FIN exam 3 study guide/quizzes
Correlation ____= perfect positive correlation ____= perfect negative correlation ____= no correlation
+1, -1, 0
An average asset has a beta of __ relative to itself
1
By definition, what is the beta of the average asset equal to?
1
Which of the following statements are accurate? I. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.
1 and 3
Which of the following statements are true of a well-diversified portfolio's expected return? I. It cannot exceed the expected return of the best performing security in the portfolio. II. It must be equal to or greater than the expected return of the worst performing security in the portfolio. III. It is independent of the unsystematic risks of the individual securities held in the portfolio. IV. It is independent of the allocation of the portfolio amongst individual securities.
1, 2 and 3
average returns of major investment classes: large company stocks: ________________ small company stocks: ________________ long term corporate bonds: ________________ long term gov bonds: ________________ US treasury bill: ________________
12.1, 16.3, 6.4, 6, 3.4
average return of risk free asset
3.4%
Private issue- sold to fewer than ______ investors. ________________ ________________ not required
35, registration statement
impact of the Great Recession on the performance of major investment classes S&P index plunged ___________ percent Of the 500 stocks in the index, ________________ were down for the year Only the year 1931 had a lower return than 2008 From nov 2007-march 2009, S&P 500 lost ________________% of its value As stocks tanked, ________________ soared, particularly ________________________________ Great recession = ________________
37%, 485, 50, bonds, us treasury bonds, 2008
capital gains yield
(P1-P0)/P0
An asset with beta of ________ has half as much risk as average; _________ has twice as much systematic risk
.5, 2
A risk free asset has a beta of _____
0
A beta of ________ is the market's measure of systematic risk.
1
frequency distribution: 1σ : 2σ : 3σ: shows the number of times an annual return on portfolio falls ________________ some percentage range
68, 95, 99; within
dividend yield
D1/P0
Which one of the following statements correctly applies to the period 1926-2019? Large-company stocks earned a higher average risk premium than did small-company stocks. The average inflation rate exceeded the average return on U.S. Treasury bills. Large-company stocks had an average annual return of 15.2 percent. Inflation averaged 2.4 percent for the period. Long-term corporate bonds outperformed long-term government bonds.
Long-term corporate bonds outperformed long-term government bonds.
_____________________: net asset value per share- dividing a funds total assets by number of shares outstanding, equivalent to the funds share price
NAV
All investments in an efficient market are 0 _____________ investments. If prices are neither too ________________ nor too ________________, then the difference between the market value of an investment and its cost is ___.
NPV, low, high, 0
Which one of the following is a direct cost of bankruptcy? Bypassing a positive NPV project to avoid additional debt Investing in cash reserves Maintaining a debt-equity ratio that is lower than the optimal ratio Losing a key company employee Paying an outside accountant to prepare bankruptcy reports
Paying an outside accountant to prepare bankruptcy reports
To sell securities through regulation CF, a company must file a form with ________________ making it eligible to list securities on ________________ portal
SEC, crowdfunding
How are the unsystematic risks of two different companies in two different industries related?
There is no relationship
_____________________: The fund seeks above-average capital gains by investing in stocks of US companies with market capitalizations of less than $2 billion.
US small cap fund
Arithmetic average: the return earned in an ________________________________over multi year period
average year
Because unsystematic risk can be eliminated at virtually no ________________ (by diversifying) there is no ________________ for bearing it.
cost, reward
Diversifiable risk is the part that can be ________________ by diversification There is a minimum level of risk called "________________ risk" which cannot be eliminated by diversification
eliminated, non diversifiable
Any new investment our firm undertakes must offer an expected return________________ than what financial markets offer for same risk
no worse
The diversification effect applies as long as there is less than ________________ correlation (p<___)
perfect; 1
________________ offerings: offerings by firms that already have outstanding securities
seasoned
Unsystematic risk: a risk that affects at most a ________________ number of assets. Also called ________________ or asset ________________ risk Oil strike by a company will only effect those competitors and suppliers
small, unique, specific
The systematic risk principle argues that the market does not reward risks _____.
that are unnecessary
According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?
the risk free rate of return
________________: the average squared difference between the actual return and the average return
variance
________________ = standard deviation Variance = ________________ Volatility = √ ________________
volatility; sx^2; variance
Venture capitalists frequently hold ________________________________, giving them priority in event that company is sold or liquidated
voting preferred stock
________________ ________________ efficiency At a minimum, the current price of a stock reflects the stocks own past prices Studying past prices to identify mispriced securities is futile- renders technical analysis useless
weak form
The standard deviation of a portfolio is less than or equal to the ________________ ________________ of the standard deviations of the assets in the portfolio.
weighted average
M&M Proposition I with tax implies that the: weighted average cost of capital decreases as the debt-equity ratio increases. value of a company is inversely related to the amount of leverage used by that company. value of an unlevered company equals the value of a levered company plus the value of the interest tax shield. cost of capital is the same regardless of the mix of debt and equity used cost of equity increases as the debt-equity ratio decreases.
weighted average cost of capital decreases as the debt-equity ratio increases.
The value of a firm is maximized when the: cost of equity is maximized. tax rate equals the cost of capital. levered cost of capital is maximized. weighted average cost of capital is minimized. debt-equity ratio is minimized.
weighted average cost of capital is minimized.
In a typical deal, venture capitalist will demand ___% or more of the equity in the company
40
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
_____________________: employment sponsored retirement plan that permits employees to divert part of their pay tax free into the plan. Money may be matched by the employer and earnings accumulate tax-deferred until withdrawn
401k plan
_____________________: private employers _____________________: schools, hospitals, and other non profits _____________________: state and local governments _____________________: federal workers _____________________: simplified employee pensions (SEPs) or solo 401(k)
401k, 403b, 457 plan, thrift savings plan, self employed
For the period 1926-2019, the average risk premium on large-company stocks was about: 12.7 percent. 10.4 percent. 8.7 percent. 6.9 percent. 7.3 percent.
