Adv. Corp. Fin Ch. 10 Smartbook Aid 2

You want to design a portfolio that has a beta of zero. Stock A has a beta of 1.69 and Stock B's beta is also greater than 1. You are willing to include both stocks as well as a risk-free security in your portfolio. If your portfolio will have a combined value of $5,000, how much should you invest in Stock B?

$0 Your entire portfolio should be invested in risk-free securities to obtain a portfolio beta of zero.

Historically in the U.S., corporate bonds have generally been issued with a par value of:

$1,000.

Ch. 10. If you buy 40 shares of BP stock at $35 per share, your total investment in BP is ___. $1,350 $1,400 $1,540 $1,450

$1,400 40*35=1400

Ch. 11 Stock A has a beta of 1.2, Stock B's beta is 1.46, and Stock C's beta is .72. If you invest $2,000 in Stock A, $3,000 in Stock B, and $5,000 in Stock C, what will be the beta of your portfolio? 1.008 1.014 1.038 1.067 1.127

1.038 ValueP = $2,000 + 3,000 + 5,000 ValueP = $10,000 βP = ($2,000/$10,000)(1.20) + ($3,000/$10,000)(1.46) + ($5,000/$10,000)(.72) βP = 1.038

Ch. 10 Today, you sold 300 shares of SLG stock and realized a total return of 12.5 percent. You purchased the shares one year ago at a price of $27.43 a share. You have received a total of $192 in dividends. What is your capital gains yield on this investment? 14.80 percent 9.39 percent 6.67 percent 10.17 percent 11.67 percent

10.17 percent g = .125 − [($192/300)/$27.43] g = .1017, or 10.17%

Ch. 11 What is the expected return of a portfolio consisting of stocks A and B if the expected return is 10 percent for A and 15 percent for B? Assume you are equally invested in both the stocks. 10% 15% 12.5% 25%

12.5% Rationale: .5 × 10% + .5 × 15% = 12.5%

Ch. 11 You recently purchased a stock that is expected to earn 12.6 percent in a booming economy, 8.9 percent in a normal economy, and lose 5.2 percent in a recessionary economy. Each economic state is equally likely to occur. What is your expected rate of return on this stock? 6.47 percent 8.90 percent 5.43 percent 7.65 percent 7.01 percent

5.43 percent E(R) = [.126 + .089 + (−.052)]/3 E(R) = .0543, or 5.43%

Angelo has decided to invest $24,500 in a portfolio with an expected return of 9.8 percent and invest $10,000 in a risk-free asset that he expects to return 3.6 percent. What rate of return is he expecting on this portfolio?

8.00 percent E(RP) = [$24,500/($24,500 + 10,000)](.098) + [$10,000/($24,500 + 10,000)](.036) E(RP) = .0800, or 8.00%

Ch. 10 Soo Lee owns a stock that has had annual returns of 11.6 percent, 9.3 percent, −22.8 percent, and 34.6 percent over the last four-year period. What is his arithmetic mean return on this investment? 7.94 percent 19.58 percent 14.62 percent 11.47 percent 8.18 percent

8.18 percent Mean = [.116 + .093 + (−.228) + .346]/4 Mean = .0818, or 8.18%

Ch. 13 Which of the following is true? A company can deduct dividends paid to shareholders when computing taxable income. A company cannot deduct interest paid on debt when computing taxable income. A company can deduct interest paid on debt up to 30% of EBIT when computing taxable income.

A company can deduct interest paid on debt up to 30% of EBIT when computing taxable income.

Ch. 13 Select all that apply Which of the following are true? Book values are often similar to market values for equity. Ideally, we should use book values in the WACC. Book values are often similar to market values for debt. Ideally, we should use market values in the WACC.

Book values are often similar to market values for debt. Ideally, we should use market values in the WACC.

What is the commonly used term for an unsecured bond? Bonds Stocks Mortgage securities Debenture

Debenture

What is the most common type of bond issued by US industrial companies? Secured debt Collateral debt Debentures Equity

Debentures

Debentures commonly pledge which type of property as security? Securities owned by the corporation Land owned by the corporation Buildings owned by the corporation Debentures do not pledge specific properties

Debentures do not pledge specific properties

Which one of the following statements is true? Bondholders are generally granted voting rights equal to those of common shareholders. Payments of both interest and dividends are tax-deductible as business expenses. Unpaid common stock dividends can force a firm into liquidation. Debt increases the possibility of financial distress. Debt holders have a residual claim on a firm's assets.

Debt increases the possibility of financial distress.

Ch. 10. What are some important lessons from the 2008 financial crisis? The risk premium going forward will probably be lower. Investors should invest all of their funds in T-bills. Diversification is important. The stock market is risky.

Diversification is important. The stock market is risky.

The ________ discount model requires estimation of the dividend yield and _____ rate.

Dividend Growth

Which one of these statements correctly applies to either a leveraged or an unleveraged syndicated loan? The loan will always be rated as investment grade. The loan may not be publicly traded. The loan arranger is not involved with the actual lending. Each bank that participates negotiates the terms for its portion of the overall loan. Each bank has its own loan agreement with the borrowers.

Each bank has its own loan agreement with the borrowers.

What does "one share, one vote" mean? Each share is entitled to one vote. Each shareholder is entitled to one vote.

Each share is entitled to one vote.

Select all that apply Which of the following are examples of collateral? Equipment Common stock A bank loan Building

Equipment Common stock Building

Ch. 13 True or false: If a firm stays in the same industry, its beta will never change. True False

False

True or false: Common stockholders receive special preference in receiving dividends. True False

False

True or false: The book value of common stock is based on the current trading price while the market value of common stock is based on the issue price at the time of an IPO. True False

False

True or false: Throwing darts at the financial pages to construct a portfolio is not be a good strategy because professional security analysts always outperform dart portfolios. True False

False

Ch. 10. True or false: The average return on the stock market can be used to find ways to beat the market. True False

False True Rationale: The average return on the stock market can be used to compare stock returns with the returns on other securities

Ch. 13 True or false: Projects should always be discounted at the firm's overall cost of capital. True False

False Rationale: Projects' discount rates should reflect their particular level of risk.

The par value of a bond is almost always higher than the face value. True False

False Rationale: The par value of a bond is almost always the same as the face value.

Select all that apply Which of the following could be mortgaged? Land Common stock Building Equipment

Land Building Equipment

Ch. 14 Which of the following is true about the IPO market? Large initial losses in stock prices often occur. Usually no changes in price occur with IPOs. Large initial gains in stock prices often occur.

Large initial gains in stock prices often occur.

Ch. 13 Select all that apply Which of the following are factors that affect beta? Operating leverage Changes in the market risk premium Financial leverage The cyclical nature of revenues

Operating leverage Financial leverage The cyclical nature of revenues

Ch. 10. The mean return and the standard deviation of returns can be used to describe the distribution of stock ______

Returns

_______ indicates preference in position over other lenders. Plurality Subordination Majority Seniority

Seniority

Which one of the following statements is true? Highly positive serial correlations are indicators of market efficiency . Abnormal returns limited to the announcement date are indicators of market inefficiency. Market studies indicate that stock markets are only weak form efficient. Studies seem to indicate stock markets are semistrong but not strong form efficient. Mutual funds provide little, if any, benefit to investors.

Studies seem to indicate stock markets are semistrong but not strong form efficient.

Which one of these is a positive covenant? The firm must maintain a current ratio of 1.2 or better. The firm will not issue any debt with higher seniority. The firm cannot be acquired in a friendly takeover. No dividend increases will be allowed. The market debt-equity ratio cannot exceed .60.

The firm must maintain a current ratio of 1.2 or better.

The opponents of efficient market theory point out the large number of ______ cannot simply be attributed to chance alone. markets high priced stocks market theories anomalies

anomalies

A deed of trust is also known as a: corporate constitution compensation contract bond indenture writ of habeas corpus

bond indenture

A financial deficit is generally made up through ______ financing. government internal creative external

external

For a levered firm the equity beta is _____ the asset beta. greater than less than equal to sometimes greater than and sometimes less than unrelated to

greater than

It is not uncommon for IPOs to ______ experience large gains. never initially eventually

initially

A security that is fairly priced will have a return that plots _____ the security market line.

on

Ch. 13 Dividends and capital gains given to the new shareholders represent ______ to the shareholders. returns costs cash inflows nothing

returns

An investor discovers that for a certain group of stocks, large positive price changes are always followed by large negative price changes. This finding is a violation of the ___ form of the efficient market hypothesis. moderate semistrong strong weak historical

weak

Ch. 10. What will the dividend income be on 1,000 shares of XYZ stock if XYZ distributes a $.20 per share dividend? $200 $2 $2,000 $20

$200 1000*.2=200

Ch. 10. If you receive a $2 dividend per share on your 100 shares, your total dividend income is ____. $10 $100 $20 $200

$200 2 * 100 = 200

Ch. 10 One year ago, you purchased a stock at a price of $32.50. The stock pays quarterly dividends of $.40 per share. Today, the stock is worth $34.60 per share. What is the total dollar return per share to date from this investment? $3.40 $3.70 $2.10 $2.50 $3.80

$3.70 Total dollar return = $34.60 − 32.50 + $.40(4) Total dollar return = $3.70

Ch. 13 A firm raises $1,000,000 in equity with flotation costs of 5%. How much will it pay in flotation costs? $55,500 $50,000 $55,000 $47,500

$50,000

Ch. 13 A firm needs to sell enough equity to raise $950,000 after covering the flotation costs of 5 percent. How much will it pay in flotation costs?

$50,000. Needs to raise $1mil and then pay flotation cost to arrive at $950,000

Ch. 10. The price of XYZ stock rises from $10 to $15. If you own 100 shares, your capital gain is ___. $500 $10 $5 $100

$500 (15-10)*100 = 500

Ch. 11 The range of possible correlations between two securities is defined as: 0 to +1. 0 to −1. ≧ 0. ≦ 1. +1 to −1.

+1 to −1.

Ch. 10. If the risk premium of stock MNO is 10 percent and the standard deviation is 40 percent, what is the Sharpe ratio? .40 .25 .30 4.00

.25 .1 * .4 = .25

Ch. 11 If a security's expected return is equal to the expected return on the market, its beta must be ____. 2 -1 1 0

1 Rationale: If a security's expected return is equal to the expected return on the market, its beta must be 1, because the expected return is equal to the risk-free rate + beta X the risk premium on the market.

If a company can issue 4% tax-exempt industrial bonds as opposed to regular 10% bonds, the savings per period should be discounted at ______%. 12 4 6 10

10 Rationale: 10% is the opportunity cost.

The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6 percent and the market risk premium is 9 percent. What is the expected rate of return?

