FINA 5320 - Exam 3 Theoretical Questions

The notion that actual capital markets, such as the NYSE, are fairly priced is called the: A. Efficient Markets Hypothesis (EMH). B. Law of One Price. C. Open Markets Theorem. D. Laissez-Faire Axiom. E. Monopoly Pricing Theorem.

A. Efficient Markets Hypothesis (EMH).

The proposition that the value of a levered firm is equal to the value of an unlevered firm is known as: A. MM Proposition I with no tax. B. MM Proposition II with no tax. C. MM Proposition I with tax. D. MM Proposition II with tax. E. both MM I with and without tax..

A. MM Proposition I with no tax.

Which one of the following statements about preferred stock is true? A. Preferred stock usually has a stated liquidating value of $100 per share. B. Dividends on preferred stock payable during the next twelve months are considered to be a corporate liability. C. Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-deductible expense. D. There is no significant difference in the voting rights granted to preferred and common shareholders.

A. Preferred stock usually has a stated liquidating value of $100 per share.

Which form of the efficient market hypothesis implies that security prices reflect only informationcontained in past prices? A. Weak form B. Semistrong form C. Strong form D. Hard form E. Past form

A. Weak form

The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset's: A. beta coefficient. B. reward-to-risk ratio. C. total risk. D. diversifiable risk. E. Treynor index.

A. beta coefficient.

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. beta of 1.0.

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. can be effectively eliminated through portfolio diversification.

The correlation between Stocks A and B is computed as the: A. covariance between A and B divided by the standard deviation of A times the standard deviation of B. B. standard deviation A divided by the standard deviation of B. C. standard deviation of AB divided by the covariance between A and B. D. variance of A plus the variance of B divided by the covariance of AB. E. square root of the covariance of AB.

A. covariance between A and B divided by the standard deviation of A times the standard deviation of B.

The beta of a security is calculated by dividing the: A. covariance of the security return with the market return by the variance of the market. B. correlation of the security return with the market return by the variance of the market. C. variance of the market by the covariance of the security return with the market return. D. variance of the market return by the correlation of the security return with the market return. E. covariance of the security return with the market return by the correlation of the security and market returns

A. covariance of the security return with the market return by the variance of the market.

MM Proposition II with taxes: A. has the same general implications as MM Proposition II without taxes. B. reveals how the interest tax shield relates to the value of a firm. C. supports the argument that business risk is determined by the capital structure employed by a firm. D. supports the argument that the cost of equity decreases as the debt-equity ratio increases. E. reaches the final conclusion that the capital structure decision is irrelevant to the value of a firm.

A. has the same general implications as MM Proposition II without taxes.

MM Proposition II with taxes: A. has the same general implications as MM Proposition II without taxes. B. reveals how the interest tax shield relates to the value of a firm. C. supports the argument that business risk is determined by the capital structure employed by a firm. D. supports the argument that the cost of equity decreases as the debt-equity ration increases. E. reached the final conclusion that the capital structure decision is irrelevant to the value of the firm.

A. has the same general implications as MM Proposition II without taxes.

A firm's WACC can be correctly used to discount the expected 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. have the same level of risk as the firm's current operations.

The reason that MM Proposition I does not hold in the presence of corporate taxation is because: A. levered firms pay less taxes compared with identical unlevered firms. B. bondholders require higher rates of return than stockholders do. C. earnings per share are no longer relevant with taxes. D. dividends become a tax shield. E. debt is more expensive than equity.

A. levered firms pay less taxes compared with identical unlevered firms.

The risk premium for an individual security is computed by: A. multiplying the security's beta by the market risk premium. B. multiplying the security's beta by the risk-free rate of return. C. adding the risk-free rate to the security's expected return. D. dividing the market risk premium by the quantity (1 + Beta). E. dividing the market risk premium by the beta of the security.

A. multiplying the security's beta by the market risk premium.

MM Proposition I with taxes is based on the concept that: A. the optimal capital structure is the one that is totally financed with equity. B. the capital structure of the firm does not matter because investors can use homemade leverage. C. the firm is better off with debt based on the weighted average cost of capital. D. the value of the firm increases as total debt increases because of the interest tax shield. E. the cost of equity increases as the debt-equity ratio of a firm increases.

A. the optimal capital structure is the one that is totally financed with equity.

The intercept point of the security market line is the rate of return which corresponds to: A. the risk-free rate of return. B. the market rate of return. C. a value of zero. D. a value of 1.0. E. the beta of the market.

A. the risk-free rate of return.

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. C. the prime rate. D. the market rate less the risk-free rate. E. zero

A. the risk-free rate.

MM Proposition I with taxes supports the theory that: A. there is a positive linear relationship between the amount of debt in a levered firm and its value. B. the value of a firm is inversely related to the amount of leverage used by the firm. C. the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield. D. a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm. E. a firm's weighted average cost of capital increases as the debt-equity ratio of the firm rises.

A. there is a positive linear relationship between the amount of debt in a levered firm and its value.

Which one of the following is an argument in favor of a low dividend policy? A.The tax on capital gains is deferred until the gain is realized. B.Few, if any, positive net present value projects are available to the firm. C.A preponderance of stockholders have minimal taxable income. D.A majority of stockholders have other investment opportunities that offer higher rewards with similar risk characteristics. E.Corporate tax rates exceed personal tax rates.

A.The tax on capital gains is deferred until the gain is realized.

Stock splits are often used to: A.adjust the market price of a stock such that it falls within a preferred trading range. B.decrease the excess cash held by a firm. C.increase both the number of shares outstanding and the market price per share. D.increase the total equity of a firm. E.adjust the debt-equity ratio such that it falls within a preferred range.

A.adjust the market price of a stock such that it falls within a preferred trading range.

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.are reluctant to cut dividends.

Payments made out of a firm's earnings to its owners in the form of cash or stock are called: A.dividends. B.distributions. C.share repurchases. D.payments-in-kind. E.stock splits.

A.dividends.

Ignore commissions, taxes, and other imperfections. If a firm substitutes a repurchase for a cash dividend, the primary difference will be an increase in the A.earnings per share. B.total value received by each investor. C.total earnings of the firm. D.excess cash reserves of the firm. E.number of shares outstanding.

A.earnings per share.

The market's reaction to the announcement of a change in the firm's dividend payout is referred to as the: A.information content effect. B.clientele effect. C.efficient markets hypothesis .D.MM Proposition I. E.MM Proposition II.

