Corporate Finance Non-Math Questions
M: Total assets minus total liabilities is called
Net worth
4: When discounting dividends you should use: A) the equity cost of capital. B) the before tax cost of debt. C) the weighted average cost of capital. D) the after tax weighted average cost of capital.
A) the equity cost of capital
4: If you buy shares of Coca-Cola on the secondary market...
...you buy the shares from another investor who decided to sell the shares.
4: If you buy shares of Coca-Cola on the primary market...
..Coca-Cola receives the money because the company has issued new shares.
2: If the sign of the cash flows for a project changes 60 times, then the project may have up to how many IRRs?
60
1: The following are functions fulfilled by financial markets: I) Source of financing; II) Provide liquidity; III) Reduce risk; IV) Source of information
I, II, III, and IV
9: For every dollar of operating income paid out as equity income, the shareholder realizes (where: TC= Corporate tax rate; TPE= Personal tax rate on equity income; and TP= Personal tax rate on interest income): A) (1 - TPE) (1 - TC) B) (1 - TP) C) (1 - TC) D) (1 - TPE) (1 - TP) E) (1 - TPE) (1 - TP - TC) F) (1 - TP) (1 - TPE)
A) (1 - TPE) (1 - TC)
1: Assets are listed on the balance sheet in order of... A) ...liquidity B) ...how quickly and easily they can be converted to cash C) ...size D) ...market value E) ...importance F) ...depreciation
A) ...liquidity B) ...how quickly and easily they can be converted to cash
2: Assume you are drafting cash flow projections for a project. Which of the following statements are correct? Select all that apply. A) A higher cost of capital can turn the project into a negative NPV project. B) Taxes are a cash flow and depend on depreciation, although depreciation itself is not a cash flow. C) The method of depreciation you use can and usually will have an impact on the NPV you obtain for the project. D) If the project has negative NPV, you should implement it. E) Cost of capital for this project is identical to all other projects. F) You can safely ignore any salvage value at the end of the project. G) You cannot ignore inflation. Instead, you have to obtain real cash flows first, and then discount them at nominal rates.
A) A higher cost of capital can turn the project into a negative NPV project. B) Taxes are a cash flow and depend on depreciation, although depreciation itself is not a cash flow. C) The method of depreciation you use can and usually will have an impact on the NPV you obtain for the project.
2: The net present value rule can be represented by (select all that apply) A) Accept investments that have positive net present value B) Reject investments that have a negative net present value C) Accept investments that increase your wealth today D) Accept investments that have a negative net present value E) Reject investments that have a positive net present value F) Reject investments that increase your wealth today G) Accept investments that have a negative future value
A) Accept investments that have positive net present value B) Reject investments that have a negative net present value C) Accept investments that increase your wealth today
9: When faced with financial distress; managers of firms acting on behalf of their shareholders' interests will likely: A) All of the other answers are correct B) Favor high risk, high return projects even if they have negative NPV C) Refuse to invest in low risk, low return projects with positive NPVs D) Delay the onset of bankruptcy as long as they can E) Tunnel cash out of the firm through dividends F) Favor issuing a large quantity of low quality debt over a low quantity of high quality debt
A) All of the other answers are correct
4: Which of the following statements is FALSE? A) Because the cash flows from stock are known with certainty, we can discount them using the risk-free rate. B) There are two potential sources of cash flows from owning a stock. C) An investor will be willing to pay a price today for a share of stock up to the point that this transaction has a zero NPV. D) An investor might generate cash by choosing to sell the shares the investor owns at some future date.
A) Because the cash flows from stock are known with certainty, we can discount them using the risk-free rate.
1: Which of the following statements are wrong? Managers in: A) in Germany generally think that shareholders rights are more important than the rights of the workforce. B) Japan and France generally think that a company's owners are only its shareholders. C) U.S. generally think that the workforce is the most important owner of the firm, shareholders are much less important. D) U.K. would generally prefer cutting dividends to laying off employees.