16.47 percent E(R) = .036 + 1.43(.09) E(R) = .1647, or 16.47%

Ch. 10 You invested in long-term corporate bonds and earned 6.8 percent. During that same time period, large-company stocks returned 12.6 percent, long-term government bonds returned 6.4 percent, U.S. Treasury bills returned 4.2 percent, and inflation averaged 3.8 percent. What excess return did you earn? 2.6 percent 2.3 percent 1.3 percent .4 percent 3.0 percent

2.6 percent Excess return = 6.8% − 4.2 Excess return = 2.6%

Ch. 10. Long-term corporate bonds is a portfolio of high-quality corporate bonds with _____ -year maturities.

20

Ch. 10. In the Ibbotson study, long-term corporate bonds is a portfolio of high-quality corporate bonds with a maturity of: less than 10 years 20 years 30 years

20 years

There are five seats on the board of directors of Atlas Corp. up for election. The firm has 120,000 shares of stock outstanding and uses cumulative voting. Each share is granted one vote per open seat. How many shares must you control if you want to guarantee your election to the board assuming no one else votes for you?

20,001 Shares needed = [1/(5 + 1)](120,000) + 1 Shares needed = 20,001

Ch. 11 Which one of the following is generally thought of as a risk-free security? Corporate bond Municipal bond 3-month Treasury bill Common stock

3-month Treasury bill

Ch. 11 RTF stock is expected to return 10.6 percent if the economy booms and only 4.2 percent if the economy goes into a recessionary period. The probability of a boom is 55 percent while the probability of a recession is 45 percent. What is the standard deviation of the returns on RTF stock? 4.03 percent 2.97 percent 3.18 percent 3.69 percent 5.27 percent

3.18 percent E(R) = .55(.106) + .45(.042) E(R) = .0772 σ = [.55(.106 − .0772)^2 + .45(.042 − .0772)^2]^.5 σ = .0318, or 3.18%

Ch. 10 You purchased 300 shares of stock at a price of $21.72 per share. Over the last year, you have received total dividend income of $210. What is the dividend yield? 3.06 percent 3.22 percent 3.17 percent 2.92 percent 2.94 percent

3.22 percent Dividend yield = ($210/300)/$21.72 Dividend yield = .0322, or 3.22%

Ch. 11 A portfolio consists of Stocks A and B and has an expected return of 11.6 percent. Stock A has an expected return of 17.8 percent while Stock B is expected to return 8.4 percent. What is the portfolio weight of Stock A? 29.87 percent 61.98 percent 32.58 percent 34.04 percent 67.42 percent

34.04 percent E(Rp) = .116 = .178A + .084(1 − A) A = .3404, or 34.04%

Ch. 10. What is the arithmetic average return for a stock that had annual returns of 8%, 2% and 11% for the past 3 years? 6% 7% 5% 8%

7% (.08+.02+.11)/3=.07

Ch. 10. Going back to 1900, the U.S. historical equity risk premium is, on average ___ percent, 4.3 7.2 6.8 9.4

7.2

The Shoe Box pays an annual dividend of $3.80 on its preferred stock. What is the cost of preferred if the stock currently sells for $42.70 a share and the tax rate is 21 percent? 7.94 percent 11.87 percent 6.68 percent 9.39 percent 8.90 percent

8.90 percent RP = $3.80/$42.70 RP = .0890, or 8.90%

Select all that apply What types of information affect the rates at which stock prices adjust to new information? All information No information Past information Publicly available information

All information Past information Publicly available information

Which characteristic does not apply to Eurobonds? Commonly traded from London Always denominated in euros Always denominated in a single currency Generally denominated in the issuer's home currency Issued in multiple countries

Always denominated in euros

Ch. 13 Select all that apply What do we know about the stability of a firm's beta? Betas do not change over time. Betas are more likely to be stable if the firm remains in the same industry. Betas are more likely to change if the firm remains in the same industry. Betas can change over time.

Betas are more likely to be stable if the firm remains in the same industry. Betas can change over time.

Ch. 13 For both academics and practitioners, the pendulum has swung over to the _______ for estimating the cost of equity capital. LMN CAPM retention ratio DDM

CAPM Rationale: Fewer than 1/6 of companies prefer the DDM, and academics also favor the CAPM.

Select all that apply What are some differences in the income received by common stockholders and the income received by bondholders? Common stock pays dividends while bonds pay interest. Both dividends and interest income are guaranteed as long as the corporation is generating sufficient income. Dividends are not based on the par value of stock, but interest is generally based on a bond's par value. Dividends are not fixed, but interest is generally a fixed dollar amount.

Common stock pays dividends while bonds pay interest. Dividends are not based on the par value of stock, but interest is generally based on a bond's par value. Dividends are not fixed, but interest is generally a fixed dollar amount.

Ch. 11 Which one of these is a measure of the interrelationship between two securities? Covariance Duration Standard deviation Alpha Variance

Covariance

Select all that apply In what ways can a firm create value with its capital budgeting decisions? Copy what other firms do Create a barrier to competition Focus on market share at all costs Locate an unsatisfied demand

Create a barrier to competition Locate an unsatisfied demand

Select all that apply Which of the following are ways to create valuable financing opportunities? Rely more on debt than equity Create a new type of security Sell more preferred stock Reduce costs or increase subsidies

Create a new type of security Reduce costs or increase subsidies

ABC owns 15 percent of XYZ Corporation. What tax benefit does ABC derive from this situation? ABC receives no tax benefit but XYZ is only taxed on 30 percent of its net income. ABC benefits because it is able to treat any XYZ dividends it receives as interest income. Fifty percent of the dividends paid by XYZ to ABC is exempt from income taxes. ABC can exclude 30 percent of any XYZ dividends received from its taxable income. All dividend income ABC receives from XYZ is tax-exempt.

Fifty percent of the dividends paid by XYZ to ABC is exempt from income taxes.

Which one of these is not a right generally granted to shareholders? Right to elect individuals to the board of directors Right to purchase shares of any new stock issue Right to receive proportional dividends Right to vote to approve or reject a merger offer First right to liquidation proceeds

First right to liquidation proceeds

Ch. 13 Select all that apply Which of the following are true? Variable costs never change. Fixed costs do not change as quantity changes. Fixed costs never change. Variable costs change with changes in quantity.

Fixed costs do not change as quantity changes. Variable costs change with changes in quantity.

Ch. 10. A ______ distribution of stock returns plots the frequency of occurrence for various ranges of return.

Frequency

Ch. 10. In the ______ and _____ study, the large-company common stock portfolio is based on the Standard & Poor's Composite Index.

Ibbotson, Sinquefield

Select all that apply Which of the following are true regarding the face value of a bond? It is the value stated on a bond certificate. It is the market value of the bond. It is the IPO value of a bond. It is the principal value of the bond.

It is the value stated on a bond certificate. It is the principal value of the bond.

Select all that apply What is the impact of fraud on security prices? Security prices will never be restored to equilibrium level. It will distort prices in the short-run. Security prices are not affected by fraudulent data. Security prices will likely revert to equilibrium once the fraud is discovered

It will distort prices in the short-run. Security prices will likely revert to equilibrium once the fraud is discovered

Ch. 11 Portfolios A and B have an expected return of 10%. Portfolio A has a standard deviation of 6% while Portfolio B has a standard deviation of 13%. Which portfolio would a rational investor choose? Portfolio A Portfolio B Either portfolio A or B since they both offer the same expected return. Neither Portfolio A nor B since they are both risky

Portfolio A

Which group has the ultimate control over a corporation? Bondholders Classified board Shareholders Directors Chief executive officer

Shareholders

Ch. 13 Select all that apply The ____ of the characteristic line of a stock's returns versus those of the market measures the stock's systematic risk. slope length width beta

Slope beta

The behavioral view holds that ______ investors are irrational. all some few no

Some

Ch. 10. In the Ibbotson study, the large-company common stock portfolio is based on the ____. sample of the smallest United State companies by market cap. Dow Jones Industrial Average by price value Standard & Poor's Composite Index Wilshire 5000 index

Standard & Poor's Composite Index

Select all that apply Which of the following are reasons why corporate treasurers prefer the use of book values when measuring debt ratios? Stock markets are very volatile. Book values lead to more desirable debt ratios. Credit rating firms use book values. Bond covenant restrictions are based on book values.

Stock markets are very volatile. Credit rating firms use book values. Bond covenant restrictions are based on book values.

Ch. 10. Select all that apply The Ibbotson SBBI data shows that ___. T-bills had the lowest risk or variability long-term corporate bonds had less risk or variability than stocks inflation was always higher than the U.S. T-bill yield large-company stocks had higher returns than small-company stocks

T-bills had the lowest risk or variability long-term corporate bonds had less risk or variability than stocks inflation was always higher than the U.S. T-bill yield Rationale: Inflation was sometimes higher than T-bill rates, but not usually. large-company stocks had higher returns than small-company stocks Rationale: Small company stocks had the highest returns.

Ch. 10. Which of the following are characteristics of a skewed distribution? The distribution is not symmetrical The distribution can be skewed to the right or left The distribution is symmetrical The mean is not equal to the median

The distribution is not symmetrical The distribution can be skewed to the right or left The mean is not equal to the median

Ch. 13 According to the CAPM, what is the expected return on a stock if its beta is equal to zero? Zero The return on the market minus the risk-free rate The market-risk premium The risk-free rate

The risk-free rate

Ch. 11 What do covariance and correlation measure? Covariance measures the mean and correlation measures the standard deviation of two random variables. They both measure how two random variables are related. They both measure the mean of two random variables They both measure the standard deviation of two random variables.

They both measure how two random variables are related.

Ch. 10. Select all that apply The rates of return in the Ibbotson SBBI yearbook are not adjusted for which of the following? Bond coupons Transactions costs Dividends Taxes

Transactions costs Taxes

True or false: Arbitrage is more risky than it appears at first glance. True False

True Rationale: If the arbitraged securities move the "wrong" way, arbitragers can take huge losses.

Ch. 11 True or false: According to CAPM, if the historical market risk premium is negative, we cannot justify a positive relationship between a security's expected return and its beta. True False

True Rationale: The market-risk premium is the slope of the CAPM equation. Thus, if the market risk premium is negative, there is a negative relationship between expected return and beta.

Ch. 13 Which one of the following is true? Under U.S. tax law, all company interest payments are taxable to the company. Under international tax law, all company interest payments are tax deductible. Under international tax law, all company interest payments are taxable to the company. Under U.S. tax law, a corporation's interest payments up to 30% of EBIT are tax deductible.

Under U.S. tax law, a corporation's interest payments up to 30% of EBIT are tax deductible.