8.7 percent.
average risk premiums of major investment classes: large company stocks: ________________ small company stocks: ________________ long term corporate bonds: ________________ long term gov bonds: ________________ US treasury bill: ________________
8.7, 12.9, 3.0, 2.6, 0
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 dividend amount An increase in the dividend amount A decrease in the market rate of return A decrease in the firm's beta A decrease in the risk-free rate
A decrease in the risk-free rate
Which one of the following statements is correct concerning market efficiency? Real asset markets are more efficient than financial markets. If a market is efficient, arbitrage opportunities should be common. In an efficient market, some market participants will have an advantage over others. A firm will generally receive a fair price when it issues new shares of stock if the market is efficient. New information will gradually be reflected in a stock's price to avoid any sudden price changes in an efficient market.
A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.
Of the options listed below, which is the best example of a diversifiable risk? Interest rates increase Energy costs increase Core inflation increases A firm's sales decrease Federal income taxes increase
A firm's sales decrease
Which one of the following statements best defines the efficient market hypothesis? Efficient markets limit competition. Security prices in efficient markets remain steady as new information becomes available. Mispriced securities are common in efficient markets. All securities in an efficient market are zero net present value investments. All securities provide the same positive rate of return when the market is efficient.
All securities in an efficient market are zero net present value investments.
Which one of the following statements related to capital gains is correct? The capital gains yield includes only realized capital gains. An increase in an unrealized capital gain will increase the capital gains yield. The capital gains yield must be either positive or zero. The capital gains yield is expressed as a percentage of a security's total return. The capital gains yield represents the total return earned by an investor.
An increase in an unrealized capital gain will increase the capital gains yield.
Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Ignore taxes. At the break-even point, there is no advantage to debt. The earnings per share will equal zero when EBIT is zero for a levered firm. The advantages of leverage are inversely related to the level of EBIT. The use of leverage at any level of EBIT increases the EPS. EPS are more sensitive to changes in EBIT when a firm is unlevered.
At the break-even point, there is no advantage to debt.
Which of the following yields on a stock can be negative? Dividend yield Capital gains yield Capital gains yield and total return Dividend yield, capital gains yield, and total return Dividend yield and total return
Capital gains yield and total return
Which one of these statements related to Chapter 11 bankruptcy is accurate? Prepacks apply only to Chapter 7, not Chapter 11, bankruptcies. Senior management must be replaced prior to exiting a Chapter 11 bankruptcy. A company can only file for Chapter 11 after it becomes totally insolvent. Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage. Chapter 11 involves the total liquidation of the bankrupt firm.
Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage.
Which one of the following is a marketed claim against the cash flows of a company? Tax payment to the IRS Dividend payment to shareholders Payment of employees' wages Payment for warranty work on a product produced by the company Payment of legal claim against the company
Dividend payment to shareholders
cross between index funds and stock
ETFs
Cervantes recently offered 60,000 new shares of stock for sale. The underwriters sold a total of 73,400 shares to the public at a price of $18.20 per share. The additional 13,400 shares were purchased in accordance with which one of the following? Green Shoe provision Red herring provision Quiet provision Lockup agreement Post-issue agreement
Green Shoe provision
total percentage costs of issuing stocks and bonds: Smaller _______ total direct costs - 22.5% of amount raised Issues over 500 mil, around 5.5% in direct costs Typical underwriter spread on ---- is about 5-10% Except for ________________ ___________ offerings, there are substantial economies of scale Costs associated with selling ________________ are substantially less than the costs of selling ________________
IPO, straight debt, debt, equity
_____________________: tax-favored retirement plan. Contribution to a traditional ira may be tax deductible depending on income and coverage. Earnings grow tax deferred and withdrawals are taxable Contributions to a _____________________ are never deductible, but earnings accumulate tax-free and withdrawals are tax free in retirement
IRA, roth ira
Of the options listed below, which is the best example of systematic risk? Investors panic causing security prices around the globe to fall precipitously. A flood washes away a firm's warehouse. A city imposes an additional one percent sales tax on all products. A toymaker has to recall its top-selling toy. Corn prices increase due to increased demand for alternative fuels.
Investors panic causing security prices around the globe to fall precipitously.
Which of the following statements regarding unsystematic risk is accurate? It can be effectively eliminated by portfolio diversification. It is compensated for by the risk premium. It is measured by beta. It is measured by standard deviation. It is related to the overall economy.
It can be effectively eliminated by portfolio diversification.
Which of the following statements is true of a portfolio's standard deviation? It is a weighted average of the standard deviations of the individual securities held in the portfolio. It can never be less than the standard deviation of the most risky security in the portfolio. It is equal to or greater than the lowest standard deviation of any single security held in the portfolio. It is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. It can be less than the standard deviation of the least risky security in the portfolio.
It can be less than the standard deviation of the least risky security in the portfolio.
Which of the following statements regarding the cost of preferred stock is accurate? It equals the dividend yield. It equals the yield to maturity. It is highly dependent on the dividend growth rate. It is independent of the preferred stock's price. It decreases when tax rates increase.
It equals the dividend yield.
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. Large-company stocks, U.S. Treasury bills, long-term government bonds Small-company stocks, long-term corporate bonds, large-company stocks Long-term government bonds, long-term corporate bonds, intermediate-term government bonds Large-company stocks, small-company stocks, long-term government bonds Intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills
Long-term government bonds, long-term corporate bonds, intermediate-term government bonds
With respect to returns, which one of the following statements is accurate? The unexpected return is always negative. The expected return minus the unexpected return is equal to the total return. Over time, the average return is equal to the unexpected return. The expected return includes the surprise portion of news announcements. Over time, the average unexpected return will be zero.
Over time, the average unexpected return will be zero.
With respect to capital project analysis, which of the following statements is accurate? The subjective approach assigns a discount rate to each project based on other companies in the same category as the project. Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects. Companies will correctly accept or reject every project if they adopt the subjective approach. Mandatory projects should only be accepted if they produce a positive NPV when the overall company WACC is used as the discount rate. The pure play approach should only be used with low-risk projects.
Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.
Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding? Consumer claims Dividend payment to preferred shareholders Company contribution to the employees' retirement account Payment to an unsecured creditor Payment of employees' wages
Payment of employees' wages
An investor wants to reduce the unsystematic risk in her portfolio. Which of the following actions is least likely to do so? Reducing the number of stocks held in her stock portfolio Adding bonds to her stock portfolio Adding international securities into her portfolio of U.S. stocks Adding U.S. Treasury bills to her risky portfolio Adding technology stocks to her portfolio of industrial stocks
Reducing the number of stocks held in her stock portfolio
Which one of the following categories of securities had the highest average annual return for the period 1926-2019? U.S. Treasury bills Large-company stocks Small-company stocks Long-term corporate bonds Long-term government bonds
Small-company stocks
Which one of the following categories of securities had the most volatile annual returns over the period 1926-2019? Long-term corporate bonds Large-company stocks Intermediate-term government bonds U.S. Treasury bills Small-company stocks
Small-company stocks
Which one of the following earned the highest risk premium over the period 1926-2019? Long-term corporate bonds U.S. Treasury bills Small-company stocks Large-company stocks Long-term government bonds
Small-company stocks
Which of the following statements best describes the principle of diversification? Concentrating an investment in two or three stocks will eliminate all of the unsystematic risk. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. Spreading an investment across multiple diverse companies will not lower the total risk. Spreading an investment across many diverse assets will eliminate all of the systematic risk. Spreading an investment across many diverse assets will eliminate some of the total risk.
Spreading an investment across many diverse assets will eliminate some of the total risk.
Which one of the following is a key goal of the aftermarket period? Collecting the largest number of Dutch auction bids as possible Determining a fair offer price Supporting the market price for a new securities issue Establishing a broad-based underwriting syndicate Distributing red herrings to as many potential investors as possible
Supporting the market price for a new securities issue
Which type of risk does not change as we add more securities to a portfolio?
Systematic risk
Assume a firm employs debt in its capital structure. Which of the following statements is accurate? The WACC would most likely decrease if the firm replaced its preferred stock with debt. In the WACC calculation, the weight assigned to preferred stock decreases as the market value of the preferred stock increases. The WACC will decrease as the corporate tax rate decreases. In the WACC calculation, the weight of equity is based on the number of shares outstanding and the book value per share. The WACC will remain constant unless a company retires some of its debt.
The WACC would most likely decrease if the firm replaced its preferred stock with debt.
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 dividend yield is expressed as a percentage of the par value. The capital gain would have been less had Vanessa not received the dividends. The total dollar return per share is $.55. The capital gains yield is positive. The dividend yield is greater than the capital gains yield.
The capital gains yield is positive.
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. Company insiders were aware of the information prior to the announcement. Investors do not pay attention to daily news. Investors tend to overreact. The news was positive. The information was expected.
The information was expected.
According to M&M Proposition II, without taxes, which of the following statements is accurate? The cost of equity remains constant as the debt-equity ratio increases. The cost of equity is inversely related to the debt-equity ratio. The required return on assets is equal to the weighted average cost of capital. Financial risk determines the return on assets. Financial risk is unaffected by the debt-equity ratio.
The required return on assets is equal to the weighted average cost of capital.
With respect to risk, which of the following statements is accurate? The beta of a portfolio will increase when a stock with a high standard deviation is added to the portfolio. Every portfolio that contains 15 or more securities is free of unsystematic risk. The systematic risk of a portfolio can be lowered by adding T-bills to the portfolio. Adding an additional stock to a diversified portfolio will lower the portfolio's beta. Stocks that move in tandem with the overall market have beta values of zero.
The systematic risk of a portfolio can be lowered by adding T-bills to the portfolio.
Which one of the following statements is correct concerning the direct costs of issuing securities? Domestic bonds are generally more expensive to issue than equity IPOs. The gross spread as a percentage of proceeds is the same for similar-sized IPOs and SEOs. A seasoned offering is always more expensive on a percentage basis than an IPO. There tends to be substantial economies of scale when issuing any type of security. The costs of issuing convertible bonds tend to be less on a percentage basis than the costs of issuing straight debt.
There tends to be substantial economies of scale when issuing any type of security.
Why do non investment grade bonds have a much higher price than investment grade issues
They are riskier and harder to market from investment bank perspective
Which one of the following categories of securities had the lowest average risk premium for the period 1926-2019? Long-term government bonds Small-company stocks Large-company stocks Long-term corporate bonds U.S. Treasury bills
U.S. Treasury bills
Which one of the following had the least volatile annual returns over the period of 1926-2019? Large-company stocks Inflation Long-term corporate bonds U.S. Treasury bills Intermediate-term government bonds
U.S. Treasury bills
_____________________: The fund seeks above-average capital gains by investing in stocks of US firms with market capitalizations in excess of $10 billion.
US large cap fund
With respect to unexpected returns, which one of the following statements is accurate? All announcements by a firm affect that firm's unexpected returns. Unexpected returns over time have a negative effect on the total return of a firm. Unexpected returns are relatively predictable in the short term. Unexpected returns generally cause the actual return to vary significantly from the expected return over the long term. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long term.
Unexpected returns can be either positive or negative in the short term but tend to be zero over the long term.
Standard deviation is a measure of which one of the following? Average rate of return Volatility Probability Risk premium Real returns
Volatility
Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst? Weak Semiweak Semistrong Strong Perfect
Weak
Assume a stock experiences an actual return that is above the security market line. An analyst can safely conclude that the stock has: more systematic risk than the overall market. more risk than that warranted by CAPM. a higher return than expected for the level of risk assumed. less systematic risk than the overall market. a return equivalent to the level of risk assumed.
a higher return than expected for the level of risk assumed.
alpha, α, as the ________________ return above or below the SML
abnormal
________________ ________________: in a seasoned issue of stock, the price of existing stock drops on average by 3 percent on the announcement of the issue.
abnormal returns
Negative covariance implies that the return on one stock is likely ________________ its average, when the return on another is ________________ its average (and vice versa)
above, below
Tombstone: an ________________ announcing a public offering
advertisement
Correlation is the relationship/association between two variables- this does not mean that the change in one ___________________________
affects the other
________________: period after a new issue is initially sold to the public During this time members of underwriting syndicate generally do not ________________ ________________ for less than the ________________ price
aftermarket, sell securities, offering
With Dutch auction underwriting: each winning bidder pays the minimum price offered by any bidder. all successful bidders pay the same price per share. all bidders receive at least a portion of the quantity for which they bid. the selling firm receives the maximum possible price for each security sold. the bidder for the largest quantity receives the first allocation of securities.
all successful bidders pay the same price per share.
The distance between a portfolios actual return and the SML is called ________________
alpha
VC funding is much more likely in the ________________ and ________________ stages, or ________________ stages
angel, seed, early
Individual investors might avoid requesting 100 shares in an upcoming IPO because they: do not want to be bothered with submitting their bid to the SEC for approval. do not want to abide by the quiet period requirement. are prevented from entering orders for less than 1,000 shares. are more apt to receive shares if the IPO is under allocated. would have to pay a premium based on their small order size.
are more apt to receive shares if the IPO is under allocated.