ALL
3: How can one invest today at the forward rate that applies to the period that starts one year from today to two years from today? That is, the forward rate from year t=1 to t=2? A) By buying a 2-year bond and selling a 1-year bond with the same coupon B) By providing a loan that starts in one year and is repaid in two years C) By buying a 1-year bond and selling a 2-year bond with the same coupon D) By buying a 1-year bond and then after a year reinvesting in a further 1-year bond E) By providing a loan that starts today and is repaid in two years
A) By buying a 2-year bond and selling a 1-year bond with the same coupon B) By providing a loan that starts in one year and is repaid in two years
10: Which of the following is NOT a step in the adjusted present value method? A) Calculating the after-tax WACC B) Calculating the unlevered value of the project C) Deducting costs arising from market imperfections or other side-effects of financing D) Calculating the value of the interest tax shield E) Assessing the risk of the project
A) Calculating the after-tax WACC
7: Which of the following statements about dividend policy is true? Select all that apply. A) Companies can choose to repurchase equity instead of paying dividends by shifting their dividend policies. If dividends are taxed more heavily than capital gains, taxpaying investors should welcome such a move and value the firm more favorably. B) None of the other statements is/are true C) Firms have short-term target dividend payout ratios D) Dividend changes follow shifts in short-term earnings E) Managers are eager to make dividend changes that might have to be reversed F) Managers make sure that dividends exhibit similar volatility as corporate earnings. G) Dividends make it easier for managers to waste money.
A) Companies can choose to repurchase equity instead of paying dividends by shifting their dividend policies. If dividends are taxed more heavily than capital gains, taxpaying investors should welcome such a move and value the firm more favorably.
6: Using the company cost of capital to evaluate a project is (select all that apply): A) Correct for projects that are roughly as risky as the average of the firm's other existing projects B) Incorrect for projects that have lower risk than the average project of the firm C) Incorrect for projects that have higher risk than the average project of the firm D) Always correct E) Always incorrect
A) Correct for projects that are roughly as risky as the average of the firm's other existing projects B) Incorrect for projects that have lower risk than the average project of the firm C) Incorrect for projects that have higher risk than the average project of the firm
2: Proper treatment of inflation in the NPV calculation involves: A) Discounting nominal cash flows using the nominal discount rate B) Discounting real cash flows using the real discount rate C) Discounting nominal cash flows using the real discount rates D) Discounting real cash flows using the nominal discount rates
A) Discounting nominal cash flows using the nominal discount rate B) Discounting real cash flows using the real discount rate
7: If both dividends and capital gains are taxed at the same ordinary income tax rate, the economic effect of tax may still be different because A) Dividends are taxed when distributed while capital gains are deferred until the stock is sold B) Capital gains are actually taxed, while dividends are taxed on paper only C) Both dividends and capital gains are taxed every year D) Neither dividends nor capital gains are taxed E) Dividend taxes are deferred while capital gains are taxed every year
A) Dividends are taxed when distributed while capital gains are deferred until the stock is sold
4: Considering the dividend discount model, which statement is FALSE? A) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends. B) A common approximation is to assume that in the long run, dividends will grow at a constant rate. C) The dividend each year is the firm's earnings per share (EPS) multiplied by its dividend payout ratio. D) There is tremendous uncertainty associated with any forecast of a firm's future dividends, and therefore its dividend growth rate.
A) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.
6: Cost of capital is the same as cost of equity for firms that are (select all that apply): A) Financed entirely by equity B) Financed entirely by common stock C) Financed entirely by debt D) Financed by both debt and equity E) All of the other answers F) Financed entirely by bonds G) Finance entirely by risk-free securities
A) Financed entirely by equity B) Financed entirely by common stock
9: Which assumptions and arguments are central to the pecking order theory of capital structure? A) Firms generally prefer internal to external financing B) Firms' managers and investors face an asymmetric information problem - managers know more about their firms and their firms' projects than investors. C) Managers will value the availability of financial slack, i.e. readily available financing inside the firm, since this financial slack can be spent on investment projects without needing to raise external financing (and encountering the costs of asymmetric information associated with it) D) A firm announcing that it will issue equity will generally be regarded as bad news by investors, since managers would only issue equity as a last resort, and investors therefore assume the company must be closer to financial distress than they may have previously believed. E) Firms with risky, intangible assets should primarily rely on equity financing. F) Managers generally have leverage targets, and if a firm through external shocks deviates from that target temporarily, managers will take actions to move leverage back to its optimum, over time.
