finance 3000 final exam
13. Similar to the Capital Market Line except risk is characterized by beta instead of standard deviation. A. Market Risk Line B. Probability Market Line C. Security Market Line D. Stock Market Line
C. Security Market Line
11. Which of the following issues Treasury Inflation Protected Securities (TIPS)? A. U.S. Treasury B. Corporations C. Municipalities D. Nonprofits
A. U.S. Treasury
3. The Net Present Value decision technique may not be the only pertinent unit of measure if the firm is facing A. time or resource constraints. B. a labor union. C. the election of a new board of directors. D. a major investment.
A. time or resource constraints.
89. Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset? A. Unable to answer since there is no data to calculate the standard deviation. B. A very low number since it would have very low risk. C. 1 D. 0
D. 0
51. Who owns the NYSE? A. NYSE members B. specialists C. dealers D. floor brokers E. shareholders
E. shareholders
98. What are the primary differences and similarities between NASDAQ and the NYSE?
The NYSE has a physical trading floor in New York City, is primarily a broker market, relies on specialists for liquidity under a single market maker system, utilizes the SuperDOT system, and has stricter listing requirements. NASDAQ is an electronic network of dealers and utilizes a multiple market maker system. NASDAQ is open to ECNs but the NYSE is not. NASDAQ has no physical trading floor.
99. Using the dividend growth model, explain why a firm would be hesitant to reduce the growth rate of its dividends.
The dividend growth model states that Pt = Dt+1/(R - g). A reduction in the growth rate will reduce both Dt+1 and g. Lowering the value of these variables will effectively lower the value of the firm's stock, which is something firms are hesitant to do.
9. Which of the following are main issuers of bonds? A. U.S. Treasury bonds B. Corporate bonds C. Municipal bonds D. All of these
D. All of these
82. All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRR B. Profitability Index C. Payback D. NPV
C. Payback
2. This is the dollar return characterized as a percentage of money invested. A. average return B. dollar return C. market return D. percentage return
D. percentage return
11. A decrease in net working capital (NWC) is treated as a A. cash inflow B. cash outflow C. sunk cost D. historical cost
A. cash inflow
80. Which of the following is correct regarding the total risk of a company? A. A company can change its risk level over time. B. Some firms are riskier because they offer many different products and/or services. C. Companies can change their risk by reducing the amount of money they have borrowed. D. None of these statements are correct.
A. A company can change its risk level over time.
82. Which of the following statements is correct? A. A decrease in NWC involves either a reduction in current assets, which generates cash, or an increase in current liabilities, thereby freeing up the shareholder's cash for other things. B. A decrease in NWC involves either an increase in current assets, which generates cash, or a decrease in current liabilities, thereby freeing up the shareholder's cash for other things. C. An example of an increase in a net working capital is to buy more machines or another plant. D. None of these statements is correct.
A. A decrease in NWC involves either a reduction in current assets, which generates cash, or an increase in current liabilities, thereby freeing up the shareholder's cash for other things.
74. Which of the following statements is correct? A. A dominant portfolio has the best risk-return relationship as compared to other portfolios. B. It is not necessarily true that when an investment achieves a high return that it is risky. C. A low standard deviation means that the investment is less likely to achieve high returns; which means that is more risky. D. None of these statements are correct.
A. A dominant portfolio has the best risk-return relationship as compared to other portfolios.
73. Which of the following statements is correct? A. A single stock has a lot of diversifiable risk. B. A single stock has more market risk than a diversified portfolio of stocks. C. Bonds and stocks have a high correlation because they are both financial assets. D. None of these statements are correct.
A. A single stock has a lot of diversifiable risk.
96. Which of the following statements is correct? A. A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback. B. Discounted payback uses a more aggressive reinvestment rate assumption than payback. C. Neither payback nor discounted payback uses time value of money concepts. D. None of these statements is correct.
A. A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback.
90. Junk bonds are those bonds with a credit rating of _____________. A. BB and lower B. B and lower C. BBB and lower D. None of these.
A. BB and lower
103. Which of the following statements is correct? A. Bonds with short-term maturities will have very little interest rate risk. B. Bonds with large coupon payments will have very little interest rate risk. C. Bonds with higher credit ratings will have very little interest rate risk. D. All of these statements are correct.
A. Bonds with short-term maturities will have very little interest rate risk.
48. Which one of the following statements related to the NYSE is correct? A. Commission brokers work on behalf of brokerage firm clients. B. Shareholders of NYSE Group, Inc. own "seats" on the exchange. C. Specialists buy at the asked price. D. The NYSE is primarily a dealer's market. E. Floor brokers earn income in the form of a bid-ask spread.
A. Commission brokers work on behalf of brokerage firm clients.
76. Jane Adams invests all her money in the stock of one firm. Which of the following must be true? A. Her return will have more volatility than the return in the overall stock market. B. Her return will have less volatility than the return in the overall stock market. C. Her return will have the same volatility as the return in the overall stock market. D. There is no relationship between her return and the return in the overall stock market.
A. Her return will have more volatility than the return in the overall stock market.
41. Hardy Lumber has a capital structure which includes bonds, preferred stock, and common stock. Which of the following rights have most likely been granted to the preferred shareholders? I. right to share in company profits prior to other shareholders II. right to elect the corporate directors III. right to vote on proposed mergers IV. right to all residual income after the common dividends have been paid A. I only B. I and III only C. I and IV only D. II, III, and IV only E. I, II, III, and IV
A. I only
82. Which of the following statements is correct? A. If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient. B. There is evidence to suggest that the market is strong-form efficient because corporate insiders have made extraordinary profits by trading on inside information. C. The Efficient Market Hypothesis states that security prices will be based on their expected return. D. None of these statements is correct.
A. If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient.
102. A local bank is contemplating adding a new ATM to their lobby. They will need another phone line to provide communications which has a monthly cost of $50 per month. This is an example of _____________. A. Incremental cash flow B. Sunk cost C. Complementary costs D. None of these
A. Incremental cash flow
93. ABC Engineering just bought a new machine. All of the following are examples of incremental cash flows except _______________. A. Interest expense on the loan used to purchase the machine B. Installation costs on the new machine C. Increase in costs as a result of the new machine D. Increases in depreciation expenses as a result of the new machine
A. Interest expense on the loan used to purchase the machine
67. Which of the following is not true about EE savings bonds? A. Interest payments are received annually but are tax deductible. B. About 1 in 6 Americans own a savings bond C. These are tax deferred investments D. Patriot bonds sell for one-half of their face value.
A. Interest payments are received annually but are tax deductible.
87. How might a small market risk premium impact people's desire to buy stocks? A. Investors with high risk aversion will be less willing to invest in stocks. B. Investors with high risk aversion will be more willing to invest in stocks. C. It will only impact the share prices. D. None of these statements is correct.
A. Investors with high risk aversion will be less willing to invest in stocks.
87. Which of the following is incorrect? A. It is possible to combine assets that all move in the exact same fashion over time and gain the benefits of diversification. B. Adding long-term Treasury bonds to a stock portfolio will reduce the risk of the portfolio. C. The optimal portfolio is the one with the lowest amount of risk. D. All of these statements are correct.
A. It is possible to combine assets that all move in the exact same fashion over time and gain the benefits of diversification.
97. Which of the following is incorrect? A. Most firms would want to sell additional shares of common stock if they feel their stock is undervalued. B. Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued. C. It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. D. None of these statements are incorrect.
A. Most firms would want to sell additional shares of common stock if they feel their stock is undervalued.
81. All of the following capital budgeting tools are suitable for firms facing time constraints except ______. A. NPV B. Payback C. Discounted payback D. All of these answers are suitable for firms facing time constraints.
A. NPV
78. Stock A has a required return of 19%. Stock B has a required return of 11%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks? A. Stock A is riskier. B. Stock B is riskier. C. The stocks have the same risk. D. We would need to know if the markets are efficient to answer this question.
A. Stock A is riskier.
95. What is the theoretical minimum for the weighted average cost of capital? A. The after-tax cost of debt B. The cost of preferred stock C. CAPM D. The cost of equity
A. The after-tax cost of debt
31. Which one of the following statements is correct? A. The capital gains yield is the annual rate of change in a stock's price. B. Preferred stocks have constant growth dividends. C. A constant dividend stock cannot be valued using the dividend growth model. D. The dividend growth model can be used to compute the current value of any stock. E. An increase in the required return will decrease the capital gains yield.
A. The capital gains yield is the annual rate of change in a stock's price.
77. Which of the following statements is incorrect? A. The capital market line shows the relationship between return and risk as measured by the standard deviation. B. The Efficient Market Hypothesis states that security prices fully reflect all available information. C. The security market line shows the relationship between return and risk as measured by beta. D. None of these statements are correct.
