Chapter 12 Finance

Security investors incur varying degrees of risk. Business risk is related to a. price level changes in the economy. b. investor behavior in the market. c. the debt-to-equity ratio of the firm. d. the potential success or failure of the firm. e. security price fluctuations. D
In which of the following types of investment is the most liquidity risk? a. Common stock b. Corporate bonds c. Treasury bonds d. Land e. Mutual fund shares D
Which of the following types of risk affect owners of fixed income securities more than owners of equity securities a. business risk b. financial risk c. market risk d. purchasing power risk e. event risk D
. Companies with a great deal of long-term debt would rate fairly high in ____ risk. a. market b. event c. business d. financial e. liquidity D
. ____ risk results from the behavior of investors in the securities market a. Business b. Financial c. Market d. Purchasing power e. Interest rate C
A high inflation rate would result in a high degree of a. business risk. b. financial risk. c. market risk. d. purchasing power risk. e. interest rate risk. D
An example of event risk would be a. inflation. b. a corporate takeover. c. a newspaper article about the economy. d. earnings announcements. e. capital growth. B
Risk and return are ____ related. a. inversely b. directly c. slightly d. oppositely B
Bond prices and market interest rates are ____ related. a. inversely b. directly c. slightly d. positively e. none of the above A
Assume you’re contemplating the purchase of a $1,000, 6% annual coupon income bond with 5 years remaining to maturity and that the bond currently is trading at $950. The approximate yield to maturity on this bond will be a. 6.0%. b. 7.2%. c. 8.1%. d. 11.3%. e. 12.1%. B
Suppose the EPS of Walmart stock is $2, and the current price per earnings ratio is 10. What is the current price of Walmart stock? a. $5 b. $8 c. $20 d. $40 e. Cannot compute with given information. C
Assume you’re contemplating the purchase of a $1,000, 5% annual coupon income bond with 10 years remaining to maturity and that the bond currently is trading at $925. The approximate yield to maturity on this bond will be a. 5.0%. b. 5.5%. c. 6.0%. d. 12.3%. e. 15.0%. C
The minimum rate of return you would like to receive in compensation for the amount of risk you have assumed is the a. desired rate of return. b. actual rate of return. c. exact rate of return. d. approximate yield. e. none of these. A
If the current price of an investment increases, what affect does the price increase have on approximate yield a. moderately increase yield b. decrease yield c. will not affect the yield d. drastically increase yield e. none of the above B
Corporate ownership is evidenced by a. a deed. b. stock. c. bonds. d. debenture. B
The Smith family owns 200 shares of Elta stock. The company declared a 5% stock dividend. The Smiths now own a. 200 shares. b. 205 shares. c. 210 shares. d. 420 shares. e. 410 shares. C
Cash dividends on common stock are most often paid a. weekly b. monthly c. quarterly d. semiannually e. annually C
U-Need-This has $12 million liabilities, $12 million preferred stock, 10 million shares of common stock outstanding, and $39 million in total assets. The book value is a. $2.00 per share. b. $4.30 per share. c. $4.10 per share. d. $1.50 per share. e. none of the above. D
Anderson, Inc. has $10 million liabilities, $12 million preferred stock, 8 million shares of common stock outstanding, and $45 million in total assets. The book value is a. $2.30 per share. b. $2.88 per share. c. $4.13 per share. d. $4.38 per share. e. none of the above. B
From an equityholder’s perspective, the firm’s overall profitability is measured by a. book value. b. return on equity. c. market value. d. net profit margin. e. beta. B
The ____ of a stock reflects stockholder confidence. a. par value b. book value c. face value d. price/earnings ratio e. dividend yield D
Market risk is often measured using a. the price/earnings ratio. b. the dividend yield. c. alpha. d. beta. e. none of these. D
A company has a beta of 1.0; if the market goes down by 8%, the value of the company’s stock will likely a. increase 8%. b. decline 8%. c. increase 1%. d. decline 1%. e. none of these. B
Only the shares of the strongest, most stable, and safe-return companies can be called a. blue-chip stocks. b. growth stocks. c. income stocks. d. defensive stocks. e. cyclical stocks. A
Stocks of companies that have experienced—and are expected to continue experiencing—higher rates of growth in operations and earnings are called a. blue-chip stock. b. growth stock. c. income stock. d. speculative stock. e. defensive stock. B
Stocks with price movements that tend to follow the business cycle are called a. cyclical stocks b. defensive stocks c. speculative stocks d. income stocks e. tech stocks A
____ stocks are really purchased as a gamble rather then because they have a proven history of good performance. a. Blue-chip b. Growth c. Cyclical d. Defensive e. Speculative E
A characteristic of defensive stocks is a. income. b. steady earnings. c. steady dividends. d. growth. e. price stability in economic decline. E
To most stockholders, the main advantages of common stock investment are a. attractive returns and active trading. b. attractive returns and voting rights. c. high dividends and active trading. d. high risk and active trading. e. high risk and attractive returns. A
The easiest way to invest in foreign stock is to purchase a. the stock directly from an over sea’s broker. b. the stock directly from your regular broker. c. the stock directly over the Internet. d. international mutual funds. e. American Depository Receipts. D
One of the more appealing features of a common stock is that stock investments a. offer ownership with a limited liability. b. offer relatively high annual income. c. can always be sold for at least the purchase price. d. have a relatively high minimum investment. e. offer tax-exempt income. A
When cash dividends on stock are paid, but the stockholder has these dividends automatically reinvested, what are the federal income tax implications? a. Taxes must be paid in the year the dividends are paid at ordinary income tax rates. b. Taxes must be paid in the year the dividends are paid at long-term capital gains rates. c. Taxes must be paid, but not until the stockholder sells the stock that was purchased through the dividend reinvestment plan. d. Taxes do not have to be paid on these dividends—ever. e. Either a or c—it is up to the investor to make the choice. A
