Corporate Finance Practice Questions Test 2

What are the differences in the claims of shareholders and bondholders during bankruptcy?

- bondholders claims are settled first - bondholders have a fixed claim while shareholders have a variable claim on all residuals

Which of the following are differences between interest payments and dividend payments by the corporation

- dividend income is not fixed while interest income is generally fixed - dividend payments are not an obligation but interest payments are an obligation - dividends are paid to stockholders while interest is paid to bondholders

The foreign currency approach to capital budgeting analysis____

- is computationally easier than the home currency approach - computes the NPV of a project in both the foreign and domestic currency - produces the same results as the home currency approach

What are the advantages of using internal financing

- it prevents the adverse market reaction that tends to accompany a stock issue. - It may be cheaper than debt equity issues

Which of the following refer to a firm with a large portion of its business outside of its parent country?

- multinational - an international corporation

Which of the following are needed to describe the distribution of stock returns? - the variety of returns - the life span of the stock -the standard deviation of returns -the mean return

- the mean return -the standard deviation of returns

A frequency distribution of stock returns display____

- various ranges of returns on the horizontal axis - the frequency of occurrence for each rate of return range

Suppose stock GHI has an initial price of $100. Tow years later, the price is $132. What is GHI's geometric return

14.89%

What is the arithmetic average return for a mutual fund that reported a return of 5 percent every year for the last 3 years?

5%

If the dividend paid over the past year was $2.25 and the beginning stock price was $42 per share, what is the dividend yield?

5.4%

What is the arithmetic average return for a stock that had annual returns of 8 percent, 2 percent, and 11 percent for the past 3 years

7%

From 1900 to 2010, the United States ranked ____ out of 17 countries in terms of having the highest equity risk premium

7th

Which firm has higher debt capacity?

A profitable firm

Which of the following is the successor to LIBOR in the U.S

SOFR

Who are the main claimants of a firm's cash flows?

Stockholders Bondholders Government

The home currency approach appears to be inferior to the foreign currency approach to capital budgeting. In truth____

The two approaches are the same

What is the difference in results between home currency approach and the foreign currency approach?

The two procedures produce the same answer

What do Modigliani and Miller assert about the relationship between leverage and firm value in the presence of corporate taxes?

The value of the firm increases with leverage

Almost all currency trading takes place in terms of the

U.S dollar

The payment to lawyers become relevant in the context of capital structure decisions in the event of ____

financial distress

The types of equity and debt to sell is an example of a(n)

financing decision

The types of equity and debt to sell is an example of a(n)___

financing decision

The value of the firm is given by the following expression

firm value = value of equity + value of debt

The use of ____ exchange agreements can help reduce the short-term exposure to exchange rate risk

forward

A ___ distribution of stock returns plots the frequency of occurrence for various ranges of return

frequency

An individual will work___ if they own a ____ percentage of the company

harder, larger less, smaller

When is a rational firm likely to increase the level of debt so as to capture the tax shield of debt

if profits are expected to be high

An efficient market is one in which any change in available information will be reflected in the company's stock price ___

immediately

An efficient market is one that fully reflects all available_____

information

It is not uncommon for IPOs to _____ experience large gains

initially

The foreign exchange market_____

is an over the counter market

What is generally the most important component of direct costs of financial distress?

legal costs

If an international firm borrows money in the foreign country where it has operations, it can reduce_____

long-run exchange rate exposure

Protective covenants typically ____ interest rates

lower

The foreign exchange market is where

one country's currency is traded for another country's currency

Weak form efficiency considers trading strategies that use information based solely on ___ stock prices

past

A ___ covenant is an agreement between bondholders and stockholders

protective

A market is said to be semi strong efficient if prices incorporate which type of information

publicly available information

A well diversified portfolio will help investors _____

reduce risk

Investors who jump into hot market believing that the high returns will continue for an even longer period are said to exhibit

representativeness

According to the pecking theory, what is the preferred source for firms seeking to raise capital?

retained earnings

The arithmetic average rate of return measures the _____

return in an average year over a given period

The mean return and standard deviation of returns can be used to describe the distribution of stock____

returns

The ___ Overnight Financing Rate is successor to LIBOR in the U.S

secured

Which of the following have empirical support?

semi strong and weak

A_____ sale occurs if the seller borrows the asset and then sells it

short

If you beat the market with inside information you have violated the concept of ___ form efficiency

strong

A normal distribution has a _____ shape

symmetrical

The rates of return in the Ibbotson SBBI yearbook are not adjusted for which of the following ? - transaction costs -dividends -bond coupons -taxes

taxes, transaction costs

Which method employs uncovered interest parity to project future exchange rates?

the home currency approach

Translation exposure results from

the need to translate financial statements into home currency

A probability distribution tends to have a smooth shape when the number of observations is

very large

An abnormal return is defined as

a stocks actual return minus the market return

An example of an ____ costs is when a firm issues more equity and an entrepreneur increases leisure time

agency

If you can beat the market by ____, then you are violating weak form effeciency

analyzing historical price patterns

If a manager has more information than an investor about the firm, that information is referred to as ____ information

asymmetric

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the

beginning stock price

A short sale occurs if the seller initially ____ the asset and then sells it

borrows

Serial ___ is the relationship between the current return on a security and the return on the same security over a later period.

correlation

Serial ____ is the relationship between the current return on a security and the return on the same security over a later period

correlation

The value of a firm is equal to the value of its____

debt plus equity

Different types of information will affect stock prices ___

differently

Legal Costs are typically the most important component of ____ costs

direct

Which of the following are ways to make money by investing in stocks? - Amortization - Dividends - interestterm-21 -capital gains

dividends, capital gains

Which of the following are broad types of costs of financial distress?

-Direct costs -Indirect costs

Which of the following are correct when describing purchasing power parity?

-Parity is expressed as both absolute and relative - Purchasing Power Parity is a major factor in the rate of change in exchange rates - Exchange rates adjust to keep purchasing power level between currencies

What types of information affect the rates at which stock prices adjust to new information?

-Publicly available information -all information -past information

Which of the following are true? - On average, T-bills outperform common stocks -T-bills sometimes outperform common stocks -Common stocks frequently experience negative returns

-T-bills sometimes outperform common stocks -Common stocks frequently experience negative returns

What are some important lessons from the 2008 financial crisis?

-diversification is important - the stock market is risky

The different types of exchange rate risk include which of the following?

-translation exposure -long-term exposure -short-term exposure

___ is the process of buying underpriced securities while selling overprices substitutes

Arbitrage

The ____ average rate of return measures in an average year over a given period

Arithmetic