A. The capital market line shows the relationship between return and risk as measured by the standard deviation.
114. If a bond is selling at a discount, which of the following statements is correct? A. The current yield must be greater than the coupon rate. B. The coupon rate must be greater than the yield to maturity. C. The bond must have a low bond rating. D. All of the statements are correct.
A. The current yield must be greater than the coupon rate.
107. Which of the following will increase the cost of equity? A. The firm's share price falls 10%. B. The firm is expected to reduce its dividend. C. The firm's corporate tax rate increases. D. None of these answers is correct.
A. The firm's share price falls 10%.
109. Which of the following statements is correct? A. There is an inverse relationship between bond prices and bond yields. B. There is a positive relationship between bond prices and bond yields. C. There is no relationship between bond prices and bond yields. D. The relationship between bond prices and bond yields is dependent on the market interest rate.
A. There is an inverse relationship between bond prices and bond yields.
74. US Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4. Given this information which of the following statements is correct? A. This is an example of a market overreaction. B. This is an example of a market underreaction. C. This is an example of a semi-strong efficient market. D. None of these statements are correct.
A. This is an example of a market overreaction.
3. Which of the following is a true statement? A. To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's existing debt. B. To estimate the before-tax cost of debt, we need to solve for the Yield to Call (YTC) on the firm's existing debt. C. To estimate the before-tax cost of debt, we use the coupon rate on the firm's existing debt. D. To estimate the before-tax cost of debt, we use the average rate on the firm's existing debt.
A. To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm's existing debt.
95. Modern portfolio theory is ________________. A. a concept and procedure for combining securities into a portfolio to minimize risk B. a concept and procedure for combining securities into a portfolio to maximize return C. a concept and procedure for combining securities into a portfolio to maximize volatility D. a concept and procedure for combining securities into a portfolio to maximize dollar return
A. a concept and procedure for combining securities into a portfolio to minimize risk
7. This model includes an equation that relates a stock's required return to an appropriate risk premium: A. asset pricing B. behavioral finance C. beta D. efficient markets
A. asset pricing
13. Which of the following is a debt security whose payments originate from other loans, such as credit card debt, auto loans, and home equity loans? A. asset-backed securities B. credit quality securities C. debentures D. junk bonds
A. asset-backed securities
3. This is a measure summarizing the overall past performance of an investment. A. average return B. dollar return C. market return D. percentage return
A. average return
13. An agent who arranges a transaction between a buyer and a seller of equity securities is called a: A. broker. B. floor trader. C. capitalist. D. principal. E. dealer.
A. broker.
19. We commonly measure the risk-return relationship using which of the following? A. coefficient of variation B. correlation coefficient C. standard deviation D. expected returns
A. coefficient of variation
6. This is a measure of risk to reward earned by an investment over a specific period of time. A. coefficient of variation B. market deviation C. standard deviation D. total variation
A. coefficient of variation
4. Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as A. complementary effects. B. substitutionary effects. C. sunk effects. D. marginal effects.
A. complementary effects.
23. Which of the following terms is the chance that the bond issuer will not be able to make timely payments? A. credit quality risk B. interest rate risk C. liquidity of interest rate risk D. term structure of interest rates
A. credit quality risk
15. Which of the following makes this a true statement: The shape of the efficient frontier implies that A. diminishing returns apply to risk-taking in the investment world. B. increasing returns apply to risk-taking in the investment world. C. returns are not impacted by risk-taking in the investment world. D. None of these complete the sentence to make it true.
A. diminishing returns apply to risk-taking in the investment world.
14. This is the term for portfolios with the highest return possible for each risk level. A. efficient portfolios B. modern portfolios C. optimal portfolios D. total portfolios
A. efficient portfolios
23. Special rights given to some employees to buy a specific number of shares of the company stock at a fixed price during a specific period of time. A. executive stock options B. privately held information C. restricted stock D. stock market bubble
A. executive stock options
9. This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification. A. firm specific risk B. market risk C. modern portfolio risk D. total risk
A. firm specific risk
18. An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a: A. floor trader. B. exchange customer. C. specialist. D. floor broker. E. market maker.
A. floor trader.
17. These are fees paid by firms to investment bankers for issuing new securities. A. flotation costs B. interest expense C. seller financing charges D. user fees
A. flotation costs
7. This is used as a measure of the total amount of available cash flow from a project. A. free cash flow B. operating cash flow C. investment in operating capital D. sunk cash flow
A. free cash flow
90. A project's IRR ____________________. A. is the average rate of return necessary to pay back the project's capital providers B. will change with the cost of capital C. is equal to the discounted cash flows divided by the number of cash flows if the cash flows are a perpetuity D. All of these answers are correct.
A. is the average rate of return necessary to pay back the project's capital providers
110. If a bond is selling at a premium, then ________________________________. A. its coupon rate must be greater than its yield B. its coupon rate must be less than its yield C. its coupon rate must be equal to its yield D. its coupon rate must be equal to one-half the yield to maturity for a 5-year bond
A. its coupon rate must be greater than its yield
5. This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project. A. payback B. internal rate of return C. net present value D. profitability index
A. payback
7. This technique for evaluating capital projects is particularly useful when firms face time constraints in repaying investors. A. payback B. internal rate of return. C. net present value D. profitability index
A. payback
92. The ____________ approach to computing a divisional weighted average cost of capital (WACC) requires only that WACCs for "risky" and "relatively safe" divisions be adjusted. A. subjective B. objective C. firmwide D. implicit
A. subjective
103. A proxy beta is _________________. A. the average beta of firms that are only engaged in the proposed new line of business B. the industry average beta that is used in lieu of the firm's beta because the firm has not existed long enough to have a beta calculated C. the beta used when the firm has a great deal of business risk D. None of these answers is correct.
A. the average beta of firms that are only engaged in the proposed new line of business
96. The total risk of the S&P500 Index is equal to ____________________. A. diversifiable risk B. nondiversifiable risk C. modern portfolio risk D. efficient frontier risk
B. nondiversifiable risk
28. Which one of the following is an underlying assumption of the dividend growth model? A. A stock has the same value to every investor. B. A stock's value is equal to the discounted present value of the futterm-28ure cash flows which it generates. C. A stock's value changes in direct relation to the required return. D. Stocks that pay the same annual dividend have equal market values. E. The dividend growth rate is inversely related to a stock's market price.
B. A stock's value is equal to the discounted present value of the future cash flows which it generates.
107. Which of the following statements is correct? A. All else the same, an investor will require less return to invest in a callable bond than one that is not callable. B. All else the same, an investor will require more return to invest in a callable bond than one that is not callable. C. The call feature does not impact the return that investors demand. D. We would need to know the current level of interest rates to answer this question.
B. All else the same, an investor will require more return to invest in a callable bond than one that is not callable.
105. Which of the following statements is correct? A. The WACC measures the before-tax cost of capital. B. An increase in the firm's marginal corporate tax rate will decrease the weighted average cost of capital. C. Flotation costs can decrease the weighted average cost of capital. D. None of these statements is correct.
B. An increase in the firm's marginal corporate tax rate will decrease the weighted average cost of capital.
99. Why do we use market-value weights instead of book-value weights? A. Because often-times firms "window-dress" their financial statements. B. Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been. C. Because it is required in the Sarbanes-Oxley regulations. D. None of these answers is correct.
B. Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been.
8. The asset pricing theory based on a beta, a measure of market risk. A. Behavioral Asset Pricing Model B. Capital Asset Pricing Model C. Efficient Markets Asset Pricing Model D. Efficient Market Hypothesis
B. Capital Asset Pricing Model
11. Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? A. Capital Asset Pricing Line B. Capital Market Line C. Efficient Market Line D. Efficient Market Hypothesis
B. Capital Market Line
95. ABC Engineering just purchased a new machine. All of the following are examples of incremental cash flows except _______________. A. Freight charged to ship the machine B. Developmental costs to determine which machine would best work with their unique process C. Increase in electric bill to run the machine D. Reduction in maintenance expense associated with the new machine
B. Developmental costs to determine which machine would best work with their unique process
10. This is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division. A. Average WACC B. Divisional WACC C. Proxy WACC D. Pure-play WACC
B. Divisional WACC
14. Section 179 allows a business, with certain restrictions, to do which of the following? A. Offset the tax liability with the cost of the asset in the year of purchase. B. Expense the asset immediately in the year of purchase. C. Expense the asset using double declining balance depreciation during the life of the asset. D. Get a government grant to purchase the asset.
B. Expense the asset immediately in the year of purchase.
96. All of the following are incremental cash flows attributable to the project except _____. A. Opportunity costs B. Financing costs C. Substitutionary effects D. Complementary effects
B. Financing costs
1. Which of the following is a true statement? A. The risk and return that a firm experienced in the past is also the risk level for its future. B. Firms can quite possibly change their stocks' risk level by substantially changing their business. C. If a firm takes on riskier new projects over time, the firm itself will become less risky. D. If a firm takes on less risky new projects over time, the firm itself will become more risky.