A.information content effect.

A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a: A.liquidating dividend. B.regular cash dividend. C.special dividend. D.extra cash dividend. E.share repurchase.

A.liquidating dividend.

Assume personal tax rates are lower than corporate tax rates. From a tax-paying shareholder point of view, how should a firm spend its excess cash once it has funded all positive net present value projects? A.repurchase shares B.acquire another firm C.purchase financial assets D.increase cash dividends E.increase executive compensation

A.repurchase shares

A payment made by a firm to its owners in the form of new shares of stock is called a _____ dividend. A.stock B.normal C.special D.extra E.liquidating

A.stock

If a firm issues debt and includes protective covenants in the indenture then the firm's debt will probably be issued at _____ similar debt without the covenants. A) A variable interest rate rather than the fixed rate paid on B) A lower interest rate than C) A significantly higher interest rate than D) An interest rate equal to that of E) A slightly higher interest rate than

B) A lower interest rate than

The MM theory with taxes implies that firms should issue maximum debt. In practice, this does not occur because: A) Debt is more risky than equity. B) Bankruptcy is a disadvantage to debt. C) The weighted average cost of capital is inversely related to the debt-equity ratio. D) The weighted average cost of capital is directly related to the debt-equity ratio. E) U.S. regulations require the debt-equity ratio of publicly-traded firms to be in the range of .3 to .7.

B) Bankruptcy is a disadvantage to debt.

One of the indirect costs of bankruptcy is the incentive toward under-investment. Under investment generally would result in: A) The firm selecting all projects with positive NPVs. B) The firm turning down positive NPV projects that would clearly be accepted if the firm were all-equity financed. C) Bondholders contributing the full amount of any new investment, but both stockholders and bondholders sharing in the benefits of those investments. D) Shareholders making decisions based on the best interests of the bondholders. E) The firm accepting more projects than it would if the probability of bankruptcy was ignored.

B) The firm turning down positive NPV projects that would clearly be accepted if the firm were all-equity financed.

Which one of these best describes steps of the separation principle? A. Determine the beta that best fits an investor's risk tolerance level and then determine which assets can be combined to create a portfolio that matches that beta. B. Determine the tangency point between the risk-free rate and the efficient set of risky assets and determine how to combine the tangency point portfolio with risk-free assets to match the investor's risk tolerance level. C. Determine the appropriate beta for an individual investor and then determine the most efficient set of risky assets that falls below that beta level. D. From a pool of assets determine which pairs of assets have the lowest covariances and then determine how to combine these pairs into a portfolio that matches the investor's preferred beta. E. Determine an investor's risk tolerance level and then determine which portfolio rate of return best fits that level of risk tolerance.

B. Determine the tangency point between the risk-free rate and the efficient set of risky assets and determine how to combine the tangency point portfolio with risk-free assets to match the investor's risk tolerance level

The proposition that the value of the firm is independent of its capital structure is called: A. the capital asset pricing model. B. MM Proposition I (no taxes). C. MM Proposition II (no taxes). D. the law of one price. E. the efficient markets hypothesis.

B. MM Proposition I (no taxes).

You are comparing Stock A to Stock B. Stock A will return 9 percent in a boom and 4 percent in a recession. Stock B will return 15 percent in a boom and lose 6 percent in a recession. The probability of a boom is 60 percent with a 40 percent chance of a recession. Given this information, which one of these two stocks should you prefer and why? A. Stock A; because it has a higher expected return and appears to be more risky than Stock B B. Stock A; because it has a higher expected return and appears to be less risky than Stock B C. Stock A; because it has a slightly lower expected return but appears to be significantly less risky than Stock B D. Stock B; because it has a higher expected return and appears to be just slightly more risky than Stock A E. Stock B; because it has a higher expected return and appears to be less risky than Stock A

B. Stock A; because it has a higher expected return and appears to be less risky than Stock B

Which one of the following statements is correct concerning the standard deviation of a portfolio? A. The greater the diversification of a portfolio, the greater the standard deviation of that portfolio. B. The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio. C. Standard deviation is used to determine the amount of risk premium that should apply to a portfolio. D. The standard deviation of a portfolio is equal to the geometric average standard deviation of the individual securities held within that portfolio. E. The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within the portfolio.

B. The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.

When the stock price follows a random walk, the price today is said to be equal to the prior period price plus the expected return for the period with any remaining difference to the actual return due to: A. a predictable amount based on the past prices. B. a component based on new information unrelated to past prices. C. the security's risk. D. the risk free rate. E. None of these.

B. a component based on new information unrelated to past prices.

Which one of the following is an example of a non-diversifiable risk? A. a well-respected president of a firm suddenly resigns B. a well-respected chairman of the Federal Reserve Bank suddenly resigns C. a key employee suddenly resigns and accepts employment with a key competitor D. a well-managed firm reduces its work force and automates several jobs E. a poorly managed firm suddenly goes out of business due to lack of sales

B. a well-respected chairman of the Federal Reserve Bank suddenly resigns

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in the: A. capital market line which shows that all investors will only invest in the riskless asset. B. capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio. C. security market line which shows that all investors will invest in the minimum variance portfolio. D. security market line which shows that all investors will invest only in the riskless asset. E. characteristic line which shows that all investors will invest in the same combination of securities.

B. capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.

Companies will generally have a: A. low beta if their sales are directly related to the market cycle. B. high beta if their sales are highly dependent on the market cycle. C. high beta if sales are independent of the market cycle. D. high beta if their sales are highly variable but unrelated to the market cycle E. low beta is their sales are highly cyclical.

B. high beta if their sales are highly dependent on the market cycle.

The beta of a firm is more likely to be high under which two conditions? A. high cyclical business activity and low operating leverage B. high cyclical business activity and high operating leverage C. low cyclical business activity and low financial leverage D. low cyclical business activity and low operating leverage E. low financial leverage and low operating leverage

B. high cyclical business activity and high operating leverage

A semistrong form efficient market is distinct from a weak form efficient market by: A. incorporating only random movements in the price. B. incorporating all publicly available information in the price. C. incorporating inside information in the price. D. All of these. E. None of these.

B. incorporating all publicly available information in the price.

MM Proposition I with taxes states that :A. capital structure does not affect firm value. B. increasing the debt-equity ratio increases firm value. C. firm value is maximized when the firm is all-equity financed. D. the cost of equity rises as the debt-equity ratio increases. E. the unlevered cost of equity is equal to RWacc.