Different classes of stock usually are issued to: allow a certain group to maintain ownership control while reducing that group's equity position. reduce the firm's dividend obligation. fool investors. extract perquisites from one class of shareholders without the other class of shareholders knowing. distinguish the time periods in which the various shares were issued.

allow a certain group to maintain ownership control while reducing that group's equity position.

If you can beat the market by _____ then you are violating weak form efficiency. using your intuition analyzing balance sheets analyzing historical price patterns utilizing insider information

analyzing historical price patterns

Ch. 13 Flotation costs are costs incurred to ____. insure the payment due to bondholders keep a firm in business obtain a bank loan bring new security issues to the market

bring new security issues to the market

Beating the market ______ would illustrate a violation of semistrong form efficiency. with intuition by analyzing financial statements with insider information

by analyzing financial statements

If there is a deferred call provision, whereby the corporation is prohibited from recalling the bonds, the bonds are said to be: call constrained call protected call anchored call deferred

call protected

Ch. 10. Select all that apply The excess rate of return ____. can occasionally be negative can never be negative for more than a 1-year period is generally positive over the long-term

can occasionally be negative is generally positive over the long-term

Serial ________ is the relationship between the current return on a security and the return on the same security over a later period. bias correlation appreciation variance

correlation

Ch. 11 When expressing covariance between two securities, the ordering of variables: does not matter is important whichever security has a higher variance should come first

does not matter

Ch. 13 A cyclical firm is one in which revenues go ______ in the contraction phase of the business cycle. down sideways up all over

down

The purpose of event studies is to test whether or not stock markets are ______. abnormal resilient fungible efficient

efficient

Warrants will be less valuable if the stock prices are _____. rising falling random

falling

Ch. 13 The issuance costs of bonds and stocks are referred to as ______ costs. reparation sunk flotation market

flotation

Ch. 13 An important advantage to a firm raising equity internally is not having to pay ___. flotation costs capital gains dividends coupons

flotation costs

Ch. 10 The average compound return earned per year over a multi-year period is called the _____ average return. arithmetic standard variant geometric real

geometric

Comparing two otherwise equivalent firms, the beta of the common stock of the levered firm is _____ the beta of the common stock of the unlevered firm. roughly equivalent to significantly less than slightly less than greater than equal to

greater than

Ch. 13 Select all that apply To apply the dividend discount model to a particular stock, you need to estimate the ___. risk-free rate growth rate stock's beta dividend yield

growth rate dividend yield

Ch. 13 When valuing a complete business enterprise, the same process that is used for individual projects can be used. However, the analysis is complicated because a _________ must be used, and a terminal firm value must be determined. mutation population duration horizon

horizon

If company managers believe interest rates will rise, they have a(n) _________ to borrow long term. incentive disincentive obligation disinclination

incentive

The use of leverage: increases both the asset and the equity betas. decreases both the asset and the equity betas. decreases the equity beta and increases the asset beta. increases the equity beta but does not affect the asset beta. decreases the equity beta but does not affect the asset beta.

increases the equity beta but does not affect the asset beta.

If managers who want to issue equity believe the company's stock is overpriced, they are likely to ___. issue equity immediately issue debt immediately wait until the stock is underpriced to issue equity do nothing at all

issue equity immediately

Ch. 13 The industry beta may be a better estimate than the firm's own beta due to the ______ standard error of the firm estimate. larger smaller

larger

Financial economists prefer the use of ______ values when measuring debt ratios. market historical book

market

According to the efficient markets hypothesis, the timing of a new equity issue is ______ important. somewhat very not

not

Weak form efficiency considers trading strategies that use information based solely on ______ stock prices. past current future

past

Investors who jump into a hot market believing that the high returns will continue for an even longer period are said to exhibit ______. wisdom conservatism representativeness foresight

representativeness

The investor trait of ______ occurs when investors draw conclusions from insufficient data. rationality bias representativeness conservatism

representativeness

A sinking fund is used to: retire equity buy debt buy equity retire debt

retire debt

Mortgage securities are: used to obtain mortgage loans secured by mortgage on the real property of the lender insured by FDIC secured by a mortgage on the real property of the borrower

secured by a mortgage on the real property of the borrower

Ch. 10. Select all that apply The Ibbotson SBBI data presents returns from 1948 to the recent past for ___. high-yield bonds small-company stocks large-company stocks U.S. Treasury bills municipal bonds

small-company stocks large-company stocks U.S. Treasury bills

Ch. 10. The standard deviation is the ______ of the variance. square root exponent square inverse

square root

If you beat the market with inside information, you have violated the concept of ________ form efficiency. weak regressive strong semi-strong

strong

The evidence clearly does not support the existence of ______ form efficiency in the stock market. semistrong strong weak

strong

Insider trading does not offer any advantages if the financial markets are: weak form efficient. semiweak form efficient. semistrong form efficient. strong form efficient. inefficient.

strong form efficient.

Event studies of dividend omissions indicate that:

the cumulative abnormal return declines on the day prior to and the day of the announcement.

The studies conducted by Fama and French show that:

value stocks have higher average returns than growth stocks around the world.

Ch. 10. The price of a stock drops from $50 to $40 per share. If you own 50 shares, your total capital loss is ___. $40 $50 $400 $500

$500 (40-50)*100 = 500

Ch. 10 Winslow, Inc., stock is currently selling for $40 a share. The stock has a dividend yield of 3.8 percent. How much dividend income will you receive per year if you purchase 600 shares of this stock? $152 $790 $329 $912 $1,053

$912 Div = $40(.038)(600) Div = $912

Ch. 10. If the risk premium of stock JKL is 5 percent while the standard deviation is 10 percent, then the Sharpe ratio equals ______. 2 .5 1.0 .75

.5 .05/.1=.5

Barges has an asset beta of .57, the risk-free rate is 4.3 percent, and the market risk premium is 7.7 percent. What is the equity beta if the firm has a debt-equity ratio of .56? .46 .89 .74 .37 .32

.89 βEquity = .57/(1/1.56) βEquity = .89

Ch. 13 A firm's target capital structure weights are evenly split between debt and equity. What is the firm's target debt-equity ratio? 2 .5 1.5 1

1

Ch. 11 Stock A has an expected return of 12 percent and a variance of .0203. The market has an expected return of 11 percent and a variance of .0093. What is the beta of Stock A if the covariance of Stock A with the market is .0137? .68 .76 1.55 1.47 1.32

1.47 β = .0137/.0093 β = 1.47

Ch. 13 Suppose Simmons' common stock has a beta of 1.37, the risk-free rate is 3.4 percent, and the market risk premium is 8.2 percent. The yield to maturity on the firm's bonds is 7.6 percent and the debt-equity ratio is .45. What is the WACC if the tax rate is 23 percent and all interest is tax deductible? 14.07 percent 10.94 percent 12.60 percent 10.59 percent 11.91 percent

11.91 percent Rs = .034 + 1.37(.082) Rs = .14634, or 14.634% WACC = (1/1.45)(.14634) + (.45/1.45)(.076)(1 − .23) WACC = .1191, or 11.91%

What is the cost of equity for a firm that has a beta of 1.2 if the risk-free rate of return is 2.9 percent and the expected market return is 11.4 percent? 13.1 percent 10.8 percent 12.8 percent 14.4 percent 13.6 percent

13.1 percent RS = .029 + 1.2(.114 − .029) RS = .131, or 13.1%

Ch. 11 Stock A has an expected return of 17.8 percent, and Stock B has an expected return of 9.6 percent. However, the risk of Stock A as measured by its variance is 3 times that of Stock B. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return? 13.37 percent 13.70 percent 15.75 percent 12.41 percent 14.55 percent

13.70 percent E(Rp) = .5(.178) + .5(.096) E(Rp) = .1370, or 13.70%

Ch. 11 The risk-free rate of return is 3.68 percent and the market risk premium is 7.84 percent. What is the expected rate of return on a stock with a beta of 1.32? 9.17 percent 9.24 percent 13.12 percent 14.03 percent 14.36 percent

14.03 percent E(R) = .0368 + 1.32(.0784) E(R) = .1403, or 14.03%

Ch. 13 Suppose a firm has a target debt-equity ratio of 2.5. What is the firm's target capital structure weight for common stock? 50.00% 28.57% 33.33% 71.43%

28.57% Rationale: S/(S + B) = 1/3.5 = 28.57%

Ch. 10. In 2016, the U.S. stock market represented about ______% of the world stock market capitalization. 52 42 65 73

42

Ch. 10. What is the arithmetic average return for a mutual fund that reported a return of 5% every year for the last 3 years? 10% 15% 3% 5%

5% (.05+.05+.05)/3 = .05

Ch. 10. Going back to 1802, the U.S. historical risk premium is, on average, about ____ percent. 5.4 7.4 6.8 3.9

5.4

If a company can issue state industrial bonds for 4% versus the normal 10%, then it can save ______% on its coupon rate. 14 6 4 7

6 Rationale: 10% - 4% = 6%

Ch. 11 What is the return on a portfolio that consists of: $50,000 in an index fund, $30,000 in a bond fund, and $20,000 in a foreign stock fund? The expected returns are 7 percent, -3 percent, and 18 percent, respectively. .06% 7.26% 22% 6.2%

6.2% Rationale: .5 × 7% + .3 × -3% + .2 × 18% = 6.2%

Ch. 10. In 2016, the U.S. stock market capitalization was about ______ trillion. 52 42 73 65

65

What is the primary source of dividends? A line of credit from a bank After-tax profits A new issue of stock Before-tax profits

After-tax profits

How is preferred stock classified on the balance sheet? Debt Asset Debt or equity, depending on manager's discretion Equity

Equity

______ studies examine whether or not the release of information on one day influences stock returns on other days. Release Abnormal Serial Event

Event

Ch. 10. The ______ period rate of return is the rate of return over some arbitrary investment period.

Holding

What is a sinking fund? It is fund set up to repay bondholders in case of default by the corporation. It is a fund set up for the repayment of bonds. It is a fund set up to bring the market value of bonds in line with the par value. It is a fund set up to pay for legal fees relating to bonds.

It is a fund set up for the repayment of bonds.

Ch. 11 If a security's expected return is equal to the risk-free rate of return, and the market-risk premium is greater than zero, what can you conclude about the value of the security's beta based on CAPM? It is equal to -1. It is equal to 1. It is equal to 0. It is equal to the market portfolio's beta.

It is equal to 0. Rationale: E(Ri) = Rf +βi(RM - Rf) = Rf → βi= 0

How is the annual coupon income calculated for a traditional bond? It is equal to the market yield multiplied by par value It is equal to the coupon rate multiplied by market value. It is equal to the coupon rate multiplied by par value. It is equal to the coupon rate multiplied by issue price

It is equal to the coupon rate multiplied by par value.

