finance final (ch.6-8)

True

True or False: A bond is a long-term promissory note issued by the firm.

False

True or False: A call provision allows the issuing firm the opportunity to avoid rising interest rates by calling investors and asking for more cash.

True

True or False: A call provision entitles a company to repurchase its preferred stock from holders at stated prices over a given time period.

False

True or False: A company with a AAA bond rating will command a higher interest rate on its bonds than a company with a lesser BBB bond rating.

True

True or False: A firm's bond rating would be favorably affected if they have a low use of financial leverage (debt).

True

True or False: A security with a beta of one has a required rate of return equal to the overall market rate of return.

False

True or False: Accounting profits is the most relevant variable the financial manager uses to measure returns.

False

True or False: Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

True

True or False: Although under normal operating conditions preferred shareholders do not have voting rights, protective provision generally allow for voting rights in the event of nonpayment of preferred dividends.

True

True or False: An all-stock portfolio is more risky than a portfolio consisting of all bonds.

True

True or False: An example of a Eurobond is a bond issued in Asia by a U.S. Corporation with interest and principal payments made in U.S. dollars.

False

True or False: As the required rate of return of an investment decreases, the market price of the investment decreases.

False

True or False: Asset allocation is not recommended by financial planners because mixing different types of assets, such as stocks with bonds, makes it more difficult to track performance and adjust portfolios to changing market conditions.

True

True or False: Because common stock represents a residual interest in the corporation, the value of common stock is equal to the total firm value less the firm's outstanding debt.

True

True or False: Because most preferred stocks are perpetuities, their value can be determined by dividing the annual dividend by an investor's required return.

False

True or False: Because risk is measured by variability of returns, how long we hold our investments does not matter very much when it comes to reducing risk.

True

True or False: Bonds generally have a maturity date while preferred stocks do not.

True

True or False: Common stock does not mature.

True

True or False: Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.

True

True or False: Convertible bonds are debt securities that can be converted into a firm's stock at a prespecified price.

True

True or False: Cumulative voting is advantageous to minority shareholders because it may allow them to elect a member of the board of directors.

False

True or False: Historically, investments with the highest returns have the lowest standard deviations because investors do not like risk.

True

True or False: Historically, price appreciation, or capital gains yield, has accounted for a greater portion of returns on common stocks than dividend payments.

True

True or False: If a bond has a market value that is higher than its par value, then the required return on the bond must be less than the bond's coupon rate.

False

True or False: If a common stockholder cannot personally attend the meeting of shareholders, then their votes are lost.

False

True or False: In Excel, the variable pv stands for a bond's par value.

True

True or False: In an efficient market, the market value and intrinsic value of a security should be equal.

False

True or False: In general, interest on bonds, like dividends on preferred stock, may be deferred until a later date at the discretion of management, making debt financing more appealing to corporate managers

True

True or False: In terms of risk, preferred stock is safer than common stock because it has a prior claim on assets and income.

False

True or False: In the case of insolvency, the claims of debt are honored prior to those of common stock and after those of preferred stock.

True

True or False: In theory, shareholders select the board of directors, but in reality, management effectively selects the directors.

False

True or False: Junk bonds are also called low-yield bonds.

False

True or False: Portfolio performance is determined mainly by stock selection and market timing, with less emphasis on asset allocation.

False

True or False: Preferred stock and common stock issued by the same firm will have the same required return because the riskiness of the firm's cash flows is the same for both securities.

True

True or False: Preferred stock is referred to as a hybrid security because it has many characteristics of both common stock and bonds.

False

True or False: Proper diversification generally results in the elimination of risk.

True

True or False: Subordinated debentures are more risky than unsubordinated debentures because the claims of subordinated debenture holders are less likely to be honored in the event of liquidation.

False

True or False: The characteristic line for any well-diversified portfolio is horizontal.

False

True or False: The market rewards the patient investor, for the period between 1926 and 2016, there has never been a time when an investor lost money if she held an all-large-stock portfolio for ten years.

True

True or False: The most relevant form of growth for valuing a firm's common stock is internal growth.

False

True or False: The risk-return trade-off that investors face on a day-to-day basis is based on realized rates of return because expected returns involve too much uncertainty.

True

True or False: The use of a call provision in addition to a sinking fund can effectively create a maturity date for preferred stock.

True

True or False: The value of a bond is inversely related to changes in the investor's present required rate of return.

True

True or False: The yield to maturity is the discount rate that equates the present value of the interest and principal payments with the current market price of the bond.

True

True or False: Variation in the rate of return of an investment is a measure of the riskiness of that investment.

U.S. Treasury bill rate.

A typical measure for the risk-free rate of return is the

the stock and paid-in-capital amounts on the balance sheet.

All of the following affect the value of a share of common stock EXCEPT

retaining profits in order to reinvest into the firm.

An example of the growth factor in common stock for the original investors is

fourth

Assume that a firm had such serious financial problems that it was about to be liquidated after a bankruptcy. All of the firm's assets are about to be sold in order to pay the following claims against the firm: bondholders, preferred stockholders, common stockholders, and federal income taxes. Of the claims mentioned, what priority would common stockholders have?

market risk

Changes in the general economy, like changes in interest rates or tax laws, represent what type of risk?

requires dividends in arrears to be carried over into the next period.

