Finance 315 Quizzes

Bonds issued by the U.S. government: A. are considered to be default-free. B. are exempt from interest rate risk. C. provide totally tax-free income. D. pay interest that is exempt from federal income tax. E. are taxed the same as municipal bonds.

A

Efficient markets require which one of these? A. Countervailing irrationalities B. Overly optimistic amateur investors C. Dart thrower investors D. Only rational investors E. Investors adhering to the conservatism principle

A

Given the vast resources available to mutual fund managers, these managers on average have generally: A. underperformed the market on a risk-adjusted basis. B. beat broad-based indexes. C. proved the market to be strong form efficient. D. eliminated excess profits for arbitrageurs. E. outperformed the overall market on a risk-adjusted basis.

A

How frequently do dividend-paying firms in the U.S. generally pay regular cash dividends? A. Quarterly B. Biannually C. Annually D. Monthly E. Semiannually

A

If the market is fully efficient, then an announcement by a firm of a new product with a high net present value will cause the market price of that firm's stock to: A. immediately increase to a new level equivalent to the increased value of the firm. B. remain constant. C. immediately decline to a new level equivalent to the decreased value of the firm. D. decline gradually over the next few days. E. rise gradually over the next few days.

A

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

A

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

A

Serial correlation: A. involves only one security. B. measures the current relationship between the returns on two securities. C. measures the cumulative difference between the returns on two similar securities. D. indicates a reversal in the direction of returns when the coefficient is positive. E. indicates a tendency toward reversal when its coefficient is positive.

A

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

A

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

A

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

A

The underlying assumption of the dividend growth model is that a stock is worth: A. the present value of the future income provided by that stock. B. the same amount to every investor. C. an amount computed as the next annual dividend divided by the market rate of return. D. an amount computed as the last annual dividend divided by the required rate of return. E. the same amount as any other stock that paid the same dividend this year.

A

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

B

A firm with high operating leverage is best defined as a firm that has: A. a high debt-to-equity ratio. B. high fixed costs relative to variable costs. C. a low, relatively stable beta. D. high variable costs relative to fixed costs. E. a high sales/assets ratio.

B

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

B

A stock report contains the following information: P/E 21.4, closing price 28.16, dividend 1.10, net chg .06, and an ask of 28.22 × 300. Which one of the following statements is correct given this information? A. The stock price has increased by 6 percent thus far this year. B. The closing price on the previous trading day was $28.10. C. The earnings per share are approximately $2. D. The dividend yield is 21.4 percent. E. The bid-ask spread is $.300.

B

Greener Grass Co. pays a constant annual dividend of $1 a share and has 1,000 shares of common stock outstanding. The company: A. must always show a current liability on its balance sheet of $1,000 for dividends payable. B. must still declare each dividend before it becomes an actual company liability. C. is obligated to continue paying $1 a share each year. D. can deduct $1,000 a year as a business expense as a result of its dividend payment. E. can be forced into bankruptcy by its shareholders if it fails to pay at least $1 a year in dividends.

B

If the net present value of a project is positive (non-zero), then the project's: A. PI will be less than 1. B. internal rate of return will exceed its required rate of return. C. costs exceed its benefits. D. discounted payback period will exceed the life of the project. E. payback period must equal the life of the project.

B

In respect to a balance sheet, a stock split will: A. increase the total value of the common stock account. B. not affect the total value of any of the equity accounts. C. decrease the value of the retained earnings account. D. Increase the value of the capital in excess of par value account. E. decrease the total book value of owners' equity.

B

One advantage of the payback method of project analysis is the method's: A. application of a discount rate to each separate cash flow. B. bias towards liquidity. C. difficulty of use. D. arbitrary cutoff point. E. consideration of all relevant cash flows.