A) Firms generally prefer internal to external financing B) Firms' managers and investors face an asymmetric information problem - managers know more about their firms and their firms' projects than investors. C) Managers will value the availability of financial slack, i.e. readily available financing inside the firm, since this financial slack can be spent on investment projects without needing to raise external financing (and encountering the costs of asymmetric information associated with it) D) A firm announcing that it will issue equity will generally be regarded as bad news by investors, since managers would only issue equity as a last resort, and investors therefore assume the company must be closer to financial distress than they may have previously believed.
6: Which statements about asset betas are correct? A) High operating leverage implies high asset betas. B) Companies with high operating leverage empirically tend to have high overall betas. C) Low operating leverage, other things being equal, implies low asset beta. D) Cyclical firms tend to have high asset betas. E) Firms whose revenues and earnings are not dependent on the stage of the business cycle tend to be low beta firms.
ALL
7: Which of the following statements is FALSE? A) Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases. B) The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all. C) When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends. D) When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate.
A) Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases.
2: Working capital is one of the most common causes of misunderstanding in estimating project cash flows. What are the most common errors made? A) Forgetting about working capital entirely B) Forgetting that working capital may change during the life of the project C) Forgetting that working capital is recovered at the end of the project D) Forgetting to depreciate the working capital
A) Forgetting about working capital entirely B) Forgetting that working capital may change during the life of the project C) Forgetting that working capital is recovered at the end of the project
M: Which of the following is a statement of weak form efficiency? Select all that apply. A) If markets are efficient in the weak form, then prices reflect past stock returns but do not adjust to other public information B) If markets are efficient in the weak form, then prices reflect all information C) If markets are efficient in the weak form, then prices will adjust immediately to public information D) If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns
A) If markets are efficient in the weak form, then prices reflect past stock returns but do not adjust to other public information D) If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns
7: Taking all pros and cons of payout policy into account, what can be safely stated? Select all that apply. A) If we live in an imperfect world with imperfect capital markets, then dividend and repurchasing policy may destroy or create value. B) Investors care about the information content of payout policy. C) Firms differ in their payout policies, and investors have a lot of choice, so it is hard to see how the individual firm can create value by switching payout policy. D) An important factor of payout policy is the life cycle of the firm, where young growth firms typically pay no or little money out to shareholders, while established and mature firms make larger payouts to shareholders via dividends and repurchases, or are more likely to make any payouts. E) Investors do not care about the information content of payout policy. F) If we live in a perfect world with perfect capital markets, then dividend and repurchasing policy may destroy or create firm value. G) Investors care about how the payout policy interacts with taxes, and it is easy to quantify how much they care.
A) If we live in an imperfect world with imperfect capital markets, then dividend and repurchasing policy may destroy or create value. B) Investors care about the information content of payout policy. C) Firms differ in their payout policies, and investors have a lot of choice, so it is hard to see how the individual firm can create value by switching payout policy. D) An important factor of payout policy is the life cycle of the firm, where young growth firms typically pay no or little money out to shareholders, while established and mature firms make larger payouts to shareholders via dividends and repurchases, or are more likely to make any payouts.
5: A stock with a beta of 1.25 would be expected to: A) Increase in value 25% more than the market in up markets B) Increase in value 25% more than the market in down markets C) Increase in value 125% more than the market in up markets D) Increase in value 125% more than the market in down markets E) Increase in value 1.25% more than the market in up markets F) Increase in value 1.25% more than the market in down markets
A) Increase in value 25% more than the market in up markets
7: How may dividends convey information in financial markets? Select all that apply. A) Investors may believe that dividends provide information about true long-term profitability. B) Managers may believe that investors believe that dividends provide information about true long-term profitability. C) Investors may believe that managers believe that investors believe that dividends provide information about true long-term profitability. D) If managers believe that investors believe that dividends provide information about true long-term profitability, then managers would be willing to increase dividends only to a level that they feel confident can be maintained by future earnings. E) If investors believe that managers believe that investors believe that dividends provide information about true long-term profitability, and that because of this managers are willing to increase dividends only to a level that they feel confident can be maintained by future earnings, then the announcement of a dividend increase must mean that managers believe that long-term profitability has increased and can therefore support a higher dividend level. Since this is good news, investors increase their valuation of the firm. Because of this, the share price increases on the day of the dividend increase announcement. F) If managers believe that investors believe that dividends provide information about true long-term profitability, then managers would be confident to increase dividends above the level that they feel can be maintained by future earnings, and investors will interpret this as a positive signal.
