FIN 4424 Exam 2 Concepts

For every dollar of operating income paid out as equity income, the shareholder realizes

(1 - TpE) (1 - TC).

If an investor buys a portion (X) of the equity of a levered firm, then his/her payoff is

(X) × (profits - interest).

If an investor buys a portion (X) of both the debt and equity of a levered firm, then his/her payoff is

(X) × (profits)

If an investor buys a portion (X) of an unlevered firm's equity, then his/her payoff is

(X) × (profits).

For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the two stocks equals

-1

The correlation coefficient between the efficient portfolio and the risk-free asset is

0

What is the beta of a security where the expected return is double that of the stock market, there is no correlation coefficient relative to the U.S. stock market, and the standard deviation of the stock market is .18?

0, no correlation means no covariance, thus no beta

The beta of the market portfolio is

1

For each additional 1 percent change in market return, the return on a stock having a beta of 2.2 changes, on average, by

2.2 %

The survey of CFOs indicates that the IRR method is used for evaluating investment projects by approximately

75%

The survey of CFOs indicates that the NPV method is always, or almost always, used for evaluating investment projects by approximately

75%

Which of the following is not a sensible reason for a firm to rely on internal funds?

A new bond issue may drive the firm's debt ratio too high. Equity issues are generally expensive. Financial markets interpret the issuance of equity unfavorably. Correct! All of these are sensible reasons to rely on internal funds.

if a stock were underpriced, it would plot

Above the SML

Which of the following statements regarding the NPV rule and the rate of return rule is false?

Accept a project if its rate of return > 0.

According to financial executives' views on dividend policy, which of the following statements is most frequently cited?

Avoid reducing the dividend

Generally, investors interpret the announcement of a decrease in dividends as Group of answer choices

Bad news

On a graph with common stock returns on the y-axis and market returns on the x-axis, the slope of the regression line represents

Beta

Generally, firms engage in stock repurchases during

Boom Times

Which of the following portfolios will have the highest beta?

Common stocks over bonds & Tbills

Which of the following investors has the strongest tax reason to prefer dividends over capital gains?

Corporations

Which of these dates, when arranged in chronological order, occurs last?

Div Payment Date

irms can pay out cash to their shareholders in the following way(s):

Dividends and share repos

Suppose that there are no taxes, transactions costs, or other market imperfections. Which of the following actions is most likely to make shareholders better off?

Eliminate negative NPV Project

If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date? Group of answer choices

Fall by less than the amount of the dividend

By purchasing U.S. government bonds, an investor can achieve both a risk-free nominal rate of return and a risk-free real rate of return.

False

Eurobonds are almost always denominated in euros.

False

he average beta of all stocks in the market is zero.

False

Generally, investors interpret the announcement of an increase in dividends as

Good News Everyone

Generally, investors view the announcement of an open-market repurchase program as

Good News Everyone

Who first developed portfolio theory?

Harry Markovitz

The rightist position is that the market will reward firms for having

High Div Yield

What are not incremental costs for this same project?

Interest costs on debt used to finance the project.

Recently, which of the following sources of funds has played the greatest role in the financing of U.S. nonfinancial firms?

Internal funds

What is the likely impact on a typical individual investor if a firm undertakes a stock repurchase in lieu of a cash dividend? Group of answer choices

Lower income tax if cap gains rate is less than div tax rates

What price do you analyze opp costs

Mkt Price

For a portfolio of N-stocks, the formula for portfolio variance contains

N(N - 1)/2 different covariance terms

Which of the following investment rules has the value additivity property?

NPV Method

The distribution of returns, measured over a short interval of time, such as daily returns, is best approximated by the

Normal D

Firms can repurchase shares in the following ways: Group of answer choices

Open market, tender, dutch offer, direct negotiation

Investments B and C both have the same standard deviation of 20 percent and have the same correlation to the market portfolio. If the expected return on B is 15 percent and that of C is 18 percent, then the investors would

Prefer C

A grant of authority allowing someone else to vote shares of stock that you own is called

Proxy voting

The Payback Period Rule

Requires an arbitrary cutoff point

The graphical representation of the CAPM (capital asset pricing model) is called the

SML

What signal is sent to the market when a firm decides to issue new stock to raise capital?