B

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

B

The incremental cash flows of a project are best defined as: A. the cash received from the additional sales generated by the project. B. any change in a firm's cash flows resulting from the addition of the project including opportunity costs. C. the cash received or lost from changes in the sales of a firm's current products as a result of adding the project. D. the increase or decrease in a firm's cash flows resulting from adding the project, excluding all sunk and opportunity costs. E. the total cash flows of a firm once the new project is completely integrated into the firm's operations.

B

The information content of a regular dividend increase generally signals that: A. the firm has more cash than it needs due to steadily declining sales. B. management believes the future earnings of the firm will be strong. C. future dividends will be lower. D. the firm has a one-time surplus of cash. E. the firm has recently sold a subsidiary.

B

Two key weaknesses of the internal rate of return rule are the: A. arbitrary determination of a discount rate and failure to consider initial expenditures. B. failure to correctly analyze mutually exclusive projects and the multiple rate of return problem. C. failure to consider all cash flows and the multiple rate of return problem. D. failure to consider initial expenditures and failure to correctly analyze mutually exclusive projects. E. failure to correctly analyze mutually exclusive projects and the lack of clear-cut decision rule.

B

Which one of the following statements concerning bond ratings is correct? A. Moody's is the sole provider of bond ratings. B. Bond ratings only assess the possibility of default. C. Investment grade bonds include only those bonds receiving an A or higher rating. D. Bond ratings consider the potential price volatility of a bond. E. A "fallen angel" is a bond that fell from an A rating or above to a BBB rating.

B

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

B

A firm s cost of debt will decrease when: A. market interest rates increase. B. the coupon rate on the firm's bonds increase. C. tax rates increase. D. inflation rates increase E. interest is paid semiannually versus annually.

C

A project has an initial cost of $68,300 and cash flows of $38,700, $102,300, and -$18,100 for Years 1 to 3, respectively. If the required rate of return for this investment is 8.7 percent, should you accept it based solely on the internal rate of return rule? Why or why not? A. Yes; because the IRR exceeds the required return B. Yes; because the IRR is a positive rate of return C. You cannot apply the IRR rule in this case because there are multiple IRRs. D. No; because the IRR is a negative rate of return E. No; because the IRR is less than the required return

C

All else equal, the market value of a stock will tend to decrease by roughly the amount of the dividend on the: A. date of payment. B. day after the date of payment. C. ex-dividend date. D. date of record. E. dividend declaration date.

C

Alto stock pays an annual dividend of $1.10 a share and has done so for the past six years. No changes in the dividend amount are expected. The relevant market rate of return is 7.8 percent. Given this, one share of this stock: A. is basically worthless as it offers no growth potential. B. is valued as a constant growth stock. C. is valued as a perpetuity. D. is valued as a differential growth stock. E. has a current market value of $1.10.

C

How can management best signal the market that a firm is doing well? A. Issue stock to pay the regular dividend B. Distribute a liquidating dividend C. Increase the regular dividend amount D. Replace the regular dividend with a stock dividend E. Issue additional shares of stock

C

In project analysis, which one of these is a common assumption regarding net working capital? A. Only changes in current assets are included in net working capital for project analysis purposes. B. The aftertax salvage value of an asset that is sold is included as a net working capital item. C. Net working capital will be returned to its pre-project level at the end of a project. D. Increases in net working capital will be treated as a cash inflow. E. Any change in net working capital will only occur when a project commences.

C

The cause of the October 19, 1987 stock market crash: A. resulted from losses in international markets. B. is related to actions taken on that date by the Federal Reserve Bank. C. has yet to be determined. D. has been identified as the result of major internet company announcements on the prior day. E. was the result of regulatory changes that were implemented that morning.

C

The efficient market hypothesis says that on average managers will: A. outperform investors with inside information. B. tend to outperform most market participants. C. not be able to earn an excess return. D. earn the same rate of return over time regardless of the risk assumed. E. tend to earn below average rates of returns.