B. Firms can quite possibly change their stocks' risk level by substantially changing their business.
95. Which of the following is incorrect regarding the IRR statistic? A. For independent projects, IRR will give the same accept/reject decision as NPV. B. For the IRR statistic to give a different accept/reject decision from NPV, the cash flows must be non-normal and the projects must be mutually exclusive. C. To solve for the IRR, one can simply solve the NPV formula for the rate that will make the NPV equal to zero. D. None of these statements is incorrect.
B. For the IRR statistic to give a different accept/reject decision from NPV, the cash flows must be non-normal and the projects must be mutually exclusive.
92. Investment grade bonds include those bonds with ratings _____________. A. From AAA to BB B. From AAA to BBB C. From AAA to B D. From AAA to A
B. From AAA to BBB
88. How might a large market risk premium impact people's desire to buy stocks? A. Investors with high risk aversion will be less willing to invest in stocks. B. Investors with high risk aversion will be more willing to invest in stocks. C. It will only impact the share prices. D. None of these statements is correct
B. Investors with high risk aversion will be more willing to invest in stocks.
88. Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI? A. The discounted payback will be greater than zero. B. It will have a PI and NPV of zero. C. The NPV and IRR will yield the same decision. D. The IRR will just equal the cost of capital.
B. It will have a PI and NPV of zero.
104. Which of the following statements is correct? A. Long-term bonds have more reinvestment rate risk than short-term bonds. B. Long-term bonds have more interest rate risk than short-term bonds. C. Short-term bonds with high coupons have high interest rate risk. D. Zero coupon bonds do not have interest rate risk.
B. Long-term bonds have more interest rate risk than short-term bonds.
92. All of the following are strengths of NPV except _______________. A. It works equally well for independent and mutually exclusive projects B. Managers have a preference for using a statistic that is in percent instead of dollars C. It uses a conservative reinvestment rate assumption D. These are all strengths of the NPV statistic
B. Managers have a preference for using a statistic that is in percent instead of dollars
83. Interest rates, inflation and economic growth are economic factors that are examples of ______________________. A. Firm-specific risks that can be diversified away B. Market risk C. External factors that are neither firm specific risk nor market risk D. None of these statements are correct
B. Market risk
116. To increase the liquidity for the home mortgage market, Fannie Mae and Freddie Mac purchased home mortgages from banks and other lenders. They combined the mortgages into diversified portfolios of loans and issued ______________. A. Trust securities B. Mortgage-backed securities C. Current yield securities D. Treasury Inflation Protected Securities
B. Mortgage-backed securities
85. Which of the following statements is correct? A. Uncorrelated assets have a correlation of -1.0. B. Most common stocks are positively correlated with each other because they are impacted by the economic factors. C. We can typically add many stocks together to fully eliminate the market risk in a portfolio. D. None of these statements are correct.
B. Most common stocks are positively correlated with each other because they are impacted by the economic factors.
107. The process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements is referred to as the _________________. A. Substitute and complement B. Pro forma analysis C. Incremental cash flows D. Estimation and depreciation analysis
B. Pro forma analysis
85. A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as _______________________. A. NPV B. Profitability Index C. MIRR D. Discounted Payback
B. Profitability Index
80. Stock A has a required return of 12%. Stock B has a required return of 15%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks? A. Stock A is riskier. B. Stock B is riskier. C. The stocks have the same risk. D. We would need to know if the markets are efficient to answer this question.
B. Stock B is riskier.
90. Sally wants to invest in only two stocks. Which pair of stocks should Sally select? A. Stocks A and B move downward at the same time. B. Stocks C and D move in opposite directions at the same time. C. Stocks E and F move upward at the same time. D. Stocks G and H move randomly at the same time.
B. Stocks C and D move in opposite directions at the same time.
105. AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000. This is an example of a(n) _______________. A. Opportunity cost B. Sunk cost C. Incremental cash flow D. Relevant cash flow
B. Sunk cost
19. Which one of the following is the electronic system used by the NYSE for directly transmitting orders to specialists? A. OTCDOT B. SuperDOT C. Instinet D. Internet E. Floornet
B. SuperDOT
24. The constant growth model assumes which of the following? A. That there is privately held information. B. That the stock is efficiently priced. C. That there are executive stock options available to managers. D. That there is no restricted stock.
B. That the stock is efficiently priced.
104. Which of the following statements is correct? A. The WACC is a measure of the before-tax cost of capital. B. The WACC measures the marginal cost of capital. C. It is common that the after-tax cost of debt exceeds the cost of equity. D. None of these statements is correct.
B. The WACC measures the marginal cost of capital.
108. Under which conditions will an investor demand a larger return (yield) on a bond? A. The bond issue is upgraded from A to AA. B. The bond issue is downgraded from A to BBB. C. Interest rates decrease due to decline in inflation. D. None of these conditions will cause an increase in the bond's yield.
B. The bond issue is downgraded from A to BBB.
94. Which of the following statements is correct? A. The flotation-adjusted cost of equity will always be less than the cost of equity that has not been adjusted for flotation costs. B. The flotation-adjusted cost of equity will always be more than the cost of equity that has not been adjusted for flotation costs. C. The flotation-adjusted cost of equity may be more than or less than the cost of equity that has not been adjusted for flotation costs. D. None of these statements is correct.
B. The flotation-adjusted cost of equity will always be more than the cost of equity that has not been adjusted for flotation costs.
78. Jenna receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. It also claims that this stock is a "safe bet" for the future. Which of the following statements is correct regarding this information? A. This investment newsletter is most likely correct because they most likely have some special knowledge about the stock. B. The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet." C. It is common for individual stocks to double the return of the S&P500 and still be a "safe bet." D. None of these statements are correct.
B. The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet."
18. Which statement is true? A. The larger the standard deviation, the lower the total risk. B. The larger the standard deviation, the higher the total risk. C. The larger the standard deviation, the more portfolio risk. D. The standard deviation is not an indication of total risk.
B. The larger the standard deviation, the higher the total risk.
100. A manufacturing firm is planning on expanding its existing operations. The expansion project is significant and will require the firm to house the expansion in a different location. The firm is considering building on a lot they own across town. The lot is currently vacant and it was paid for nearly 20 years ago. Given this information, which of the following statements is correct? A. The lot is not an incremental cash flow because it is not being utilized at this time. B. The lot is an incremental cash flow because it represents an opportunity cost. C. The lot is an incremental cash flow because it represents a sunk cost. D. The lot is not an incremental cash flow because it has already been paid for.
B. The lot is an incremental cash flow because it represents an opportunity cost.
86. In 2000, the S&P500 Index earned 11% while the T-bill yield was 4.4%. Given this information, which of the following statements is correct with respect to the market risk premium? A. The market risk premium must have been negative. B. The market risk premium must have been positive. C. The market risk premium must have been zero. D. Unable to answer without more information.
B. The market risk premium must have been positive.
94. Which of the following statements is correct? A. Discounted payback solves all the shortcomings of payback. B. The reinvestment rate of NPV and MIRR is the same. C. The MIRR and IRR have the same reinvestment rate. D. All of these are correct statements.
B. The reinvestment rate of NPV and MIRR is the same
34. Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true? A. The dividend must be constant. B. The stock has a negative capital gains yield. C. The dividend yield must be zero. D. The required rate of return for this stock increased over the year. E. The firm is experiencing supernormal growth.
B. The stock has a negative capital gains yield.
12. Which of the following is true regarding U.S. Government Agency Securities? A. They carry the federal government's full faith and credit guarantee. B. They do not carry the federal government's full faith and credit guarantee. C. They are insured by the FDIC. D. They are treated the same as U.S. Treasury bonds with regard to the federal government's full faith and credit guarantee.
B. They do not carry the federal government's full faith and credit guarantee.
73. US Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price continues to increase resulting in a total increase of $11. Given this information which of the following statements is correct? A. This is an example of a market overreaction. B. This is an example of a market underreaction. C. This is an example of a semi-strong efficient market. D. None of these statements are correct.
B. This is an example of a market underreaction.
93. Which of the following is the correct ranking from least risky to most risky? A. Long-term Treasury bonds, Stocks, Treasury Bills B. Treasury Bills, Long-term Treasury Bonds, Stocks C. Stocks, Long-term Treasury Bond, Treasury Bills D. Stocks, Treasury Bills, Long-term Treasury Bonds
B. Treasury Bills, Long-term Treasury Bonds, Stocks
11. Which of these statements is true regarding divisional WACC? A. Using a divisional WACC vs a WACC for the firm's current operations will result in quite a few incorrect decisions. B. Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta. C. Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present less risk than the firm's average beta. D. Using a firmwide WACC to evaluate new projects would have no impact on projects that present less risk than the firm's average beta.
B. Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta.
17. One way to account for flotation costs of raising capital is to A. adjust all the project's cash flows so that each year it will reflect the flotation costs. B. adjust the project's initial cash flow so that it will reflect the flotation costs. C. adjust only the project's operating cash flows to account for paying back the shareholders. D. adjust the project's tax burden to account for the tax implications of raising capital.
B. adjust the project's initial cash flow so that it will reflect the flotation costs.
21. The study of the cognitive processes and biases associated with making financial and economic decisions. A. asset pricing model B. behavioral finance C. efficient market hypothesis D. stock market bubble
B. behavioral finance
12. A measure of the sensitivity of a stock or portfolio to market risk. A. behavioral finance B. beta C. efficient market D. hedge
B. beta
6. To compensate the bondholders for getting the bond called, the issuer pays which of the following? A. call feature B. call premium C. coupon rate D. original issue premium
B. call premium
16. This is a measurement of the co-movement between two variables that ranges between -1 and +1. A. coefficient of variation B. correlation C. standard deviation D. total risk
B. correlation
5. A company has two open seats, Seat A and Seat B, on its board of directors. There are 6 candidates vying for these 2 positions. There will be a single election to determine the winner of both open seats. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 200 of your votes for a single candidate. What is this type of voting called? A. democratic B. cumulative C. straight D. deferred E. proxy
B. cumulative
2. The Net Present Value decision technique uses a statistic denominated in A. years. B. currency. C. a percentage. D. time lines.
B. currency.
6. This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project plus interest at market rates. A. payback B. discounted payback C. net present value D. profitability index
B. discounted payback
17. To find the percentage return of an investment, A. multiply the dollar return by the investment's value at the beginning of the period. B. divide the dollar return by the investment's value at the beginning of the period. C. multiply the dollar return by the investment's value at the end of the period. D. divide the dollar return by the investment's value at the end of the period.
B. divide the dollar return by the investment's value at the beginning of the period.
What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A. zero growth B. dividend growth C. capital pricing D. earnings capitalization E. discounted dividend
B. dividend growth
1. This includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment. A. average return B. dollar return C. market return D. portfolio
B. dollar return
2. This is the average of the possible returns weighted by the likelihood of those returns occurring. A. efficient return B. expected return C. market return D. required return
B. expected return
10. The use of debt to increase an investment position. A. behavioral finance B. financial leverage C. probability D. stock market bubble
B. financial leverage
17. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? A. credit quality risk B. interest rate risk C. liquidity rate risk D. reinvestment rate risk
B. interest rate risk
10. This is the portion of total risk that is attributable to overall economic factors. A. firm specific risk B. market risk C. modern portfolio risk D. total risk
B. market risk
14. The owner of one of the 1,366 trading licenses for the NYSE is called a: A. broker. B. member. C. agent. D. specialist. E. dealer.
B. member.
12. This is the concept and procedure for combining securities into a portfolio to minimize risk. A. firm specific theory B. modern portfolio theory C. optimal portfolio theory D. total portfolio theory
B. modern portfolio theory
42. Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company: A. must always show a current liability of $2,400, ($2.40 1,000), for dividends payable. B. must still declare each dividend before it becomes an actual company liability. C. is obligated to pay $2.40 per share each year in perpetuity. D. will be declared in default if it does not pay at least $2.40 per share per year on a timely basis. E. has a liability that must be paid at a later date should the company miss paying an annual dividend payment.
B. must still declare each dividend before it becomes an actual company liability.
14. A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows. A. discounted payback B. net present value C. internal rate of return D. profitability index
B. net present value
17. A graph of a project's ______ is a function of cost of capital. A. discounted payback B. net present value C. modified internal rate of return D. profitability index
B. net present value
91. The ___________ approach to computing a divisional weighted average cost of capital (WACC) uses the average beta of projects in each division to calculate the WACC. A. subjective B. objective C. firmwide D. implicit
B. objective
8. Bond prices are quoted in terms of which of the following? A. original issue discount B. percent of par value C. coupon rate in dollars D. market rate in dollars
B. percent of par value
3. The set of probabilities for all possible occurrences. A. probability B. probability distribution C. stock market bubble D. market probabilities
B. probability distribution
8. An average of which of the following will give a fairly accurate estimate of what a project's beta will be? A. flotation beta B. proxy beta C. pure-play proxies D. weighted average beta
B. proxy beta
13. Accelerated depreciation allows firms to A. receive less of the dollars of depreciation earlier in the asset's life. B. receive more of the dollars of depreciation earlier in the asset's life. C. not pay any taxes during an asset's life. D. receive more of the dollars of depreciation later in the asset's life.
B. receive more of the dollars of depreciation earlier in the asset's life.
19. When looking at these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life. A. incremental B. replacement C. cost-cutting D. new
B. replacement
4. This is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium. A. required return B. risk-free rate C. risk premium D. market risk premium
B. risk-free rate
5. Effects that arise from a new product or service that decrease sales of the firm's existing products or services are referred to as A. complementary effects. B. substitutionary effects. C. sunk effects. D. marginal effects.
B. substitutionary effects.
18. With regard to depreciation, the time value of money concept tells us that A. delaying the depreciation expense is always better. B. taking the depreciation expense sooner is always better. C. delaying the depreciation expense is sometimes better. D. taking the depreciation expense sooner is sometimes better
B. taking the depreciation expense sooner is always better.
16. Which of these makes this a true statement? When determining the appropriate weights used in calculating a WACC, it should reflect A. the relative sizes of the total book capitalizations for each kind of security that the firm issues. B. the relative sizes of the total market capitalizations for each kind of security that the firm issues. C. only the market after-tax cost of debt. D. only the market after-tax cost of equity.
B. the relative sizes of the total market capitalizations for each kind of security that the firm issues.
15. Which of these makes this a true statement? The WACC formula A. is not impacted by taxes. B. uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing. C. uses the pre-tax costs of capital to compute the firm's weighted average cost of debt financing. D. focuses on operating costs only to keep them separate from financing costs.
B. uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing.
1. As new capital budgeting projects arise, we must estimate A. the float costs for financing the project. B. when such projects will require cash flows. C. the cost of the loan for the specific project. D. the cost of the stock being sold for the specific project.
B. when such projects will require cash flows.
106. Rank the following bonds, from highest to lowest interest rate risk: 2-year zero coupon, 2-year 5% coupon bond, 30-year 5% coupon bond, 30-year, zero coupon bond. A. 30-year, zero coupon bond, 30-year 5% coupon bond, 2-year 5% coupon bond, 2-year zero coupon bond B. 2-year 5% coupon bond, 2-year zero coupon bond, 30-year 5% coupon bond, 30-year zero coupon bond C. 30-year, zero coupon bond, 30-year 5% coupon bond, 2-year zero coupon bond, 2-year 5% coupon bond D. 30-year, 5% coupon bond, 30-year zero coupon bond, 2-year 5% coupon bond, 2-year zero coupon bond
C. 30-year, zero coupon bond, 30-year 5% coupon bond, 2-year zero coupon bond, 2-year 5% coupon bond
11. The benchmark for the Profitability Index, PI, is the A. cost of capital B. managers' maximum number of years C. zero or anything larger than zero D. zero or anything less than zero
C. zero or anything larger than zero
97. Which of the following best describes the NPV profile? A. A graph of a project's NPV as a function of possible IRRs. B. A graph of a project's NPV over time. C. A graph of a project's NPV as a function of possible capital costs. D. None of these statements is correct.
C. A graph of a project's NPV as a function of possible capital costs.
108. Which of the following is most correct? A. When comparing two firms within the same industry, most analysts calculate the weighted average cost of capital on a before-tax basis to facilitate comparisons. B. Firms should use historical costs rather than marginal costs of capital. C. An increase in the risk-free rate will increase the cost of equity. D. All of these statements are equally correct.
C. An increase in the risk-free rate will increase the cost of equity.
91. Which of following are backed only by the reputation and financial stability of the corporation? A. Debentures B. Unsecured bonds C. Both a and b D. None of these.
C. Both a and b
115. If a bond is selling at par value, which of the following statements is correct? A. The current yield must equal the coupon rate. B. The current yield must equal the yield to maturity. C. Both of these statements are correct. D. None of these statements is correct.
C. Both of these statements are correct.
82. Which of the following statements is correct regarding total risk? A. The coefficient of variation is a measure of the firm's total risk. B. All firms have the same amount of total risk because they are all exposed to the same market risk. C. Conglomerates will have less total risk than a firm that has one line of business. D. None of these statements are correct.