Most of the difference in small and large stock returns occurs in the month of ____. October January March June

January

Ch. 13 ______ companies prefer the CAPM to the DDM. More Less An equal amount of

More

Ch. 10. The Ibbotson SBBI small stock portfolio includes the bottom 20% of ______ listed stocks. NYSE NASDAQ AMEX

NYSE

Who elects the board of directors? Shareholders Managers Bondholders

Shareholders

Who acts as a link between shareholders and top management? The SEC Corporate lawyers The board of directors Accountants

The board of directors

Select all that apply What is included in the bond indenture? The bond's yield to maturity (YTM) The face value of the bond The coupon rate The call provisions

The face value of the bond The coupon rate The call provisions

Ch. 11 Why is the determination of the efficient set for 50 securities more complex than the determination of the efficient set for two securities? The number of variance, return, and correlation calculations increases dramatically. The number of variance, return, and correlation calculations decreases. The process of determining the efficient set for 50 securities is not complex. There are no mathematical equations available for determining the efficient set for 50 securities.

The number of variance, return, and correlation calculations increases dramatically.

Ch. 11 What is the intercept of the security market line (SML)? The market-risk premium Beta The risk-free rate The market rate of return

The risk-free rate

True or false: A line of credit from a bank sets the maximum amount that the bank is willing to lend to the business. True False

True

Ch. 13 The ______ is the overall expected return the firm must earn on its existing assets to maintain its value if the firm is levered. cost of debt cost of equity WACC

WACC

_______ will be less valuable if the underlying stock's price is falling. Coupon interest payments Subpoenas Warrants Tax breaks

Warrants

The market return used in the abnormal return definition is based on ___. the stock's average market return over the past 5 years a broad-based stock market index the Dow Jones Transportation Index the prime rate

a broad-based stock market index

Unsecured corporate debt is commonly referred to as: an indenture. a debenture. deferred debt. protected debt. collateralized debt.

a debenture.

A real world example that seems to contradict market efficiency is called a(n): representation conservatism anomaly bogey

anomaly

Today, the majority of financial economists _______________. take the behavioral position that markets are inefficient believe in efficient markets are not convinced one way or the other about market efficiency

are not convinced one way or the other about market efficiency

Collateral refers to any: firm that has high quality intangible assets asset pledged on a debt liability pledged on a debt debt that has high credit rating

asset pledged on a debt

The flotation cost of internal equity is: assumed to be zero. assumed to be the same as the cost of external equity. assigned a cost equal to the aftertax cost of equity. assumed to be the same as the firm's return on equity. assigned a cost equal to the risk-free rate.

assumed to be zero.

Ch. 13 The covariance between the stock and the market index's returns divided by the variance of the market index's returns represents the for ________ a company's stock.

beta

Ch. 11 Unsystematic risk: can be effectively eliminated through portfolio diversification. is compensated for by the risk premium. is measured by beta. cannot be avoided if you wish to participate in the financial markets. is related to the overall economy.

can be effectively eliminated through portfolio diversification.

Ch. 10. If you buy a stock for $10 and later sell it for $16, you will have a ____. capital gain of $6 capital loss of $6 capital gain of $16 dividend of $6

capital gain of $6 16 - 10 = 6

Ch. 10 Alpha Industries stock sold for $39 a share at the beginning of the year. During the year, the company paid a dividend of $3 a share and then ended the year with a stock price of $37. The change in the stock price is best described as a: capital gain. positive total dollar return. capital loss. negative total dollar return. negative dividend yield.

capital loss.

Ch. 10. The average return on the stock market can be used to ___. find ways to beat the market compare stock returns with the returns on other securities accurately forecast the market's returns in the future

compare stock returns with the returns on other securities find ways to beat the market Rationale: The historical average cannot be used to find ways to beat the market. accurately forecast the market's returns in the future Rationale: The historical average is not an accurate forecast of the future.

In general, financial companies in the US typically issue: secured debt gilts debentures consols

debentures

The decline in the ratio of total debt to the book value of equity for US nonfarm, non-financial firms declined modestly from 1995 to 2013. This modest decline is understandable because as long as net income exceeds __________, retained earnings will be positive, raising the book value of equity. dividends accounts payable accounts receivable revenues

dividends

Ch. 13 A firm should only undertake a project if its expected return is ______ that of a financial asset of comparable risk. equal to or less than equal to or greater than

equal to or greater than

Ch. 11 The range of risk-return combinations possible with a portfolio of securities is captured by the opportunity set, which is also known as the ______ set. matched investment feasible

feasible

Ch. 10. The Ibbotson SBBI small stock portfolio includes the bottom _________ of NYSE listed stocks. 10% 1% 50% fifth

fifth

Ch. 13 An increase in a firm' s level of debt is an example of ___. variable cost leverage operating leverage financial leverage cyclical leverage

financial leverage

When calculating the weighted average flotation cost, the weights should be based on the: mix of debt and equity that will be used to finance the specific project. firm's target capital structure. percentages of internal and external financing that will be used for the project. firm's current mix of debt and equity. average amounts of external capital raised during the past twelve months.

firm's target capital structure.

The principal and coupon payments are ______ for a conventional bond. fixed optional variable randomized

fixed

Ch. 11 The return per unit of risk of the optimal portfolio will be ______ compared to that of any other portfolio. lower higher the same as

higher

Ch. 10. The ______ period rate of return is simply the rate of return over some arbitrary investment period. holding cumulative carryover total

holding

Ch. 11 A world where all investors possess the same estimates of expected returns, variances, and covariances is: a complicating assumption imaginary literal truth

imaginary

Ch. 11 The expected return on the market will increase if the risk-free rate _________ or if the market risk premium _____. decreases; decreases decreases; increases increases; increases increases; decreases

increases; increases

Ch. 13 In reality, most firms cover the equity portion of their capital spending with ___. a new bond issue internally generated cash flow a new preferred stock issue a new common stock issue

internally generated cash flow

Ch. 13 If a firm issues no debt, its average cost of capital will equal ___. half the sum of the cost of debt and equity its cost of debt its cost of equity its dividend yield

its cost of equity

Ch. 13 A firm with debt in its capital structure is said to be: levered operating unlevered

levered

Ch. 10. Diversification is commonly used to ___. lower risk lower the Sharpe ratio increase risk

lower risk lower the Sharpe ratio Rationale: Diversification will reduce risk, and will sometimes increase the Sharpe ratio. increase risk Rationale: Diversification will reduce risk.

Ch. 11 A dominant portfolio within an opportunity set that has the lowest possible level of risk is referred to as the: efficient frontier. minimum variance portfolio. upper tail of the efficient set. tangency portfolio. optimal covariance portfolio.

minimum variance portfolio.

Ch. 11 The variance of the return on a portfolio with many securities is _______ dependent on the covariances between the individual securities than on the variances of the individual securities. more less

more

A grant of authority allowing someone else to vote shares of stock that you own is called a: power-of-share authorization. proxy. share authority grant (SAG). restricted conveyance. general right of execution.

proxy.

Ch. 13 If the expected return of a project is below that of a financial asset of comparable risk, the firm should ______ the project. reject accept

reject

Ch. 11 The risk-free security is ______. a corporate bond a stock riskless risky

riskless

An efficient capital market is one in which: brokerage commissions are zero. taxes are irrelevant. securities always offer a positive NPV. all investments earn the market rate of return. security prices reflect all available information.

security prices reflect all available information.

Ch. 13 For debt, book values and market values are typically: different similar

similar

Ch. 10 Based on the period of 1926 through 2017, _____ have tended to outperform other securities over the long-term. U.S. Treasury bills large-company stocks long-term corporate bonds small-company stocks long-term government bonds

small-company stocks

Ch. 11 The principle of diversification tells us that: concentrating an investment in two or three large stocks will eliminate all your risk. concentrating an investment in three companies all within the same industry will greatly reduce your overall risk. spreading an investment across five diverse companies will not lower your overall risk. spreading an investment across many diverse assets will eliminate all the risk. spreading an investment across many diverse assets will eliminate idiosyncratic risk.

spreading an investment across many diverse assets will eliminate idiosyncratic risk.

There are three directors' seats up for election. If you own 1,000 shares of stock and you can cast 1,000 votes in each of the three elections, then the firm uses the voting procedure referred to as: cumulative voting. absolute priority voting. sequential voting. market share voting. straight voting.

straight voting.

Earnings _______ occur when earnings are different than expected. surprises retractions objections rewards

surprises

A classified board is one which has: representation from various classes of stock. terms that expire at different times. both employee and non-employee directors. directors elected solely by one class of shareholders. directors that have been assigned differing numbers of votes per seat.

terms that expire at different times.

Select all that apply Typical financing decisions include: choosing between NPV and IRR choosing between operating cash flow and financing cash flow the types of equity and debt to sell when to sell equity and debt how much equity and debt to sell

the types of equity and debt to sell when to sell equity and debt how much equity and debt to sell

Select all that apply Not everyone believes in efficient markets because ___, there are anomalies the SEC does a poor job investors suffer illusions of corporate greed

there are anomalies investors suffer illusions

An overconfident investor will tend to: trade primarily in securities from their local area. trade less frequently than an average investor. underperform due to excess trading. suffer from the disposition effect. underestimate their ability to pick a winning stock.

underperform due to excess trading.

Ch. 13 The weighted average cost of capital (RWACC) is the overall expected return the firm must earn on its existing assets to maintain its ___. reputation capital structure market share value

value

Select all that apply Which of the following have empirical support? strong weak semistrong

weak semistrong

Ch. 10. If you buy 100 shares of ABC stock at $5 per share, your total investment is ___. $50 $100 $5 $500

$500 100 * 5 = 500

Ch. 10. What will your capital gain be if you hold 40 shares of BP stock and the stock price rises from $27 to $40 a share? $520 $1,600 $980 $650

$520 ($40-$27)*40 shares=$520

Ch. 10. What is the maximum capital loss that you can incur if you bought 200 shares of TP Inc. for $32? $3,200 Unlimited $1,600 $6,400

$6,400 Rationale: The maximum loss occurs when the stock price falls to $0.

There are three seats on the board of directors of MMT, Inc., up for election. The firm has 175,000 shares of stock outstanding and uses cumulative voting. Each share is granted one vote per open seat. You currently own 10,000 shares that have a market value of $23 each. How much must you spend, if anything, to acquire sufficient shares to guarantee your election to the board? Assume no one else votes for you. $1,111,690 $776,273 $830,814 $1,006,273 $688,230

$776,273 Total shares needed = [1/(3 + 1)](175,000) + 1 Total shares needed = 43,751 Cost to acquire shares = (43,751 − 10,000)($23) Cost to acquire shares = $776,273

Norris Co. has developed an improved version of its most popular product. To get this improvement to the market will cost $48 million but the project will return an additional $13.5 million for 5 years in net cash flows. The firm's debt-equity ratio is .25, the cost of equity is 13 percent, the pretax cost of debt is 9 percent, and the tax rate is 21 percent. All interest is tax deductible. What is the net present value of this proposed project?