C

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

C

The total return on a stock is equal to: A. the annual dividend divided by the current stock price. B. the difference between the capital gains yield and the dividend yield. C. the capital gains yield plus the dividend yield. D. (1 + Dividend yield ) × (1 + Inflation rate). E. (1 + Capital gains yield) × (1 + Dividend yield).

C

Today, July 15, you are buying a bond from a dealer with a quoted price of 100.023. The bond pays interest on February 1 and August 1. The invoice price you pay for this purchase will equal: A. the clean price. B. the asked price. C. the dirty price. D. par value. E. the bid price.

C

What does weak form efficiency imply? A. A stock with a highly positive serial correlation in the past will maintain that correlation in the future. B. Abnormal returns will disappear within a trading day. C. Past price movement is unrelated to the movement of future prices. D. Portfolio diversification is ineffective as all prices are interrelated. E. Price patterns that existed in the past will reappear in the future.

C

Which of these are reasons why people do not accept the efficient market hypothesis? I. Optical illusions II. Normal profits III. Earnings surprises IV. Market bubbles A. I, II, and IV only B. I and III only C. I, III, and IV only D. II and IV only E. III and IV only

C

Which of these help prevent arbitrage from totally correcting market mispricings? I. Trading costs II. Market domination by rational professionals III. Number of amateur investors IV. Near-term risk A. III and IV only B. I only C. I, III, and IV only D. I and II only E. I, II, III, and IV

C

Which one of these increases a firm's number of shares outstanding without changing its owners' equity? A. Share repurchase B. Liquidating dividend C. Stock split D. Tender offer E. Special dividend

C

Which one of these is an indicator that a market is efficient? A. Repetitive price patterns B. Lack of daily price movement C. Normal rates of return D. Positive serial correlation coefficients equal to or greater than 1 E. Lack of any adjustment for degree of risk

C

Which type of bond grants its holder the right to force repayment of the bond at a stated price prior to maturity? A. Income B. Call C. Put D. Structured note E. Convertible

C

All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate. A. at par; less than B. a premium; equal to C. at par; higher than D. a discount; higher than E. a premium; higher than

D

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

D

Stock prices fluctuate daily. In relation to the efficient market hypothesis, these fluctuations are: A. inconsistent with all forms of market efficiency. consistent with all forms of market efficiency provided the B. prices do fluctuate on a daily basis. C. inconsistent with the semistrong form of efficiency because prices should be stable. D. consistent with the semistrong form because new information arrives daily. E. consistent with the strong form because prices and information are controlled by insiders.

D

The U.S. Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits. Based on this fact, you would tend to argue that the financial markets are at best _____ form efficient. A. strong B. weak C. semiweak D. semistrong E. perfect

D

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-dividend date. B. ex-rights date. C. declaration date. D. date of record. E. date of payment.

D

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

D

The internal rate of return: A. is more reliable as a decision making tool than net present value when considering mutually exclusive projects. B. is the discount rate that makes the net present value of a project equal to one. C. is easier to apply than net present value when cash flows are unconventional. D. will provide the same accept/reject decision as NPV when cash flows are conventional and projects are independent. E. is influenced by daily changes in the market rate of interest.

D

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. efficient markets hypothesis. B. information content effect. C. MM Proposition II. D. clientele effect. E. MM Proposition I.

D

The owner of preferred stock: A. owns shares that generally have a stated liquidating value of $1,000 per share. B. has the right to veto the outcome of an election held by the common shareholders. C. has the right to collect payment on any unpaid dividends as long as the stock is non-cumulative preferred. D. is entitled to a distribution of income prior to the common shareholders. E. is guaranteed voting rights similar to a common shareholder.

D

The terminal value of a firm is based on which one of these assumptions? A. The growth rate of the future cash flows will exceed the firm's WACC. B. All future cash flows will be constant. C. The cash flows after Time T will diminish on an annual basis. D. The cash flows will increase in the future at a constant perpetual rate. E. The firm will be sold at Time T for the stated terminal value.