If you know the true ________________ average, this is what you should use for your forecast Usually we have only estimates of returns, and estimates have ________________; arithmetic is likely too high for ________________ periods, while geometric may be too pessimistic for ________________ periods
arithmetic, errors, longer, shorter
10 years in future- go ________________ Few decades in future - go ________________
arithmetic, geometric
Portfolio: a group of ________________ such as stocks and bonds held by an investor
assets
Efficient capital market: a market in which security prices reflect ________________ ________________
available information
If you were to pick a year at random, your best guess is the ________________ Add up all historical returns and divide by years
average return, years
________________ ________________ underwriting: underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility
best efforts
The _________ coefficient is the amount of systematic risk present in a particular risky asset relative to that in an average asset.
beta
________________: the amount of systematic risk present in a particularly risky asset relative to that in an average asset
beta coefficiant
For the period 2009-2019, U.S. Treasury bills had an annual rate of return that was: between .5 and 1 percent. between 1 and 2 percent. negative in at least one year. negative for two or more years. between 0 and 2.5 percent.
between 1 and 2 percent.
Dutch auction underwriting: offer price is set based on competitive ________________ by investors. Also known as a ________________ price auction
bidding, uniform
Token sales are most popular among ________________ ________________ companies
blockchain technology (bitcoin, crypto)
five basic steps of issuing securities: 1. Management must obtain approval from ________________________________ 2. Firm must prepare a ________________ ________________: a statement filed with the SEC that discloses all material information concerning the corporation making a public offering 3. SEC examines registration statement during a ________________ ________________, during which time the firm may distribute copies of a ________________ ________________: a legal document describing details of the issuing corporations and the proposed offering to potential investors 4. Firm cannot ________________ ________________ during waiting period, but oral offers can be made 5. On effective date of registration statement, a ________________ is determined and a full fledged selling effort gets underway
board of directors, registration statement, waiting period, preliminary prospectus, sell securities, price
_____________________: issuer promises to pay the investor a certain rate of interest, and principal at maturity. Bond funds come in different flavors, with some investing in just one type of bond, and some in many.
bond funds
Yields on comparable ________________ can be clearly observed, so pricing a ------- accurately is less difficult
bonds
The required return is what the firm must earn on its capital investment in a project just to ________________ ________________.
break even
Assume you are an analyst monitoring Okello stock. Which one of the following would be reflected in Okello's expected return? a. The chief financial officer of Okello unexpectedly resigned. b. The labor union representing Okello's employees unexpectedly called a strike. c. This morning Okello confirmed that, as expected, the CFO is retiring at the end of the year. d. The price of Okello stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. e. The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.
c
The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk.
capital asset pricing model
______________________________________________: the equation of the SML showing the relationship between expected return and beta
capital asset pricing model
the SML is a graphical depiction of the ________________________________. It shows the relationship between ________________ return and ________________.
capital asset pricing model, expected, beta
_____________________: overseen by an investment or fund manager Trades on an exchange Creates a supply/demand and therefore premium/discount pricing
closed ended funds
Ignoring taxes, at the break-even point between a levered and an unlevered capital structure, the: company is earning just enough to pay for the cost of the debt. company's earnings before interest and taxes are equal to zero. earnings per share for the levered option are exactly double those of the unlevered option. advantages of leverage exceed the disadvantages of leverage. company has a debt-equity ratio of .50.
company is earning just enough to pay for the cost of the debt.
Gross spread: ________________ to the underwriter; difference between underwriters ________________ price and ________________ price
compensation, buying, offering
Geometric average return: the average ________________ return earned per year over a multiyear period
compound
Seed round investors may receive equity directly, but often paid with ________________ notes or ________________ shares
convertible, advisory
________________ is the relationship/association between two variables- this does not mean that the change in one affects the other ________________ indicates that one event is the result of the other; action A causes B
correlation, causation
Covariance incorporates both: The ________________ between the two assets The ________________ of each of the two securities measured by Sd
correlation, variability
The _____________ is the minimum required return on a new investment
cost of capital
________________: a statistic that measures the interrelationship (correlation) between two securities
covariance
Sign of correlation must be same as ________________; if correlation is ________________ they are positively correlated; if ________________ then negatively correlated
covariance, positive, negative
JOBS act was signed into law; provision of this act allows companies to raise money through ________________
crowdfunding
value of the right = ________________ price - new ________________ per share
current, cost (new cost is total cost now divided among more shares)
Stock prices tend to ________________ following announcement of a new equity issue for SEO: Managerial information: if manager has superior info, it may know when the firm is ________________ and attempt to issue new shares when market value ________________ correct value Debt usage: co decision to issue new equity may reveal that co has too much ________________ or too little liquidity- or that an equity issue is a ________________ ________________ to the market ________________ costs: substantial costs with selling securities
decline, overvalued, exceeds, debt, bad signal, issue
The standard deviation of a portfolio ________________ as the number of securities increases
declines
When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to: increase. decrease. remain constant. respond, but the direction of the response is not predictable as shown by past studies. decrease momentarily and then immediately increase substantially within an hour following the announcement.
decrease
When new securities are added to a portfolio, the total unsystematic risk portion of that portfolio is most likely to _____.
decrease
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: was unaffected by the announcement. increased proportionately with the dividend decrease. decreased proportionately with the dividend decrease. decreased by $.35 per share. increased by $.35 per share.
decreased proportionately with the dividend decrease.
________________ reaction: price partially adjusts to new info, then eventually completely reflects the new info ________________ reaction: the price instantaneously adjusts and fully reflects new information ________________ reaction: the price over adjusts to new info and overshoots price, then subsequently corrects
delayed, efficient market, over
When evaluating any capital project proposal, the cost of capital: is determined by the overall risk level of the firm. is dependent upon the source of the funds obtained to fund that project. is dependent upon the firm's overall capital structure. should be applied as the discount rate for all other projects considered by the firm. depends upon how the funds raised for that project are going to be spent.
depends upon how the funds raised for that project are going to be spent.