$879,838 WACC = (1/1.25)(.13) + (.25/1.25)(.09)(1 − .21) WACC = .11822 NPV = −$48,000,000 + $13,500,000[(1 − 1/1.118225)/.11822] NPV = $879,838

Ch. 13 A project's NPV without flotation costs is $1,000,000 and its flotation costs are $50,000. What is the true NPV? $1,000,000 $1,050,000 $950,000 $900,000

$950,000

Ch. 11 Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a recession. Stock B is expected to return 11 percent in a normal economy and 5 percent in a recession. The probability of the economy being normal is 75 percent and being recessionary is 25 percent. What is the covariance of these two securities? .007006 .006563 .005180 .007309 .006274

.006563 E(RA) = .75(.14) + .25(−.21) E(RA) = .0525, or 5.25% E(RB) = .75(.11) + .25(.05) E(RB) = .0950, or 9.50% Product of DeviationsNormal = (.14 − .0525)(.11 − .095) Product of DeviationsNormal = .001313 Product of DeviationsRecession = (−.21 − .0525)(.05 − .095) Product of DeviationsRecession = .011813 σA,B = (.001313 + .011813)/2 σA,B = .006563

Ch. 11 A portfolio has 45 percent of its funds invested in Security One and 55 percent invested in Security Two. Security One has a standard deviation of 6 percent. Security Two has a standard deviation of 12 percent. The securities have a coefficient of correlation of .62. What is the portfolio variance? .006946 .007295 .007157 .008104 .007506

.007295 σ2 = .45^2(.06)^2 + 2(.45)(.55)(.62)(.06)(.12) + .55^2(.12)^2 σ2 = .007295

The cost of equity for RJ Corporation is 8.4 percent and the debt-equity ratio is .6. The expected return on the market is 10.4 percent and the risk-free rate is 3.8 percent. Using the common assumption for the debt beta, what is the asset beta? .70 .44 .62 .67 .59

.44 .084 = .038 + βEquity(.104 − .038) βEquity = .697 βAsset = (1/1.6)(.697) βAsset = .44

Ch. 11 What is the beta for stock A if the covariance between stock A and the market is 1.5 and the variance of the market is 2.5? 1.67 3.75 .6 .4

.6 Rationale: 1.5/2.5 = .6

A firm has an equity beta of 1.2, the risk-free rate is 3.4 percent, the market return is 15.7 percent, and the pretax cost of debt is 9.4 percent. The debt-equity ratio is .47. If you apply the common beta assumptions, what is the firm's asset beta?

.82 βAsset = (1/1.47)(1.2) βAsset = .82

Ch. 13 The weighted average cost of capital (WACC) formula, for a firm with no debt or preferred stock will have a WACC of: Cost of equity/Cost of debt 1 × Cost of equity Cost of debt/Cost of equity 1 + Cost of equity

1 × Cost of equity

Ch. 10 Three years ago, you purchased a stock at a price of $33.48. The stock paid annual dividends of $.60 per share. Today, the stock is worth $35.20 per share. What is your holding period return? 10.03 percent 6.93 percent 10.51 percent 5.14 percent 6.59 percent

10.51 percent R3 = [$35.20 − 33.48 + 3($.60)]/$33.48 R3 = .1051, or 10.51%

Jack's Construction Co. has 80 bonds outstanding that are selling at their par value of $1,000 each. Bonds with similar characteristics are yielding a pretax 8.6 percent. The firm also has 4,000 shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. T-bill is yielding 4 percent, the market risk premium is 8 percent, and the firm's tax rate is 21 percent. What is the firm's weighted average cost of capital assuming its earnings are sufficient to classify all interest as a tax-deductible expense? 10.10 percent 11.39 percent 10.80 percent 10.65 percent 11.40 percent

10.80 percent Re = .04 + 1.1(.08) Re = .128 Debt = 80($1,000) Debt = $80,000 Common stock = 4,000($40) Common stock = $160,000 Total debt and equity = $80,000 + 160,000 Total debt and equity = $240,000 WACC = ($160,000/$240,000)(.128) + ($80,000/$240,000)(.086)(1 − .21) WACC = .1080, or 10.80%

Ch. 11 How many variance and covariance terms will be needed in order to calculate the variance of a portfolio consisting of 100 stocks? 100 variance terms and 9,900 covariance terms 90 variance terms and 90 covariance terms 100 variance terms and 100 covariance terms 4,950 variance terms and 100 covariance terms

100 variance terms and 9,900 covariance terms Rationale: Var terms = 100 Cov terms = N2 - N = 1002 - 100 = 9,900

A portfolio has 38 percent of its funds invested in Security C and 62 percent invested in Security D. Security C has an expected return of 8.47 percent and a standard deviation of 7.12 percent. Security D has an expected return of 13.45 percent and a standard deviation of 16.22 percent. The securities have a coefficient of correlation of .89. What are the portfolio rate of return and variance values?

11.56 percent ; .015688 E(Rp) = .38(.0847) + .62(.1345) E(Rp) = .1156, or 11.56% σ2P = (.38)2(.0712)2+ 2(.38)(.62)(.89)(.0712)(.1622) + (.62)2(.1622)2 σ2P = .015688

Ch. 11 What is the expected return of a security with a beta of 1.2 if the risk-free rate is 4 percent and the expected return on the market is 12 percent? 14.8% 13.6% 12% 18.4%

13.6% Rationale: 4% + 1.2(12% - 4%) = 13.6%

Ch. 10 The return pattern on your favorite stock has been 5.39 percent, 8.26 percent, −12.04 percent, and 14.27 percent over the last four years. What are the average arithmetic and geometric rates of return? 3.45 percent; 3.21 percent 3.97 percent; 3.48 percent 3.88 percent; 3.64 percent 3.92 percent; 3.56 percent

3.97 percent; 3.48 percent AverageArithmetic = [.0539 + .0826 + (−.1204) + .1427]/4 AverageArithmetic = .0397 or 3.97% AverageGeometric = [1.0539(1.0826)(.8796)(1.1427)]^.25 − 1 AverageGeometric = .0348, or 3.48%

Ladder Works has debt outstanding with a coupon rate of 6 percent and a yield to maturity of 6.8 percent. What is the aftertax cost of debt if the tax rate is 21 percent? Assume all interest is tax deductible. 5.37 percent 4.86 percent 4.74 percent 5.29 percent 5.13 percent

5.37 percent RD = .068(1 − .21) RD = .0537, or 5.37%

Ch. 10. If the dividend paid over the past year was $2.25 and the beginning stock price was $42 per share, what is the dividend yield? 4.7% 6.1% 5.4%

5.4%

Ch. 11 The market has an expected rate of return of 9.8 percent. The long-term government bond is expected to yield 4.5 percent and the U.S. Treasury bill is expected to yield 3.4 percent. The inflation rate is 3.1 percent. What is the market risk premium? 2.2 percent 3.3 percent 5.3 percent 6.4 percent 6.7 percent

6.4 percent Market risk premium = 9.8% − 3.4% Market risk premium = 6.4%

Ch. 13 If the risk-free rate is 3 percent, the market risk premium is 7 percent, the industry beta is 1, and the firm beta is 2, the cost of equity will be ____ percent less if the industry beta is used instead of the firm beta. 7 4 10 8

7 Rationale: (1 - 2) × 7% = -7%

Ch. 10 A stock had returns of 9 percent, −6 percent, 4 percent, and 16 percent over the past four years. What is the standard deviation of these returns? 8.56 percent 6.67 percent 7.14 percent 9.25 percent 7.98 percent

9.25 percent Average return = [.09 + (−.06) + .04 + .16]/4 Average return = .0575 SD = {[(.09 − .0575)^2 + (−.06 − .0575)^2 + (.04 − .0575)^2 + (.16 − .0575)^2]/(4 − 1)}^.5 SD = .0925, or 9.25%

Albert's recently paid its annual dividend of $1.98 per share. At that time, the firm announced that all future dividends will be increased by 2.2 percent annually. What is the firm's cost of equity if the stock is currently selling for $28.40 a share? 9.33 percent 11.32 percent 10.47 percent 11.08 percent 10.06 percent

9.33 percent Rs = [$1.98(1.022)]/$28.40 + .022 Rs = .0933, or 9.33%

Which group of equityholders can participate in the election of the board of directors? Only minority shareholders with a right to vote All common stockholders with a right to vote Only majority shareholders with a right to vote Both preferred and common stockholders

All common stockholders with a right to vote

Ch. 11 What does a normal return depend upon? All relevant information available to shareholders The rate of return in normal business years The average return of all firms in the stock market The average return of all firms in the industry

All relevant information available to shareholders

Ch. 11 Select all that apply Which of the following are reasons why an investor cannot attain a portfolio above the feasible or opportunity set? An investor cannot increase the return on individual securities An investor cannot decrease the standard deviation of individual securities An investor cannot afford the portfolio above the feasible set An investor cannot decrease the correlation between the two securities

An investor cannot increase the return on individual securities An investor cannot decrease the standard deviation of individual securities An investor cannot decrease the correlation between the two securities

______ is the process of buying of underpriced securities while selling overpriced substitutes. Arbitrage Mezzanine financing Sabotage Entourage

Arbitrage

Ch. 10. The _______ average rate of return measures the return in an average year over a given period.

Arithmetic

Ch. 11 How can a positive relationship between expected return on a security and its beta be justified? Because the difference between the return on the market and the risk-free rate is likely to be negative. Because the difference between the return on the market and the risk-free rate is likely to be positive. Because the value of beta is always positive. Because the risk-free rate is equal to zero.

Because the difference between the return on the market and the risk-free rate is likely to be positive.

Ch. 11 For a diversified investor, what is the best way to measure the systematic risk of an individual security? Standard deviation Variance Beta Correlation

Beta

Ch. 11 What is the appropriate measure of risk for an individual security if an investor holds a diversified portfolio? Median Mode Beta Standard deviation

Beta

Select all that apply How can a firm create value in its capital budgeting process? By lowering all barriers to industry entry to be more competitive By ignoring demand since supply is what really counts By producing its products and services at lower costs By being ahead of other companies in developing new products

By producing its products and services at lower costs By being ahead of other companies in developing new products

Bonds that grant the issuer the right to extinguish the debt prior to maturity are referred to as which type of bond? Put bond Debenture Callable bond Subordinated bond Covenant bond

Callable bond

What type of bonds can be redeemed before the maturity date by the issuing corporation? Convertible bonds Putable bonds Sunset bonds Callable bonds

Callable bonds

Select all that apply What are the two main types of securities issued by a corporation? Debt securities Mortgage securities Equity securities Redeemable securities

Debt securities Equity securities

Ch. 13 Select all that apply What can we say about the dividends paid to common and preferred stockholders? Dividends are guaranteed for both preferred and common stockholders. Preferred stock dividends change every year based on the earnings of the firm. Dividends to common stockholders are not fixed. Dividends to preferred stockholders are fixed.

