FNAN401-Chapter 14: Capital Structure and dividend Policy.

If a company can issue 4 percent tax-exempt industrial bonds as opposed to regular 10 percent bonds, the savings per period should be discounted at Blank______ percent

10%

If a company can issue 4 percent tax-exempt industrial bonds as opposed to regular 10 percent bonds, the savings per period should be discounted at Blank______ percent.

10% is the opportunity cost

a company can issue state industrial bonds for 4 percent versus the normal 10 percent, then it can save Blank______ percent on its coupon rate.

10%-4% = 6%

If a company can issue state industrial bonds for 4 percent versus the normal 10 percent, then it can save Blank______ percent on its coupon rate.

10-4 = 6

If managers who want to issue equity believe the company's stock is overpriced, they are likely to Blank______.

Issue equity immediately

Most of the difference in small and large stock returns occur in the month of Blank______.

January

Which of the following is true about the IPO market?

Large initial gains in stock prices often occur.

A(n) Blank______ coefficient of serial correlation for a particular stock indicates a tendency toward reversal.

Negative

A market is said to be semistrong efficient if prices incorporate which type of information?

publicly available information

The proponents of efficient markets question whether the psychological traits of Blank______ will dominate in any given situation.

representativeness or conservatism

Rationality implies that investors, when faced with new information about a stock, will Blank______.

reprice the stock rationally

A firm may fool investors with a financing decision if they can Blank______.

sell a security for more than it is worth

Throwing darts at the financial pages to construct a portfolio may not be a good strategy because Blank______.

the darts cannot consider the overall risk of the portfolio

If company managers believe interest rates will rise, they have a(n) Blank______ to borrow long term.

Incentives

If company managers believe interest rates will rise, they will Blank______ borrowing now.

Increase

An efficient market is one that fully reflects all available Blank______.

Information

It is not uncommon for IPOs to Blank______ experience large gains.

Initially

An efficient market is one in which any change in available information will be reflected in the company's stock price Blank______.

Immediately

In what ways can a firm create value with its capital budgeting decisions?

A) Locate an unsatisfied demand for a product. B) Create a barrier to make it more difficult for other firms to compete. C) Create a barrier to make it more difficult for other firms to compete. D) Be the first to make a new product.

An abnormal return is defined as Blank______.

AR = R- Rm a stock's actual return minus the market return

Cumulative abnormal returns are the sums of the daily Blank______ returns.

Abnormal

The opponents of the efficient market theory point out the large number of Blank______ cannot simply be attributed to chance alone.

Anomalies

A real-world example that seems to contradict market efficiency is called a(n) Blank______.

Anomaly

______ is the process of buying underpriced securities while selling overpriced substitutes.

Arbitrage

A short sale occurs if the seller initially ---- the asset and then sells it.

Borrows

If on days −1, 0, and +1, the abnormal returns are 1, 2, and 3 percent, respectively, then the cumulative abnormal return on day +1 is Blank______ percent.

CAR day+1 = 1% + 2+ 3 =6%

A positive coefficient of serial correlation for a particular stock indicates a tendency toward Blank______, which means that a higher-than-average return today is likely to be followed by higher-than-average returns in the future.

Continuation.

Serial Blank______ is the relationship between the current return on a security and the return on the same security over a later period.

Correlation

Different types of information will affect stock prices Blank______.

Differently

If a Japanese firm believes the yen will increase relative to the dollar, then that firm will want to issue debt that is denominated in Blank______.

Dollars

The purpose of event studies is to test whether or not stock markets are Blank______.

Efficient

If a U.S. firm believes the euro will decline relative to the dollar, then that firm will want to issue debt that is denominated in Blank______.

Euros

______ studies examine whether or not the release of information on 1 day influences stock returns on other days.

Event

The use of fraudulent accounting methods can cause a company's stock price to Blank______.

Exceed its fair value

True or false: Throwing darts at the financial pages to construct a portfolio is not a good strategy because professional security analysts always outperform dart portfolio

False

Which of the following does the efficient markets hypothesis tell us?

Financial managers cannot time bond and stock sales. Prices correctly reflect value.

The types of equity and debt to sell is an example of a(n) Blank______.

Financing decisions.

Which of the following are ways to create valuable financing opportunities?

Fool investors, reduce cost or increase subsidies, create a new security.

Financial managers try to package securities to receive the Blank______ value.

Greatest

According to the efficient markets hypothesis, the timing of a new equity issue is Blank______ important.

Not

According to the random walk theory, if the prices have been going up for the last 10 days, on the 11th day, the prices will Blank______.

Not necessarily go up

Weak form efficiency considers trading strategies that use information based solely on Blank______ stock prices.

Past

What types of information affect the rates at which stock prices adjust to new information?

Past information. all information. publicly available information

According to the Blank______ theory, the random component in any period is unrelated to random errors in any past period.

Random walk

Investors who jump into a hot market believing that the high returns will continue for an even longer period are said to exhibit Blank______.

Representativeness

The investor trait of Blank______ occurs when investors draw conclusions from insufficient data.

Representativeness

A negative coefficient of serial correlation for a particular stock indicates a tendency toward Blank______, which means a lower-than-average return today is likely to be followed by higher-than-average returns in the future.

Reversal

There is a difference in returns on small and large stocks, and most of that difference can be explained by differences in Blank______.

Risk

What is the impact of fraud on security prices?

Security prices will likely revert to equilibrium once the fraud is discovered. It will distort prices in the short-run.

A market is said to be Blank______ form efficient if prices incorporate all publicly available information.

Semistrong

A ---- sale occurs if the seller borrows the asset and then sells it.

Short

The evidence clearly does not support the existence of Blank______ form efficiency in the stock market.

Strong

Earnings Blank______ occur when earnings are different than expected.

Surprises

True or false: Arbitrage is more risky than it appears at first glance.

True

Which of the following have empirical support

Weak and Semistrong

The market return used in the abnormal return definition is based on Blank______.

a broad-based stock market index

An abnormal return is defined as Blank______.

a stock's actual return minus the market return

If you can beat the market by Blank______, then you are violating weak form efficiency.

analyzing historical price patterns

How can a firm create value in its capital budgeting process?

by producing its products and services at lower costs. by being ahead of other companies in developing new products

Which of the following are ways to create valuable financing opportunities?

create a new type of security. reduce costs or increase subsidies

Since it is difficult to find financing opportunities with positive net present values when capital markets are efficient, firms must Blank______.

create value in other more difficult ways

Earnings surprises occur when earnings are Blank______.

higher than expected. AND lower than expected

Typical financing decisions include Blank______.

how much equity and debt to sell. the types of equity and debt to sell. When to sell equity and debt

Not everyone believes in efficient markets because Blank_____

investors suffer illusions. there are anomalies

When Blank______-than-average returns today are likely to be followed by Blank______-than-average returns in the future, the coefficient of serial correlation will be positive indicating a tendency toward continuation.

lower; lower. AND higher; higher

A(n) Blank______ coefficient of serial correlation for a particular stock indicates a tendency toward reversal.

negative

The serial correlation of a stock's returns is different from the correlation between the returns of two different stocks because it Blank______.

only involves the returns of one stock

Markets are more likely to be efficient if the investors Blank______.

use relevant information to make a trade are rational