B. increasing the debt-equity ratio increases firm value.

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. market risk premium.

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

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

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

B. minimum variance portfolio.

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

B. minimum variance portfolio.

If the correlation between two stocks is -1, the returns on the stocks: A. generally move in the same direction. B. move perfectly opposite to 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. move perfectly opposite to one another.

The beta of debt is commonly considered to be: A. equal to the market beta. B. one-half of the equity beta. C. the same as the asset beta. D. zero. E. one.

B. one-half of the equity beta.

The weighted average cost of capital for a firm is the: A. discount rate which the firm should apply to all of the projects it undertakes. B. overall rate which the firm must earn on its existing assets to maintain its value. C. rate the firm should expect to pay on its next bond issue. D. maximum rate which 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. overall rate which the firm must earn on its existing assets to maintain its value

According to MM Proposition II with no taxes, the: A. return on assets is determined by financial risk. B. required return on equity is a linear function of the firm's debt-equity ratio. C. cost of equity in inversely related to the firm's debt-equity ratio. D. cost of debt must equal the cost of equity. E. required return on assets exceeds the weighted average cost of capital.

B. required return on equity is a linear function of the firm's debt-equity ratio.

The semistrong form of the efficient market hypothesis states that: A. all information is reflected in the price of securities. B. security prices reflect all publicly available information. C. future prices are predictable. D. Both all information is reflected in the price of securities; and future prices are predictable. E. None of these

B. security prices reflect all publicly available information.

An investor discovers that predictions about weather patterns published years in advance and found in the Farmer's Almanac are amazingly accurate. In fact, these predictions enable the investor to predict the health of the farm economy and therefore certain security prices. This finding is a violation of the: A. moderate form of the efficient market hypothesis. B. semistrong form of the efficient market hypothesis. C. strong form of the efficient market hypothesis. D. weak form of the efficient market hypothesis. E. None of these.

B. semistrong form of the efficient market hypothesis.

Correlation is expressed as the symbol: A. α. B. ρ. C. β. D. c. E. є.

B. ρ.

Leslie purchased 100 shares of GT stock on Wednesday, June 7th. Marti purchased 100 shares of GT stock on Thursday, July 8th. GT declared a dividend on June 20th to shareholders of record on July 12th 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 Leslie nor Marti are entitled to the dividend. B.Leslie is entitled to the dividend but Marti is not. C.Marti is entitled to the dividend but Leslie is not. D.Both Marti and Leslie are entitled to the dividend. E.Both Marti and Leslie are entitled to one-half of the dividend amount.

B.Leslie is entitled to the dividend but Marti is not.

A firm can repurchase its shares in all of the following ways except through: A.a tender offer. B.a reverse stock split. C.a targeted repurchase. D.open market purchases. E.a Dutch auction.

B.a reverse stock split.

The information content effect implies that stock prices will rise when dividends are increased provided that the dividend increase: A.is denoted as a one-time event. B.causes stockholders to increase their expectations of future cash flows. C.is greater than the average historical dividend increase. D.is substantial in both dollar amount and percentage terms. E.is combined with a stock repurchase.

B.causes stockholders to increase their expectations of future cash flows.

The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on investors is called the: A.information content effect. B.clientele effect. C.efficient markets hypothesis. D.MM Proposition I. E.MM Proposition II.

B.clientele effect.

The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after which she does not receive the dividend, is called the _____ date. A.ex-rights B.ex-dividend C.record D.payment E.declaration

B.ex-dividend

Ignoring taxes and all else held constant, the market value of a stock should decrease by the amount of the dividend on the: A.dividend declaration date. B.ex-dividend date. C.date of record. D.date of payment. E.day after the date of payment.

B.ex-dividend date.

All else equal, a stock dividend will _____ the number of shares outstanding and _____ the value per share. A.increase; increase B.increase; decrease C.not change; increase D.decrease; increase E.decrease; decrease

B.increase; decrease

From a tax-paying investor's point of view, a stock repurchase: A.is equivalent to a cash dividend. B.is more desirable than a cash dividend. 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.is more desirable than a cash dividend.

Financial executives place the greatest importance on which one of these factors when setting dividend policy? A.setting a high-dividend payout ratio even when earnings are unstable B.maintaining a consistent dividend policy C.increasing dividends even if they need to be lowered in the near future D.reducing dividends anytime future earnings are in doubt E.attracting institutional investors

B.maintaining a consistent dividend policy

Of the following factors, which one is considered to be the primary factor affecting a firm's dividend 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.maintaining a consistent dividend policy

An increase in a firm's number of shares outstanding without any change in owners' equity is called a: A.special dividend. B.stock split. C.share repurchase. D.tender offer. E.liquidating dividend.

B.stock split.

The market price of a stock moves or fluctuates daily. This fluctuation is: A. inconsistent with the semistrong efficient market hypothesis because prices should be stable. B.inconsistent with the weak form efficient market hypothesis because all past information should be priced in. C .consistent with the semistrong form of the efficient market hypothesis because as new information arrives daily prices will adjust to it. D. consistent with the strong form because prices are controlled by insiders. E. None of these.

C .consistent with the semistrong form of the efficient market hypothesis because as new information arrives daily prices will adjust to it.

The optimal capital structure of a firm _____ the marketable claims and _____ the non-marketable claims against the cash flows of the firm. A) Minimizes; minimizes B) Minimizes; maximizes C) Maximizes; minimizes D) Maximizes; maximizes E) Equates; (leave blank)

C) Maximizes; minimizes

One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When following this strategy: A) The firm will rank all projects and select the project which results in the highest expected firm value. B) Bondholders expropriate value from stockholders by selecting high-risk projects. C) Stockholders expropriate value from bondholders by selecting high-risk projects. D) The firm will always select the lowest-risk project available. E) The firm will select only all-equity financed projects.

C) Stockholders expropriate value from bondholders by selecting high-risk projects.

The proposition that the cost of equity is a positive linear function of capital structure is called: A. the capital asset pricing model. B. MM Proposition I (no taxes). C. MM Proposition II (no taxes). D. the law of one price. E. the efficient markets hypothesis.

C. MM Proposition II (no taxes).

MM Proposition II is the proposition that: A. supports the argument that the capital structure of a firm is irrelevant to the value of the firm. B. the cost of levered equity depends solely on the return on debt, the debt-equity ratio, and the tax rate. C. a firm's cost of equity capital is a positive linear function of the firm's capital structure. D. the cost of equity is equivalent to the required return on the total assets of a levered firm. E. supports the argument that the size of the pie does not depend on how the pie is sliced.