________________: loss in existing shareholders value in terms of ownership, market value, book value or EPS
dilution
Gross spread: the gross spread consists of ________________ fees paid by the issuer to the underwriting ________________- the difference between the price issuer receives and the offer price
direct, syndicate
Assume a firm has a debt-equity ratio of .48. The firm's cost of equity is: generally less than its WACC. unaffected by changes in the market risk premium. directly related to the risk level of the firm. generally less than the firm's aftertax cost of debt. inversely related to changes in the level of inflation.
directly related to the risk level of the firm.
Unsystematic risk = ________________ risk Systematic risk = ________________ risk
diversifiable, nondiversifiable
Principle of ________________: spreading an investment across a number of assets will eliminate some, but not all, of the risk
diversification
Total dollar return = ________________ + ________________
dividend income + capital gain
Over the years, companies may pay ________________ to shareholders. In addition to the --- the other part of return is the ________________ arising from changes in the value of your investment
dividends, capital gains
_____________________ - index of 30 "blue chip" US stocks _____________________ - index of top 500 large cap US equities _____________________ - mainly composed of technology companies _____________________ - measures small cap companies _____________________ - major international developed equity markets _____________________ - large and mid cap representation across 25 emerging markets
dow jones, sp500, nasdaq composite, russell 2000, msci eafe, msci emerging markets
________________ ________________ underwriting: offer price is set based on competitive bidding by investors. Also known as a uniform price auction
dutch auction
Assume a portfolio contains stocks of 25 different companies, and the weights of each are unequal. Also assume the various potential economic states have unequal likelihoods of occurring. Which one of the following statements is accurate? a. Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. b. The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. c. Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. d. The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. e. Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.
e
"Seed money": ground floor, ________________ financing
early stage
Why are costs of selling equity larger than selling debt? ______________ of __________________ Debt issues are ________________ and less ________________ to sell Debt securities are much easier to ________________ Can be sold to a relatively ________________ number of buyers
economies of scale, easier, risky, price, small
________________________________ hypothesis: actual capital markets, such as the NYSE are efficient
efficient markets
Stock Alpha has a beta of .79 and a reward-to-risk ratio that is less than the reward-to-risk ratio of Stock Omega. Omega has a beta of 1.12. This information implies that: Alpha is riskier than Omega and both stocks are fairly priced. Alpha is less risky than Omega and both stocks are fairly priced. either Alpha is underpriced or Omega is overpriced or both. either Alpha is overpriced or Omega is underpriced or both. Alpha is less risky than Omega and both stocks are correctly priced.
either Alpha is overpriced or Omega is underpriced or both.
_____________________: The fund seeks above-average capital gains by investing in stocks of companies located in Brazil, Russia, China, India, Thailand, Poland, Hungary, Mexico, Indonesia, South Korea and Turkey.
emerging markets fund
Firm commitment underwriting: underwriter buys the ________________ issue, assuming ________________ financial responsibility for ________________ shares
entire, full, unsold
_____________________: mutual funds that trade like stocks on the exchanges. Their portfolios generally track an index that represents a particular market or a slice of a market
etfs
strong form efficiency All information of ________________ ________________ is reflected in stock prices. There is no such thing as ________________ information Stock prices will react to a ________________ ________________ as soon as board of directors votes, and ________________ it is even announced publicly
every kind, insider, dividend increase, before
________________: the beginning of the period when stock is sold without a recently declared right, normally two trading days before the holder of record date
ex rights
If the IRR ________________ the cost of capital (minimum required return) then the project will have positive NPV
exceeds
Risk premium: the ________________ return required from an investment in a ________________ asset over that required from a ________________ investment Basically your ________________ for risk
excess, risky, risk free, reward
Rights offer: a public issue of securities in which securities are first offered to ________________ shareholders. Also called a ________________ offering
existing, rights
The ________________ on the portfolio is a weighted average of expected returns on the individual securities
expected return
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
Risk premium =________________ - ________________
expected return, risk free rate
To determine if investment has positive NPV, compare ________________ return on investment to the ________________ return with same beta
expected, financial market
_____________________: funds annual operating expenses as a percentage of its total assets; ratio covers cost of management, legal, accounting or marketing
expense ratio
Other direct expenses: these are direct costs, incurred by the issuer, that are not part of the compensation to underwriters. These costs include ________________ fees, ________________ fees, ________________- all reported on the ________________
filing, legal, taxes, prospectus
Hondros Corporation recently went public. The firm offered 42,000 shares and received net proceeds of $18.56 per share. Hirani & Tran served as the underwriter and sold 37,000 shares to the public at an offer price of $20.63 per share. What type of underwriting was this?
firm commitment
________________ ________________ underwriting: underwriter buys the entire issue, assuming full financial responsibility for unsold shares
firm commitment
Initial public offering: a company's ________________ equity issue made available to the public. Also called an ________________ new issue
first, unseasoned
number of new shares =
funds to be raised / subscription price
General cash offer: an issue of securities offered for sale to the ________________ ________________ on a ________________ basis
general public, cash
The average compound return earned per year over a multiyear period is called the _____ average return.
geometric
________________ average return is always smaller than ________________ average
geometric, arithmetic
________________- "what was your average compound return per year over a particular period?" ________________- "what was your return in an average year over particular period?"
geometric, arithmetic
Sml tells us the "________________ ________________" for bearing risk in the economy
going rate
________________________________: gives the underwriters the right to buy additional shares at the offer price to cover over allotments
green shoe option
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. under price amount. filing fee. new issue premium. offer price.
gross spread
A syndicate can best be defined as a: venture capitalist. group of attorneys providing services for an IPO. block of investors who control a firm. bank that loans funds to finance the start-up of a new company. group of underwriters sharing the risk of selling a new issue of securities.
group of underwriters sharing the risk of selling a new issue of securities.
Series B funding: used to ignite ________________ in the company. Financing needed to ________________ production and grow market share. Goal is to generate a ________________ First stage at which ________________ stock is popular form of financing
growth, expand, net profit, common
IPOs have ________________ expenses than SEOs, but the difference is not as great as might be guessed ________________ of IPOs is an additional cost to issuer Total direct costs for IPO around 10% and underpricing amounts to about 19% Seo has higher ________________ cost of abnormal returns
higher, underpricing, indirect
Competitive offer basis: offer its securities to the ________________ ________________ underwriter
highest bidding
________________________________ date is the date on which existing shareholders on company records are designated as the recipients of stock rights;
holder of record (date of record)
_____________________: The fund seeks above-average current income and preservation of capital by investing in bonds as well as stocks that pay dividends.
income fund
Assume a firm utilizes its WACC as the discount rate for every capital project it implements. Accordingly, the firm will tend to: accept all positive net present value projects. increase the average risk level of the company over time. reject all high-risk projects. reject all negative net present value projects. favor low-risk projects over high-risk projects.
increase the average risk level of the company over time.