D

The yield to maturity on a bond is the rate: A. computed as annual interest divided by the bond's market price. B. an investor earns if the bond is sold prior to the maturity date. C. of annual interest initially offered when the bond was issued. D. of return currently required by the market. E. of annual interest paid on the bond.

D

Weak form efficiency is best defined as a market where current prices are based on: A. irrational decisions by amateur investors. B. information known to any person or organization. C. all publicly available information. D. historical prices. E. totally rational decisions.

D

What does the spread between the bid and asked bond prices represent? A. Difference between the coupon rate and the current yield B. Difference between the current yield and the yield to maturity C. Accrued interest D. Dealer's profit E. Bondholder's profit

D

Which of the following are the two primary advantages of CAPM? I. Simplicity II. Absence of estimation error III. Applicability to both dividend and non-dividend paying firms IV. Explicit adjustment for risk A. I and II B. II and III C. I and III D. III and IV E. I and IV

D

Which one of these represents the difference between a nominal rate and a real rate as they relate to project analysis? A. Interest rate on any project debt B. Risk-free rate of interest C. Market rate of return D. Rate of inflation E. Required rate of return

D

Which one of these terms is used to describe a market where investors draw conclusions from insufficient data? A. Conservatism B. Arbitrage C. Independent deviations from rationality D. Synergy E. Representativeness

E

Which one of these statements is true? A. The betas used in the CAPM must be greater than 1 but less than 2. B. By convention, the market is given a beta of zero. C. There is zero chance of default on a U.S. Treasury bill. D. A U.S. Treasury bill has a beta of zero. E. The rate of return on a U.S. Treasury bill is used as the value of RM in the CAPM.

D

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

E

Differential growth refers to a firm that increases its dividend by: A. three or more percent per year. B. an amount that is determined on an annual basis. C. a rate that is expected to be sustainable indefinitely. D. an amount in excess of $.25 per year. E. varying rates over a period of time.

E

From a tax-paying shareholder's point of view, a stock repurchase: A. has the same tax effects as a cash dividend. B. is more highly taxed than a cash dividend. C. creates a tax liability even if the investor does not participate in the repurchase. D. is equivalent to a stock split. E. is more desirable than a cash dividend.

E

Payments made by a firm to its owners from sources other than current or accumulated earnings are called: A. interest payments. B. stock splits. C. payments-in-kind. D. share repurchases. E. distributions.

E

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. record C. payment D. declaration E. ex-dividend

E

The principle that investors might be too slow in adjusting their beliefs to new information is referred to as: A. weak form efficiency. B. the timing decision. C. liberalism. D. representativeness. E. conservatism.

E

Toni's Tools is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using: A. net present value only. B. both net present value and the internal rate of return. C. the replacement parts approach. D. the depreciation tax shield approach. E. the equivalent annual cost method.

E

What is the primary shortcoming of the average accounting rate of return from a financial perspective? A. The lack of use in the business world B. The lack of a clear-cut decision rule C. The degree of the calculation difficulty D. The degree of estimation involved with the initial cost E. The use of net income rather than cash flows

E

You are considering a project with the following data: IRR = 8.7 percent; PI = .98; NPV = -$393; Payback period = 2.44 years. Which one of the following statements is correct given this information? A. The discount rate used in computing the net present value must have been less than 8.7 percent. B. The discounted payback period will have to be less than 2.44 years. C. The discount rate used to compute the profitability ratio was equal to the internal rate of return. D. This project should be accepted based on the profitability ratio. E. The required rate of return must be greater than 8.7 percent.

E

own a fixed-rate bond that has a coupon rate of 6.5 percent and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 6.8 percent, then you would expect: A. the bond issuer to increase the amount of each interest payment. B. the yield to maturity to remain constant due to the fixed coupon rate. C. the current yield today to be less than 6.5 percent. D. today's market price to exceed the face value of the bond. E. to realize a capital loss if you sold the bond at the market price today.

E