A) Investors may believe that dividends provide information about true long-term profitability. B) Managers may believe that investors believe that dividends provide information about true long-term profitability. C) Investors may believe that managers believe that investors believe that dividends provide information about true long-term profitability. D) If managers believe that investors believe that dividends provide information about true long-term profitability, then managers would be willing to increase dividends only to a level that they feel confident can be maintained by future earnings. E) If investors believe that managers believe that investors believe that dividends provide information about true long-term profitability, and that because of this managers are willing to increase dividends only to a level that they feel confident can be maintained by future earnings, then the announcement of a dividend increase must mean that managers believe that long-term profitability has increased and can therefore support a higher dividend level. Since this is good news, investors increase their valuation of the firm. Because of this, the share price increases on the day of the dividend increase announcement.
8: Assume a tax system where there is a corporate tax rate of 35%,no personal taxes on capital gains, but personal taxes on interest income (with a tax rate to be specified). In this tax system,a company can direct $1 to either debt interest or capital gains for equity investors. Which of the following investors would not care how the money was channeled? A) Investors paying personal tax of 35% B) Investors paying personal tax of 53% C) No investor would care D) Investors paying personal tax of 17.5% E) All investors would care, i.e. independent of their personal tax rate
A) Investors paying personal tax of 35%
5: The distribution of returns, measured over long intervals, like annual returns, can be approximated by which distribution? A) Lognormal distribution B) Normal distribution C) Binomial distribution D) Poisson distribution E) Chi square distribution F) Gamma distribution
A) Lognormal distribution
5: Which of the following observations would provide evidence against the strong form of efficient market theory? Select all that apply. A) Managers who trade in their own firm's stocks make superior returns B) IPO stocks underperform other stocks with equal risk C) Investors underreact to positive or negative earnings surprises D) Mutual fund managers do not on average make superior returns E) In any year approximately 50% of all pension funds outperform the market
A) Managers who trade in their own firm's stocks make superior returns B) IPO stocks underperform other stocks with equal risk C) Investors underreact to positive or negative earnings surprises
8: According to the trade-off theory of capital structure: A) Optimal capital structure is reached when the present value of tax savings on account of additional borrowing is just offset by increases in the present value of costs of distress B) Optimal capital structure is reached when stockholders' right to default is balanced by the the bondholders' right to get interest and principal payments C) Optimal capital structure is reached when the benefits of limited liability is just offset by the value of the lawyers' claim D) None of the other answers is correct E) Optimal capital structure is reached when the costs of tax shields are exactly offset by benefits of financial distress. F) Optimal capital structure is reached when the marginal benefit of an extra dollar financed through debt due to debt tax shields is exactly offset by the costs of increased tax payments.
A) Optimal capital structure is reached when the present value of tax savings on account of additional borrowing is just offset by increases in the present value of costs of distress
6: Assume a regression framework is used to decompose the total risk of a stock. How can you obtain an estimate of the proportion of total risk that is market risk? A) R-squared is an estimate of the proportion of total risk that is market risk. B) The standard error of the beta estimate is an estimate of the proportion of total risk that is market risk. C) The beta coefficient is an estimate of the proportion of total risk that is market risk. D) The standard deviation of the stock is an estimate of the proportion of total risk that is market risk. E) The variance of the stock is an estimate of the proportion of total risk that is market risk.
A) R-squared is an estimate of the proportion of total risk that is market risk.