To convince investors to accept greater volatility, you must: decrease the risk premium. increase the risk premium. decrease the real return. decrease the risk-free rate. increase the risk-free rate.
increase the risk premium.
Drop in value of existing stock following a new issue is an example of an ________________ cost of selling securities - may be around _____% which can be a lot for a large company
indirect, 3
________________ expenses: these costs are not reported on the prospectus and include the costs of ________________ time spent working on the new issue
indirect, management
Lockup agreement: part of underwriting contract that specifies how long ________________ must wait after an IPO before they can ________________ ________________
insiders, sell stock
Efficient market reaction: the price ________________ adjusts and ________________ reflects new information Delayed reaction: price ________________ adjusts to new info, then eventually ________________ reflects the new info Overreaction: the price ________________ adjusts to new info and ________________ price, then subsequently ________________
instantaneously, fully; partially, completely; over, overshoots, corrects
_____________________: The Fund seeks to track the performance of a benchmark index that measures the performance of intermediate-term US corporate bonds.
intermediate term bond index fund
_____________________: The fund seeks above-average capital gains by investing in stocks of companies located in global developed markets, excluding the US.
international fund
_____________________: The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in both developed and emerging markets, excluding the US.
international index fund
Covariance: a statistic that measures the ________________ (________________) between two securities
interrelationship, correlation
The business risk of a company: depends on the company's level of unsystematic risk. is inversely related to the required return on the company's assets. is dependent upon the relative weights of the debt and equity used to finance the company. is positively related to the company's cost of equity. has no relationship with the required return on a company's assets according to M&M theory.
is positively related to the company's cost of equity.
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. is correctly priced. will plot below the security market line. will plot on the security market line. will plot to the right of the overall market on a security market line graph.
is underpriced.
A company is technically insolvent when: it has a negative book value. its total debt exceeds its total equity. it is unable to meet its financial obligations. it files for bankruptcy protection. the market value of its stock is less than its book value.
it is unable to meet its financial obligations.
With firm commitment underwriting, the issuing firm: is unsure of the total amount of funds it will receive until after the offering is completed. is unsure of the number of shares it will actually issue until after the offering is completed. knows exactly how many shares will be purchased by the general public during the offer period. retains the financial risk associated with unsold shares. knows upfront the amount of money it will receive from the stock offering.
knows upfront the amount of money it will receive from the stock offering.
Lockup expiration - ________________ number of shares hit the market and the value ________________
large, goes down
Systematic risk: a risk that influences a ________________ number of assets. Also called ________________ risk Systematic risks have ________________ effects - market risk ________________ of economic conditions- GDP, interest rates, inflation
large, market, market wide
Define _____________________ as market capitalization of > $10B Define _____________________ as market capitalization of $2B to $10B Define _____________________ as market capitalization of < $2 B
large, mid small cap
"Mezzanine level": financing in the ________________ stages of development by ________________
later, VC
Growth equity: form of venture capital in ________________ stage of a companies growth Provides funds for ________________ companies (where buyout or IPO doesnt make sense) Allows company to stay ________________ longer than ever
later, mature, private
________________________________: part of underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock
lockup agreement
Venture capital backed companies are particularly likely to experience a loss in value on the ________________ ________________ ________________ (bc preferred stock holders are likely to sell on this day)
lockup day expiration
A company that has a(n) ________ would be most likely to have a high percentage of debt in its optimal capital structure. exceptionally high level of depreciation expense very low marginal tax rate substantial level of tax shields from other sources low probability of financial distress minimal level of taxable income
low probability of financial distress
Individual investors who continually monitor the financial markets seeking mispriced securities: earn excess profits on all of their investments. make the markets increasingly more efficient. are never able to find a security that is temporarily mispriced. are overwhelmingly successful in earning abnormal profits. are always quite successful using only historical price information as their basis of evaluation.
make the markets increasingly more efficient.
The value of a right depends upon the number of rights required for each new share as well as the: subscription price and book value per share. market and book values per share. market price, book value, and subscription price. market and subscription prices. difference between the market and book values per share.
market and subscription prices.
When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the:
market value of the investment in each stock
Registration statement: a statement filed with the SEC that discloses all ________________ information concerning the corporation making a ________________ ________________
material, public offering
A firm should select the capital structure that: produces the highest cost of capital. maximizes the value of the firm. minimizes taxes. is fully unlevered. equates the value of debt with the value of equity.
maximizes the value of the firm.
Existing shareholders: may or may not have a pre-emptive right to newly issued shares. must purchase new shares whenever rights are issued. are prohibited from selling their rights. are generally well advised to let the rights they receive expire. can maintain their proportional ownership positions without exercising their rights.
may or may not have a pre-emptive right to newly issued shares.
"________________": financing in the later stages of development by VC
mezzanine level
Cost of capital: ________________ required return on a new investment
minimum
_____________________: very low risk, commonly used by investors to keep cash on hand and earn some interest. Much like savings accounts. Designed to be $1 per share. Invest in high quality debt with short maturities. Low risk low reward. The fund seeks to preserve principal and provide liquidity by investing in US Treasury Bills and other short-term securities.
