum of (Weights * Beta)
C) Sum of (Probabilities * Beta)
D) Sum of(Expected Returns * Beta)

42) The Bank of Canada will probably take a bearish stance on interest rates in the near 42)
future, if this is true, what direction would interest rates change to?
A) Long term interest rates will fall
B) Short term interest rates will remain the same
C) Short term interest rates will rise
D) Short term interest rates will fall

43) If
the portfolio below was increased by $50,000 in bonds of the Ontario Provincial 43)
government providing and expected yield to maturity of 5.5%, what would be the new
expected return on the portfolio and what would be the new risk?

Securities Market Value Expected Returns

BCE $10,000 12%

MIT $15,000 -7% Negative
2YZ $25,000 9%

A) Higher risk with an expected return of 7.25%

B) Lower risk with an expected return of 7.25%
C) Higher risk with an expected return of 5.15%
D) Lower risk with an expected return of 5.15%

44) The closing prices of a particular stock for the following six (6) weeks are; $10.00, 10.25, 44)
10.50, 10.70, 10.90, 10.95. What is the 5 (five) week moving average?
A) $10.66 B) $10.47 C) $10.61 D) $10.95

45) Invested Capital is? 45)

A) Book Value of Owner's Equity
B) All Debt + Book Value of Equity
C) Short Term debt + Long Term debt + Book Value of Equity
D) Short term Debt restricted to loans or issues of debt only + long Term Debt + Book
Value of Equity

46) If a company has a debt/equity ratio of 1.50: 46)

A) The company is in financial difficulties
B) The company shareholders are no longer in control of the company
C) Higher interest payments may push the company into bankruptcy if demand decreases
significantly
D) The company is in default of its covenants

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47) From the following table, what would you expected the trend line to be? 47)

2000 - EPS 2001 - EPS 2002 - EPS 2003 - EPS 2004 - EPS

$1.25 $1.30 $1.38 $1.49 $1.68

A) Decreasing but mainly flat B) Decreasing

C) Increasing but mainly flat D) Increasing

48) Investment constraints are very important for both; investors and 48)
agents/dealers/brokers, which one is the most important as an investment policy?
A) Taxation B) Wealth accumulation
C) Liquidity D) Time horizon

49) If
the stock is at $37.00 but the growth rate on the dividends has decreased from 15% to 49)
4% while the expected earnings will be $2.50, the expected return wil be 12.5%. What
would you do?
A) You would buy the Stock B) None of the above
C) You would buy some Puts D) You would buy some Calls

50) Toassess a company’s ability to meet the fixed charges on its debt payments, which ratio 50)
should be used?
A) Operating coverage ratio B) Asset Coverage ratio
C) Acid Test ratio D) Interest Coverage ratio

51) Aninvestor has a portfolio with the following asset mix; 5% cash, 50% fixed income and 51)
45% in equity. His total porfolio is $850,000.
A) Equity is $297,000 B) Cash is $425,000
C) Bonds are $382,000 D) Fixed income is $425,000

52) Aninvestor has various assets in its portfolio that includes convertible bonds and 52)
preferred shares, those should be included in which mix?
A) Equities B) Other Asset Class
C) Cash and Cash Equivalent D) Fixed Income

53) The net income for your company is $5,000,000, you have paid in dividends $2,000,000 53)
and your investors require a rate of return of 9% with your expected dividend or
company growth is going to be 5% forever. Your are expecting your pay-out ratio to be
the same next year but earning are going to increase to $6,000,000.
A) Your investor will sell the stock at $10
B) Your P/E ratio will vary since earnings have increased
C) Your P/E ratio will be the same
D) Your investor will purchase the stock at $10

54) A strategic asset mix allocation is? 54)

A) The long term asset mix that will be adhere to and monitored but /and when necessary,
re-balance it
B) Allow for some short term, tactical deviations from the strategic asset mix to capitalize on
investment opportunities
C) Buy and hold the strategic approach since the market is always efficient
D) Adjusting the asset mix to systematically re-balance the portfolio back to its long term
mix

55) An investment broker has the following portfolio information; the return on the portfolio 55)
is 7.05%, the Bank of Canada T-bils are at 2.75%, and the portfolio variance is 0.029,
find the Sharpe ratio?
A) 0.5225 B) 1.4827 C) 0.1482 D) 0.2525