1: What does inventory consist of? A) Raw material B) Work in progress C) Finished goods D) Cash E) Goodwill F) Brand value G) Property plant and equipment
A) Raw material B) Work in progress C) Finished goods
7: Select all statements about how are different types of dividends paid that are correct. A) Regular dividends are usually paid in cash B) Special dividends are usually paid in cash C) Stock dividends are never paid in cash D) Regular dividends are never paid in cash E) Special dividends are never paid in cash F) Stock dividends are usually paid in cash
A) Regular dividends are usually paid in cash B) Special dividends are usually paid in cash C) Stock dividends are never paid in cash
6: Which of the following statements is false? A) Securities than tend to move more than the market have betas higher than 0. B) Securities whose returns tend to move in tandem with the market on average have a beta of 1. C) Beta corresponds to the slope of the best fitting line in the plot of the securities excess returns versus the market excess returns D) The statistical technique that identifies the best-fitting line through a set of points is called linear regression E) In case regression techniques are used to obtain beta estimates, one challenge is that betas are estimated with error, and the true beta of a security remains unknown.
A) Securities than tend to move more than the market have betas higher than 0.
6: Conceptionally, the cost of equity of a firm could be obtained using the following methods (select all that apply): A) The Capital Asset Pricing Model (CAPM) B) Arbitrage Pricing Theory (APT) C) Regression methodology D) The income statement of the firm E) The interest expenses of the firm, adjusted by a rescaled standard deviation of stock returns of the firm
A) The Capital Asset Pricing Model (CAPM) B) Arbitrage Pricing Theory (APT) C) Regression methodology
3: The annuity formula can be used to calculate the value of bonds. What conditions must apply for this to work? Select all that apply. A) The discount rate period must match the periodicity of the cash flows in the annuity formula. B) The coupon payments must occur at regular intervals. C) The bond must have annual coupon payments, and not semi-annual ones. D) The bond's duration must be greater than the yield-to-maturity. E) The bond must be trading at par.
A) The discount rate period must match the periodicity of the cash flows in the annuity formula. B) The coupon payments must occur at regular intervals.
4: Which of the following statements is FALSE? A) The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price. B) We must discount the cash flows from stock based on the equity cost of capital for the stock. C) The firm might pay out cash to its shareholders in the form of a dividend. D) The divided yield is the percentage return the investor expects to earn from the dividend paid by the stock.
A) The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price.
6: If a firm uses the same company cost of capital for evaluating all projects, which of the following is likely to happen? Select all that apply. A) The firm is likely to accept high risk projects that are strongly underpriced B) The firm is likely to accept projects with average risk that are slightly underpriced C) The firm is likely to reject low risk projects that are correctly priced D) The firm is likely to accept low risk projects that are correctly priced E) The firm is likely to at least occasionally accept high risk projects that are overpriced
A) The firm is likely to accept high risk projects that are strongly underpriced B) The firm is likely to accept projects with average risk that are slightly underpriced C) The firm is likely to reject low risk projects that are correctly priced E) The firm is likely to at least occasionally accept high risk projects that are overpriced
10: If a manager uses the firm's WACC to evaluate an investment project, what assumptions does she make? A) The project's risks are identical to the risks of the firm's existing projects and remain unchanged for the lifetime of the project. B) The project is financed in identical proportions of equity and debt as the firm's existing capital structure. C) The proportions of equity and debt used to finance the project will remain constant throughout the lifetime of the project. D) The amounts of equity and debt used to finance the project will remain constant throughout the lifetime of the project. E) The project's risks can be higher or lower than the risks of the firm's existing projects, as long as they remain unchangedfor the lifetime of the project.
A) The project's risks are identical to the risks of the firm's existing projects and remain unchanged for the lifetime of the project. B) The project is financed in identical proportions of equity and debt as the firm's existing capital structure. C) The proportions of equity and debt used to finance the project will remain constant throughout the lifetime of the project.