money market funds
Best efforts underwriting: underwriter sells as ________________ of the issue as possible, but can ________________ any unsold shares to the issuer without financial ________________
much, return, responsibility
_____________________: a professionally managed portfolio of stocks, bonds, and other investments divided up into shares
mutual fund
daily fluctuations in stock prices arise due to responses to ________________ ________________, and support, rather than contradict, the idea of ________________ ________________
new information, market efficiency
The return on stock is composed of two parts: The ________________ or ________________ return from stock that shareholders in the market predict or expect The ________________ or ________________ part from unexpected information revealed within the year
normal, expected; uncertain, risky
efficiency implies that investors should expect to earn ________________ returns, and firms should expect to receive ________________ value for the securities they sell
normal, fair
number of rights needed to buy share of stock =
old shares/ new shares
_____________________: offered through a fund company that sells shares directly to investors (ETFs and hedge funds) Traded at certain times of day unlimited shares Fixed once a day at their NAV
open ended funds
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
weak form efficiency At a minimum, the current price of a stock reflects the stocks own ________________ Studying past prices to identify mispriced securities is ________________- renders technical analysis useless
past prices, futile
Several kinds of dilution: Dilution of ________________ ________________ Dilution of ________________ value Dilution of ________________ value and ________________
percentage ownership, market, book, EPS
Portfolio weight: the ________________ of a portfolio's total ________________ that is invested in a particular asset
percentage, value
It is usually more convenient to summarize returns in ________________ rather than ________________ because that way your return does not depend on how much a person actually invests A dollar return depends on the ________________ return, and will ________________ based on investment
percentages, dollars, percentage, change
________________: a group of assets such as stocks and bonds held by an investor
portfolio
________________ ________________: the percentage of a portfolio's total value that is invested in a particular asset
portfolio weight
The security market line (SML) shows that the relationship between a security's expected return and its beta is ______.
positive
________________ alpha = asset has earned a return in excess of what it should earn based on its beta ________________ alpha= less than desirable, earns less than it should based on beta
positive, negative
________________ ________________: a legal document describing details of the issuing corporations and the proposed offering to potential investors
preliminary prospectus
Red herring: a ________________ prospectus distributed to prospective ________________ in a new issue of securities
preliminary, investors
________________- sold to fewer than 35 investors. Registration statement not required
private issue
Rights offering: an issue of common stock offered to existing stockholders; AKA ________________ ________________ Each shareholder is issued rights to buy a ________________ ________________ of new shares from the firm at specified ________________ within a specified time, after which the rights are said to ________________. Rights offerings appear to be ________________ for issuing firm than cash offers Rights offerings can be done without using an ________________ whereas as an ---------- is almost necessary in cash offer
privileged subscription, specified number, price, expire; cheaper, underwriter
the only way to benefit shareholders is to implement capital ________________ with expected returns that ________________ the returns in the financial markets for investments of ________________ risk, as measured by beta; that is to implement projects with positive ________________
projects, exceed, similar, npv
________________ - required to register the issue with the SEC
public issue
Bridge financing: for companies looking to go ________________ in next year or so used to cover the expenses of an ________________ Often provided by ________________ ________________
public, IPO, investment bank
semi-strong form efficiency All ________________ information is reflected Relevant info in an ___________ filing will be incorporated into a stock price as soon as the filing is made ________________ A person (security analyst) who tries to identify mispriced stocks is wasting time because that info is already ________________ in the ________________ ________________
public, sec, public, reflected, current price
Green shoe provision: contract provision giving the underwriter the option to ________________ ________________ ________________ from the issuer at the ________________ price. Intended to cover excess ________________ and ________________
purchase additional shares, offering; demand, oversubscription
________________: once a firm begins to contemplate IPO, the SEC requires firm and underwriters to observe ---------------. All communication to public is ________________ to ordinary announcements.
quiet period, limited
Assume a firm has a debt-equity ratio of .62. The firm's weighted average cost of capital is the: discount rate that the firm should apply to all of the projects it undertakes. rate of return a company must earn on its existing assets to maintain the current value of its stock. coupon rate the firm should expect to pay on its next bond issue. minimum discount rate the firm should require on any new project. rate of return debtholders should expect to earn on their investment in this firm.
rate of return a company must earn on its existing assets to maintain the current value of its stock.
A preliminary prospectus is sometimes called a: tombstone. green shoe. registration statement. rights offer. red herring.
red herring
________________: a preliminary prospectus distributed to prospective investors in a new issue of securities
red herring
We assume that relevant information is ________________ in the expected return, or the current price reflects current available ________________; we implicitly assume that markets are reasonably efficient in the ________________-________________ form
reflected, information, semi strong
Public issue - required to ________________ the issue with the SEC
register
Regulation A: an SEC regulation that exempts public issues of less than $5 million from most ________________ ________________
registration requirements
When an issuer offers new securities to the general public, it must file a(n) ________ with the SEC to disclose all material information about the issuer.
registration statement
________________ ________________: a statement filed with the SEC that discloses all material information concerning the corporation making a public offering
registration statement
The firm must prepare a ________________ ________________ and file it with the SEC. the -------- ----------- is required for all public interstate issues of securities with two exceptions loans that ________________ within 9 months issues ________________ than 5 million (________________ issues exemption)
registration statement; mature, less, small
________________: an SEC regulation that exempts public issues of less than $5 million from most registration requirements
regulation A
May 2016, ________________ kicked in (title III of JOBS act): allows small investors access to new crowdfunding "________________"
regulation CF, portals
Causation indicates that one event is the ________________ of the other; action A causes B
result
risk premium (calculate)
return - risk free rate
________________________________: the slope of the SML line
reward to risk ratio
If the market is efficient and securities are priced fairly, all securities will have the same: variance. standard deviation. reward-to-risk ratio. beta value. market risk premium.
reward-to-risk ratio.
After the ex rights date, an investor who purchases the shares will not receive ________________
rights
Dilution of ownership of existing shareholders can be avoided by using a ________________ ________________
rights offering
market efficiency does not mean that dart throwing is an effective means of selecting stocks; ________________ ________________ and ________________ still matter
risk exposure, diversification
The pure time value of money, as measured by ________________
risk free rate
The security market line intercepts the vertical axis at the:
risk free rate
CAPM depends on three things: Pure time value of money measured by ________________ Reward for bearing systematic risk: measured by ________________________________ [E(RM) - RF)] The amount of ________________ risk measured by β
risk free rate, risk premium, systematic
The greater risk an investment has, the greater the return will be to account for that ________________
risk tolerance
The return will increase as ________________ increases - small company stocks have a ________________ risk premium because they bear a greater ________________ of a number of things
risk, higher, risk
The standard deviation historically shows that ________________ companies have greater standard deviations on average over long time periods
riskier
For any given capital project proposal, the discount rate should be based on the: company's overall weighted average cost of capital. actual sources of funding used for the project. average of the company's overall cost of capital for the past five years. current risk level of the overall firm. risks associated with the use of the funds required by the project.
risks associated with the use of the funds required by the project.
