Business Finance Final FA-17

which of the following is true of par value of a common stock it is arbitrary value established for legal purposes in a firms corporate charter
which of the following is an advantage for a firm to issue common stock over long term debt no maturity date on which the par value of the issue must be repaid
which of the following is a difference between common stock and bonds dividend paid to stockholders is tax deductible but interest paid to bondholders are not
holders of equity capital own the firm
because equity holders are the last to receive nay distribution of assets as a result of bankruptcy proceedings, the expect __________ greater returns from their investment in the firms stock
which of the following typically applies to common stock but not to preferred stock voting rights
which of the following is true of equity it does not mature, so repayment is not required
equity capital can be raised through the stock market
which of the following is true of a common stock it gives the holder voting rights which permit selection of the firms directors
which of the following is typically a feature of common stock common stocks may or may not pay dividends
________ are promised a fixed periodic dividend that must be prior to paying any common stock dividends preferred stockholders
dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are cumulative
an 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of $8.00
which of the following is a disadvantage of issuing preferred stock from the common stockholders perspective there is a seniority of preferred stockholders claim over that of common stockholders
which of the following is true of preferred stocks restrictive covenants of preferred stocks include provisions about listing of stocks on the securities exchange and determining the price of stock
regarding the tax treatment of payments to securities holders, it is true that _____ common stock dividends and preferred stock dividends are not tax deductible, while interest is tax deductible
which of the following is true of outstanding shares authorized shares become outstanding shares when they re not issued or sold to investors
______ are financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares rights offering
which of the following is true of a common stock? there is no fixed dividend payment obligation for the company
treasury stock refers to the repurchase of outstanding stock
according to the efficient market hypothesizes, prices of actively traded stocks do not differ from their true values in an efficient market
if expected return is less than required return on asset, rational investors would sell the asset, which will drive the price up and cause the expected return to reach the level of the required return
if the expected return is above the required return on an asset, rational investors will, buy the asset, which will drive the price up and cause expected return to reach the level of the required return
emmy lou, inc. has an expected divident next year of $5.60 per share, growth rate of dividends of 0 percent, and a required return of 20 percent. the value of a share of emmy lou, inc.’s common stock is $56.00
a firm has experienced a constant annual rate of dividend growth of 9 percent on its common stock and expects the dividend per share in the coming year to be $2.70. the firm can earn 12 percent on similar risk involvements. the value of the firms common stock is $90 per share
you are planning to purchase the stock of Ted’s Sheds Inc. and you expect it to pay a dividend of $3 in 1 year, $4.25 in 2 years and $6 in 3 years. you expect to sell the stock for $100 in 3 years, if your required return for purchasing the stock is 12%, how much would you pay for the stock today? $81.52
Smith Corporation’s common stock is expected to pay a dividend of $3 forever and currently sells for $21.42. What is the required rate of return 14%
Harry Corporation’s common stock currently sells for $180 per share. Harry just paid a dividend of $10.18 and dividends are expected to grow at a constant rate of 6 percent forever. if the required rate of return is 12 percent, what will harry Corporation’s stock sell for one year from now $190.64
Which of the follwoing valuation methods is superior to others in the list since it considers expected earnings Price per Earnings Multiple
Which of the following is true of risk-return trade off? risk can be measured on the basis of variability of return.
Which of the following is true of risk? Risk of a measure of the uncertainty surrounding the return that an investment will earn.
If a manager prefers a higher return investment regardless of its risk, the he is following a _______ strategy ? Risk-Neutral
If a manager prefers investments with greater risk even if they have lower expected returns, then he is following a ______ strategy ? Risk-Seeking
Risk Aversion is the behavior exhibited by managers who require______ ? an increase in return, for a given increase in risk.
The ______ of a given outcome is its chance of occurring ? probability
A _____ measures the dispersion around the expected value ? standard deviation
A _____ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns. coefficient of variation
Which asset would the risk – averse financial manager prefer? The one in which the pessimistic rate of return is the closest to the most likely rate of return. Asset D (In this case)
Given the following expected returns and standard deviations of assets B, M, Q, and D, which asset should the prudent financial manager select? Asset B (my guess is that it has the most predictable return based on the smallest standard deviation)
A(n) ______ portfolio maximizes return for a given level of risk, or minimizes risk for a given level or return ? Efficient
_____ is a statistical measure of the relationship between any two series of numbers ? Correlation
Perfectly______ correlated series move exactly together and have a correlation coefficient of ____, while perfectly _____ correlated series move exactly in the opposite directions and have a correlation coefficient of _____ ? Positively; +1; negatively; -1
combining two negatively correlated assets to reduce risk is known as ______ ? diversification
Systematic Risk is also referred to as _____ ? nondiversifiable
Risk that affects all firms is called _____ ? nondiversifiable
the portion of an assets risk that is attributable to firm specific, random causes is called Unsystematic risk
relevant portion of an assets risk attributable to market factors that affect all firms is called systematic risk
_______ risk represents the portions of an assets risk that can be eliminated by combining assets with less than perfect positive correlation. Diversifiable risk
Unsystematic risk can be eliminated through diversification
strikes, lawsuits, regulatory actions, or the loss of a key account are all examples of diversifiable risk diversifiable risk
War, Inflation, and the condition of the foreign markets are all examples of nondiversifiable risk
A beta coefficient of +1 represents an asset that has the same response as the market portfolio
A beta coefficient of -1 represents an asset that has the same response and the market portfolio but in the opposite direction
the higher an asset’s beta the more responsive it is to changing market returns
An increase in nondiversifiable risk would cause an increase in beta and would increase the required return
In the capital asset pricing model, the beta coefficient is a measure of Nondiversifiable risk
Asset Y has a beta of 1.2. The risk-free rate of return is 6%, while the return on the market portfolio of assets is 12%. The asset’s market risk premium is _____ 6%
Asset P has a beta of .9. the risk-free rate of return is 8%, while the return on the market portfolio of assets is 14%. The asset’s required rate of return is_____ 13.4%
What is the expected risk-free rate of return is Asset X, with a beta of 1.5, has an expected return of 20%, and the expected market return is 15% 5%
What is the expected rate of return for Asset X if it has a beta of 1.5, the expected market return is 15%, and the expected risk-free rate is 5% 20%
the_____ is the rate of return that a firm must earn on its investments in order to maintain the market value of its stock ? cost of capital
The four basic sources of long term funds for a firm are_____ Long-term debt, common stock, preferred stock, and retained earnings
Which of the following is a source of long term funds? Retained Earnings
Generally, the order of cost, from the least expensive to the most expensive, for long term capital of a corporation is______ Long term debt, preferred stock, retained earnings, new common stock
Generally the least expensive source of long term capital is long term debt
a tax adjustment must be made in determining the cost of Long term debt
the before tax cost of debt for a firm, which has a marginal tax rate of 40%, is 12%. The after tax cost of debt is _____ 7.2%
What is the dividend on an 8% stock that currently sells for $45 and has a face value of $50 per share? $4.00
A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5%. the cost of the firm’s common stock equity is _______ 13%
Cost of common stock equity formula Cost of Equity = Dividend in Next Period/current market price + Growth Rate

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