10: If we take an MM-assumptions firm, and add taxes. Then, lowering the debt-equity ratio of a firm can change: A) The relative proportions of financing used by the firm B) The cost of equity C) The cost of debt D) The effective tax rate E) The risk of the assets of the firm F) The weighted average cost of capital of the firm
A) The relative proportions of financing used by the firm B) The cost of equity C) The cost of debt D) The effective tax rate F) The weighted average cost of capital of the firm
6: The cost of capital for a new project specifically depends on: A) The use to which the capital is put, i.e. the project's risk B) The company's cost of capital C) The industry cost of capital D) None of the other options E) The betas of the existing projects of the whole company
A) The use to which the capital is put, i.e. the project's risk
10: Which of the following statements regarding guarantees and government restrictions on international projects is (are) true? A) The value of the guarantees is added to the APV and the value of the government restrictions is subtracted from the APV. B) The value of the guarantees is subtracted from the APV and the value of the government restrictions is subtracted from the APV. C) The value of the guarantees is subtracted from the APV and the value of the government restrictions is added to the APV. D) The value of the guarantees is added to the APV and the value of the government restrictions is added to the APV.
A) The value of the guarantees is added to the APV and the value of the government restrictions is subtracted from the APV.
7: Which statements about tax systems are correct? Select all that apply. A) Under an imputation tax system, shareholders receive a tax credit for the corporate tax the firm pays. B) Under an imputation tax system, shareholders may pay a higher effective tax rate than the corporate tax rate. C) Under a US-style tax system, corporate tax paid by the firm reduces the income tax paid by investors, even if investors do not receive an actual tax credit for corporate tax. D) Under an imputation tax system, the maximum effective tax rate shareholders pay is the corporate tax rate. E) Under a US-style tax system, the maximum effective tax rate shareholders pay is the corporate tax rate. F) Under a US-style tax system, shareholders receive a tax credit for the corporate tax the firm pays.
A) Under an imputation tax system, shareholders receive a tax credit for the corporate tax the firm pays. B) Under an imputation tax system, shareholders may pay a higher effective tax rate than the corporate tax rate. C) Under a US-style tax system, corporate tax paid by the firm reduces the income tax paid by investors, even if investors do not receive an actual tax credit for corporate tax.
5: Assume, starting from an empty set, you increase the number of stocks in a portfolio, by adding securities randomly. By doing this you also achieve the following: A) Unique risk decreases and approaches zero B) Market risk decreases C) Unique risk decreases and becomes equal to market risk D) Total risk approaches zero E) Unique risk increases and approaches one
A) Unique risk decreases and approaches zero
M: Which of the following statements is FALSE? A) We divide the capital gain by the expected future stock price to calculate the capital gain rate. B) The sum of the dividend yield and the capital gain rate is called the total return of the stock. C) Future dividend payments and stock prices are not known with certainty; rather these values are based on the investor's expectations at the time the stock is purchased. D) The capital gain is the difference between the expected sale price and the purchase price of the stock.
A) We divide the capital gain by the expected future stock price to calculate the capital gain rate.
5: A "factor" in arbitrage pricing theory is a variable that: A) affects the return of a risky asset in a systematic manner B) is pure "noise" C) correlates with risky asset returns in an unsystematic manner D) affects the return of a risky asset in a random manner E) correlates with the risk-free asset in a systematic manner
A) affects the return of a risky asset in a systematic manner
6: On a graph with stock returns on the Y-axis and market returns on the X-axis, the slope of the regression line represents A) beta B) alpha C) the risk free rate D) the standard error of the regression E) total risk/market risk
A) beta
2: The present value of a perpetuity can be calculated by: A) dividing the cash flow received in perpetuity by the discount rate B) dividing the discount rate by the cash flow received in perpetuity C) multiplying the discounted cash flow received in perpetuity with the discount rate D) multiplying the discount rate with the undiscounted cash flow E) multiplying the discount rate with the discounted cash flow F) dividing the cash flow received in perpetuity by the discount factor
A) dividing the cash flow received in perpetuity by the discount rate
5: Markets are more likely to be weak form efficient than semi-strong efficient because... A) historical stock price information is easy to obtain B) if everyone traded on historical information, prices would fluctuate wildly C) easy profits would lead everyone to trade on historical information D) data from analyst reports, financial reports, and economic forecasts are arguably harder to obtain and to process than past stock data E) insider information is illegal to trade on F) investors can only use information provided by the SEC