C. a firm's cost of equity capital is a positive linear function of the firm's capital structure.

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 one-half of one percent E. the GDP rises by .5 percent more than anticipated

C. an oil tanker runs aground and spills its cargo

According to the efficient market hypothesis, financial markets fluctuate daily because they: A. are inefficient. B. slowly react to new information. C. are continually reacting to new information. D. offer tremendous arbitrage opportunities. E. only reflect historical information

C. are continually reacting to new information.

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

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

Which of these are squared values? A. variance, correlation, and covariance B. variance and beta C. covariance and variance D. correlation, beta, variance E. covariance and correlation

C. covariance and variance

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. eliminate asset-specific risk.

If the financial markets are efficient, then investors should expect their investments in those marketsto: A. earn extraordinary returns on a routine basis. B. generally have positive net present values. C. generally have zero net present values. D. produce arbitrage opportunities on a routine basis. E. produce negative returns on a routine basis.

C. generally have zero net present values.

The capital market line: A. and the characteristic line are two terms describing the same function. B. intersects the feasible set at its midpoint. C. has a vertical intercept at the risk-free rate of return. D. has a horizontal intercept at the market beta. E. lies tangent to the opportunity set at its minimum point.

C. has a vertical intercept at the risk-free rate of return.

A firm with high operating leverage has: A. low fixed costs in its production process. B. high variable costs in its production process. C. high fixed costs in its production process. D. high costs per unit. E. low costs per unit.

C. high fixed costs in its production process.

A key underlying assumption of MM Proposition I without taxes is that: A. financial leverage increases risk. B. individuals can borrow at lower rates than corporations. C. individuals and corporations borrow at the same rate. D. managers always act to maximize the value of the firm. E. corporations are all-equity financed.

C. individuals and corporations borrow at the same rate.

MM Proposition I with no tax supports the argument that: A. business risk determines the return on assets. B. the cost of equity rises as leverage rises. C. it is completely irrelevant how a firm arranges its finances. D. a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress. E. financial risk is determined by the debt-equity ratio.

C. it is completely irrelevant how a firm arranges its finances.

MM Proposition I without taxes proposes that: A. the value of an unlevered firm exceeds that of a levered firm. B. there is one ideal capital structure for each firm. C. leverage does not affect the value of the firm. D. shareholder wealth is directly affected by the capital structure selected. E. the value of a levered firm exceeds that of an unlevered firm.

C. leverage does not affect the value of the firm.

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. market value of the total shares held in each stock.

A security that is fairly priced will have a return _____ the security market line. A. below B. on or below C. on D. on or above E. above

C. on

For a multi-product firm, if a project's level of risk differs from that of the overall firm, then the: A. CAPM can no longer be used to estimate the cost of equity as beta no longer applies. B. project should be discounted using the overall firm's beta. C. project should be discounted using a beta commensurate with the project's risks. D. project should be discounted at the market rate. E. project should be discounted at the T-bill rate.

C. project should be discounted using a beta commensurate with the project's risks.

The characteristic line graphically depicts the relationship between the: A. beta of a security and the return on the security. B. arithmetic average beta of the securities in a portfolio and the weighted average beta of those securities. C. return on a security and the return on the market. D. beta of a security and the return on the market. E. beta of a security and the corresponding beta of the market.

C. return on a security and the return on the market.

In an efficient market when a firm makes an announcement of a new product or product enhancement with superior technology providing positive NPV, the price of the stock will: A. rise gradually over the next few days. B. decline gradually over the next few days. C. rise on the same day to the new price. D. stay at the same price, with no net effect. E. drop on the same day to the new price.

C. rise on the same day to the new price.

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

C. semistrong

A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can "beat the market" by short-selling the stock of the firm that will be sued. This finding is a violation of the: A. moderate form of the efficient market hypothesis. B. semistrong form of the efficient market hypothesis. C. strong form of the efficient market hypothesis. D. weak form of the efficient market hypothesis. E. None of these.

C. strong form of the efficient market hypothesis.

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. systematic

The measure of beta associates most closely with: A. idiosyncratic risk. B. the risk-free return. C. systematic risk. D. unexpected risk. E. unsystematic risk.

C. systematic risk.

The free cash flow hypothesis states: A. that firms with greater free cash flow will pay more in dividends thereby reducing the risk of financial distress. B. that firms with greater free cash flow should issue new equity to help minimize the wasting of resources by managers. C. that issuing debt requires interest and principal payments to be paid thereby reducing the potential of management to waste resources. D. that firms will higher levels of free cash flow should reduce their debt levels. E. that firms with higher levels of free cash flow should reward their managers with bonuses.

C. that issuing debt requires interest and principal payments to be paid thereby reducing the potential of management to waste resources.

Which one of the following is the best example of systematic risk? A. the price of lumber declines sharply B. airline pilots go on strike C. the Federal Reserve increases interest rates D. a hurricane hits a tourist destination E. people become diet conscious and avoid fast food restaurants

C. the Federal Reserve increases interest rates

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. the portfolio concentration in a single cyclical industry increases.

As we add more diverse securities to a portfolio, the ____ risk of the portfolio will decrease while the _____ risk will not. A. total; unsystematic B. systematic; unsystematic C. total; systematic D. systematic; total E. unsystematic; total

C. total; systematic

A stock with an actual return that lies above the security market line has: A. more systematic risk than the overall market. B. more risk than warranted based on the realized rate of return. C. yielded a higher return than expected for the level of risk assumed. D. less systematic risk than the overall market. E. yielded a return equivalent to the level of risk assumed.

C. yielded a higher return than expected for the level of risk assumed.

Which one of these conditions must exist if the standard deviation of a portfolio is to be less than the weighted average of the standard deviations of the individual securities held within that portfolio? A. β< 1 B. Rm> 1 C. ρ< 1 D. β = 0 E. ρ >1

C. ρ< 1

A small stock dividend is generally defined as a stock dividend of less than _____ percent. A.10 to 15 B.15 to 20 C.20 to 25 D.25 to 30 E.30 to 35

C.20 to 25

Which one of these is a con of paying dividends? A.Paying dividends reduces agency costs when excess cash is available. B.Dividends can be used to signal a firm's optimistic outlook. C.Dividends are frequently taxed as ordinary income. D.Dividends appeal to income-seeking investors. E.Managers can pay dividends to keep cash from bondholders.

C.Dividends are frequently taxed as ordinary income.

The dividend-irrelevance proposition of Miller and Modigliani depends on which one of the following relationships between investment policy and dividend policy? A.The level of investment does not influence or matter to the dividend decision. B.Once dividend policy is set the investment decision can be made. C.The investment policy is set ahead of time and not altered by changes in dividend policy. D.Since dividend policy is irrelevant there is no relationship between investment policy and dividend policy E.Miller and Modigliani were only concerned about capital structure.

C.The investment policy is set ahead of time and not altered by changes in dividend policy.

A change in dividend policy does not affect the value of a share of stock as long as: A.the dividend payout ratio remains constant. B.the following dividends are changed by the same amount. C.all of the distributable cash flow is paid out. D.there is an offsetting change in stock repurchases. E.shareholders are given ample warning.

C.all of the distributable cash flow is paid out.

Firms generally: A.set high target payout ratios when they are relatively young. B.decrease their dividends as soon as they expect earnings to decline. C.allow their dividend changes to lag their earnings changes. D.set short-term target ratios of dividends to earnings. E.set the dividend growth rate equal to the firm's earnings growth rate.

C.allow their dividend changes to lag their earnings changes.

The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the: A.ex-rights date. B.ex-dividend date. C.date of record. D.date of payment. E.declaration date

C.date of record.

A stock split: A.increases the total value of the common stock account. B.decreases the value of the retained earnings account. C.does not affect the total value of any of the equity accounts. D.increases the value of the capital in excess of par account. E.decreases the total owners' equity on the balance sheet.

C.does not affect the total value of any of the equity accounts.

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.management believes the future earnings of the firm will be strong.

A cash payment made by a firm to its owners in the normal course of business is called a: A.share repurchase. B.liquidating dividend. C.regular cash dividend. D.special dividend. E.extra cash dividend

C.regular cash dividend.

Under the concept of an efficient market, a random walk in stock prices means that: A. there is no driving force behind price changes. B. technical analysts can predict future price movements to earn excess returns. C.the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period. D .the unexplained portion of price change in one period that cannot be explained by expected return can only be explained by the unexplained portion of price change in a prior period. E. None of these

C.the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period.

The last date on which you can 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.three D.five E.seven

C.three

The optimal capital structure will tend to include more debt for firms with: A) The highest depreciation deductions. B) The lowest marginal tax rate. C) Substantial tax shields from other sources. D) Lower probability of financial distress. E) Less taxable income.

D) Lower probability of financial distress.

The value of a firm is maximized when the: A) Cost of equity is maximized. B) Tax rate is zero. C) Levered cost of capital is maximized. D) Weighted average cost of capital is minimized. E) Debt-equity ratio is minimized

D) Weighted average cost of capital is minimized.

Which one of the following statements is correct concerning market efficiency? A. Real asset markets are more efficient than financial markets. B. If a market is efficient, arbitrage opportunities should be common. C. In an efficient market, some market participants will have an advantage over others. D. A firm will generally receive a fair price when it sells shares of stock. E. New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.

D. A firm will generally receive a fair price when it sells shares of stock.

f the weak form of efficient markets holds, then: A. technical analysis is useless. B. stock prices reflect all information contained in past prices. C. stock prices follow a random walk. D. All of these. E. None of these

D. All of these.

Which of the following would be indicative of inefficient markets? A. Overreaction and reversion B. Delayed response C. Immediate and accurate response D. Both Overreaction and reversion; and Delayed response E. Both Overreaction and reversion; and Immediate and accurate response

D. Both Overreaction and reversion; and Delayed response

The expected return on a portfolio: A. can be greater than the expected return on the best performing security in the portfolio. B. can be less than the expected return on the worst performing security in the portfolio. C. is independent of the performance of the overall economy. D. is limited by the returns on the individual securities within the portfolio. E. is an arithmetic average of the returns of the individual securities when the weights of those securities are unequal.

D. Is limited by the returns on the individual securities within the portfolio.

The expected return on a stock that is computed using economic probabilities is: A. guaranteed to equal the actual average return on the stock for the next five years. B. guaranteed to be the minimal rate of return on the stock over the next two years. C. guaranteed to equal the actual return for the immediate twelve month period. D. a mathematical expectation based on a weighted average and not an actual anticipated outcome. E. the actual return you will receive.

D. a mathematical expectation based on a weighted average and not an actual anticipated outcome.

Assume you are looking at an opportunity set representing many securities. Where would the minimum variance portfolio be located in relation to this set? A. at the lowest point of the set B. in the exact center of the set C. at the far-right point of the set D. at the far-left point of the set E. at the highest point of the set

D. at the far-left point of the set

The separation principle states that an investor will: A. choose between any efficient portfolio and a riskless asset to generate the desired expected return. B. choose a portfolio from the efficient set based on individual risk tolerance. C. never choose to invest in a riskless asset due to the low expected rate of return. D. combine a riskless asset with the tangency portfolio based on their risk tolerance level. E. combine a riskless asset with the minimum variance portfolio based on their risk tolerance level.

D. combine a riskless asset with the tangency portfolio based on their risk tolerance level.

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. A. roughly equivalent to B. significantly less than C. slightly less than D. greater than E. equal to

D. greater than

You have a portfolio comprised of two risky securities. This combination produces no diversification benefit. The lack of diversification benefits indicates the returns on the two securities: A. are too low for their level of risk. B. move perfectly opposite of one another. C. are too large to offset. D. move perfectly in sync with one another. E. are completely unrelated to one another

D. move perfectly in sync with one another.

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

D. react immediately to new information with no further price adjustments related to that information.

The linear relation between an asset's expected return and its beta coefficient defines the: A. reward-to-risk ratio. B. covariance line. C. characteristic line. D. security market line. E. market risk premium.

D. security market line.

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

D. strong form efficient.

The market risk premium is computed by: A. adding the risk-free rate of return to the inflation rate. B. adding the risk-free rate of return to the market rate of return. C. subtracting the risk-free rate of return from the inflation rate. D. subtracting the risk-free rate of return from the market rate of return. E. multiplying the risk-free rate of return by the market beta.

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

An efficient set of portfolios is comprised of: A. a complete opportunity set. B. the portion of the opportunity set located below the minimum variance portfolio. C. only the minimum variance portfolio. D. the dominant portion of the opportunity set. E. only the maximum return portfolio.

D. the dominant portion of the opportunity set.

Risk that affects at most a small number of assets is called _____ risk. A. portfolio B. nondiversifiable C. market D. unsystematic E. total

D. unsystematic

The hypothesis that market prices reflect all historical information is called _____ form efficiency. A. open B. strong C. semistrong D. weak E. stable

D. weak

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: A. moderate form of the efficient market hypothesis. B. semistrong form of the efficient market hypothesis. C. strong form of the efficient market hypothesis. D. weak form of the efficient market hypothesis. E. None of these

D. weak form of the efficient market hypothesis.

A firm announces that it is willing to purchase a number of shares back at various prices and shareholders have the option to indicate how many shares they are willing to sell at the various prices. This process is called a: A.homemade dividend. B.tender offer. C.free market sale. D.Dutch auction. E.targeted repurchase.

D.Dutch auction.

Nu Tech, Inc. is a technology firm with good growth prospects. The firm wishes to do something to acknowledge the loyalty of its shareholders but needs all of its available cash to fund its rapid growth. The market price of its stock is currently trading in the upper end of its preferred trading range. The firm could consider: A.a liquidating dividend. B.an extra cash dividend. C.a reverse stock split. D.a stock dividend. E.a cash distribution.

D.a stock dividend.

The date on which the firm mails out its declared dividends is called the: A.ex-rights date. B.ex-dividend date. C.date of record. D.date of payment. E.declaration date.

D.date of payment.

Which one of the following lists 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.declaration date, ex-dividend date, date of record

Ignoring capital gains as an alternative, the tax law changes in 2003 tend to favor a: A.lower dividend policy. B.constant dividend policy. C.zero-dividend policy. D.higher dividend policy. E.restrictive dividend policy.

D.higher dividend policy.

A one-for-four reverse stock split will: A.increase the par value by 25 percent. B.increase the number of shares outstanding by 400 percent. C.increase the market value but not affect the par value per share. D.increase a $1 par value to $4. E.increase a $1 par value by $4.

D.increase a $1 par value to $4.

Probably the best argument for 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 set by a stock exchange. E.raise additional capital from current stockholders.

D.maintain a minimum share price set by a stock exchange.

Wydex, Inc. stock is currently trading at $82 a share. The firm feels that its primary clientele can afford to spend between $2,000 and $2,500 to purchase a round lot of 100 shares. The firm should consider a: A.reverse stock split. B.liquidating dividend. C.stock dividend. D.stock split. E.special dividend.

D.stock split.

Based on the concept of the clientele effect, which one of these combinations correctly aligns an investor group with its preferred type of stocks? A.low-tax-bracket individuals; zero-to-low payout stocks B.high-tax-bracket individuals; low-to-medium payout stocks C.corporations; low-to-medium payout stocks D.tax-free institutions; medium-payout stocks E.high-tax-bracket individuals; high-payout stocks

D.tax-free institutions; medium-payout stocks

In a reverse stock split: A.the number of shares outstanding increases and owners' equity decreases. B.the firm buys back existing shares of stock on the open market. C.the firm sells new shares of stock on the open market. D.the number of shares outstanding decreases but owners' equity is unchanged. E.shareholders make a cash payment to the firm.

D.the number of shares outstanding decreases but owners' equity is unchanged.

The optimal capital structure has been achieved when the: A) Debt-equity ratio is equal to 1. B) Weight of equity is equal to the weight of debt. C) Cost of equity is maximized given a pretax cost of debt. D) Debt-equity ratio is such that the cost of debt exceeds the cost of equity. E) Debt-equity ratio selected results in the lowest possible weighed average cost of capital.

E) Debt-equity ratio selected results in the lowest possible weighed average cost of capital.

Indirect costs of financial distress: A) Effectively limit the amount of equity a firm issues. B) Serve as an incentive to increase the financial leverage of a firm. C) Include costs such as legal and accounting fees. D) Tend to increase as the debt-equity ratio decreases. E) Include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.

E) Include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.

In a world with taxes and financial distress, when a firm is operating with the optimal capital structure the: A) Debt-equity ratio will be less than optimal. B) Weighted average cost of capital will be maximized. C) Firm will be all-equity financed. D) Required return on assets will be at its maximum point. E) Increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.

E) Increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.

Which of the following tend to reinforce the argument that the financial markets are efficient?I. Information spreads rapidly in today's world.II. There is tremendous competition in the financial markets. III. Market prices continually fluctuate. IV. Market prices react suddenly to unexpected news announcements. A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

According to theory, studying historical prices in order to identify mispriced stocks will not work inmarkets that are _____ efficient.I. weak formII. semistrong form III. strong form A. I only B. II only C. I and II only D. II and III only E. I, II, and III

E. I, II, and III

The slope of an asset's security market line is the: A. reward-to-risk ratio. B. portfolio weight. C. beta coefficient. D. risk-free interest rate. E. market risk premium.

E. Market risk premium

An investor discovers that stock prices change drastically as a result of certain events. This finding is aviolation of the: A. moderate form of the efficient market hypothesis. B. semistrong form of the efficient market hypothesis. C. strong form of the efficient market hypothesis. D. weak form of the efficient market hypothesis. E. None of these

E. None of these

Which one of the following would indicate a portfolio is being effectively diversified? A. an increase in the portfolio beta B. a decrease in the portfolio beta C. an increase in the portfolio rate of return D. an increase in the portfolio standard deviation E. a decrease in the portfolio standard deviation

E. a decrease in the portfolio standard deviation

If a market is strong form efficient then: A. company insiders are the only investors capable of earning an abnormal profit. B. abnormal profits are obtainable by any and all investors. C. technical analysts who study past market performance have a market advantage. D. all investments should have positive NPVs. E. company insiders have no advantage over John Q. Public investor.

E. company insiders have no advantage over John Q. Public investor.

When computing the weighted average cost of capital, which of these are 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 all forms of financing E. cost of debt

E. cost of debt

The variance of a portfolio comprised of many securities is primarily dependent upon the: A. variances of the securities held within the portfolio. B. beta of the portfolio. C. portfolio's correlation with the market. D. covariance between the overall portfolio and the market. E. covariances between the individual securities.

E. covariances between the individual securities.

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: A. be equal to one-half of 8 percent if there is a 50 percent chance of an economic boom. B. vary inversely with the growth of the economy. C. increase as the probability of a recession increases. D. be independent of the probability of each economic state occurring. E. increase as the probability of a boom economy increases.

E. increase as the probability of a boom economy increases.

According to the capital asset pricing model, 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. positively and linearly related to the security's beta.

An efficient capital market is one in which: A. brokerage commissions are zero. B. taxes are irrelevant. C. securities always offer a positive rate of return to investors. D. security prices are guaranteed by the U.S. Securities and Exchange Commission to be fair. E. security prices reflect available information.

E. security prices reflect available information.

The principle of diversification tells us that: A. concentrating an investment in two or three large stocks will eliminate all of 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 at all. D. spreading an investment across many diverse assets will eliminate all of the risk. E. spreading an investment across many diverse assets will eliminate idiosyncratic risk

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

Which one of these statements is true? A.Dividends are irrelevant. B.Shareholders are unable to personally adjust the dividend policy set by the firm. C.According to Miller and Modigliani, a firm should alter its investment policy whenever a change is made in its dividend policy. D.Dividend policy is relevant. E.Firms should never give up a positive NPV project to increase a dividend.

E.Firms should never give up a positive NPV project to increase a dividend.

Which one of these 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. E.Much of the dividend income paid in the U.S. is related to a small number of firms

E.Much of the dividend income paid in the U.S. is related to a small number of firms

Which one of the following is cited as an argument for 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 contained in a bond indenture agreement E.agency costs related to excess cash reserves

E.agency costs related to excess cash reserves

Which one of these is a characteristic of a sensible payout policy? A.over time pay out half of all free cash flows B.set the current regular dividend consistent with a 100 percent payout ratio C.increase regular dividends to distribute transitory cash flow increases D.set the dividends high even if it means acquiring expensive external financing E.avoid rejecting positive NPV projects to increase dividends or buyback shares

E.avoid rejecting positive NPV projects to increase dividends or buyback shares

Share repurchases: A.reduce a firm's demand for external financing. B.offer less tax advantages to shareholders than do cash dividends. C.tend to increase agency costs. D.are always positive net present value investments. E.can be difficult to verify.

E.can be difficult to verify.

Which one of the following is not a reason why firms choose repurchases rather than dividends? A.provide flexibility B.increase the value of existing stock options C.provide shareholders with a tax advantage D.offset dilution E.conserve cash

E.conserve cash

The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _____ date. A.ex-rights B.ex-dividend C.record D.payment E.declaration

E.declaration

The annual dividend per share stated as a percentage of the annual earnings per share is called the: A.dividend yield. B.dividend per share. C.annual yield. D.dividend rate. E.dividend payout.

E.dividend payout.

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.high cash dividends.

The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend payment policy via reinvesting dividends or selling shares of stock is referred to as: A.the perfect foresight model. B.MM Proposition I. C.capital structure irrelevancy. D.homemade leverage. E.homemade dividends.

E.homemade dividends.

According to the clientele effect, firms can only boost their stock price: A.by increasing the dividend payout ratio. B.by increasing their regular cash dividends. C.by setting their dividend to the level expected by the highest-dividend-receiving satisfied clientele group. D.by commencing dividend payments if they are a non-dividend-paying firm. E.if an unsatisfied clientele group exists.

E.if an unsatisfied clientele group exists.

If a market is strong form efficient, it also implies that: A. semistrong form efficiency holds. B. weak form efficiency holds. C. one cannot earn abnormal returns with inside information. D. Both semistrong form efficiency holds; and one cannot earn abnormal returns with inside information. E.semistrong form efficiency holds; and weak form efficiency holds; and one cannot earn abnormal returns with inside information.

E.semistrong form efficiency holds; and weak form efficiency holds; and one cannot earn abnormal returns with inside information.

A _____ is an alternative method to cash dividends which is used to pay out a firm's earnings to shareholders. A.merger B.acquisition C.payment-in-kind D.stock split E.share repurchase

E.share repurchase

Which one of the following statements is correct? a. The greater the volatility of returns, the greater the risk premium. b. The lower the volatility of returns, the greater the risk premium. c. The lower the average return, the greater the risk premium. d. The risk premium is unrelated to the average rate of return. e. The risk premium is not affected by the volatility of returns.

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

Stock Splits are often used to a. adjust the market price of a stock such that it falls within a preferred trading range b. decrease the excess cash held by a firm c. increase both the number of shares outstanding and the market price per share d. increase the total equity of a firm e. adjust the debt-equity such that it falls within a preferred range

a. adjust the market price of a stock such that it falls within a preferred trading range

The return earned in an average year over a multi-year period is called the _____ average return. a. arithmetic b. standard c. variant d. geometric e. real

a. arithmetic

A manager should attempt to maximize the value of the firm by changing the capital structure if and only if the value of the firm increases a. as a result of the change b. to the sole benefit of the managers c. to the sole benefit of the debtholders d. while also decreasing shareholder value e. while holding stockholder value constant

a. as a result of the change

Which one of these is a measure of the interrelationship between two securities? a. covariance b. duration c. standard deviation d. alpha e. variance

a. covariance

The variance of returns is computed by dividing the sum of the a. squared deviations by the number of returns minus one b. average returns by the number of returns minus one c. average returns by the number of returns plus one d. squared deviations by the average rate of return e. squared deviations by the number of returns plus one

a. squared deviations by the number of returns minus one

Individuals who continually monitor the financial markets seeking mispriced securities: a. earn excess profits over the long-term. b. make the markets increasingly more efficient. c. are never able to find a security that is temporarily mispriced. d. are overwhelmingly successful in earning abnormal profits. e. are always quite successful using only historical price information as their basis of evaluation.

b. make the markets increasingly more efficient.

The hypothesis that market prices reflect all available information of every kind is called _____ form efficiency a. open b. strong c. semistrong d weak e. stable

b. strong

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

b. tend to make the markets more efficient

Efficient financial markets fluctuate continuously because: a. the markets are continually reacting to old information as that information is absorbed. b. the markets are continually reacting to new information. c. arbitrage trading is limited. d. current trading systems require human intervention. e. investments produce varying levels of net present values.

b. the markets are continually reacting to new information.

Standard deviation is a measure of which one of the following? a. average rate of return b. volatility c. probability d. risk premium e. real returns

b. volatility

Which of the following statements is correct in relation to a stock investment?I. The capital gains yield can be positive, negative, or zero.II. The dividend yield can be positive, negative, or zero.III. The total return can be positive, negative, or zero.IV. Neither the dividend yield nor the total return can be negative. a. I only b. I and II only c. I and III only d. I and IV only e. IV only

c. I and III only

Which one of the following events would be included in the expected return on Sussex stock? a. The chief financial officer of Sussex unexpectedly resigned. b. The labor union representing Sussex' employees unexpectedly called a strike. c. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. d. The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. e. The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.

c. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated.

If Financial markets are efficient, then attempting to accurately predict interest rates is: a. an endeavor best left to corporate executives b. a relatively easy and accurate exercise c. a waste of good time d. relatively easy to do if you have a general understanding of finance and economics e. a little tricky but wise managers tend to success at it on an ongoing basis

c. a waste of good time

Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: a. was unaffected by the announcement. b. increased proportionately with the dividend decrease. c. decreased proportionately with the dividend decrease. d. decreased by $0.14 per share. e. increased by $0.14 per share.

c. decreased proportionately with the dividend decrease.

which one of the following is a direct, rather than an indirect, cost of financial distress? a. key employee leaving for another job due to concerns over job security given the company's financial status b. loss of a key supplier due to late payments to that supplier c. fees paid to financial advisors related to bankruptcy matters d. loss of customers due to concerns the company will close e. money spent to send a mailing to customers dispelling any and all financial distress concerns about the company

c. fees paid to financial advisors related to bankruptcy matters

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return. a. greater than b. equal to c. less than d. greater than or equal to e. unrelated to

c. less than

The real rate of return on a stock is approximately equal to the nominal rate of return: a. multiplied by (1 + inflation rate). b. plus the inflation rate. c. minus the inflation rate. d. divided by (1 + inflation rate). e. divided by (1 - inflation rate).

c. minus the inflation rate.

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

c. regular cash dividend

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly? a. variance b. standard deviation c. reward-to-risk ratio d. beta e. risk premium

c. reward-to-risk ratio

The US securities and exchange commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Base on this fact, you would tend to argue that the financial markets are at best ___form efficiency a. weak b. semiweak c. semistrong d. strong e. perfect

c. semistrong

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient. a. weak b. semiweak c. semistrong d. strong e. perfect

c. semistrong

Small-company stocks, as the term is used in the textbook, are best defined as the: a. 500 newest corporations in the U.S. b. firms whose stock trades OTC. c. smallest twenty percent of the firms listed on the NYSE. d. smallest twenty-five percent of the firms listed on NASDAQ. e. firms whose stock is listed on NASDAQ.

c. smallest twenty percent of the firms listed on the NYSE.

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 US treasury bill from d. adding the average return on the us treasury bill to e. subtracting the average return on long-term government bonds from

c. subtracting the average return on the US treasury bill from

Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy? a. the expected return is a geometric average where the probabilities of the economic states are used as the exponential powers b. the expected return is an arithmetic average of the individual returns for each state of the economy c. the expected return is a weighted average where the probabilities of the economic states are used as the weights d. the expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state e. as long as the total probabilities of the economic states equal 100%, then the expected return on the stock is a geometric average of the expected returns for each economic state

c. the expected return is a weighted average where the probabilities of the economic states are used as the weights

AN OVERCONFIDENT INVESTOR WILL TEND TO a. trade primarily in securities from their local area b trade less frequently than an average investor c. underperform due to excess trading d. suffer from the disposition effect e. underestimate their ability to pick a winning stock

c. underperform due to excess trading

The historical record for the period 1926-2010 supports which one of the following statements? a. A higher-risk security will provide a higher rate of return next year than will a lower-risk security. b. If you need a stated amount of money next year, your best investment option today for those funds would be long-term government bonds. c. Increased long-run potential returns are obtained by lowering risks. d. It is possible for small-company stocks to more than double in value in any one given year. e. Inflation was positive each year throughout the period of 1926-2010.

d. It is possible for small-company stocks to more than double in value in any one given year.

Nu Tech is a technology firm with good growth prospects. The firm wishes to do something to acknowledge the loyalty of its shareholders but needs all its available cash to fund its rapid growth. The market price of its stock is currently trading in the upper end of its preferred trading range. The firm could consider a. a liquidating dividend b. an extra cash dividend c. a reverse stock split d. a stock dividend e. a cash distribution

d. a stock dividend

You have plotted the monthly returns for 2 securities for the past 5 years on the same graph. The pattern of the movements of each of the 2 securities generally rose and fell to the same degree in step with each other. 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. a strong positive correlation

Conflicts of interest between stockholders and bondholders are known as: a. trustee costs b. financial distress costs c. dealer costs d. agency costs e. underwriting costs

d. agency costs

The average compound return earned per year over a multi-year period is called the _____ average return. a. arithmetic b. standard c. variant d. geometric e. real

d. geometric

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

d. managers cannot boost stock prices by changing their accounting methods

the firms capital structure refers to the a. mix of current and fixed assets a firm holds b. amount of capital invested in the firm c. amount of dividends a firm pays d. mix of debt and equity used to finance the firms assets e. amount of cash versus receivables the firm holds

d. mix of debt and equity used to finance the firms assets

The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly. a. real return b. actual return c. nominal return d. risk premium e. expected return

d. risk premium

Which one of these lowers cash flows? a. decreased use of leverage b. decreased costs c. increased sales due to an improved economy d. the associated costs of bankruptcy e. a decrease in the interest rate charged on debt

d. the associated costs of bankruptcy

The range of possible correlations between 2 securities is defined as a. 0 to +1 b. 0 to -1 c. >=0 d. <= 1 e +1 to -1

e +1 to -1

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010? a. long-term government bonds b. small company stocks c. large company stocks d. long-term corporate bonds e. U.S. Treasury bills

e. U.S. Treasury bills

In estimating the future equity risk premium, it is important to include assumptions about the a. historical distribution of returns on derivative securities only b. future risk environment only c. amount of risk aversion of future investors only d. historical distribution of returns on derivative securities and the future risk environment e. future risk environment and the amount of risk aversion of future investors

e. future risk environment and the amount of risk aversion of future investors

In the absence of taxes, the capital structure chosen by a firm doesn't really matter because of a. taxes b. the interest tax shield c. the relationship between dividends and earnings per share d. the effects of leverage on the cost of equity e. homemade leverage

e. homemade leverage

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

e. security prices reflect all available information