FIN Exam 3 Concept Questions
Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:
2 years
Which one of the following statements is correct concerning market efficiency?
A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.
Which one of the following is the best example of a diversifiable risk?
A firm's sales decrease
Which two methods of project analysis are the most biased towards short-term projects?
Payback and discounted payback
Executive Tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is serving as a(n):
underwriter
It is common for venture capitalists to receive at least ___ percent of a start-up company's equity in exchange for the venture capital.
40
What is a prospectus?
A document that describes the details of a proposed security offering along with relevant information about the issuer
With Dutch auction underwriting
All successful bidders pay the same price per share.
Which one of the following statements concerning net present value (NPV) is most CORRECT?
An investment should be accepted if the NPV is positive and rejected if it is negative.
Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following?
Assumes the firm has sufficient funds to undertake both projects
Which of the following statements are true based on the historical record for 1926-2016?
Bonds are generally a safer, or less risky, investment than are stocks.
Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?
Capital asset pricing model
Which of the following yields on a stock can be negative?
Capital gains yield and total return
Which one of the following statements is correct concerning the issuance of long-term debt?
Direct placement debt tends to have more restrictive covenants than publicly issued debt.
The internal rate of return is defined as the _____________:
Discount rate which causes the net present value of a project to equal zero.
The internal rate of return is defined as the:
Discount rate which causes the net present value of a project to equal zero.
Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the uniform auction price for each of those shares. Which one of the following terms best describes this underwriting?
Dutch auction
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
Which one of the following statements concerning venture capitalists is correct?
Exit strategy is a key consideration when selecting a venture capitalist.
Mobile Units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 shares were purchased in accordance with which one of the following?
Green Shoe provision
Generally speaking, which of the following best correspond to a wide frequency distribution?
High standard deviation, large risk premium
Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.
I and III only
Which one of the following will decrease the net present value (N PV) of a project?
Increasing the project's initial cost at time zero
Which one of the following will decrease the net present value of a project?
Increasing the project's initial cost at time zero
JLK is a partnership that was formed two years ago and has been extremely successful thus far. The owners have decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called?
Initial public offering
In actual practice, managers most frequently use which two types of investment criteria?
Internal rate of return and net present value
Which one of the following is an example of systematic risk?
Investors panic causing security prices around the globe to fall precipitously
Which of the following are advantages of the payback method of project analysis?
Liquidity bias, ease of use
Which one of the following is represented by the slope of the security market line?
Market risk premium
Which one of the following statements related to market efficiency tends to be supported by current evidence?
Markets tend to respond quickly to new information.
In actual practice, managers most frequently use which two types of investment criteria?
NPV and IRR.
You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?
NPV profile
Which one of the following is an example of unsystematic risk?
National decrease in consumer spending on entertainment
Which of the following statement is most CORRECT?
One must know the discount rate to compute the NPV of a project, but one can compute the IRR without referring to the discount rate.
What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public?
Registration statement
Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?
Risk premium
What is a seasoned equity offering?
Sale of newly issued equity shares by a publicly owned company
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
Security market line
The U.S. Securities and Exchange Commission (SEC) periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, one would be most likely to suggest that the stocks markets are less than _____ form efficient.
Strong
Which one of the following is a risk that applies to most securities?
Systematic
A project has a net present value of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in current dollar terms.
A project has a NPV of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in present dollar terms.
A project has a net present value (NPV) of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in present dollar terms.
Standard deviation of stock returns measures the _____ risk of the stock
Total
Which one of the following statements related to unexpected returns is correct?
Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.
Which one of the following risks is irrelevant to a well-diversified investor?
Unsystematic risk
Which one of the following statements concerning venture capital financing is correct?
Venture capitalists should have key contacts and financial strength.
Standard deviation is a measure of which one of the following?
Volatility
A stock with an actual return that lies above the security market line has:
a higher return than expected for the level of risk assumed.
Underwriters generally:
accept the risk of selling the new securities in exchange for the gross spread.