Dividends to common stockholders are not fixed. Dividends to preferred stockholders are fixed.

A bond issued by a US corporation in Japan and denominated in US dollars will be classified as a(n): Japanese bond Eurobond Multilingual bond Asia bond

Eurobond

Ch. 11 True or false: Systematic risk will impact all securities in every portfolio equally. True False

False Rationale: While it is possible, it is highly unlikely that systematic risk (such as changes in interest rates) will affect all firms equally.

Who typically issues Eurobonds? Small businesses Domestic companies with no presence in foreign countries Governments International companies

Governments International companies

When is the seniority of debt of particular importance? In the event of economic recession In the event of the conversion of debt to equity In the event of voting on a potential merger In the event of default by the corporation

In the event of default by the corporation

Which type of bond only pays coupon payments if it can do so from the income earned by the firm?

Income bond

Ch. 11 What does the security market line depict? It depicts the relationship between the return on the S&P 500 and an individual security's return. It depicts the relationship between systematic risk and unsystematic risk. It depicts the relationship between expected return and the standard deviation of returns. It is a graphical depiction of the capital asset pricing model.

It is a graphical depiction of the capital asset pricing model. Rationale: It depicts the relationship between expected return and systematic risk (β).

Ch. 11 What is unsystematic risk? It is a risk that affects a single asset or a small group of assets. It is a risk that is unavoidable. It is a risk that affects all the assets in a diversified portfolio. It is a risk that is always caused by external factors.

It is a risk that affects a single asset or a small group of assets.

Ch. 11 What is systematic risk? It is a risk that increases in a systematic, gradual fashion. It is a risk that affects only one or a few assets. It is a risk that pertains to a large number of assets. It is a risk that is caused by failure of the internal control system of a corporation.

It is a risk that pertains to a large number of assets

Ch. 11 Select all that apply As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk? It is likely to decrease. It is likely to increase. It may eventually be almost totally eliminated. It will not change.

It is likely to decrease. It may eventually be almost totally eliminated.

Select all that apply Which of the following have been identified by behavioral finance researchers as examples of irrationality? Not minimizing taxes Not diversifying enough Gambling Buying both stocks and bonds

Not minimizing taxes Not diversifying enough Gambling

In general, how frequently is the board of directors elected? Once a year Every 10 years Board directors are elected for life. Every 5 years

Once a year

Ch. 13 Changes in _______ leverage and _______ leverage will affect beta.

Operating Financial

Which of the following would be indicative of inefficient markets? Overreaction and reversion Delayed response Immediate and accurate response Overreaction with reversion and delayed response Immediate and accurate response with a zero NPV

Overreaction with reversion and delayed response

Select all that apply Which of the following does the efficient markets hypothesis tell us? Investors are foolish. There is no upward trend in stock prices. Prices correctly reflect value. Financial managers cannot time bond and stock sales.

Prices correctly reflect value. Financial managers cannot time bond and stock sales.

Ch. 13 The formula for calculating the cost of equity capital that is based on the dividend discount model is ___. R = (Div/P) + g R = (Div−g)/P R =(Div/P) - g R = Divg/P

R = (Div/P) + g

Ch. 13 The formula for the dividend discount model when the growth rate is zero is ___. R = P/Div R = Div - P R = Div + P R = Div/P

R = Div/P

Ch. 13 What is the CAPM formula? RS = RF + β× (RM- RF) RS = RF + β/(RM + RF) RS = RF - β + RM - RF

RS = RF + β× (RM- RF)

What is preferred stock? Stock that is preferred by external investors when considering a hostile bid. Stock that enjoys preference over common stock with regard to voting rights. Stock that enjoys preference with regard to payment of dividends and distribution of assets over common stockholders. Stock that does not enjoy any preferential rights over common stock holders.

Stock that enjoys preference with regard to payment of dividends and distribution of assets over common stockholders.

Ch. 10. Select all that apply Which of the following are true? T-bills sometimes outperform common stocks. Common stocks frequently experience negative returns. On average, T-bills outperform common stocks.

T-bills sometimes outperform common stocks. Common stocks frequently experience negative returns.

Select all that apply Which of the following statements is/are true of the relationship between shareholders and the board of directors? There is no relationship between shareholders and the board of directors. The board of directors acts as a link between shareholders and management. The board of directors' role is to protect the interests of shareholders. Shareholders elect the board of directors.

The board of directors acts as a link between shareholders and management. The board of directors' role is to protect the interests of shareholders. Shareholders elect the board of directors.

Who are the parties to the bond indenture agreement? The corporation and the shareholders The corporation and the bondholders The board of directors and the bondholders The corporation and the government

The corporation and the bondholders

Ch. 11 Select all that apply Which of the following are needed in order to compute the variance of a portfolio consisting of two stocks, A and B? The covariance between stocks A and B The variances of stocks A and B The variance of the stock market index The market value, in dollars, of the investments in stocks A and B

The covariance between stocks A and B The variances of stocks A and B The market value, in dollars, of the investments in stocks A and B

Ch. 13 Select all that apply Which of the following variables do we need to compute the beta for a company's stock? The covariance between the stock and the market index's returns. The covariance between the stock and the industry index's returns. The correlation between the stock's returns and the CPI index. The variance of the market index's returns.

The covariance between the stock and the market index's returns. The variance of the market index's returns.

Ch. 11 Select all that apply Which of the following statements are true about expected return? The expected return can be calculated as the average of the returns in previous periods. The expected return indicates the return that an investor earned in the past. The expected return reflects an estimate that can be based on sophisticated forecasts of future outcomes. The actual return can be higher or lower than the expected return.

The expected return can be calculated as the average of the returns in previous periods. The expected return reflects an estimate that can be based on sophisticated forecasts of future outcomes. The actual return can be higher or lower than the expected return.

Ch. 11 According to the capital asset pricing model, what is the expected return on a security with beta of 1? 0% The risk-free rate of return 1%. The expected return on the market

The expected return on the market

Ch. 11 A security has a beta of 1, the market risk premium is 8 percent, and the risk-free rate is 3 percent. What will happen to the expected return if the beta doubles? The expected return will decrease by 8%. The expected return will increase to 19% from 11%. The expected return will increase by 1%. The expected return will double.

The expected return will increase to 19% from 11%.

Ch. 10 Which one of the following statements concerning the standard deviation is correct? The standard deviation is a measure of total return. The higher the standard deviation, the higher the expected return. The standard deviation varies in direct relation to increases in dividend yield. The higher the standard deviation, the lower the risk. The lower the standard deviation, the less certain the rate of return in any one given year.

The higher the standard deviation, the higher the expected return.

Ch. 10. Select all that apply Which of the following are needed to describe the distribution of stock returns? The variety of returns The mean return The standard deviation of returns The life span of the stock

The mean return The standard deviation of returns

Select all that apply Which of the following are provisions of a bond indenture? The repayment arrangement The income tax rules on dividend income The call provisions A description of property used as security The total number of bonds issued

The repayment arrangement The call provisions A description of property used as security The total number of bonds issued

Ch. 11 What is expected return? The expected variation in return over the next period. The return that an individual expects to earn over the next period. The return that an individual earned during the last period. The variation in return during the last period.

The return that an individual expects to earn over the next period. The expected variation in return over the next period. Rationale: This is expected standard deviation or variance. The return that an individual earned during the last period. Rationale: This is realized return. The variation in return during the last period. Rationale: This is realized standard deviation or variance.

Ch. 11 Select all that apply What are the two components of the expected return on the market (RM)? The risk premium The default spread Beta The risk-free rate (RF)

The risk premium The risk-free rate (RF)

Ch. 13 Select all that apply Which of the following are true about U.S. Treasury instruments? They have never defaulted. T-bills are perfectly risk free, but T-bonds are not. They are completely free of the risk of default. They are not expected to default at this time.

They have never defaulted. They are not expected to default at this time.

Ch. 11 Select all that apply Which of the following are true about optimal portfolios? They provide the best risk-return trade-off. They offer the highest return for a given level of risk. They guarantee a particular expected return for a given level of risk. They offer the lowest risk for a given level of return.

They provide the best risk-return trade-off. They offer the highest return for a given level of risk. They offer the lowest risk for a given level of return.

Ch. 11 Why are the deviations of returns squared when computing variance? This ensures that the sum of the deviations equals zero. This ensures that that the sum of the deviations is a positive number. This ensures that the sum of the deviations is a negative number. This ensures that variance is larger than expected return.

This ensures that that the sum of the deviations is a positive number. This ensures that the sum of the deviations equals zero. Rationale: If the deviations are not squared, their sum would be zero by definition. This ensures that the sum of the deviations is a negative number. Rationale: This ensures that the sum of the deviations is a positive number. This ensures that variance is larger than expected return. Rationale: Variance can be smaller than expected return. Because it is squared, it is often smaller, though the standard deviation (square root of the variance) can be larger.

Select all that apply In a publicly traded corporation, which of the following is true regarding the relationship between the board of directors and management? Top management is hired by the board of directors. Top management advises and oversees the work of the board of directors. The board of directors advises and oversees the work of management. The board of directors is elected by top management.

Top management is hired by the board of directors. The board of directors advises and oversees the work of management.

Ch. 10. If a stock has returns of 10 percent and 20 percent over 2 years, the geometric average rate of return can be calculated by ____. [1.10 + 1.20]^(.5)+1 (1.10/1.20).5 + 1 [(1.10)(1.20)]^(.5) - 1 [(1.10 + 1.20)(.5)] - 1

[(1.10)(1.20)]^(.5) - 1

Ch. 13 If a firm has multiple projects, each project should be discounted using ___. the marginal cost of capital for the latest project the average cost of capital a discount rate commensurate with the project's risk the firm's overall cost of capital

a discount rate commensurate with the project's risk

The cost of capital used to compute the present value of a project should be the rate that can be earned on: the overall market portfolio. the sponsoring firm's return on assets. a financial asset of comparable risk. a riskless asset with a similar life span. the sponsoring firm's return on equity.

a financial asset of comparable risk.

Ch. 11 Based on the capital asset pricing model (CAPM) there is generally ___ relationship between beta and the expected return on a security. no relationship a positive a negative

a positive Rationale: The market risk premium is the slope of the CAPM. As long as the market risk premium is positive, the relationship between beta and the expected return on a security will be positive.

