FNCE 440 - Practice Exam

An equity issue sold to the firm's existing stockholders is called a a. rights offer. b. general cash offer. c. private placement. d. discriminatory-price auction.

A

Economic rents are returns that a. exceed the opportunity cost of capital b. equal the opportunity cost of capital c. are less than the opportunity cost of capital d. are not related to the opportunity cost of capital

A

If dividends are taxed more heavily than capital gains, then investors a. should be willing to pay more for stocks with low dividend yields. b. should be willing to pay more for stocks with high dividend yields. c. should be willing to pay the same for stocks regardless of their dividend yields. d. should be willing to pay more for stocks having infrequent share repurchases.

A

The following are real options except a. stock options b. timing options c. options to expand d. options to abandon

A

The market value of equity equals a. (Market price) × (# of shares outstanding). b. (Market price) × (# of treasury shares). c. (Market price) × (# of authorized shares). d. (Par value) × (# of shares outstanding).

A

The stock exchange that specializes in trading the shares of young and rapidly growing companies is the a. NASDAQ. b. NYSE. c. London Stock Exchange. d. Tokyo Stock Exchange.

A

When securities are sold by a firm, this is termed a(an): a. primary issue. b. secondary transaction. c. OTC transaction. d. open operation.

A

Which of the following does not represent an option to abandon a project? a. your friend builds a custom-made home b. you enroll in five classes, planning to drop one class before the semester ends c. a dry cleaner purchases equipment that can be readily sold to other dry cleaners d. you purchase a fully refundable airplane ticket

A

A grant of authority allowing someone else to vote shares of stock that you own is called a. repurchase agreement. b. proxy voting. c. share repurchase. d. repurchase agreement and share repurchase.

B

Generally, investors interpret the announcement of an increase in dividends as a. bad news, and the stock price drops. b. good news, and the stock price increases. c. a nonevent that does not affect the stock price. d. very bad news, and the stock price plunges.

B

If capital markets are efficient, then the sale or purchase of any security at the prevailing market price is generally a. a positive NPV transaction b. a zero NPV transaction c. a negative NPV transaction d. no general trend exists for such transactions

B

Suppose the current price of gold is $600 per ounce. The price of gold is expected to grow 4 percent per year for the foreseeable future. If the appropriate discount rate is 10 percent, then the current value of gold per ounce is a. less than $600 per ounce b. $600 per ounce c. greater than $600 per ounce d. not enough information is provided

B

The semistrong form of efficiency focuses on the economic ineffectiveness of the following type of information: a. insider information. b. publicly available information. c. privileged information. d. only information provided by the SEC.

B

Which type of voting allows minority shareholders to allocate their votes in a manner to increase the chance of electing a director? a. Majority voting b. Cumulative voting c. Representative voting d. Executive voting

B

Suppose that 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 firms that will be sued. This hypothetical finding would violate the a. weak-form hypothesis of market efficiency. b. semistrong form hypothesis of market efficiency. c. strong-form hypothesis of market efficiency. d. none of the hypotheses of market efficiency.

C

The change in a firm's retained earnings is a. the amount of cash that the firm has saved up. b. the difference between the market price of the stock and the book value. c. the difference between the net income earned and the dividends paid during a year. d. the amount of directly contributed equity capital in excess of par value.

C

Weak-form efficiency implies that past stock returns a. form patterns that tend to repeat b. are major inputs to investors for forming trading strategies c. do not help predict future returns d. are difficult to explain

C

What is the NPV of a project in a perfectly competitive environment? a. positive b. negative c. zero d. the answer cannot be determined

C

When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds, and so forth, it is called a(an) a. rights offering. b. general art offering. c. private placement. d. unseasoned issue.

C

Which of the following are not financial intermediaries? a. Insurance companies b. Mutual funds c. Banking regulators d. Venture capital funds

C

Which of the following lists events in chronological order from earliest to latest? a. Record date, declaration date, ex-dividend date b. Declaration date, record date, ex-dividend date c. Declaration date, ex-dividend date, record date d. Record date, ex-dividend date, declaration date

C

According to Warren Buffet, which of the following is the most important lesson on growth and profitability? a. investors should have invested in the car industry in the early twentieth century b. investors should have invested in the aircraft manufacturing industry in the early twentieth century c. one should look to invest in economically important sectors of the economy that have room for many firms d. Understanding a firm's competitive advantage is more important than understanding the firm's growth rate or impact on society.

D

If markets are efficient, which of the following investors should achieve superior returns over time? a. investors who choose stocks by throwing darts at a list of stocks in the financial pages of a newspaper b. analysts who spend considerable time evaluating the best stocks to buy c. mutual fund managers who manage other people's money for a living d. none of these options.

D

Which of the following is NOT a sensible reason for a firm to rely on internal funds? a. Equity issues are generally expensive. b. A new bond issue may drive the firm's debt ratio too high. c. Financial markets interpret the issuance of equity unfavorably. d. All of these are sensible reasons to rely on internal funds.

D

Firms can pay out cash to their shareholders in two ways: cash dividends and stock dividends. T or F

F

The first public issue by a firm is known as a seasoned equity offering T or F

F

The market for venture capital refers to the I) private financial marketplace for providing equity investment for small, start-up firms; II) bond market; III) market for providing equity to well-established firms

I only

The statement that stock prices follow a random walk implies that I) successive price changes are independent of each other; II) successive price changes are positively related; III) successive price changes are negatively related; IV) the autocorrelation coefficient is either +1.0 or −1.0

I only

Firms can pay out cash to their shareholders in the following way(s): I) dividends; II) share repurchases; III) interest payments

I, II

Underwriters will handle an issue of new securities on a(n) I) best efforts basis; II) firm commitment basis; III) all or none basis

I, II, III

Which of the following are true? I) Firms have long-run target dividend payout ratios. II) Dividend changes follow shifts in long-term, sustainable earnings. III) Managers are reluctant to make dividend changes that might have to be reversed.

I, II, III

A business plan generally contains a description of I) the proposed products; II) the potential market; III) the underlying technology; IV) resources needed

I, II, III, and IV

Long-lasting competitive advantages include I) patents II) brand names III) economies of scale

I, II, and III

If you use futures prices to estimate the cash flows of a project, which discount rate should you use? I) cost of capital for the firm II) cost of capital for the project III) risk free rate

III only

Strong-form market efficiency states that the market incorporates all information into stock prices. Strong-form efficiency implies that I) an investor can only earn risk-free rates of return; II) an investor can always rely on technical analysis; III) professional investors cannot consistently outperform the market

III only

The best way to uncover forecasting errors contained within NPV estimates is by looking at I) book values II) historical values III) market values

III only

The following are characteristics of preferred stock except it I) pays fixed dividends; II) can demand payments of cumulative dividends; III) has voting rights

III only

A warrant is a type of option T or F

T

Behavioral finance deals with the idea that individual investors have built-in biases and misconceptions that can drive prices away from fair values. T or F

T

Managers are reluctant to make dividend changes that they may have to reverse. T or F

T

Many companies have automatic dividend reinvestment plans (DRIPs) T or F

T

Monte Carlo simulation is mostly an advanced version of scenario analysis T or F

T

The cash forecasts for a positive NPV project is more reliable if the managers of the firm can identify the economic rents associated with the project. T or F

T