The return earned in an average year over a multiyear period is called the _____ average return.
arithmetic
The systematic risk of the market is measured by a:
beta of 1
Unsystematic risk ________
can be effectively eliminated by portfolio diversification.
Unsystematic risk:
can be effectively eliminated by portfolio diversification.
The standard deviation of a portfolio:
can be less than the standard deviation of the least risky security in the portfolio. can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.
Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:
cost of capital
The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:
crossover rate
The raising of small amounts of capital from a large number of people is known as:
crowdfunding
When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:
decrease
Roy owns 200 shares of RTF Inc. He has opted not to participate in the current rights offering by this company. As a result, Roy will most likely be subject to:
dilution
Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the uniform auction price for each of those shares. Which one of the following terms best describes this underwriting?
dutch auction
The primary purpose of portfolio diversification is to:
eliminate asset-specific risk.
Jones & Co. recently went public and received $23.07 a share on their entire offer of 30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was this?
firm commitment
Trevor is the CEO of Harvest Foods, which is a privately held corporation. What is the first step he must take if he wishes to take Harvest Foods public?
gain board approval
The average compound return earned per year over a multiyear period is called the _____ average return.
geometric
The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the:
gross spread
A syndicate can best be defined as a _____
group of underwriters sharing the risk of selling a new issue of securities.
A syndicate can best be defined as a:
group of underwriters sharing the risk of selling a new issue of securities.
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:
have multiple rates of return.
To convince investors to accept greater volatility, you must:
increase the risk premium.
The dividend growth model (DGM)______:
is only as reliable as the estimated rate of growth.
The dividend growth model:
is only as reliable as the estimated rate of growth.
Net present value:
is the best method of analyzing mutually exclusive projects.
Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:
is underpriced
With firm commitment underwriting, the issuing firm:
knows upfront the amount of money it will receive from the stock offering.
The slope of an asset's security market line (SML) is the _______
market risk premium.
Existing shareholders:
may or may not have a preemptive right to newly issued shares
Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.
overestimate; underestimate
Which one of the following characteristics is most associated with financing type projects?
prepaid services
Equity financing of new, non-public companies is broadly referred to as:
private equity
The weighted average cost of capital for a firm with debt is the:
rate of return a company must earn on its existing assets to maintain the current value of its stock.
The cost of preferred stock is computed the same as the:
rate of return on a perpetuity.
Which one of the following is a preliminary prospectus?
red herring
The Securities and Exchange Commission:
reviews registration statements to ensure they comply with current laws and regulations.
Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?
reward-to-risk ratio
Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the company is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called?
rights offer
Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return?
risk premium
The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.
risk premium
The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:
risk premium
Pearson Electric recently registered 180,000 shares of stock under SEC Rule 415. The company plans to sell 100,000 shares this year and the remaining 80,000 shares next year. What type of registration was this?
shelf registration
Which one of the following categories of securities had the most volatile annual returns over the period 1926-2016?
small-company stocks
Which one of the following earned the highest risk premium over the period 1926-2016?
small-company stocks
Small-company stocks, as the term is used in the textbook, are best defined as the:
smallest 20 percent of the companies listed on the NYSE.
The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient.
strong
Inside information has the least value when financial markets are:
strong form efficient.
Most people would readily agree that the stock market is NOT _________.
strong-form efficient
Most people would readily agree that the stock market is NOT _________.
strong-form efficient
Direct business loans typically ranging from one to five years are called:
term loans
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
Efficient financial markets fluctuate continuously because:
the markets are continually reacting to new information.
If a project has a net present value equal to zero, then:
the project earns a return exactly equal to the discount rate.
The intercept point of the security market line is the rate of return which corresponds to:
the risk-free rate
Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:
tombstones
The rate of return on which type of security is normally used as the risk-free rate of return?
treasury bills
Business Aid is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called?
venture capital
The equivalent annual cost method is useful in determining:
which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives.