Chapter 19 - Long Term and Capital Investments

"An equity management company s Chief Financial Officer and Treasurer are evaluating their corporate investments and decide that they need to diversify their stock holdings to include personal care products companies. Based on their analysis, publicly-traded companies A and B stand out as choices. Company A has a beta value of 0.65 while company B has a beta value of 1.10. They decide to invest in Company A. What objective of their investment policy did they use to make their decision? " A. Safety B. Liquidity C. Exposure horizon D. Risk/return trade-off

A. Safety

A publicly traded company is looking to fund its next project with the issuance of stock. The companys stock is primarily held by a small group of investors. The company is concerned that issuing stock may upset these investors because it would dilute their holdings. Which of the following strategies would help address the investors concern? A. Grant the investors cumulative voting rights B. Grant the investors preemptive rights to the new issue C. Allow the investors to cast their votes by proxy at the next shareowners meeting D. Offer to stagger the election of directors

B. Grant the investors preemptive rights to the new issue

The yield curve is inverted. A creditworthy firm considering alternative debt maturities would MOST LIKELY: A. Enter into a short-term floating rate agreement B. Obtain long-term fixed interest rate debt C. Roll-over short-term debt at each maturity D. Obtain a long-term floating rate agreement

B. Obtain long-term fixed interest rate debt

"The Company J portfolio consists of two stocks, 65% of Stock A with a return of 7.63% and 35% of Stock B with a return of 3.89%. What is the Company J portfolio return? " A. 1.86% B. 5.10% C. 6.32% D. 18.57%

C. 6.32%

"The stock of a manufacturing company is priced so that its expected rate of return is below its required rate, as calculated by the Capital Asset Pricing Model (CAPM). Which of the following will occur in an efficient capital market? " A. Buying pressure for the firm s stock will drive the price up B. Buying pressure for the firm s stock will drive the price down C. Selling pressure for the firm s stock will drive the price up D. Selling pressure for the firm s stock will drive the price down

D. Selling pressure for the firm s stock will drive the price down

"The risk-free rate of return is 2.15% and the historical stock market average rate of return is 6%. If Company M has a beta of 1.36, what is their required rate of return for capital asset pricing? " A. 8.083% B. 7.39% C. 0.42% D. 0.04%

B. 7.39%