Cumulative preferred stock

Fred may determine a different value for a bond than Ethel because each investor may have a different level of risk aversion, and hence a different required return.

Fred and Ethel are both considering buying a corporate bond with a coupon rate of 8%, a face value of $1,000, and a maturity date of January 1, 2025. Which of the following statements is MOST correct?

The intrinsic value of the bond for the investor is less than the market value of the bond.

Harold considers investing in an LM Corp. bond and decides not to purchase the bond. Which of the following statements is MOST correct?

Purchase a variety of securities; i.e., diversify.

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

first

If a firm were to experience financial insolvency, the legal system provides an order of hierarchy for the payment of claims. Assume that a firm has the following outstanding securities: mortgage bonds, common stock, debentures, and preferred stock. Rank the order in which investors that own mortgage bonds would have their claim paid?

a proxy

If a shareholder cannot attend the corporation's annual meeting, the shares may still be voted using

Market value and intrinsic value would be the same.

If markets were entirely efficient (perfect), which of the following would we conclude?

the yield to maturity increases.

If the market price of a bond decreases, then

false, because the required return could be different

If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.

beta

If we are able to fully diversify, what is the appropriate measure of risk to use?

long-term government bonds

If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the least risky investment?

discount rate or required return.

In the present value bond valuation model, risk is generally incorporated into the

sinking fund

Many preferred stocks have a feature that requires a firm to periodically set aside an amount of money for the retirement of its preferred stock. What is the name of this feature?

callable

Many preferred stocks have a provision that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period. What is the name of this provision?

cumulative

Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid. What is the name of this feature?

common stocks of small companies

Of the following different types of securities, which is typically considered most risky?

beta; standard deviation

Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.

preferred stock dividends are fixed.

Preferred stock differs from common stock in that

Both investments provide a stated income stream.

Preferred stock is similar to a bond in the following way:

perpetuity

Preferred stock valuation usually treats the preferred stock as a

interest rates decrease.

Progressive Corporation issued callable bonds. The bonds are most likely to be called if

Systematic is undiversifiable and deals with market risk. Unsystemic risk is unique to the company and it is diversifiable. The method to measure a firm's market risk would be estimating beta coefficient line.

Short Answer: Define systematic and unsystematic risk. What method is used to measure a firm's market risk?

Internal growth is better as it allows for reinvestment to grow while new capital requires only purchasing or borrowing brand new.

Short Answer: How does internal growth versus the infusion of new capital affect the original shareholders?

They would need to offer higher rates in order to get a higher return or reward. Factors such as time value and market value affect a bond's rating.

Short Answer: How does the bond rating affect an investor's required rate of return? What factors affect a bond's rating?

Risk is something given up knowing there could her something good or bad to follow.

Short Answer: How is risk defined?

They allow for voting rights and as well as less risk and return due to common stock restrictions. Protective provisions generally allow for voting rights in the event of nonpayment of dividends, or they restrict the payment of common stock dividends if sinking-funds(A sinking fund is a type of fund that is created and set up purposely for repaying debt) payments are not met or if the firm is in financial difficulty. These protective provisions reduce the risk and consequently, expected return.

Short Answer: What provisions are available to protect a preferred stockholder?

A convertible bond has the potential of increase as it can converted into a firm's stock at a prespecified price.

Short Answer: Why would a convertible bond increase much more in value than a bond that is not convertible?

beta

The appropriate measure for risk according to the capital asset pricing model is

provides a risk-return trade-off in which risk is measured in terms of beta.

The capital asset pricing model

small company stocks

The category of securities with the highest historical risk premium is

cash flows

The relevant variable a financial manager uses to measure returns is

is the required rate of return on the bond

The yield to maturity on a bond

asset allocation

What is diversifying among different kinds of assets known as?

the capital asset pricing model

What is the name given to the equation that financial managers use to measure an investor's required rate of return?

the asset is undervalued to the investor.

When the intrinsic value of an asset exceeds the market value,

I, II, III, IV

Which of the following affect an asset's value to an investor? I. Amount of an asset's expected cash flow II. The riskiness of the cash flows III. Timing of an asset's cash flows IV. Investor's required rate of return

The bond is convertible.

Which of the following bond provisions will make a bond more desirable to investors, other things being equal?

all of the above

Which of the following features, or benefits, belong to a firm's common stockholders?

discount rate that equates present value of future cash flows with a bond's face value.

Which of the following is NOT a definition of yield to maturity?

The bond makes no coupon payments.

Which of the following is true of a zero coupon bond?

The higher the risk, the higher the required return, other things being equal.

Which of the following statements concerning the required rate of return on stocks is true?

Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.

Which of the following statements is MOST correct concerning diversification and risk?

These bonds are convertible into common stock of the issuing firm at a prespecified price.

Which of the following statements is true regarding convertible bonds?

book value

Which type of value is shown on the firm's balance sheet?

common stockholders

Who bears the greatest risk of loss of value if a firm should fail?

II, III

You are considering investing in Ford Motor Company. Which of the following are examples of diversifiable risk? I. Risk resulting from possibility of a stock market crash. II. Risk resulting from uncertainty regarding a possible strike against Ford. III. Risk resulting from an expensive recall of a Ford product. IV. Risk resulting from interest rates decreasing.