Finance Final

The most important reason to diversify a portfolio is to:

eliminate asset-specific risk.

Most financial securities have some level of ________ risk.

systematic

Which of the following yields on a stock can be negative?

Capital gains yield and total return

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

Constant growth model

Which of the following statements best describes the principle of diversification?

Spreading an investment across many diverse assets will eliminate some of the total risk.

The rate of return on which type of security is normally used as the risk-free rate of return?

Treasury bills

Which one of the following is most indicative of a totally efficient stock market?

Zero net present values for all stock investments

A firm's aftertax cost of debt will increase if there is a(n):

decrease in the company's tax rate.

Which one of the following represents the capital gains yield as used in the dividend growth model?

g

Evidence seems to support the view that studying public information to identify mispriced stocks is:

ineffective.

Given a well-diversified stock portfolio, the variance of the portfolio:

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

Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n):

portfolio weight.

The dividend growth model:

requires the growth rate to be less than the required return.

With respect to evaluating capital projects, which of the following statements is accurate?

A project that is unacceptable today might be acceptable tomorrow given a change in market returns.

Which one of the following applies to a premium bond?

Coupon rate > Current yield > Yield to maturity

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

Determining the amount of the dividend to be paid per share

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

Discount rate

Of the options listed below, which are examples of diversifiable risk? I. Wildfires damage an entire town II. The federal government imposes a $1,000 fee on all business entities III. Payroll taxes are increased nationally IV. All software providers are required to improve their privacy standards

I and IV only

Assume you are an analyst monitoring Okello stock. Which one of the following would be reflected in Okello's expected return?

This morning Okello confirmed that, as expected, the CFO is retiring at the end of the year.

Sung Office Products just announced it is decreasing its annual dividend from $2.20 per share to $1.85 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price:

decreased proportionately with the dividend decrease.

Assume a firm has a debt-equity ratio of .36. The firm's cost of equity:

is affected by both a change in the firm's beta and the firm's projected rate of growth.

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar per share long into the future. Given this, one share of the firm's stock is:

priced the same as a $1 perpetuity.

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity?

A decrease in the risk-free rate

Which of the following items are included when calculating the expected return on a portfolio? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy

I, II, III, and IV

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification.

Which of the following statements is true of a portfolio's standard deviation?

It can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2019? Rank from highest to lowest.

Long-term government bonds, long-term corporate bonds, intermediate-term government bonds

Which one of the following correctly describes the dividend yield?

Next year's annual dividend divided by today's stock price

Which one of the following is defined by its mean and its standard deviation?

Normal distribution

Ernst & Frank stock is listed on Nasdaq. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

Primary

Which one of the following statements is correct?

Stocks can have negative growth rates.

Which one of the following best defines the variance of an investment's annual returns over a number of years?

The average squared difference between the actual returns and the arithmetic average return

The capital structure of Pendekanti Products is 58 percent common stock, 2 percent preferred stock, and 40 percent debt. The firm maintains a dividend payout ratio of 24 percent, has a beta of 1.08, and has an income tax rate of 21 percent. Given this information, which one of the following statements is accurate?

The cost of equity is unaffected by a change in the company's tax rate.

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.

The information was expected

Which one of the following had the least volatile annual returns over the period of 1926-2019?

U.S. Treasury bills

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

Weak

The average compound return earned per year over a multiyear period is called the _____ average return.

geometric

Olivares, Incorporated, bonds mature in 17 years and have a coupon rate of 5.4 percent. If the market rate of interest increases, then the:

market price of the bond will decrease.

The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

weighted average of the returns for each economic state.

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?

Efficient capital market

Buxbaum Corporation is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?

The bonds will sell at a premium if the market rate is 5.5 percent.

With respect to unexpected returns, which one of the following statements is accurate?

Unexpected returns can be either positive or negative in the short term but tend to be zero over the long term.

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment.

coupon

For any given capital project proposal, the discount rate should be based on the:

risks associated with the use of the funds required by the project.

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information.

With respect to risk, which of the following statements is accurate?

The systematic risk of a portfolio can be lowered by adding T-bills to the portfolio.

Vanessa purchased a stock one year ago and sold it today for $3.15 per share more than her purchase price. She received a total of $2.60 per share in dividends. Which one of the following statements is correct in relation to this investment?

The capital gains yield is positive.

Assume a firm utilizes its WACC as the discount rate for every capital project it implements. Accordingly, the firm will tend to:

increase the average risk level of the company over time.

The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.

next year's

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.

risk-free rate

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the:

expected return.