Corporate Finance Practice Questions Test 2
What are the differences in the claims of shareholders and bondholders during bankruptcy?
- bondholders claims are settled first - bondholders have a fixed claim while shareholders have a variable claim on all residuals
Which of the following are differences between interest payments and dividend payments by the corporation
- dividend income is not fixed while interest income is generally fixed - dividend payments are not an obligation but interest payments are an obligation - dividends are paid to stockholders while interest is paid to bondholders
The foreign currency approach to capital budgeting analysis____
- is computationally easier than the home currency approach - computes the NPV of a project in both the foreign and domestic currency - produces the same results as the home currency approach
What are the advantages of using internal financing
- it prevents the adverse market reaction that tends to accompany a stock issue. - It may be cheaper than debt equity issues
Which of the following refer to a firm with a large portion of its business outside of its parent country?
- multinational - an international corporation
Which of the following are needed to describe the distribution of stock returns? - the variety of returns - the life span of the stock -the standard deviation of returns -the mean return
- the mean return -the standard deviation of returns
A frequency distribution of stock returns display____
- various ranges of returns on the horizontal axis - the frequency of occurrence for each rate of return range
Suppose stock GHI has an initial price of $100. Tow years later, the price is $132. What is GHI's geometric return
14.89%
What is the arithmetic average return for a mutual fund that reported a return of 5 percent every year for the last 3 years?
5%
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?
5.4%
What is the arithmetic average return for a stock that had annual returns of 8 percent, 2 percent, and 11 percent for the past 3 years
7%
From 1900 to 2010, the United States ranked ____ out of 17 countries in terms of having the highest equity risk premium
7th
Which firm has higher debt capacity?
A profitable firm
Which of the following is the successor to LIBOR in the U.S
SOFR
Who are the main claimants of a firm's cash flows?
Stockholders Bondholders Government
The home currency approach appears to be inferior to the foreign currency approach to capital budgeting. In truth____
The two approaches are the same
What is the difference in results between home currency approach and the foreign currency approach?
The two procedures produce the same answer
What do Modigliani and Miller assert about the relationship between leverage and firm value in the presence of corporate taxes?
The value of the firm increases with leverage
Almost all currency trading takes place in terms of the
U.S dollar
The payment to lawyers become relevant in the context of capital structure decisions in the event of ____
financial distress
The types of equity and debt to sell is an example of a(n)
financing decision
The types of equity and debt to sell is an example of a(n)___
financing decision
The value of the firm is given by the following expression
firm value = value of equity + value of debt
The use of ____ exchange agreements can help reduce the short-term exposure to exchange rate risk
forward
A ___ distribution of stock returns plots the frequency of occurrence for various ranges of return
frequency
An individual will work___ if they own a ____ percentage of the company
harder, larger less, smaller
When is a rational firm likely to increase the level of debt so as to capture the tax shield of debt
if profits are expected to be high
An efficient market is one in which any change in available information will be reflected in the company's stock price ___
immediately
An efficient market is one that fully reflects all available_____
information
It is not uncommon for IPOs to _____ experience large gains
initially
The foreign exchange market_____
is an over the counter market
What is generally the most important component of direct costs of financial distress?
legal costs
If an international firm borrows money in the foreign country where it has operations, it can reduce_____
long-run exchange rate exposure
Protective covenants typically ____ interest rates
lower
The foreign exchange market is where
one country's currency is traded for another country's currency
Weak form efficiency considers trading strategies that use information based solely on ___ stock prices
past
A ___ covenant is an agreement between bondholders and stockholders
protective
A market is said to be semi strong efficient if prices incorporate which type of information
publicly available information
A well diversified portfolio will help investors _____
reduce risk
Investors who jump into hot market believing that the high returns will continue for an even longer period are said to exhibit
representativeness
According to the pecking theory, what is the preferred source for firms seeking to raise capital?
retained earnings
The arithmetic average rate of return measures the _____
return in an average year over a given period
The mean return and standard deviation of returns can be used to describe the distribution of stock____
returns
The ___ Overnight Financing Rate is successor to LIBOR in the U.S
secured
Which of the following have empirical support?
semi strong and weak
A_____ sale occurs if the seller borrows the asset and then sells it
short
If you beat the market with inside information you have violated the concept of ___ form efficiency
strong
A normal distribution has a _____ shape
symmetrical
The rates of return in the Ibbotson SBBI yearbook are not adjusted for which of the following ? - transaction costs -dividends -bond coupons -taxes
taxes, transaction costs
Which method employs uncovered interest parity to project future exchange rates?
the home currency approach
Translation exposure results from
the need to translate financial statements into home currency
A probability distribution tends to have a smooth shape when the number of observations is
very large
An abnormal return is defined as
a stocks actual return minus the market return
An example of an ____ costs is when a firm issues more equity and an entrepreneur increases leisure time
agency
If you can beat the market by ____, then you are violating weak form effeciency
analyzing historical price patterns
If a manager has more information than an investor about the firm, that information is referred to as ____ information
asymmetric
The dividend yield for a 1-year period is equal to the annual dividend amount divided by the
beginning stock price
A short sale occurs if the seller initially ____ the asset and then sells it
borrows
Serial ___ is the relationship between the current return on a security and the return on the same security over a later period.
correlation
Serial ____ is the relationship between the current return on a security and the return on the same security over a later period
correlation
The value of a firm is equal to the value of its____
debt plus equity
Different types of information will affect stock prices ___
differently
Legal Costs are typically the most important component of ____ costs
direct
Which of the following are ways to make money by investing in stocks? - Amortization - Dividends - interestterm-21 -capital gains
dividends, capital gains
Which of the following are broad types of costs of financial distress?
-Direct costs -Indirect costs
Which of the following are correct when describing purchasing power parity?
-Parity is expressed as both absolute and relative - Purchasing Power Parity is a major factor in the rate of change in exchange rates - Exchange rates adjust to keep purchasing power level between currencies
What types of information affect the rates at which stock prices adjust to new information?
-Publicly available information -all information -past information
Which of the following are true? - On average, T-bills outperform common stocks -T-bills sometimes outperform common stocks -Common stocks frequently experience negative returns
-T-bills sometimes outperform common stocks -Common stocks frequently experience negative returns
What are some important lessons from the 2008 financial crisis?
-diversification is important - the stock market is risky
The different types of exchange rate risk include which of the following?
-translation exposure -long-term exposure -short-term exposure
___ is the process of buying underpriced securities while selling overprices substitutes
Arbitrage
The ____ average rate of return measures in an average year over a given period
Arithmetic