Finance Final Exam

You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ________ quarter(s) of dividends when the next dividend is paid.

3

Which one of the following statements best defines the efficient market hypothesis?

All securities in an efficient market are zero net present value investments

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable

Which one of the following is the rate at which a stock's price is expected to appreciate?

Capital gains yield

Which one of the following relationships is stated correctly?

Decreasing the time to maturity increases the price of a discount bond, all else constant

Real rates are defined as nominal rates that have been adjusted for which of the following?

Inflation

The average compound return earned per year over a multiyear period is called the ___________ average return.

geometric

The current yield is defined as the annual interest on a bond divided by the:

market price

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar per share long into the future. Given this, one share of the firm's stock is:

priced the same as a $1 perpetuity

Inside information has the least value when financial markets are:

strong form efficient

The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?

50 percent plus one vote

Based on the period 1926-2019, the actual real return on large-company stocks has been around:

9 percent

Which one of the following is the price at which a dealer will sell a bond?

Asked price

Today, June 15th, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing the bond today?

Dirty price

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?

Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent anually thereafter

Assume a portfolio contains stocks of 25 different companies, and the weights of each are unequal. Also assume the various potential economic states have unequal liklihoods of occurring. Which of the following statements is accurate?

Given both the unequal weights of the securities and the economic states, and investor might be able to create a portfolio that has an expected deviation of zero.

Generally speaking, which of the following best correspond to a wide frequency distribution?

High standard deviation, large risk premium

Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information?

If cumulative voting applies, Ines is assured one seat on the board.

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Interest rate risk

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Liquidity

Which one of the following statements correctly applies to the period 1926-2019?

Long-term corporate bonds outperformed long-term government bonds.

Which bond would you generally expect to have the highest yield?

Long-term, taxable junk bond

Which one of the following statements related to market efficiency tends to be supported by current evidence?

Markets tend to respond quickly to new information.

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

Over-the-counter

Which one of the following transactions occurs in the primary market?

Purchase of newly issued stock from the issuer

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?

Real rate

Rate of appreciation =

Return on the common stock - Dividend yield

Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return?

Risk premium

Which one of the following categories of securities has the highest average annual return for the period 1926-2019?

Small-company stocks

Which of the following best defines the variance of an investment's annual returns over a number of years?

The average squared difference between the actual returns and the arithmetic average return

Whihc one of the following best defines the variance of an investment's annual returns over a number of years?

The average squared difference between the actual returns and the arithmetic average return

Buxbaum Corporation is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?

The bonds will sell at a premium if the market rate is 5.5 percent

Vanessa purchased a stock one year ago and sold it today for $3.15 per share more than her purchase price. She received a total of $2.60 per share in dividends. Which one of the following statements is correct in relation to this investment?

The capital gains yield is positive

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.

The information was expected

A premium bond that pays $60 in interest matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?

The yield to maturity is less than the coupon rate.

Which one of the following statements is a correct reflection of the U.S. financial markets for the period 1926-2019?

U.S. Treasury bulls has an annual return in excess of 10 percent in 3 or more years.

Johnathan has researched Tejeda Tech and believes the firm is poised to vastly increase in value. He has decided to purchase Tejeda Tec bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish?

Warrant

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

Weak

Assume the current market price of a bond exceeds its par value. Which one of these equations applies?

Yield to maturity < Coupon rate

Assume a stock experiences an actual return that is above the security market line. An analyst can safely conclude that the sock has:

a higher return than expected for the level of risk assumed

When using economic probabilities to compute the expected return on a stock, the result is:

a mathematical expectation based on a weighted average and not a guaranteed outcome

A note is generally defined as:

an unsecured bond with an initial maturity of 10 years or less

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

broker

The ______________ explains the relationship between the expected return on a security and the level of that security's systematic risk.

capital asset pricing model

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:

credit risk

Evidence seems to support the view that studying public information to identify mispriced stocks is:

ineffective

The market risk premium equals the:

market rate of return minus the risk-free rate of return

A deferred call provision:

prohibits the bond issuer from redeeming callable bonds prior to a specified date.

The security market line intercepts the vertical axis at the:

risk-free rate

If a poorly-diversified portfolio becomes well diversified, we would expect the portfolio's:

standard deviation to decrease