Adv Fin Mgmt Exam 2

A firm with cyclical earnings is characterized by: a. revenue patterns that vary with the business cycle. b. high levels of debt in its capital structure. c. high fixed costs. d. high costs per unit. e. low contribution margins.

a

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

a

A stock with a beta of zero would be expected to have a rate of return equal to: a. the risk-free rate. b. the market rate of return. c. the prime rate. d. the market risk premium. e. zero.

a

An industry is likely to have a low beta if the: a. stream of revenues within that industry is less volatile than the market. b. economy is in a recessionary period. c. market for its goods is highly affected by the market cycle. d. number of firms within the industry is fairly constant. e. industry tends to use a lot of debt financing.

a

Assume a firm made a payment to its owners in the form of new shares of stock. The transaction is called a(n) ________ dividend. a. stock b. normal c. special d. extra e. liquidating

a

Assume a firm sells off some of its long-term assets and distributes the proceeds to its owners. The cash payment to the owners is called a(n) a. liquidating dividend. b. regular cash dividend. c. special dividend. d. extra cash dividend. e. share repurchase.

a

Financial managers: a. are reluctant to cut dividends. b. tend to ignore past dividend policies. c. tend to prefer cutting dividends every time quarterly earnings decline. d. prefer cutting dividends over incurring flotation costs. e. place little emphasis on dividend policy consistency.

a

Standard deviation measures _____ risk while beta measures ____ risk. a. total; systematic b. nondiversifiable; diversifiable c. unsystematic; total d. unsystematic; systematic e. total; unsystematic

a

The CAPM has an advantage over the DDM because the CAPM: a. explicitly adjusts for risk. b. applies to firms that pay dividends. c. has no measurement risk. d. specifically considers a firm's rate of growth. e. ignores changes in the overall market over time.

a

The portfolio of small-company common stocks measured by Ibbotson, et al. is best described as the stocks of the firms that: Multiple Choice a. represent the smallest twenty percent of the companies listed on the NYSE. b. have gone public within the past five years. c. are too small to be listed on the NYSE. d. are included in the S&P 500 index. e. trade publicly for $5 per share or less.

a

The systematic risk of the market is measured by a: a. beta of 1.0. b. beta of zero. c. standard deviation of 1.0. d. standard deviation of zero. e. variance of 1.0.

a

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

a

Which one of the following types of securities produced the lowest real rate of annual return, on average, for the period from 1926 through 2020? a. U.S. Treasury bills b. Long-term government bonds c. Small-company stocks d. Large-company stocks e. Long-term corporate bonds

a

________ are payouts of earnings, in the form of cash or stock, that are made to a firm's owners. a. Dividends b. Distributions c. Share repurchases d. Payments-in-kind e. Stock splits

a

A ____ will increase the number of shares outstanding without affecting the book value of any of the owners' equity account values. a. special dividend b. stock split c. share repurchase d. tender offer e. liquidating dividend

b

Before the ________ date, a purchaser of stock is entitled to receive a declared dividend, but on or after that date they cannot. a. ex-rights b. ex-dividend c. record d. payment e. declaration

b

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

b

From a tax-paying investor's point of view, a stock repurchase: a. is equivalent to a cash dividend if the stock is held for more than one year. b. is more desirable than a cash dividend if the stock is held for more than one year. c. has the same tax effects as a cash dividend. d. is more highly taxed than a cash dividend. e. creates a tax liability even if the investor does not sell any of the shares he owns.

b

If the correlation between two stocks is −1, the returns on the stocks: a. generally move in the same direction. b. move perfectly opposite one another. c. are unrelated to one another. d. have standard deviations of equal size but opposite signs. e. totally offset each other producing a rate of return of zero.

b

Ignoring taxes and all else held constant, on the ________, the market value of a stock should decrease by the amount of the dividend. a. dividend declaration date b. ex-dividend date c. date of record d. date of payment e. day after the date of payment

b

Of the following factors, which one is considered to be the primary factor affecting a firm's dividend payout decision? a. Considering the personal taxes of company stockholders b. Maintaining a consistent dividend policy c, Attracting retail investors d. Attracting institutional investors e. Avoiding flotation costs

b

One example of a nondiversifiable risk is the sudden: a. resignation of a well-respected president of a firm. b. outbreak of a global virus. c. resignation of a key employee of a major manufacturer. d. replacement of a firm's workforce with robots. e. closing of a business due to a lack of sales.

b

The ________ refers to the observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on those investors. a. information content effect b. clientele effect c. efficient markets hypothesis d. MM Proposition I e. MM Proposition II

b

The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-free asset is referred to as the: a. market rate of return. b. market risk premium. c. systematic return. d. total return. e. real rate of return.

b

The weighted average cost of capital for a firm is the: a. discount rate that the firm should apply to all the projects it undertakes. b. overall rate that the firm must earn on its existing assets to maintain the value of its stock. c. rate the firm should expect to pay on its next bond issue. d. maximum rate that the firm should require on any projects it undertakes. e. rate of return that the firm's preferred stockholders should expect to earn over the long term.