Which of the following is an advantage of owning growth stocks? a. High and growing dividends b. High but declining dividends c. Low P/E ratio d. High potential for capital gains e. Tend to be solid blue-chip stocks D
When evaluating a stock as a possible investment, one must consider a. the current market price. b. the expected capital gain. c. the expected dividend income. d. one’s investment goals. e. all of the above E
Advantages of common stock investments include a. guaranteed dividend income. b. potential for high return c. liquidity. d. b and c e. a, b, and c D
Which of the following statements about preferred stock is true? a. Preferred shareholders generally get enhanced voting rights. b. Dividends must generally be paid to preferred shareholders before dividends may be paid to common shareholders. c. Preferred stocks are a hybrid between equity and debt, because like common stock the owners of preferred shares can vote and like debt they are paid interest. d. It would be foolish to purchase the common stock of a company that also issues preferred shares, because the preferred shares have a higher yield with a stronger guarantee. e. None of the above are true. B
Which of the following would be a disadvantage of owning an income stock? a. High and growing dividends b. High but declining dividends c. Lower growth potential d. High potential for capital growth e. Tend to be solid blue-chip stocks C
Advantages of a dividend reinvestment plan can include a. stock sold at a discount. b. guaranteed rate of return. c. tax advantages. d. free of brokerage commissions. e. a and d. E
A bond may sell a. at par value. b. below par value. c. above par value. d. any of these. e. none of these. D
A bond selling below par value is selling at a. a discount. b. its coupon value. c. a premium. d. maturity. e. the highest effective yield. A
Which of the following is most likely to occur immediately following the announcement that the rating on a corporate bond has been lowered to junk status? a. The yield-to-maturity on the bond will decline. b. The price of the bond will decline. c. The price of the bond will increase d. More than one of these e. None of these B
Bonds are issued by a. corporations and federal, state, and local governments. b. state and local governments and partnerships. c. corporations and partnerships. d. Moody’s and Standard & Poor’s. e. none of these. A
Bonds issued by subdivisions of the U.S. government but not guaranteed by the government are called a. federal bonds. b. agency bonds. c. treasury bonds. d. municipal bonds. e. trust bonds. B
A bond is issued at $1,000 par value during a time in which interest rates for similar bonds were 8%. Today, new bonds with similar creditworthiness are issued at 10%. Which of the following is most likely to be true about the bond? a. It is currently selling for a premium. b. It is currently selling at a discount. c. It is currently selling at par. d. The bond is likely to be called. e. None of these apply. B
Which of the following types of bonds are unsecured? a. mortgage bond b. equipment trust certificate c. debenture bond d. agency bond e. all of these C
John Smith is in the 28 percent tax bracket. If he were to purchase a $1,000 municipal bond that had a stated interest rate of 6.9%, the taxable equivalent yield would be a. 6.900%. b. 8.261%. c. 9.583%. d. 12.105%. e. 14.625%. C
Julie Johnson is in the 35 percent tax bracket. If she were to purchase a $1,000 municipal bond that had a stated interest rate of 6.5%, the fully taxable equivalent yield would be a. 6.50%. b. 9.03%. c. 9.24%. d. 10.00%. e. 10.51%. D
When market interest rates rise, bond prices will a. return to a steady price. b. rise. c. fall. d. vary unpredictably. e. not be affected. C
The approximate yield to maturity of a bond is greater than the stated rate of interest when a. purchased at face value. b. purchased at discount. c. purchased at premium. d. market rates of interest decline. e. market rates of interest are constant. B
A company’s $1,000 bond has a 7.5% interest rate and is currently selling for $820. The current yield is a. 6.15%. b. 7.50%. c. 9.15%. d. 10.27%. e. 11.43%. C
Sunshine Mining Bonds have a $1,000 face value, pay $95 annual interest, and are currently quoted at $1,302.50. The coupon rate of interest is a. 8.500%. b. 9.500%. c. 13.025%. d. 13.052%. e. can’t tell from the information given. B
Positive aspects about bonds do not include a. high long-run return. b. desirable diversification properties. c. low risk. d. stable current income. e. a and b A
Which of the following is a characteristic of Treasury inflation-indexed bonds? a. They are short-term securities issued by the federal government. b. The interest paid is indexed for inflation. c. The par value of the bond is indexed for inflation d. Both b and c. C
Characteristics of corporate bonds include a. interest paid semiannually. b. issued in $1,000 denominations. c. tax-free interest income. d. sinking funds are common. e. all of the above except c. E
Zero coupon bonds are issued by a. federal agencies. b. municipalities. c. corporations. d. all of these. e. b and c only. D
A convertible bond is usually a a. government bond. b. participating bond. c. debenture in corporate market. d. mortgage bond. e. junk bond. C
Your convertible bond has a conversion ratio of 15. The current market price of the common stock is $50/share. The conversion value of this bond is a. $150. b. $500. c. $650. d. $750. e. $900. D
The best returns in the stock market will be achieved by a. remaining fully invested. b. missing the five best months. c. missing the ten best months. d. missing the fifteen best months. e. missing the twenty best months. A
The relevant sale or invoice price of a bond to the buyer is its a. par value. b. clean price. c. negotiated price. d. dirty price. e. discount price. D
A bond is priced at 89 8/32. What is its price? a. $89.25 b. $890.25 c. $898.32 d. $646.50 e. $892.50 E
Which of the following bond ratings would be for junk bonds? a. BBB b. A c. BB d. AAA e. AA C

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