An abnormal return is defined as ___. the market return minus the stock's actual return a return 10 percent higher than the day before a return 25 percent lower than the day before a stock's actual return minus the market return

a stock's actual return minus the market return

Ch. 11 You have plotted the monthly returns for two securities for the past five years on the same graph. The pattern of the movements of each of the two securities generally rose and fell to the same degree in step with each other. This indicates the securities have: no correlation with each other. a weak negative correlation. a strong negative correlation. a strong positive correlation. a weak positive correlation.

a strong positive correlation.

Financial markets fluctuate daily because they: are inefficient. are slowly reacting to new information. are continually reacting to new information. offer tremendous arbitrage opportunities. only reflect historical information.

are continually reacting to new information.

Dividends ______ business expenses. are not are

are not

Ch. 10. The dividend yield for a one-year period is equal to the annual dividend amount divided by the ____. average of the beginning and ending stock prices beginning stock price ending stock price

beginning stock price

Ch. 13 The slope of the characteristic line of a firm's returns versus those of the market is the ___. alpha beta delta gamma

beta

Ch. 11 The systematic risk of the market is measured by a: beta of 1.0. beta of zero. standard deviation of 1.0. standard deviation of zero. variance of 1.0.

beta of 1.0.

The market price of a stock tends to fluctuate throughout every trading day. This fluctuation is: inconsistent with the semistrong form of the efficient market hypothesis because prices should be stable. inconsistent with the weak form of the efficient market hypothesis because all past information should already be included in the price. consistent with the semistrong form of the efficient market hypothesis because daily prices should adjust as new information becomes available. consistent with the strong form of market efficiency because prices are controlled by insiders. a strong indicator that abnormal profits can be realized.

consistent with the semistrong form of the efficient market hypothesis because daily prices should adjust as new information becomes available.

positive coefficient of serial correlation for a particular stock indicates a tendency towards _________, which means that a higher-than-average return today is likely to be followed by higher-than-average returns in the future. randomization continuation reversal discombobulation

continuation

Plain vanilla bonds are: bonds issued by small businesses conventional bonds with typical bond features exotic bonds with unusual bond features bonds issued by ice cream companies

conventional bonds with typical bond features

Ch. 13 Dividends and capital gains given to the new shareholders represent ______ to the firm. nothing returns cash inflows costs

costs

Ch. 11 Select all that apply Two ways to measure the relationship between the returns of two securities are ______ and ______. covariance standard deviation variance correlation

covariance correlation standard deviation Rationale: Standard deviation measures the deviation of the return from its expected return. Each security has a standard deviation. variance Rationale: Variance measures the squared deviation of the return from its expected return. Each security has a variance.

Ch. 11 The variance of the return on a portfolio with many securities is more dependent on the _______ between the individual securities than on the ______ of the individual securities. covariances; variances variances; covariances

covariances; variances

Since it is difficult to find financing opportunities with positive net present values when capital markets are efficient, firms must: create ever more complex securities lobby for more tax breaks learn how to fool investors create value in other more difficult ways

create value in other more difficult ways

There are three directors' seats up for election. If you own 1,000 shares of stock and have been granted a total of 3,000 votes to cast in a single election, then the firm uses the voting procedure referred to as: cumulative voting. absolute priority voting. sequential voting. straight voting. market share voting.

cumulative voting.

Lewis Bros. currently has outstanding debt but has decided to issue additional debt for expansion purposes. The pretax cost of the new debt is best estimated at the _____ of the currently outstanding debt. original yield to maturity current yield to maturity embedded cost current yield coupon rate

current yield to maturity

The ratio of total debt to the book value of equity for US nonfarm, non-financial firms has ______ over time. declined remained the same increased

declined

Ch. 11 When new securities are added to a portfolio, the total unsystematic risk portion of that portfolio is most likely to _____. increase remain constant decrease

decrease

Ch. 13 U.S. Treasury securities considered to be risk-free because they have minimal, if any, ____ risk. inflation price default interest rate

default

A provision whereby the corporation is prohibited from calling the bonds for a stipulated time is known as a(n) ______ call provision restricted deferred settled annuitized

deferred

When a corporation is prohibited from calling bonds for 7 years, it is subject to a(n): delayed call provision discretionary call provision extended call provision deferred call provision

deferred call provision

Different types of information will affect stock prices ______. equally differently

differently

Ch. 10. Historically, there is a(n) ______ relationship between risk and expected return in the financial markets. indirect stagnant inverse direct

direct

The notion that actual capital markets, such as the NYSE, are fairly priced is called the: efficient market Hypothesis (EMH). law of one price (LOP). open markets theorem (OMT). laissez-faire axiom. monopoly pricing theorem (MPT).

efficient market Hypothesis (EMH).

The two main types of securities issued by a corporation are debt securities and ______ securities. exotic innovative derivative equity

equity

If a firm increases its use of both operating and financial leverage, then you should expect the firm's: asset beta to exceed its equity beta. beta of debt to exceed 1.0. beta to remain constant as the increased operating leverage will offset the increased financial leverage. equity beta to increase. debt beta to exceed its equity beta.

equity beta to increase.

The use of fraudulent accounting methods can cause a company's stock price to ___. be fairly priced remain unchanged for decades exceed its fair value invert along the cotangent

exceed its fair value

The types of equity and debt to sell is an example of a(n): cost decision net present value financing decision operating decision

financing decision

Ch. 11 If investors have homogeneous expectations, they will ___. cease trading all assume the same level of risk aversion. have similar estimates about the risk and return attributes of individual securities disagree about the estimates of risk and return for individual securities

have similar estimates about the risk and return attributes of individual securities

A firm's WACC can be correctly used to discount the expected cash flows of a new project when that project will: have the same level of risk as the firm's current operations. be financed solely with new debt and internal equity. be managed by the firm's current managers. be financed based on the firm's current debt-equity ratio. be financed solely with internal equity.

have the same level of risk as the firm's current operations.

A firm with high operating leverage has: low fixed costs in its production process. high variable costs in its production process. high fixed costs in its production process. high total costs per unit. low total costs per unit.

high fixed costs in its production process.

Companies will generally have a ____ beta if their: low; stock price is relatively low. high; sales are highly dependent on the market cycle. high; sales are growing at a steady rate of increase. high; sales are high compared to other firms in their industry. low; production costs are primarily fixed in nature.

high; sales are highly dependent on the market cycle.

An efficient market is one in which any change in available information will be reflected in the company's stock price ___. in a day in two days immediately at least within a week

immediately

Ch. 10. Dividends are the ______ component of the total return from investing in a stock. income amortization capital gains price appreciation

income amortization Rationale: Amortization is not a cash flow. capital gains Rationale: Capital gains are earned when the price increases. price appreciation Rationale: Price appreciation represents a capital gain.

If company managers believe interest rates will rise, they will _____ borrowing now. increase not change decrease

increase

Ch. 11 You are considering purchasing Stock S. This stock has an expected return of 12 percent if the economy booms, 8 percent if the economy is normal, and 3 percent if the economy goes into a recessionary period. The overall expected rate of return on this stock will: be equal to one-half of 8 percent if there is a 50 percent chance of an economic boom. vary inversely with the growth of the economy. increase as the probability of a recession increases. be independent of the probability of each economic state occurring. increase as the probability of a boom economy increases.

increase as the probability of a boom economy increases.

Ch. 11 Select all that apply Investors cannot attain a portfolio below the feasible set or opportunity set because they cannot ____. cannot afford a portfolio below the feasible set increase the standard deviation of the securities increase the correlation between two securities lower the return on individual securities

increase the standard deviation of the securities increase the correlation between two securities lower the return on individual securities

The written agreement between a corporation and its bondholders is called the: collateral agreement. note. indenture. conveyance. legal understanding.

indenture.

Ch. 10. Select all that apply The Ibbotson SBBI data presents rates of return from 1948 through recent times for ___. inflation long-term U.S. government bonds long-term corporate bonds U.S. commercial paper preferred stocks

inflation long-term U.S. government bonds long-term corporate bonds

An efficient market is one that fully reflects all available ______. redundancies information investments inefficiencies

information

A project with the same level of risk as an all-equity firm should be accepted if the project's: internal rate of return exceeds the firm's cost of equity capital. expected rate of return exceeds the market rate of return. anticipated rate of return exceeds the firm's return on assets. internal rate of return is positive given this level of risk. expected rate of return exceeds the risk-free rate.

internal rate of return exceeds the firm's cost of equity capital.

One reason why the efficient capital market hypothesis may not hold in reality is that:

irrationality may be related across individuals.

Select all that apply Earnings surprises occur when earnings are ___. lower than normal higher than normal lower than expected higher than expected

lower than expected higher than expected

Select all that apply When ______-than-average returns today are likely to be followed by ______-than-average returns in the future, the coefficient of serial correlation will be positive indicating a tendency towards continuation. lower; lower lower; higher higher; higher higher; lower

lower; lower higher; higher

Ch. 11 A minimum variance portfolio has the ____. lowest possible transactions costs highest possible return lowest possible variance lowest possible asset turnover rate

lowest possible variance lowest possible transactions costs Rationale: Mean/variance analysis is unrelated to transactions costs. highest possible return Rationale: The minimum variance portfolio most likely will not have the highest possible return. lowest possible asset turnover rate Rationale: Mean/variance analysis is unrelated to asset turnover rate.

Ch. 11 Select all that apply A minimum variance portfolio will be characterized by its ___. lowest possible transaction costs lowest possible variance lowest possible standard deviation highest possible return

lowest possible variance lowest possible standard deviation

Empirical evidence suggests that: prices may not reflect their true underlying value. financial managers lack any ability to correctly time stock repurchases. managers may profitably speculate in foreign currency. managers cannot boost stock prices by changing their accounting methods. wise accounting choices can impact a firm's stock price.

managers cannot boost stock prices by changing their accounting methods.

Ch. 11 From an investor's perspective, an optimal portfolio will ___. minimize expected return and maximize risk maximize expected return and minimize risk minimize risk maximize return

maximize expected return and minimize risk

Ch. 11 If a stock portfolio is well diversified, then the portfolio variance: will equal the variance of the most volatile stock in the portfolio. may be less than the variance of the least risky stock in the portfolio. must be equal to or greater than the variance of the least risky stock in the portfolio. will be a weighted average of the variances of the individual securities in the portfolio. will be an arithmetic average of the variances of the individual securities in the portfolio.