C. Conglomerates will have less total risk than a firm that has one line of business.
111. The bond's annual coupon rate divided by its market price is referred to as the __________. A. Yield to Call B. Yield to Maturity C. Current Yield D. Term Structure of Interest Rates
C. Current Yield
66. Which of the following was the catalyst for the recent financial crisis? A. Corruption in the investment banking industry. B. Widespread layoffs due to illegal alien hiring. C. Defaults on subprime mortgages. D. All of these.
C. Defaults on subprime mortgages.
83. All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRR B. Profitability Index C. Discounted Payback D. NPV
C. Discounted Payback
Which one of the following is computed by dividing next year's annual dividend by the current stock price? A. yield to maturity B. total yield C. dividend yield D. capital gains yield E. growth rate
C. Dividend yield
90. An estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular business unit is known as the ____________. A. Business unit WACC B. Pure play beta C. Divisional WACC D. Component cost
C. Divisional WACC
16. The best approach to convert an infinite series of asset purchases into a perpetuity is known as the A. Net working capital approach B. Net present value approach C. Equivalent annual cost approach D. Equivalent annual cash flow approach
C. Equivalent annual cost approach
47. Which of the following apply to a specialist who trades on the floor of the NYSE? I. provides liquidity for an individual security II. partially being replaced by SuperDOT III. pays an annual fee for a trading license IV. acts as a dealer A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV
C. I, III, and IV only
84. All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRR B. Profitability Index C. IRR D. NPV
C. IRR
101. Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division? A. Managers in different divisions may use different methods to calculate the WACC. B. The expected return of the new project may be incorrect. C. If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be. D. None of these answers is correct.
C. If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be.
92. Which of the following is most correct? A. In an efficient market, investors will buy overvalued stock which will drive its price down. B. In an efficient market, investors will sell undervalued stock which will drive its price down. C. In an efficient market, investors will sell overvalued stock which will drive its price down. D. None of these statements is correct.
C. In an efficient market, investors will sell overvalued stock which will drive its price down.
117. Under what conditions is a bond likely to be called? A. The firm is in financial duress. B. The firm is planning a massive expansion and needs to raise a lot of capital. C. Interest rates have significantly declined. D. The firm wants to increase its debt ratio.
C. Interest rates have significantly declined.
79. Which of the following is correct regarding the coefficient of variation? A. It measures the amount of standard deviation for each one percent of covariance. B. It measures the amount of return achieved for each one percent of risk taken. C. It measures the amount of risk taken for each one percent of return achieved. D. None of these statements are correct.
C. It measures the amount of risk taken for each one percent of return achieved.
87. A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as ______________. A. PI B. IRR C. NPV D. MIRR
C. NPV
96. You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different. Which of the following would not be a correct explanation for the difference? A. One source used weekly data and another used monthly data. B. One source used the S&P500 for a market proxy and the other used the Dow Jones Industrial Average. C. One used regression analysis and the other used geometric analysis. D. All of these are correct explanations for the difference.
C. One used regression analysis and the other used geometric analysis.
55. You are the sole shareholder of a small corporation. Presently, you wish to diversify your holdings and thus want to sell a portion of your shares but do not want to incur the costs associated with SEC filings. Which one of the following markets, if any, might be conducive to this sale? A. NASDAQ B. OTCBB C. Pink Sheets D. NYSE E. None of the above
C. Pink Sheets
10. Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return? A. Internal Rate of Return, IRR B. Modified Internal Rate of Return, MIRR C. Profitability Index, PI D. Net Present Value, NPV
C. Profitability Index, PI
7. This index tracks 500 companies which allows for a great deal of diversification. A. Nasdaq B. Fortune 500 C. S&P 500 D. Wall Street Journal
C. S&P 500
92. Due to rapid growth, a computer superstore is contemplating expanding by adding another location. Which of the following items should the financial officer NOT include in estimating the cash flow associated with this expansion? A. The company owns the land of the future site of the new location. B. The new location is expected to take sales away from the existing location. C. The company spent $100,000 six months ago in a major advertising campaign which will help the new store become profitable sooner. D. All of these items should be included in the analysis.
C. The company spent $100,000 six months ago in a major advertising campaign which will help the new store become profitable sooner.
100. All of the following items would need to be included in the bond's indenture agreement except _____. A. The coupon rate B. The call feature C. The credit rating D. Steps that the bondholder can take in the event that the issuer fails to pay the interest or principal
C. The credit rating
93. Which of the following statements is incorrect? A. The Security Market Line shows the relationship between risk and return for any stock or portfolio. B. The y-intercept of the Security Market Line represents the return on the risk-free asset. C. The measure of risk used in creating the Security Market Line is the standard deviation. D. None of these statements are incorrect.
C. The measure of risk used in creating the Security Market Line is the standard deviation.
97. Which of the following is a situation in which you would want to use the constant growth model approach for estimating the component cost of equity? A. When the firm has a low beta. B. When the firm has multiple divisions. C. When the firm's stock is expected to experience constant dividend growth. D. When the firm has a high level of financial leverage.
C. When the firm's stock is expected to experience constant dividend growth.
96. Which of following is a situation in which you would want to use the CAPM approach for estimating the component cost of equity? A. When you are able to estimate the market risk premium with certainty. B. When you are able to estimate the risk-free rate with certainty. C. When you are able to estimate the firm's beta with certainty. D. When the firm pays a constant dividend.
C. When you are able to estimate the firm's beta with certainty.
94. Which of the following statements is correct? A. Yield spreads between bonds of different quality remain static over time. B. Yield spreads are set by the Securities Exchange Commission. C. Yield spreads between bonds of different quality change over time. D. None of these statements is correct.
C. Yield spreads between bonds of different quality change over time.
29. Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: A. an increase in all stock values. B. all stock values to remain constant. C. a decrease in all stock values. D. dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. E. dividend-paying stocks to increase in price while non-dividend paying stocks decrease in value.
C. a decrease in all stock values.
26. High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of High Country Builders' has a higher ______ than the stock of Valley High Builders. A. market price B. dividend yield C. capital gains yield D. total return E. The answer cannot be determined based on the information provided.
C. capital gains yield
8. Neither payback period nor discounted payback period techniques for evaluating capital projects account for A. time value of money. B. market rates of return. C. cash flows that occur after payback. D. cash flows that occur during payback.
C. cash flows that occur after payback.
15. For which situation below would one need to "smooth out" the variation in each set of cash flows so that each becomes a perpetuity? A. choosing between projects with differing risks B. choosing between independent project C. choosing between alternative assets with differing lives D. choosing between alternative assets with equal lives
C. choosing between alternative assets with differing lives
93. Flotation costs are _______________. A. insignificant and can be assumed away B. the difference between the bid-ask spread on the sale of the security C. commissions to the underwriting firm that floats the issue D. None of these answers are correct.
C. commissions to the underwriting firm that floats the issue
12. An objective approach to calculating divisional WACCs would be done by A. simply considering the project's risk relative to the firm's lines of business and adjusting upward or downward to account for subjective opinions of project risk. B. computing the average beta for the firm, the firm's CAPM formula, and the firm's WACC. C. computing the average beta per division, using these figures for each division in the CAPM formula, and then constructing divisional WACCs. D. simply averaging out all the WACCs for all the firm's projects.
C. computing the average beta per division, using these figures for each division in the CAPM formula, and then constructing divisional WACCs.
7. This determines the dollar amount of interest paid to bondholders. A. original issue discount B. call premium C. coupon rate D. market rate
C. coupon rate
8. What are the distributions to shareholders by a corporation called? A. retained earnings B. net income C. dividends D. capital payments E. diluted profits
C. dividends
17. A theory that describes the types of information that are reflected in current stock prices. A. asset pricing B. behavioral finance C. efficient market hypothesis D. public information
C. efficient market hypothesis
17. A floor broker on the NYSE does which one of the following? A. supervises the commission brokers for a financial firm B. trades for his or her personal inventory C. executes orders on behalf of a commission broker D. maintains an inventory and takes the role of a specialist E. is charged with maintaining a liquid, orderly market
C. executes orders on behalf of a commission broker
8. Which of the following is NOT included when calculating the depreciable basis for real property? A. freight charges for item B. sales tax paid for item C. financing fees D. installation and testing fees
C. financing fees
4. Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder? A. debenture B. enforcement codes C. indenture D. prospectus
C. indenture
15. A capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return. A. discounted payback B. net present value C. internal rate of return D. profitability index
C. internal rate of return
1. When calculating the weighted average cost of capital, weights are based on A. book values. B. book weights. C. market values. D. market betas.
C. market values.
16. A capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision rule. A. discounted payback B. net present value C. modified internal rate of return D. profitability index
C. modified internal rate of return
12. These are groups or pairs of projects where you can accept one but not all. A. dependent B. independent C. mutually exclusive D. mutually dependent
C. mutually exclusive
11. This is another term for market risk. A. firm specific risk B. modern portfolio risk C. nondiversifiable risk D. total risk
C. nondiversifiable risk
13. This is the investor's combination of securities that achieves the highest expected return for a given risk level. A. efficient portfolio B. modern portfolio C. optimal portfolio D. total portfolio
C. optimal portfolio
20. The stream of customer orders coming in to the NYSE trading floor is called the: A. paper trail. B. trading volume. C. order flow. D. bid-ask spread. E. commission trail.
