Financial Management MSU Exam 3

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

A discount; less than

Which one of the following is the best example of a diversifiable risk?

A firm's sales decrease

A stock with an actual return that lies above the security market line has:

A higher return than expected for the level of risk assumed

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

A purchase of newly issues stock from AT&T

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

Capital gains yield

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?

Comparable real rate

Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?

Coupon

An agent who maintains an inventory from which he or she buys and sells securities is called a:

Dealer

Today, Hannah paid a total of $1,176, including accrued interest, to purchase a 20-year bond that has 6 years left until maturity. This price is referred to as the:

Dirty price

An increase in what will increase the current value of a stock according to the dividend growth model?

Dividend amount, number of future dividends (provided the current number is less than infinite), dividend growth rate.

A sinking fund is managed by a trustee for which one of the following purposes?

Early bond redemption

Which one of the following statements is correct concerning unsystematic risk?

Eliminating unsystematic risk is the responsibility of the individual investor.

To convince investors to accept greater volatility, you must:

Increase risk premium

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

Inflation

Which one of the following is represented by the slope of the security market line?

Market risk premium

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Market value of the investment in each stock.

The second market is best defined by which one of the following?

Market where outstanding shares of stocks are resold

The expected return on a portfolio considers which of the following factors?

Percentage of the portfolio invested in each individual security, projected states of the economy, the performance of each security given various economic states, probability of occurrence for each state of the economy.

Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets?

Primary

Ernst & Frank stock is listed on Nasdaq. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

Primary

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?

Security market line

Total risk is measured by _____ and systematic risk is measured by _____.

Standard deviation; beta

Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium?

Stock with a beta of 1.24

Which one of the following is the electronic system used by the NYSE for directly transmitting orders to specialists?

SuperDOT

Which of the following is a risk that applies to most securities?

Systematic

Assume a firm employs debt in its capital structure. Which of the following statements is accurate?

The WACC would most likely decrease if the firm replaced its preferred stock with debt.

Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid 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.

Which of the following statements is correct?

The greater the volatility of returns, the greater the risk premium.

An indenture is:

The legal agreement between the bond issuer and the bondholders.

Assume you are an analyst monitoring Okello stock. Which one of the following would be reflected in Okello's expected return?

This morning Okello confirmed that, as expected, the CFO is retiring at the end of the year.

Standard deviation measures which type of risk?

Total

A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent. What type of risk does this news flash represent?

Unsystematic

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by proxy

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?

Yield to Maturity

A bond that has only one payment, which occurs at maturity, defines which one of the following?

Zero Coupon

Bonds issues by the U.S. government:

are considered to be free of default risk

The return earned in an average year over a multi-year period is called the ____ average return.

arithmetic

Velasquez Manufacturing has two vastly different lines of business: Alpha and Omega. The Alpha line is the riskiest of the two, and accounts for 72 percent of the firm's sales. When deciding which project proposals should be accepted, the managers should:

assign appropriate, but differing, discount rates to each business line and then select the projects with the highest net present values.

The subjective approach to project analysis:

assigns discount rates to projects based on the discretion of the senior managers of a firm.

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

beta

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

broker

The standard deviation of a portfolio:

can be less than the standard deviation of the least risky security in the portfolio.

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):

commission broker

Which one of the following is an example of unsystematic risk?

consumer spending on entertainment decreased nationally

The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond?

decrease the market price

Which one of the following is computed by dividing next year's annual dividend by the current stock price?

dividend yield

Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market?

efficient capital market

The primary purpose of portfolio diversification is to:

eliminate asset-specific risk.

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?

expected return

An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a:

floor trader

The average compound return earned per year over a year multi-year period is called the ____ average return

geometric

Incorporating flotation costs into the analysis of a project will:

increase the initial cash outflow of the project.

A "fallen angel" is a bond that moved from:

investment grade to speculative grade

Which one of the following is an example of a systematic risk?

investors panic causing security prices around the globe to fall precipitously

According to theory, studying historical stock price movements to identify mispriced stocks:

is ineffective even when the market is only weak form efficient

Individuals who continually monitor the financial markets seeking misprices securities:

make the markets increasingly more efficient.

Given a well-diversified stock portfolio, the variance of the portfolio:

may be less than the variance of the least risky stock in the portfolio.

The owner of one of the 1,366 trading licenses for the NYSE is called a:

member

Interest rates that include an inflation premium are referred to as:

nominal rates

Municipal bonds:

pay interest that is federally tax-free

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

portfolio weight

The counter area on the floor of the NYSE where a specialist operates is called a:

post

The items in an indenture that limit actions of the issuer in order to protect a bondholder's interests are referred to as the:

protective covenants

The weighted average cost of capital for a firm may be dependent upon the firm's:

rate of growth, debt-equity ratio, preferred dividend payment, retention ratio

The weighted average cost of capital for a firm is the:

rate of return a firm must earn on its existing assets to maintain the current value of its stock.

The cost of preferred stock is equivalent to the:

rate of return on a perpetuity.

The excess return is computed as the:

return on a risky security minus the risk-free rate.

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?

reward-to-risk ratio

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?

risk premium

The expected risk premium on a stock is equal to the expected return on the stock minus the:

risk-free rate

For any given capital project proposal, the discount rate should be based on the:

risks associated with the use of the funds required by the project.

A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a:

specialist

The U.S Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than ____ form efficient.

strong

Inside information has the least value when financial markets are:

strong form efficient

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

systematic risk principle

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information.

The intercept point of the security market line is the rate of return which corresponds to:

the risk-free rate

The discount rate assigned to an individual project should be based on:

the risks associated with the use of the funds required by the project

The flotation cost for a company is computed as:

the weighted average of the flotation costs associated with each form of financing.

Standard deviation is a measure of which of the following?

volatility

Flotation costs for a levered firm should be:

weighted and included in the initial cash flow.