### Define the efficient markets hypothesis.

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Question 1:

(Financial Statement Analysis)

Consider the following sets of financial statements and answer the questions that follow:

a. Which firm is the most liquid? Why? (Justify your answer with at least two ratios).

b. Which firm is the most profitable? Why? (Justify your answer with at least two ratios).

c. Construct a Du Pont equation (use the extended, or modified version shown in the Week 1, chapters 2 & 3 lesson notes) for each firm and comment on the sources of each firm's ROE as revealed by the equation.

Question 2:

(Time Value of Money - Monthly Loan Payments)

Best Buy has a 65" 4K Ultra HD TV on sale for \$1,999.99. If you could borrow that amount from First National Bank of St Louis at 4% for 1 year, what would be your monthly loan payments?

Question 3:

(Time Value of Money - Present Value)

You have figured out that you will need \$800,000 to finance your child's college education when she turns 18, which will be 16 years from now, so you decide to invest in zero-coupon bonds, which will mature in 16 years and will pay off \$800,000 at maturity. How much would you have to invest in zero-coupon bonds today to reach your goal, assuming the going rate on such bonds is currently 3.5% per year?

Question 4:

(Risk & Return)

You hold a portfolio of stocks consisting of the following:

Stock Beta Current Value

Caterpillar 0.6 \$20,000
CitiCorp 0.8 \$21,000
Wendy's 1.0 \$22,000
Boeing... 1.2 \$27,000
Total: \$90,000

a. What is the beta of the portfolio?

b. You have decided to sell Boeing for \$27,000 and to use the proceeds to buy \$27,000 of Nike stock with a beta of 1.4. After the transaction is complete, what will be the new beta of the portfolio? (Disregard any commissions on the buy and sell transactions.)

Question 5:

(Risk & Return)

a. Define the Capital Asset Pricing Model.

b. Explain what a stock's "beta" is.

c. If the risk-free rate is 1% and the expected rate of return on the stock market is 9%, what is the required rate of return per the CAPM for a stock that has a beta of 1.3?

Question 6:

(Bond valuation)

a. Curley's Company's bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a \$1,000 par value, and the coupon interest rate is 4%. The bonds have a yield to maturity (YTM) of 5%. Given these conditions, what should be the current price of these bonds?

b. Larry's Company's bonds have 8 years remaining to maturity. Interest is paid annually, the bonds have a \$1,000 par value, and the coupon interest rate is 4%. The bonds have a current market price of \$890. Given these conditions, what should be the yield to maturity (YTM) of these bonds?

Question 7: (Stock Valuation)

a. Define the Efficient Markets Hypothesis.

b. Financial theorists generally define three forms of market efficiency: the weak-form, the semi-strong-form, and the strong-form. Explain these three forms.

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