C. order flow.
22. A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which type of market? A. auction B. private C. over-the-counter D. regional E. electronic network
C. over-the-counter
5. Regarding a bond's characteristics, which of the following is the principal loan amount that the borrower must repay? A. call premium B. maturity date C. par or face value D. time to maturity value
C. par or face value
8. This is defined as a combination of investment assets held by an investor. A. bundle B. market basket C. portfolio D. All of these
C. portfolio
24. National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: A. basically worthless as it offers no growth potential. B. equal in value to the present value of $1 paid one year from today. C. priced the same as a $1 perpetuity. D. valued at an assumed growth rate of one percent. E. worth $1 a share in the current market.
C. priced the same as a $1 perpetuity.
19. This has not been released to the public, but is known by few individuals, likely company insiders. A. audited financial statements B. restricted stock C. privately held information D. insider trading
C. privately held information
2. This is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements. A. incremental cash flows B. cash flow analysis C. pro forma analysis D. substitutionary analysis
C. pro forma analysis
10. This is the concept that a unit's sales will follow an approximate bell-shaped curve versus a steady sales life. A. bell curve cycle B. coefficient of variation C. product life cycle D. NWC life cycle
C. product life cycle
22. Shares of stock issued to employees that have limitations on when they can be sold. A. executive stock options B. privately held information C. restricted stock D. stock market bubble
C. restricted stock
14. This is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing. A. generally accepted accounting principle B. financing principle C. separation principle D. WACC principle
C. separation principle
16. A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a: A. floor trader. B. floor post. C. specialist. D. floor broker. E. commission broker
C. specialist.
6. You want to be on the board of directors of Wisely Foods. Since you are the only shareholder that will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected under these conditions? A. democratic B. cumulative C. straight D. deferred E. proxy
C. straight
20. A bond's current yield is defined as A. the bond's annual coupon rate divided by the bond's par value. B. the bond's annual coupon rate divided by the market interest rate. C. the bond's annual coupon rate divided by the bond's current market price. D. the bond's annual coupon rate divided by the bond's original issue price.
C. the bond's annual coupon rate divided by the bond's current market price.
89. The optimal portfolio for you will be ______________________. A. the one that offers the lowest correlation B. the one that offers the highest returns C. the one that reflects the amount of risk that you are willing to take D. the one that offers the most diversification
C. the one that reflects the amount of risk that you are willing to take
45. You own one share of a cumulative preferred stock which pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next dividend is paid. A. 0 B. 1 C. 2 D. 3 E. either 1, 2, or 3
D. 3
105. Which of the following bonds will have the largest percentage increase in value if interest rates decrease by 1%? A. 2-year, 5% coupon bond B. 30-year, 10% coupon bond C. 10-year, zero coupon D. 30-year, zero coupon
D. 30-year, zero coupon
75. Which of the following is incorrect? A. Technical analysis is expected to work if markets are weak-form efficient. B. If markets are strong-form efficient then they must also be weak-form efficient. C. It is not likely that the market is strong-form efficient. D. None of these statements are incorrect.
D. None of these statements are incorrect.
39. The Blue Marlin is owned by a group of 5 shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting? A. 17 percent B. 20 percent plus one vote C. 25 percent plus one vote D. 50 percent plus one vote E. 51 percent
D. 50 percent plus one vote
107. We accept projects with a positive NPV because it means that ____________. A. We have recovered all our costs B. We are creating wealth for shareholders C. The project's expected return exceeds the cost of capital D. All of these
D. All of these
3. Which of these statements answers why bonds are known as fixed income securities? A. Many investors on fixed incomes buy them. B. Investors know how much they will receive in interest payments. C. Investors will not receive their principal when the bond's term is up. D. All of these
D. All of these
94. Which of the following statements is correct with respect to Section 179 deductions? A. It was designed to help small businesses. B. It allows the firm to expense the asset immediately in the year of purchase. C. Most businesses can expense up to $108,000 of property placed in service during each year. D. All of these are correct statements.
D. All of these are correct statements.
109. A disadvantage of the payback statistic is that ___________. A. It does not reflect the time value of money B. It does not give an indication of the project's riskiness C. It does not consider cash flows beyond the payback period D. All of these are disadvantages of payback
D. All of these are disadvantages of paybac
14. Which of the following is NOT a factor that determines the coupon rate of a company's bonds? A. The amount of uncertainty about whether the company will be able to make all the payments. B. The term of the loan. C. The level of interest rates in the overall economy at the time. D. All of these are factors that determine the coupon rate of a company's bonds.
D. All of these are factors that determine the coupon rate of a company's bonds.
79. To correctly project cash flows, we need to consider all of the factors except _____. A. Use of assets or employees already employed by the firm B. The likely impact that the new service or product will have on the firm's existing products' cost and revenues C. The new product's or service's costs and revenues D. All of these are factors that need to be considered.
D. All of these are factors that need to be considered.
91. Which of the following are investor diversification problems? A. Many employees hold mostly their employer's stocks as investments. B. Many households hold relatively few individual stocks—the median is three. C. Investors seem to prefer local firms thereby limiting diversification opportunities. D. All of these are investor diversification problems.
D. All of these are investor diversification problems.
112. Possible shapes for the yield include all of the following except ____________. A. Humped B. Downward sloping C. Flat D. All of these are possible shapes.
D. All of these are possible shapes.
101. Which of the following is not a correct statement? A. Treasury inflation-protected securities have fixed coupon rates. B. The federal government adjusts the par value of Treasury inflation-protected securities at the rate of inflation. C. At maturity, investor in Treasury inflation-protected securities receives an inflation-adjusted principal amount. D. All of these statements are correct.
D. All of these statements are correct.
76. Which of the following is correct? A. Hedge funds often sell stock they don't even own. B. Hedge funds maintain secrecy about their holdings, trading and strategies. C. Hedge funds are limited to sophisticated investors. D. All of these statements are correct.
D. All of these statements are correct.
93. Which of the following statements is correct? A. Michael Milken pioneered an active high-yield bond market in the late 1970s that provided much needed capital to entrepreneurs and financial innovators. B. Prior to Milken, the only junk bonds were those issued by once financially stable firms that had fallen on hard times. C. Milken showed investors that, historically, junk bonds rarely defaulted and offered a very high return to those willing to assume the risk of owning them. D. All of these statements are correct.
D. All of these statements are correct.
94. Which of the following is correct? A. Investors can reduce the risk in their portfolio by investing in international stocks since they tend to have low correlation with our own stock market. B. Combining both stocks and bonds will likely reduce risk in a portfolio because the two assets have low correlation. C. Your optimal portfolio is an efficient portfolio with your desired risk level. D. All of these statements are correct.
D. All of these statements are correct.
98. Which of the following is a concern regarding beta? A. Using different market proxies will result in different estimates of beta. B. A company can alter its risk level which may make the beta estimate obsolete. C. Research indicates that a company's beta does not appear to predict its future return very well. D. All of these statements are valid concerns regarding beta.
D. All of these statements are valid concerns regarding beta.
9. Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business A. one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk. B. one would like to find at least three or four pure-play proxies. C. two, or even one, proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough. D. All the answers make this a true statement.
D. All the answers make this a true statement.
. Which of these statements is false? A. Bonds are more important capital sources than stocks for companies and governments. B. Some bonds offer high potential for rewards and, consequently, higher risk. C. The bond market is larger than the stock market. D. Bonds are always less risky than stocks.
D. Bonds are always less risky than stocks.
106. An asset's cost plus the amounts you paid for items such as sales tax, freight charges, and installation and testing fees is referred to as the ___________________. A. Opportunity cost B. Sunk cost C. Asset costing reference D. Depreciable basis
D. Depreciable basis
9. When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following? A. EBIT - Interest - Taxes + Depreciation B. EBIT - Taxes C. EBIT + Depreciation D. EBIT - Taxes + Depreciation
D. EBIT - Taxes + Depreciation
30. Which one of the following statements is correct concerning the two-stage dividend growth model? A. G1 cannot be negative. B. Pt = Dt/R. C. G1 must be greater than G2. D. G1 can be greater than R. E. R must be less than G1 but greater than G2.