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

The sales of cyclical firms are ______ sensitive to the business cycle than are the sales of non-cyclical firms. more less

more

Warrants are _____ valuable if stock prices are rising. less more

more

If a debt is subordinated, it: has a higher priority status than secured creditors. is secondary to equity. must give preference to the secured creditors in the event of default. has been issued because the company is in default. is treated as an equity security.

must give preference to the secured creditors in the event of default.

The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings. This prohibition is an example of a(n): maintenance of security provision. collateral restriction. affirmative indenture. negative covenant. put provision.

negative covenant.

Common stockholders receive special preference in: receiving dividends funds distributions in bankruptcy neither of these

neither of these

The serial correlation of a stock's returns is different from the correlation between the returns of two different stocks because it ____. occurs over shorter periods of time involves the returns of more than two stocks only involves the returns of one stock occurs over longer periods of time

only involves the returns of one stock

Ch. 13 Select all that apply Preferred stock ___. pays dividends in perpetuity has a fixed maturity does not pay dividends pays a constant dividend

pays dividends in perpetuity pays a constant dividend

Psychologists generally agree that irrational traits such as those related to behavioral finance are generally: temporary and limited to a small sector of the population. pervasive across individuals. offset within the overall population. cyclical in nature. unique to a few individuals.

pervasive across individuals.

Ch. 11 The security market line (SML) shows that the relationship between a security's expected return and its beta is ______. insignificant positive overrated negative

positive Rationale: The security market line (SML) shows that the relationship between a security's expected return and its beta is positive; the higher the risk, the higher the expected return.

Ch. 11 According to the CAPM, the expected return on a security is: negatively and non-linearly related to the security's beta. negatively and linearly related to the security's beta. positively and linearly related to the security's variance. positively and non-linearly related to the security's beta. positively and linearly related to the security's beta.

positively and linearly related to the security's beta.

In an efficient market, the price of a security will: always rise immediately upon the release of new information with no further price adjustments related to that information. react to new information over a two-day period after which time no further price adjustments related to that information will occur. rise sharply when new information is first released and then decline to a new stable level by the following day. react immediately to any new information that affects the value of the issuing firm. be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed.

react immediately to any new information that affects the value of the issuing firm.

The proponents of efficient markets question whether the psychological traits of ______ will dominate in any given situation. representativeness or conservatism conservatism or liberalism representativeness or democracy attachment or separateness

representativeness or conservatism

Drawing conclusions from too small of a sampling describes the behavioral characteristic of: conservatism. familiarity. representativeness. overconfidence. underreaction.

representativeness.

Rationality implies that investors, when faced with new information about a stock, will ___. not revalue the stock price immediately, but will wait for more detailed information reprice the stock rationally overvalue the stock never reprice the stock

reprice the stock rationally

Ch. 10. The arithmetic average rate of return measures the ____. return in an average year over a given period compound return per year average return in a year compound return in an average year

return in an average year over a given period compound return per year Rationale: The arithmetic average rate of return measures the return in an average year over a given period. It does not account for compounding. average return in a year Rationale: The arithmetic average rate of return measures the return in an average year over a given period. compound return in an average year Rationale: The arithmetic average rate of return measures the return in an average year over a given period. It does not account for compounding.

There is a difference in returns on small and large stocks, and most of that difference can be explained by differences in ___. the effect of different 10-year periods the effect of the market risk the effect of incorporating

risk

Ch. 10. The excess return on a risky asset is the difference between the risky return and the ____ rate. risk-free prime inflation federal funds

risk-free

The disposition effect refers to: the underreaction of investors to bad news. selling any security that creates a tax liability. the hesitancy to sell a security of any firm with which you are affiliated. the urge to sell all your securities when market values decline. selling your winners while holding your losers.

selling your winners while holding your losers.

The hypothesis that market prices reflect all publicly available information is called _____ form efficiency. open strong semistrong weak stable

semistrong

Your best friend works in the finance office of the Delta Corporation. You are aware this friend trades Delta stock based on information he overhears in the office but which is not known to the general public. Your friend continually brags to you about the profits he earns trading Delta stock. Based on this information, you would tend to argue that the financial markets are at best _____ form efficient. weak semiweak semistrong strong perfect

semistrong

Ch. 11 In the context of a portfolio of two securities, the opportunity set ___. shows the combination of weights that will totally eliminate risk shows the range of potential future prices for the two securities outlines the possible strategies for making money with the two securities shows the range of risk-return combinations, based on various weights for the two securities

shows the range of risk-return combinations, based on various weights for the two securities

Ch. 10. Select all that apply The Ibbotson SBBI data show that over the long-term, ___. small-company stocks had the highest risk level T-bills, which had the lowest risk, generated the lowest return small-company stocks generated the highest average return long-term corporate bonds had the lowest risk large-company stocks generated the highest average return

small-company stocks had the highest risk level T-bills, which had the lowest risk, generated the lowest return small-company stocks generated the highest average return

Ch. 10. Using the Ibbotson SBBI yearbook, year-by-year real returns can be calculated by ___. adding the annual inflation rate to the annual historical rate of return subtracting the annual historical rate of return from the annual inflation rate subtracting the annual inflation rate from the annual historical rate of return

subtracting the annual inflation rate from the annual historical rate of return

Ch. 11 The market risk premium is computed by: adding the risk-free rate of return to the inflation rate. adding the risk-free rate of return to the market rate of return. subtracting the risk-free rate of return from the inflation rate. subtracting the risk-free rate of return from the market rate of return. multiplying the risk-free rate of return by the market beta.

subtracting the risk-free rate of return from the market rate of return.

Ch. 10. A normal distribution has a ______ shape. symmetrical box-like asymmetrical skewed

symmetrical

Ch. 11 Beta measures the _____ risk of a security.

systematic

Ch. 11 Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk. idiosyncratic diversifiable systematic asset-specific total

systematic

Ch. 11 The measure of beta associates most closely with: idiosyncratic risk . the risk-free return. systematic risk. unexpected risk. unsystematic risk.

systematic risk.

Individuals that continually monitor the financial markets seeking mispriced securities: tend to make substantial profits on a daily basis. tend to make the markets more efficient. are never able to find a security that is temporarily mispriced. are always quite successful using only well-known public information as their basis of evaluation. are always quite successful using only historical price information as their basis of evaluation.

tend to make the markets more efficient.

Ch. 13 When valuing a firm with the weighted average cost of capital, the ________ value of the firm can be estimated by assuming a constant perpetual growth rate for cash flows beyond the horizon. retroactive terminal fundamental substantial

terminal Rationale: When valuing a firm with the weighted average cost of capital, the terminal value of the firm can be estimated by assuming a constant perpetual growth rate for cash flows beyond the horizon.

Throwing darts at the financial pages to construct a portfolio may not be a good strategy because: dart throwing assumes that the markets are semistrong form efficient professional security analysts always outperform dart portfolios the darts cannot consider the overall risk of the portfolio

the darts cannot consider the overall risk of the portfolio

Ch. 10. Select all that apply A frequency distribution of stock returns displays ____. the average of all data points the standard deviation of all data points the frequency of occurrence for each rate of return range various ranges of returns on the horizontal axis

the frequency of occurrence for each rate of return range various ranges of returns on the horizontal axis the average of all data points Rationale: A frequency distribution of stock returns does not display the average, but plots the frequency of occurrence for various ranges of return. the standard deviation of all data points Rationale: A frequency distribution of stock returns does not display the standard deviation, but plots the frequency of occurrence for various ranges of return.

Event studies attempt to determine: the influence of information released to the market on stock prices in days surrounding the information's release. if the market is at least weak form efficient. whether the market is semi strong or strong form efficient. the correlation between the returns on two diverse securities. the optimal time to release new information to the public.

the influence of information released to the market on stock prices in days surrounding the information's release.

Ch. 11 The standard deviation of a portfolio will tend to increase when: a risky asset in the portfolio is replaced with U.S. Treasury bills. one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry. the portfolio concentration in a single cyclical industry increases. the weights of the various diverse securities become more evenly distributed. short-term bonds are replaced with Treasury Bills.

the portfolio concentration in a single cyclical industry increases.

Ch. 11 As we add more diverse securities to a portfolio, the ____ risks of the portfolio will decrease. total and systematic systematic and unsystematic total and unsystematic unsystematic systematic

total and unsystematic

Ch. 10 The capital gains yield plus the dividend yield on a security is called the: variance of returns. geometric return. average period return. current yield. total return.

total return.

Ch. 11 Standard deviation measures ______ risk while beta measures ______ risk. total; systematic systematic; total total; unsystematic unsystematic; systematic

total; systematic

Ch. 11 Select all that apply Another name for idiosyncratic risk is ______ risk. insane market systematic unsystematic diversifiable

unsystematic diversifiable

Select all that apply Rationality implies that investors will ___. use current information as well as new information to estimate stock prices slowly bid the stock price up or down upon the release of new information use new information to estimate stock prices

use current information as well as new information to estimate stock prices use new information to estimate stock prices

Lesco's is evaluating a project that has a different level of risk than the overall firm. This project should be evaluated: using the market beta. using the overall firm's beta. using a beta commensurate with the project's risks. at the market rate of return. at the T-bill rate of return.

using a beta commensurate with the project's risks.

Ch. 10. The square of the standard deviation is equal to the ____. Sharpe ratio variance mean median return

variance

Ch. 10. A probability distribution tends to have a smooth shape when the number of observations is ___. about 100 or so very small about 30 or so very large

very large

The form of market efficiency that only relates to whether past market returns are useful in predicting future market returns is ______ form efficiency. open strong semistrong weak stable

weak

Bonds with attached warrants are frequently issued: with very low coupons. at a greatly discounted price. with an attached share of preferred stock. with a share purchase price set equal to the market price at time of share purchase. with an attached share of common stock.

with very low coupons.

Ch. 10 You just sold 700 shares of Alcove stock at a price of $34.08 a share. Last year you paid $39.20 a share to buy this stock. You received dividends totaling $1.04 per share. What is your total capital gain on this investment? −$3,584 −$3,672 −$3,544 −$2,856 −$2,608

−$3,584 g = ($34.08 − $39.20)(700) g = −$3,584

Ch. 11 Stock A has a variance of .1428 while Stock B's variance is .0910. The covariance of the returns for these two stocks is −.0206. What is the correlation coefficient? −.1505 −.1146 −.1480 −.1643 −.1807

−.1807 ρA,B = −.0206/[.1428.5(.0910.5)] ρA,B = −.1807

Ch. 10 You bought 360 shares of stock at a total cost of $7,754.40. You received a total of $403.20 in dividends and sold your shares for $19.98 a share. What was your total rate of return? 3.67 percent −2.04 percent −1.29 percent 7.24 percent 5.38 percent

−2.04 percent R = [360($19.98) − $7,754.40 + 403.20]/$7,754.40 R = −.0204, or −2.04%