_____________________: an account that allows you to move funds from your prior employer retirement plan into an IRA, and preserve the tax deferred status of retirement assets without paying current taxes or early withdrawal penalties
rollover
The reward to risk ratio must be the ________________ for all the assets in the market Because prices and returns move in ________________ directions, As returns would fall as demand ________________, and B would rise as demand decreases- therefore over time they will offer the same reward for risk and plot same line If one asset has twice as much systematic risk as another, its risk premium will be twice as large
same, opposite, increases
market competition will drive all assets in the market to have ________________ line, and the same ________________________________, such that if one asset has twice as much systematic risk as another asset, its ________________ ________________ will be twice as large
same, reward to risk, risk premium
________________ equity offering: a new equity issue of securities by a company that has previously issued securities to the public
seasoned
_____________________: The fund seeks above-average capital gains by investing in companies that participate in the healthcare industry.
sector fund
"________________": ground floor, early stage financing
seed money
Series A funding: next stage after ________________ funding; generally covers salaries, market research, and finalizing the product ________________ stock is commonly used in this round
seed, preffered
_________________ _______________ form efficiency All public information is reflected Relevant info in an SEC filing will be incorporated into a stock price as soon as the filing is made public A person (security analyst) who tries to identify mispriced stocks is wasting time because that info is already reflected in the current price
semi strong
Tokens: grant the holder the right to use the companies ________________ in the future Token sales occur on digital currency platforms and can be easily ________________ or ________________ ________________ makes tokens a popular means of funding
services, transferred, liquidated, liquidated
Market risk premium: the ________________ of the SML which is the difference between the ________________ ________________ on a market portfolio and the ________________
slope, expected return, risk free rate
_____________________: The Fund seeks to track the performance of a benchmark index that measures the return of small-capitalization stocks.
small cap index fund
Standard deviation: positive ________________ of the variance
square root
Variance: the average ________________ difference between the ________________ return and the ________________ return
squared, actual, average
The total risk of an investment is measured by the ________________ ________________ of its return
standard deviation
________________: positive square root of the variance
standard deviation
If a poorly-diversified portfolio becomes well diversified, we would expect the portfolio's: beta to increase. beta to decrease. rate of return to increase. standard deviation to increase. standard deviation to decrease.
standard deviation to decrease.
As long as p (correlation) < 1, the ________________ ________________ of a portfolio of two securities is less than the ________________ ________________ of the standard deviations of the individual securities
standard deviation, weighted average
_____________________: most popular mutual funds, measured by number of funds and amount of money invested in them. Stock funds usually invest in one type of stock.
stock funds
________________ bonds are cheaper to float than ________________ bonds Investment grade issues have much ________________ direct costs, particularly for straight bonds ________________ bond issue < 10 mil expected to cost about 1.9% if investment grade, vs 5.27% with ________________ bond rating Straight bond issue > 500 mil expected to cost only .8%, while similar junk bond would cost 2.63%
straight bonds, convertible, lower, straight, junk,
________________ ________________ efficiency All information of every kind is reflected in stock prices. There is no such thing as inside information Stock prices will react to a dividend increase as soon as board of directors votes, and before it is even announced publicly
strong form
Inside information has the least value when financial markets are: weak form efficient. semiweak form efficient. semistrong form efficient. strong form efficient. inefficient.
strong form efficient.
To purchase a share in a rights offering, an existing shareholder generally just needs to: pay the subscription amount in cash. submit the required form along with the required number of rights. pay the difference between the market price of the stock and the subscription price. submit the required number of rights along with a payment for the underwriting fee. submit the required number of rights along with the subscription price.
submit the required number of rights along with the subscription price.
Only way to benefit shareholders is by finding investments ________________ to what financial markets offer (with positive NPVs)
superior
The actual return R differs from the expected return due to ________________ that occur during any given year
surprises
Diversification cannot eliminate ________________ risk because it affects almost all assets to some degree
systematic
the reward for bearing risk depends only on the ________________ risk of an investment
systematic
Beta coefficient: the amount of ________________ risk present in a particularly risky asset relative to that in an ________________ asset
systematic, average
________________ risk = nondiversifiable risk ________________ risk = diversifiable risk
systematic, unsystematic
The interest tax shield is a key reason why: the required rate of return on assets rises when debt is added to the capital structure. the value of an unlevered company is equal to the value of a levered company. the net cost of debt is generally less than the cost of equity. the cost of debt is equal to the cost of equity for a levered company. companies prefer equity financing over debt financing.
the net cost of debt is generally less than the cost of equity.
To determine whether an investment has a positive NPV, you can compare the expected return on that new investment to what the financial market offers on an investment with _____.
the same beta
Initial coin offering ICO: initial sale of a ________________ on a digital currency platform
token
________________: grant the holder the right to use the companies service in the future
tokens
________________: an advertisement announcing a public offering
tombstone
Standard deviation is the ________________ risk, while beta represents ________________ risk
total, systematic
With the exception of a few industries, most corporations in the U.S. tend to: minimize taxes. underutilize debt. rely equally on debt and equity. have relatively similar debt-equity ratios across industry lines. rely more heavily on debt than on equity.
underutilize debt.
Negotiated offer basis: negotiate directly with an ________________; more ________________ approach
underwriter, common
Direct listing: firm arranges for its stock to be listed on an exchange without marketing and other help from an ________________ Much ________________ expensive bc no ________________ fees an associated costs Avoid ________________ cost of selling stocks at a discount Often more initial ________________
underwriter, less, underwriting, indirect, volatility
Syndicate: a group of ________________ formed to share the ________________ and to help sell an issue
underwriters, risk
"________________": private companies that have a value exceeding 1 billion dollars
unicorns
An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ risk.
unsystematic
________________ risk is essentially eliminated by diversification, so a portfolio with many assets has almost no ------- risk
unsystematic
_____________________: The fund seeks above-average capital gains by investing in stocks of US firms that the fund deems have opportunities for accelerated earnings growth.
us growth fund
what category of investment would give risk free rate
us treasury bill
_____________________: The fund seeks above-average capital gains by investing in stocks of US companies that the fund deems are under-valued.
us value fund
If a company has the optimal amount of debt, then the: value of the firm is equal to VL + TCD. direct financial distress costs must equal the present value of the interest tax shield. debt-equity ratio is equal to 1. value of the levered company will exceed the value of the unlevered company. company has no financial distress costs.
value of the levered company will exceed the value of the unlevered company.