D. G1 can be greater than R.
54. You own 600 shares of a NASDAQ listed stock that you wish to sell. Which of the following are options available to you for this purpose? I. sell the shares to a dealer at the dealer's bid price II. sell directly to another individual via an ECN III. offer the shares yourself on NASDAQ via an ECN IV. have a broker offer the shares for sale on the NYSE A. I and II only B. III and IV only C. II and III only D. I, II, and III only E. II, III, and IV only
D. I, II, and III only
25. An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate A. I and II only B. III and IV only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV
D. I, II, and IV only
78. Rank from highest credit risk to lowest credit risk the following bonds, with the same time to maturity, by their yield to maturity: Treasury bond with yield of 6.55%, IBM bond with yield of 10.95%, Trump Casino bond with a yield of 9.15%, and Banc Ono bond with a yield of 9.46%. A. Treasury, Trump Casino, Banc Ono, IBM B. Banc Ono, Trump Casino, IBM, Treasury C. Trump Casino, Treasury, Banc Ono, IBM D. IBM, Banc Ono, Trump Casino, Treasury
D. IBM, Banc Ono, Trump Casino, Treasury
81. Which of the following statements is correct regarding total risk? A. A conglomerate will have more total risk than a firm that has one line of business. B. All firms have about the same total risk because they are all exposed to the same market risk. C. Total risk can be quantified by measuring the covariance between the firm and the overall market. D. None of these statements are correct.
D. None of these statements are correct.
38. Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information? A. Regardless of the voting procedure, Jen does not own enough shares to gain a seat on the board. B. If straight voting applies, Jen is assured a seat on the board. C. If straight voting applies, Jen can control all of the open seats. D. If cumulative voting applies, Jen is assured one seat on the board. E. If cumulative voting applies, Jen can control all of the open seats.
D. If cumulative voting applies, Jen is assured one seat on the board.
16. Which of the following is a true statement? A. If interest rates fall, U.S. Treasury bonds will have decreasing values. B. If interest rates fall, corporate bonds will have decreasing values. C. If interest rates fall, no bonds will enjoy rising values. D. If interest rates fall, all bonds will enjoy rising values.
D. If interest rates fall, all bonds will enjoy rising values.
10. Which of the following statements is true? A. Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level. B. Interest payments paid to corporate bond holders are not taxed at the federal level. C. Interest payments paid to corporate bond holders are not taxed at the state level. D. Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.
D. Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.
91. All of the following are necessary conditions for an efficient market except _________. A. Low trading or transaction costs B. Many buyers and sellers C. Free and readily available information to market participants D. Low stock prices
D. Low stock prices
106. The least-used capital budgeting technique in industry is ____________. A. NPV B. IRR C. Payback D. MIRR
D. MIRR
86. A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as ______________. A. IRR B. EAR C. NPV D. MIRR
D. MIRR
89. Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV? A. Independent projects that are evaluated at a high cost of capital. B. Mutually exclusive projects that are evaluated at a low cost of capital. C. Any projects that exhibit differences in scale or timing. D. Mutually exclusive projects that exhibit differences in scale or timing.
D. Mutually exclusive projects that exhibit differences in scale or timing.
80. Which of the following tools is suitable for choosing between mutually exclusive projects? A. Profitability Index B. IRR C. MIRR D. NPV
D. NPV
15. Which of the following is NOT a necessary condition for an efficient market? A. Many buyers and sellers. B. No prohibitively high barriers to entry. C. Free and readily available information available to all participants. D. No trading or transaction costs.
D. No trading or transaction costs.
93. All of the following are strengths of payback except ____________________. A. Its benchmark is not determined by a relevant external constraint B. It incorporates the time value of money C. It uses a conservative reinvestment rate D. None of these
D. None of these
98. The reason that we do not use an after-tax cost of preferred stock is __________. A. because preferred dividends are paid out of before-tax income B. because most of the investors in preferred stock do not pay tax on the dividends C. because we can only estimate the marginal tax rate of the preferred stockholders D. None of these answers is correct.
D. None of these answers is correct.
84. Which of the following statements is correct? A. For a few firms in completely different industries, it is possible to have a correlation that approaches -2.0. B. A correlation of -1.0 means that the two firms are uncorrelated or that they have no relationship. C. Most common stocks have low correlation with each other since they operate in different industries. D. None of these statements are correct.
D. None of these statements are correct
75. Which of the following statements is correct? A. The dollar return is a more useful measure to compare performance because it more accurately reflects the change in wealth of the investor. B. A dominant portfolio is one that has the highest risk and highest return within a set of portfolios. C. By adding stocks to your portfolio, it is possible to effectively eliminate nearly all of the market risk. D. None of these statements are correct.
D. None of these statements are correct.
77. Which of the following statements is correct with regards to diversification? A. Diversifying reduces the return of the portfolio. B. Diversifying reduces the market risk of the portfolio. C. Diversifying reduces the dollar return of the portfolio. D. None of these statements are correct.
D. None of these statements are correct.
106. Which of the following statements is correct? A. A decrease in the firm's marginal corporate tax rate will decrease the weighted average cost of capital. B. Flotation costs can decrease the weighted average cost of capital. C. The cost of debt is based on the cost of all liabilities, including accounts payable and accruals. D. None of these statements is correct.
D. None of these statements is correct.
86. Which of the following statements is correct? A. Stocks and long-term Treasury bonds are highly positively correlated. B. Stocks and Treasury bills are highly positively correlated. C. Stocks, long-term Treasury bonds and Treasury bills are all highly correlated. D. None of these statements is correct.
D. None of these statements is correct.
56. You are an accountant and have been analyzing the financial statements of Euro Place Markets, which is a foreign retailer. While the firm's financials are not prepared according to GAAP, you have still been able to understand the firm's accounting practices and feel that this firm has a bright future. On which one of the following U.S. markets, if any, might you be able to purchase shares in this firm? A. NYSE B. NASDAQ C. OTCBB D. Pink Sheets E. No U.S. market will list this foreign security.
D. Pink Sheets
68. If Zeus Energy bonds are upgraded from BBB- to BBB+, which of the following statements is true? A. The current bond price will increase. B. Interest rates required on new bond issues will increase. C. The current bond price will decrease. D. The current bond price will increase and interest rates on new bonds issues will decrease.
D. The current bond price will increase and interest rates on new bonds issues will decrease.
92. Which of the following describes what will occur as you randomly add stocks to your portfolio? A. The nondiversifiable risk will decrease. B. Both the diversifiable and nondiversifiable risk will decrease. C. The portfolio return will increase. D. The diversifiable risk will decrease.
D. The diversifiable risk will decrease.
21. Which of the following is an important advantage to the issuer of a bond with a call provision? A. They are able to avoid interest rate risk. B. They are able to avoid reinvestment rate risk. C. They are able to reduce their credit risk. D. They allow for refinancing opportunities.
D. They allow for refinancing opportunities.
22. Which of the following is a reason municipal bonds offer lower rates of interest income for their investors? A. They are able to avoid interest rate risk. B. They are able to avoid reinvestment rate risk. C. They are able to offer reduced credit risk as they are backed by the federal government. D. They are tax exempt—at least at the federal level.
D. They are tax exempt—at least at the federal level.
102. Which of the following would NOT be an example of an agency bond? A. Federal Home Loan Bank bond B. Student Loan Marketing Association bond C. Fannie Mae bond D. Treasury bills
D. Treasury bills
99. All of the following can be included in the depreciable basis of an asset except _______. A. Freight charges B. Installation fees C. Sales tax D. Variable costs
D. Variable costs
113. Possible shapes for the yield curve include all of the following except ___________. A. Upward sloping B. Humped C. Horizontal line D. Vertical line
D. Vertical line
4. Which of these statements is true? A. When people purchase a stock, they know exactly what their dollar and percent return are going to be. B. Many people purchase stocks as they find comfort in the certainty for this safe form of investing. C. When people purchase a stock, they know the short-term return, but not the long term return. D. When people purchase a stock, they do not know what their return is going to be - either short term or in the long run.
D. When people purchase a stock, they do not know what their return is going to be - either short term or in the long run.
100. Suppose a new project was going to be financed partially with retained earnings. What flotation costs should you use for retained earnings? A. Use the same flotation cost that would be used to issue new common stock. B. Use an average of the flotation costs for debt, preferred and common stock. C. Use the industry average flotation cost for common stock. D. Zero.
D. Zero.
49. Which one of the following transactions occurs in the primary market? A. purchase of 500 shares of GE stock from a current shareholder B. gift of 100 shares of stock to a charitable organization C. gift of 200 shares of stock by a mother to her daughter D. a purchase of newly issued stock from AT&T E. IBM's purchase of GE stock
D. a purchase of newly issued stock from AT&T
23. An ECN is best described as: A. an electronic network which transmits orders directly to the floor of the NYSE. B. the network used in the primary market for selling newly issued shares. C. the international trading network of the NYSE. D. a website that allows individual investors to trade directly with one another. E. a computerized network used by independent
D. a website that allows individual investors to trade directly with one another.
2. Bonds are issued by which of the following? A. corporations B. federal government or its agencies C. state and local governments D. all of these
D. all of these
91. A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10 percent. Given this, the project must have: A. only one negative cash flow. B. a PI that is negative. C. a discounted payback period that is shorter than its payback period. D. an NPV that is greater than zero.