Stock Price is too high

in the case of electric cars, which cash inflows should be considered incremental?

Tax savings resulting from depreciation

The capital asset pricing model (CAPM) states which of the following?

The Expected Risk prem on an investment is proportional to its beta

Capital structure is irrelevant if

capital markets are efficient, each investor can borrow/lend on the same terms as the firm, and there are no tax benefits to debt.

MM Proposition I with corporate taxes states that

capital structure can affect firm value by an amount that is equal to the present value of the interest tax shield; and, by raising the debt-to-equity ratio, the firm can lower its taxes and thereby increase its total value.

What to remember when estimating cash flows of a project

cash flow is relevant, estimate on an incremental basis, be consistent with treatment of inflation

As a provider of funds to a corporation, owning which of the following corporate securities will give you the most control rights?

common stock

owining which of the following corporate securities gives you most control rights

common stock

Even if both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of each type of tax is different because

dividends are taxed when distributed, cap gains taxes are deferred

The cost of capital for a firm, rWACC, in a tax-free environment is

equal to the market value weighted average of the return on equity and the return on debt; equal to rA, the rate of return for that business risk class; and equal to the overall rate of return required on the levered firm.

The following are characteristics of preferred stock except it

has voting rights.

The main advantage of debt financing for a firm is that

interest expenses are tax dudectable

Which of the following sources of funds has played the greatest rile in the financing of US nonfinancial firms

internal funds

Beta is a measure of

market risk

MM prop 1 says

market value of any firm is independent of its capital structure

If a bond is junior or subordinated, it

must give preference to senior creditors in the event of default.

According to the trade-off theory of capital structure,

optimal capital structure occurs when the present value of tax savings on account of additional borrowing just offsets the increase in the present value of costs of distress.

The following functions, provided by financial intermediaries, enable the smooth functioning of the economy:

processing of payments, borrowing and lending, and pooling risks.

The trade-off theory of capital structure predicts that Group of answer choices

safe firms should borrow more than risky ones.

If dividends are taxed more heavily than capital gains, then investors

should be willing to pay more for stocks with low div yields

Correlation coefficient measures

the degree to which the returns of two stocks move together

SML graphs

the expected rate of return on an investment vs beta

MM prop 2 says

the expected return on equity is positively related to leverage, the required return on equity is a linear function of the firms debt to equity ratio, and the risk to equity increases with leverage

the capital structure of the firm can be defined as

the firm's mix of different securities used to finance assets.

Generally, managers of corporations prefer internally generated cash to finance their capital expenditures because

they can avoid the discipline of financial markets, the costs of issuing new securities are high, and the announcement of a new equity issue is usually bad news for investors.

LIBOR stands for London Interbank Offered Rate.

tru

When a firm has no debt, then such a firm is known as a(n)

unlevered firm and an all-equity firm

Beta of t-bills and risk free assets

zero

Dividend policy may affect firm value because

There is an unsatisfied clientele that prefers dividends to capital gains, and well managed companies prefer to signal wealth by paying high dividends

One possible reason that shareholders often insist on higher dividends is Group of answer choices

They don't trust managers to spend the money wisely

U.S. firms, in general, have been repurchasing shares and thus net equity issues have been negative.

Tru

A risk premium is the difference between a security's return and the Treasury bill return.

True

Australia follows an imputation tax system for the payment of taxes on dividends.

True

Diversification can reduce portfolio risk even in the case when correlations across stock returns equal zero.

True

Dual-class shares are often created to give one group of owners more control rights over the company than another group.

True

For the most part, stock returns tend to move together. Thus, pairs of stocks tend to have both positive covariances and correlations.

True

Miller and Modigliani's argument for dividend irrelevance assumes an efficient market.

True

The portfolio risk that cannot be eliminated by diversification is called market risk.

True

As the number of stocks in a portfolio is increased,

Unique risk decreases and approaches zero

In the case of a loan project (Borrowing) when do you accept the project?

When IRR < CoC

The following are debts in disguise:

accounts payable,leases, and underfunded pensions

EXAM REVIEW FROM HERE ON OUT

aightden

Which is true for beta

beta is slope of regression line, beta is measure of mkt risk

In the case of Google, which has issued Class A and Class B shares, Group of answer choices

both classes of shares have the same cash-flow rights and both classes of shares have different control rights.