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56) Technical analysis is; 56)
A) The process of analyzing historical market action in an effort to determine probable
future price trends
B) Studying interest rates, economic variables and industry or stock valuation using
computers, database, statistics and an objective mathematical approach to valuation
C) Assessing the short, medium and long term range prospects of different industries and
companies
D) All of the above

57) If
we are reaching the peak of the business cycle, what would you expect the price of a 57)
stock to do?
A) Price will remain the same
B) Price will fall
C) Inflation will decrease and prices will increase
D) Prices will rise

58) What is a portfolio Alpha? 58)

A) None of the above
B) The negative returns above your expected return according to WACC or SML
C) The extra positive returns due to management knowledge, skills and superior talent
D) The negative returns due to the economic conditions

59) Operating performance ratios are; 59)

A) To show the investors what the company's share are worth
B) To judge the company's ability to meet its short-term commitments
C) To show how well management is making use of the company's resources
D) To show how well the company is operating

60) If
you have a portfolio of 2 assets and you decide to lower the overall risk, what would 60)
you do?
A) Find two assets that are negatively correlated to -1
B) Find two assets that have a correlation of 0
C) Find two assets that are positively correlated to 1
D) Find two assets that are negatively correlated to -2

61) Which of the following statements regarding the Debt/Equity ratio are correct? 61)
1) The debt/equity ratio is a risk analysis ratio
2) The debt/equity ratio measures a company's ability to meet its short-term obligations
3) The higher the debt/equity ratio, the higher the financial risk
4) The higher a company's equity position, the higher its debt/equity ratio
A) 2) and 4) B) 1), 2) and 3) C) 1) and 3) D) Only 4)

62) A preferred share has the following rating from Dominion Bond Rating Service, “ D”; 62)
A) No payment of principal or interest is expected since the payments are delayed by the
Board of Directors
B) Earnigs are expected to decrease but the preferred shares are in default
C) Earnigs are expected to increase but the preferred shares are in default
D) The dividend and/or principal payments are in arrear

63) You are reviewing the portfolio of a client with the following asset mix; 10% in cash, 63)
55% in bonds and 35% in equity. The expected returns are; bonds 4.5%, cash 2.5% and
for equity 7.25%. What is the expected return on this protfolio?
A) 4.6135% B) 5.2625% C) .52625% D) 4.3625%

64) A company expects to pay $2.50 in dividends next year and its growth is expected to be 64)
stable at 5% while an investor expects a return on this company of 12% and the expected
EPS will be $5.00. Find the theoretical price of the stock (Po) using the P/E ratio
approach?
A) $35.71 B) 7.142 C) 50.00 D) $7.142

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65) Technicalanalysis method identifies trends and/or provides information about expected 65)
changes in stock prices, which one does not provide this type of information?
A) Sentiments Analysis indicators B) Quantitative Analysis
C) Business cycle D) Pricing trends for products or services

66) Earnings per Share (EPS) is? 66)

A) An Operating Performance ratio B) A Liquidity ratio
C) A Risk Analysis ratio D) A Value ratio

67) Monetary versus fiscal policies imply that the Bank of Canada will be looking forward 67)
and trying to determine the movement of interest rates, inflation and exchange rates in
order to maintain economic stability within the country. What will we expect if the Bank
of Canada increases the amount of Euros in its reserves?
A) Exchange rates will decrease for the Canadian dollars versus the Euro
B) Exchange rates will increase for the Canadian dollars versus the Euro and the interest
rates will start to increase therefore increasing inflation in the longer term
C) Exchange rates will decrease for the Canadian dollars versus the Euro and the interest
rates will start to increase therefore decreasing inflation in the longer term
D) Exchange rates will increase for the Canadian dollars versus the Euro

68) Using Sentiment indicators to invest may provide positive results if the investor 68)
understands how and when to use them. A Contrarian sentiment investor will invest;
A) In the stock market because more investors are investing while the index is increasing
B) In the stock market because it is Friday and everyone is selling therefore, you decide to
sell also
C) In the stock market because most investors are bullish and you decided to be bearish
D) In the stock market because the volume change has increased positively

69) If
we are using the DDM (Divident Discount Model) to price stocks, why should we 69)
purchase them at the market trough?
A) "r" is decreasing and "g" is decreasing at a slower rate
B) "r" is decreasing and "g" is stable
C) "r" is stable and "g" is stable
D) "r" is increasing and "g" is increasing at a slower rate

70) What security is taxed more favourably in Canada? 70)

A) Money market instrument B) Preferred share
C) Interest on bonds D) T-bill