D. an NPV that is greater than zero.
3. Which one of following is the rate at which a stock's price is expected to appreciate? A. current yield. B. total return. C. dividend yield. D. capital gains yield. E. coupon rate
D. capital gains yield.
37. Which one of the following rights is never directly granted to all shareholders of a publicly-held corporation? A. electing the board of directors B. receiving a distribution of company profits C. voting either for or against a proposed merger or acquisition D. determining the amount of the dividend to be paid per share E. having first chance to purchase any new equity shares that may be offered
D. determining the amount of the dividend to be paid per share
4. All capital budgeting techniques A. render the same investment decision. B. use the same measurement units. C. include all crucial information. D. exclude some crucial information.
D. exclude some crucial information.
6. Concerning incremental project cash flow, this is a cost one would never count as an expense of the project. A. initial investment B. taxes paid C. operating expenses of the project D. financing costs
D. financing costs
52. Which one of the following players on the floor of the NYSE can be likened to part-time help because they are called to duty only when others are fully employed? A. floor trader B. specialist C. dealer D. floor broker E. commission broker
D. floor broker
33. Which one of the following represents the capital gains yield as used in the dividend growth model? A. D1 B. D1/P0 C. P0 D. g E. g/P0
D. g
35. The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: A. pay an increasing dividend for a period of time and then cease paying dividends altogether. B. increase the dividend amount every other year. C. pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. D. grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. E. pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.
D. grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
12. This is the IRS convention that requires that all property placed in service during a given period is assumed to be placed in service at the midpoint of that period. A. mid-point convention B. mid-month convention C. mid-quarter convention D. half-year convention
D. half-year convention
32. Supernormal growth is a growth rate that: A. is both positive and follows a year or more of negative growth. B. exceeds a firm's previous year's rate of growth. C. is generally constant for an infinite period of time. D. is unsustainable over the long term. E. applies to a single, abnormal year.
D. is unsustainable over the long term.
24. Which of the following bonds carry significant risk that the issuer will not make current or future payments? A. credit quality risk bonds B. interest rate risk bonds C. liquidity rate risk bonds D. junk bonds
D. junk bonds
11. The secondary market is best defined by which one of the following? A. market in which subordinated shares are issued and resold B. market conducted solely by brokers C. market dominated by dealers D. market where outstanding shares of stock are resold E. market where warrants are offered and sold
D. market where outstanding shares of stock are resold
50. Which one of the following statements currently applies to a NYSE broker? A. owns a "seat" on the exchange B. buys at the bid price C. remains at his or her specified post D. matches customer buy and sell orders E. trades for his or her personal account
D. matches customer buy and sell orders
1. Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects? A. payback period B. discounted payback period C. modified internal rate of return D. net present value
D. net present value
13. These are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive. A. expected cash flows B. time line cash flows C. non-normal cash flows D. normal cash flows
D. normal cash flows
14. Which of these is the measurement of risk for a collection of stocks for an investor? A. beta B. efficient market C. expected return D. portfolio beta
D. portfolio beta
88. The efficient frontier portfolios are __________________________. A. portfolios that risk adverse investors will select B. portfolios where all the market risk is diversified away C. portfolios where the correlation among assets is 0.0 D. portfolios that dominate all others
D. portfolios that dominate all others
21. The counter area on the floor of the NYSE where a specialist operates is called a: A. pit. B. hot spot. C. seat. D. post. E. DOT.
D. post.
18. This is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc. A. audited financial statements B. generally accepted accounting principles C. privately held information D. public information
D. public information
18. Which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate? A. credit quality risk B. interest rate risk C. liquidity rate risk D. reinvestment rate risk
D. reinvestment rate risk
20. Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices. A. behavior finance B. efficient market C. privately held information D. stock market bubble
D. stock market bubble
3. If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a A. committed cost B. complementary cost C. obligated cost D. sunk cost
D. sunk cost
19. Which of the following terms is a comparison of market yields on securities, assuming all characteristics except maturity are the same? A. credit quality risk B. interest rate risk C. liquidity of interest rate risk D. term structure of interest rates
D. term structure of interest rates
9. When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose A. either project if they both are more than managers' maximum payback period. B. neither project if they both are less than managers' maximum payback period. C. the project that pays back the soonest. D. the project that pays back the soonest if it is equal to or less than managers' maximum payback period.
D. the project that pays back the soonest if it is equal to or less than managers' maximum payback period.
5. This is defined as the volatility of an investment, which includes firm specific risk as well as market risk. A. diversifiable risk B. market risk C. standard deviation D. total risk
D. total risk
15. Which of the following bonds makes no interest payments? A. a bond whose coupon rate is equal to the market interest rates B. a bond whose coupon rates are greater than market interest rates C. a bond whose coupon rates are less than the market interest rates D. zero coupon bond
D. zero coupon bond
43. Which one of the following statements related to corporate dividends is correct? A. Dividends are nontaxable income to shareholders. B. Dividends reduce the taxable income of the corporation. C. The Chief Executive Officer of a corporation is responsible for declaring dividends. D. The Chief Financial Officer of a corporation determines the amount of dividend to be paid. E. Corporate shareholders may receive a tax break on a portion of their dividend income.
E. Corporate shareholders may receive a tax break on a portion of their dividend income.
44. Which one of these statements related to preferred stock is correct? A. Preferred shareholders normally receive one vote per share of stock owned. B. Preferred shareholders determine the outcome of any election that involves a proxy fight. C. Preferred shareholders are considered to be the residual owners of a corporation. D. Preferred stock normally has a stated liquidating value of $1,000 per share. E. Cumulative preferred shares are more valuable than comparable non-cumulative shares.
E. Cumulative preferred shares are more valuable than comparable non-cumulative shares.
27. The dividend growth model: I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point in time. III. can be used to value zero-growth stocks. IV. requires the growth rate to be less than the required return. Aterm-27. I and III only B. II and IV only C. I, III, and IV only D. term-27I, II, and IV only E. I, II, III, and IV
E. I, II, III, and IV
46. Which of the following features do preferred shareholders and bondholders frequently have in common? I. lack of voting rights II. conversion option into common stock III. annuity payments IV. fixed liquidation value A. I and II only B. III and IV only C. II, III, and IV only D. I, III, and IV only E. I, II, III, and IV
E. I, II, III, and IV
15. The person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n): A. floor trader. B. dealer. C. specialist. D. executor. E. commission broker
E. commission broker
4. Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? A. dual class B. cumulative C. non-cumulative D. preferred E. common
E. common
53. Which one of the following statements applies to NASDAQ? A. a partner with the London exchange B. exchange floor is located in Chicago C. single market maker for each listed security D. broker's market E. comprised of three separate markets
E. comprised of three separate markets
12. An agent who maintains an inventory from which he or she buys and sells securities is called a: A. broker. B. trader. C. capitalist. D. principal. E. dealer.
E. dealer.
36. Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model? A. no dividends for 5 years, then increasing dividends forever B. $1 per share annual dividend for 2 years, then $1.25 annual dividends forever C. decreasing dividends for 6 years followed by one final liquidating dividend payment D. dividends payments which increase by 2, 3, and 4 percent respectively for 3 years followed by a constant dividend thereafter E. dividend payments which increase by 10 percent per year for 5 years followed by dividends which increase by 3 percent annually thereafter
E. dividend payments which increase by 10 percent per year for 5 years followed by dividends which increase by 3 percent annually thereafter
9. Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities? A. senior bond B. debenture C. warrant D. common stock E. preferred stock
E. preferred stock
10. Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets? A. private B. auction C. exchange floor D. secondary E. primary
E. primary
40. Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management? A. negotiated settlement where each side is granted control over one of the open seats B. protracted legal battle over control of the board of directors C. arbitrated settlement where the arbitrator determines who will be elected to the board D. control of the board decided without your influence E. proxy fight for control of the board
E. proxy fight for control of the board
7. You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? A. altering B. cumulative voting C. straight voting D. indenture agreement E. voting by proxy
E. voting by proxy
100. Kelley wants to purchase shares in Classic Kars, Inc., but is torn between buying shares of common stock or shares of preferred stock. What should he consider before determining the type of share he should purchase?
Kelley needs to identify the reasons he wishes to purchase this stock. If he is looking for a steady stream of income and preferential treatment should the company go bankrupt, then he should purchase preferred stock. On the other hand, if he believes the company has a bright financial future and wishes to share in that success, then he should buy common stock and enjoy the benefits of residual ownership associated with high profitability. In addition, if he wishes to have a voice in company matters, he should purchase common stock to ensure that he will have voting rights.