b

When setting dividend policy, financial executives place the greatest importance on which one of the following factors? a. Setting a high-dividend payout ratio even when earnings are unstable b. Maintaining a consistent dividend policy c. Increasing current dividends even if those dividends need to be lowered in the near future d. Reducing dividends anytime future earnings are in doubt e. Attracting institutional investors

b

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

b

A stockholder must be registered on the firm's list as having share ownership by the ________ in order to receive a declared dividend. a. ex-rights date b. ex-dividend date c. date of record d. date of payment e. declaration date

c

A(n) ________ is a cash payment made by a firm to its owners in the normal course of business. a. share repurchase b. liquidating dividend c. regular cash dividend d. special dividend e. extra cash dividend

c

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

c

The excess return is computed by ______ the average return for the investment. a. subtracting the inflation rate from b. adding the inflation rate to c. subtracting the average return on the U.S. Treasury bill from d. adding the average return on the U.S. Treasury bill to e. subtracting the average return on long-term government bonds from

c

The information content of a dividend increase generally signals that: a. the firm has a one-time surplus of cash. b. the firm has several net present value projects to pursue. c. management believes the future earnings of the firm will be strong. d. the firm has more cash than it needs due to sales declines. e. future dividends will be lower.

c

The last date on which an investor could purchase shares of stock and still receive the dividend is the date _____ business day(s) prior to the date of record. a. zero b. one c. two d. five e. seven

c

The measure called beta associates most closely with: a. idiosyncratic risk. b. the risk-free return. c. systematic risk. d. unexpected risk. e. unsystematic risk.

c

The primary purpose of portfolio diversification is to: a. increase returns and risks. b. eliminate all risks. c. eliminate asset-specific risk. d. eliminate systematic risk. e. lower both returns and risks.

c

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

c

When computing the expected return on a portfolio of stocks, the portfolio weights are based on the: a. number of shares owned in each stock. b. price per share of each stock. c. market value of the total shares held in each stock. d. original amount invested in each stock. e. cost per share of each stock held.

c

Which one of the following is an example of unsystematic risk? a. The inflation rate increases unexpectedly b. The federal government lowers income taxes c. An oil tanker runs aground and spills its cargo d. Interest rates decline by .5 percent e. A country's GDP rises by .5 percent more than anticipated

c

Which one of the following is the best example of systematic risk? a. The price of lumber declines sharply b. The machinery operators at a firm go on strike c. Inflation increases consumer prices d. A storm causes a power outage in a city e. People become health aware and avoid fast food restaurants

c

With respect to the CAPM, which one of the following statements is correct? a. The CAPM is the only available method for determining an appropriate discount rate for a proposed project. b. The market rate of return is most commonly based on the forecasted return on the market for the next 5-year period. c. CAPM is used quite frequently by firms in their capital budgeting processes. d. The expected return on the 30-year U.S. Treasury bond is the most commonly used as the risk-free rate of return. e. An increase in the risk-free rate combined with a beta greater than 1.0 increases the discount rate computed using the CAPM.

c

A symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the _____ distribution. a. gamma b. Poisson c. bimodal d. normal e. uniform

d

Based on the period from 1926 through 2020, _____ have tended to outperform other securities over the long-term. a. U.S. Treasury bills b. large-company stocks c. long-term corporate bonds d. small-company stocks e. long-term government bonds

d

Capital market history shows us that a correct ordering of the average return by asset class, from lowest to highest, is: a. corporate bonds, U.S. Treasury bills, small-company stocks, large-company stocks. b. U.S. Treasury bills, small-company stocks, large-company stocks, government bonds. c. government bonds, U.S. Treasury bills, large-company stocks, small-company stocks. d. U.S. Treasury bills, government bonds, large-company stocks, small-company stocks. e. U.S. Treasury bills, long-term government bonds, intermediate-term government bonds, small-company stock.

d

In a reverse stock split the: a. number of shares outstanding increases and the owners' equity decreases. b. firm buys back existing shares of stock on the open market. c. firm sells new shares of stock on the open market. d. number of shares outstanding decreases while the book value of owners' equity is unchanged. e. shareholders make a cash payment to the firm.

d

On a single graph, you plotted the monthly returns for two securities for the past five years. You observed that the returns of each of the two securities generally rose and fell together at the same time, and to the same degree. This indicates the securities have: a. no correlation with each other. b. a weak negative correlation. c. a strong negative correlation. d. a strong positive correlation. e. a weak positive correlation.

d

On average, for the period from 1926 through 2020: a. the real rate of return on U.S. Treasury bills has been negative. b. small-company stocks underperformed large-company stocks. c. long-term government bonds produced higher returns than long-term corporate bonds. d. the excess return on long-term corporate bonds exceeded the excess return on long-term government bonds. e. the excess return on large-company stocks exceeded the excess return on small-company stocks.