A) historical stock price information is easy to obtain C) easy profits would lead everyone to trade on historical information D) data from analyst reports, financial reports, and economic forecasts are arguably harder to obtain and to process than past stock data
2: Future Value
Amount to which an investment will grow after earning interest
M: A US treasury bond can be valued as a combination of
An annuity and a perpetuity
M: A stock with a beta of zero would be expected to A) Have a rate of return equal to the market rate of return B) Have a rate of return equal to the risk-free rate C) Have a rate of return equal to the market risk premium minus the risk-free rate. D) Have a rate of return equal to zero E) Have a rate of return equal to the market risk premium
B) Have a rate of return equal to the risk-free rate
6: Which statements about debt betas, equity betas and asset betas are false? A) The asset beta of a levered firm is the weighted average of equity and debt beta B) The debt beta of any firm is zero. C) The debt beta of a firm will generally be lower than the equity beta of that firm. D) The following ranking emerges for any firm: asset beta > equity beta > debt beta E) If the debt of a firm is risky, the firm's debt beta will be larger than zero. F) A firm with higher asset beta, other things equal, will have a higher weighted average costs of capital
B) The debt beta of any firm is zero. D) The following ranking emerges for any firm: asset beta > equity beta > debt beta
6: Which statements are FALSE (select all that apply)? A) Cost of capital is the same as cost of equity for firms that are financed entirely by equity B) Cost of capital is the same as cost of equity for firms that are financed entirely by common stock C) Cost of capital is the same as cost of equity for firms that are financed entirely by debt D) Cost of capital is the same as cost of equity for firms that are financed by both debt and equity E) Cost of capital is the same as cost of equity for firms that are financed entirely by bonds F) Cost of capital is the same as cost of equity for firms that are finance entirely by risk-free securities
C) Cost of capital is the same as cost of equity for firms that are financed entirely by debt D) Cost of capital is the same as cost of equity for firms that are financed by both debt and equity E) Cost of capital is the same as cost of equity for firms that are financed entirely by bonds F) Cost of capital is the same as cost of equity for firms that are finance entirely by risk-free securities
10: The APV method is most useful in analyzing A) small projects. B) projects having the same risk as the firm. C) large international projects. D) domestic projects.
C) large international projects.
1: Agency conflicts between managers and shareholders are mitigated by: A) compensation plans B) boards of directors C) the market for takeovers D) through monitoring by specialists E) auditors F) by debtholders
Compensation plans, BoDs, market for takeovers, monitoring by specialists, auditors, ALL EXCEPT debtholders
5: Considering common stocks as an investment, their risk premium... A) cannot be zero, for investors would be unwilling to invest in common stocks. B) cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky. C) is negative, as common stocks are risky. D) cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory. E) must always be positive, in theory.
D) cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory.
1: The distinguishing feature of a corporation is that: A) there is no legal difference between the corporation and its owners. B) provides limited liability only to small shareholders. C) it spreads liability for its corporate obligations to all shareholders. D) it is a legally defined, artificial being, separate from its owners.
D) it is a legally defined, artificial being, separate from its owners
M: The distribution of returns, measured over a short interval of time, like daily returns, can be approximated by which distribution? A) Binomial distribution B) Chi square distribution C) Poisson distribution D) Lognormal distribution E) Normal distribution
E) Normal distribution
7: Generally, investors interpret the announcement of an increase in dividends as:
Good news and stock price increases
2: Time Value of Money
Idea that buying power of cash flows depends on when they occur.
2: Discount Rate
Interest rate used to compute present values of future cash flows
M: The present value formula for a cash flow in period t is:
PV = Ct / (1+r)^t
2: Discount Factor
Present value of a $1 future payment
2: Present Value
Value today of a future cash flow
7: Anyone who purchases the stock on or after the ________ date will not receive the dividend.
ex dividend date
6: Firms with high operating ________ tend to have higher asset betas
leverage
1: In a corporation, the ultimate decisions regarding business matters are made by
the Board of Directors
M: In a corporation, the ultimate decisions regarding business matters are made by
the Board of Directors
6: The _____ average cost of capital on an _____ basis is calculated as: WACC = (rD) (1 - TC) (D/V) + (rE) (E/V) where: V = D + E
weighted; after-tax
