Question 1

1.  For this question,assume taxes, depreciation and amortization are always equal to zero. Consideran all‐equity firm with market capitalization equal to $10,000,earnings equal $600 per year, and with zero cash.

a.  What are the P/Eand EV/EBITDA of the firm?

The firm then decides to change its capital structure. It takes on $6,000 ofdebt and use all debt proceeds to buy back its own stock. The new debt is aperpetuity with interest rate equal to 3% per year.

b.  What are the P/Eand EV/EBITDA of the firm after the capital structure change?

c. Based on your answers to a) and b), explain why, compared to P/Eratios, EV/EBITDA is a conceptually superior

valuation ratio.

Question 2

1.  When defining theRussell 3000 Value and the Russell 3000 Growth (or Glamour) indices, Russellseparate stocks according to Price to Book Ratios only. In contrast, whendefining the S&P 1500 Value and S&P 1500 Growth (or Glamour) indices,S&P uses a combination of P/B, P/E and P/Sales. Discuss which approach issuperior in terms of capturing the outperformance of Value over Growth (orGlamour).

Question 3

1.  Choose one signalfrom each of the following classes of signals: Value, Quality, Risk, PriceTrends, and Information. For each signal, explain:

a.  How is the signalcalculated? Explain precisely what youcalculate in each case

b.  Which directiondoes it go? (I.e., high signal means low or high stock returns going forward?)

c. Provide one potential explanationfor why the signal is able to forecast relative stock returns.

Question 4

1.  In a meeting of aninvestment fund, Andrew is pitching stock ABC, while Ximena is pitching stockXYZ. 

To support his pitch, Andrew mentions that most sell‐side analystscovering ABC have "strong buy" recommendations, while most sell‐side analystscovering XYZ have "hold" recommendations. Both stocks are part of theS&P1500 index. Does Andrew have a good point? Make sure to support youranswer using output from Portfolio123.

Hint: How would you use Portfolio123 to verify whether analystrecommendations can forecast relative stock returns?

Question 5

1.  Backtest theperformance of the UM Super Combo ranking system over MAX time period usingthree Universes: S&P 500, Russell 3000, and ALL FUNDAMENTALS. Use thefollowing parameters: All Sectors, Minimum Price=3$, rebalancing every 4 weeks,10 buckets.

a.  Copy paste the bargraphs with annualized returns.

b.  Explain as well asyou can the calculations P123 does to generate the graphs above.

c. In which of the Universes does the UM Super Combo ranking system"work" best? TO measure how well it works, consider the spreadbetween the extreme buckets, and the smoothness (monotonicity) across buckets.

d.  Can you rationalizethe results in c?