d

Probably the best argument in favor of a reverse stock split is to: a. decrease the liquidity of a stock. b. decrease the market value per share. c. increase the number of stockholders. d. maintain a minimum share price as set by a stock exchange. e. raise additional capital from current stockholders.

d

River & Wood is an outdoors-focused firm with excellent prospects for growth. The firm's management wants to acknowledge the loyalty of its shareholders but must use all of the firm's available cash to fund its rapid growth. The market price of its stock is currently at the upper end of its preferred trading range. Given this situation, a(n) ________ is the firm's best choice. a. liquidating dividend b. extra cash dividend c. reverse stock split d. stock dividend e. cash distribution

d

Tasneem purchased 100 shares of Bentwood stock on June 7th. Andre purchased 100 shares of Bentwood stock on Monday, July 9th. Bentwood declared a dividend on June 20th to shareholders of record on July 13th that is payable on August 1st. Which one of the following statements concerning the dividend paid on August 1st is correct given this information? a. Neither Tasneem nor Andre are entitled to the dividend. b. Tasneem is entitled to the dividend but Andre is not. c. Andre is entitled to the dividend but Tasneem is not. d. Both Andre and Tasneem are entitled to the dividend. e. Both Andre and Tasneem are each entitled to one-half of the dividend amount.

d

When estimating the cost of equity using the DDM, the factor that is the most apt to add error to this estimate is the: a. value of the last dividend. b. firm's tax rate. c. historical beta. d. dividend growth rate. e. current stock price.

d

Which one of the following choices reports dividend events in the correct chronological order, from earliest to latest? a. Date of record, declaration date, ex-dividend date b. Date of record, ex-dividend date, declaration date c. Declaration date, date of record, ex-dividend date d. Declaration date, ex-dividend date, date of record e. Ex-dividend date, date of record, declaration date

d

Which one of the following is a correct ranking of securities based on their volatility during the period from 1926 to 2020? Rank from highest to lowest volatility. a. Large-company stocks, intermediate-term government bonds, long-term government bonds b. Small-company stocks, long-term corporate bonds, large-company stocks c. Long-term government bonds, long-term corporate bonds, small-company stocks d. Small-company stocks, large-company stocks, long-term corporate bonds e. Long-term corporate bonds, large-company stocks, U.S. Treasury bills

d

A(n) ________ is simultaneously a cash payment shareholders, an alternative to cash dividends, and a method used to pay a firm's earnings to shareholders. a. merger b. acquisition c. payment-in-kind d. stock split e. stock repurchase

e

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

e

For any given stock, the capital gains yield plus the dividend yield equals the: a. variance of returns. b. geometric return. c. average period return. d. current yield. e. total return.

e

On the ________ date, the board of directors passes a resolution authorizing payment of a dividend to the shareholders. a. ex-rights b. ex-dividend c. record d. payment e. declaration

e

Over the period from 1926 through 2020, the annual rate of return on _____ was more volatile than the annual rate of return on _____. a. large-company stocks; small-company stocks b. U.S. Treasury bills; small-company stocks c. U.S. Treasury bills; long-term government bonds d. long-term corporate bonds; small-company stocks e. large-company stocks; long-term corporate bonds

e

The ________ equals the annual dividend per share stated as a percentage of the annual earnings per share. a. dividend yield b. dividend per share c. annual yield d. dividend rate e. dividend payout ratio

e

The behavioral finance concept of self-control is an argument in favor of: a. frequent stock splits. b. low cash dividends. c. stock dividends. d. reverse stock splits. e. high cash dividends.

e

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

e

The range of possible correlations between two securities is defined as: a. 0 to +1. b. 0 to −1. c. ≧ 0. d. ≦ 1. e. +1 to −1.

e

When computing the weighted average cost of capital, which of the following items must be adjusted for taxes? a. Cost of equity b. Cost of preferred stock c. Both the cost of equity and the cost of preferred stock d. The costs of debt and preferred stock e. Cost of debt

e

Which one of the following is cited as an argument favoring a high dividend payout? a. Flotation costs involved with a new securities issue b. High personal tax rates relative to corporate rates c. Desire to maintain constant dividends over time d. Restrictive covenant on dividend payouts contained in a bond indenture agreement e. Agency costs related to excess cash reserves

e

Which one of the following is not a reason why firms choose repurchases rather than dividends? a. provide flexibility to the firm b. increase the value of existing stock options c. provide shareholders with a tax advantage d. offset dilution e. conserve cash

e

Which one of the following statements is correct? a. In the U.S. economy, dividends are quite insignificant. b. Over the last few decades, the percentage of U.S. firms paying dividends has increased. c. The tax law change in May 2003 is cited as one reason why the percentage of dividend payers has decreased in the U.S. d. Dividends are more tax-advantaged than capital gains as of 2017. e. Much of the dividend income paid in the U.S. is related to a relatively small number of firms.

e