BUS 3360 Finance

Which of the following would be considered a capital budgeting decision?- Planning to issue common stock rather than issuing preferred stock- Deciding to expand into a new line of products, at a cost of $5 million- Repurchasing shares of common stock Deciding to expand into a new line of products, at a cost of $5 million
The best criterion for success in a capital budgeting decision would be to:- minimize the cost of the investment.- maximize the number of capital budgeting projects.- maximize the difference between cash inflows and cost.- finance all capital budgeting projects with debt. maximize the difference between cash inflows and cost.
An example of a firm’s financing decision would be:- acquiring a competitive firm.- determining how much to pay for a specific asset.- issuing 10-year versus 20-year bonds.- deciding whether or not to increase the price of its products. issuing 10-year versus 20-year bonds.
Long-term financing arrangements occur in the:- money markets.- capital markets.- secondary markets.- tertiary markets. capital markets.
The term “capital structure” refers to:- the manner in which a firm obtains its long-term sources of funding.- the length of time needed to repay debt.- whether the firm invests in capital budgeting projects.- which specific assets the firm should invest in. the manner in which a firm obtains its long-term sources of funding.
When a corporation decides to issue long-term debt in order to pay for the acquisition of real assets, it has made a:- capital budgeting decision.- financing decision.- money market decision.- secondary market decision. financing decision.
Which of the following represents a financing decision?- A decision to borrow $10 million through a bank loan- A decision to invest in the common stock of another corporation- A decision to buy a new mainframe computer- A decision to pay $1 million of accounts payable A decision to borrow $10 million through a bank loan
Which of the following statements best distinguishes the difference between real and financial assets?- Real assets have less value than financial assets.- Real assets are tangible; financial assets are not.- Financial assets represent claims to income that is generated by real assets.- Financial assets appreciate in value; real assets depreciate in value. Financial assets represent claims to income that is generated by real assets.
Financial markets are used for trading:- both real assets and financial assets.- the goods and services produced by a firm.- securities, such as shares of IBM.- the raw materials used in manufacturing. securities, such as shares of IBM.
Which of the following would be considered an advantage of the sole proprietorship form of organization?- Wide access to capital markets- Unlimited liability- A pool of expertise- Profits taxed at only one level Profits taxed at only one level
Which of the following would correctly differentiate general partners from limited partners in a limited partnership?- General partners have more job experience.- General partners have an ownership interest.- General partners are subject to double taxation.- General partners have unlimited personal liability. General partners have unlimited personal liability.
One common reason for partnerships to convert to a corporate form of organization is that the partnership:- faces rapidly growing financing requirements.- wishes to avoid double taxation of profits.- has issued all of its allotted shares.- agreement expires after ten 10 years. faces rapidly growing financing requirements.
When a corporation fails, the maximum that can be lost by an investor protected by limited liability is:- the amount of the initial investment.- the amount of the profit on the investment.- the amount necessary to pay the corporation’s debts.- the amount of the investor’s personal wealth. the amount of the initial investment.
Which of the following is not an advantage to incorporating a business?- Easier access to financial markets- Limited liability- Becoming a permanent legal entity- Profits taxed at the corporate level and the shareholder level Profits taxed at the corporate level and the shareholder level
A board of directors is elected as a representative of the corporation’s:- top management.- stakeholders.- shareholders.- customers. shareholders.
A chief financial officer would typically:- report to the treasurer, but supervise the controller.- report to the controller, but supervise the treasurer.- report to both the treasurer and controller.- supervise both the treasurer and controller. supervise both the treasurer and controller.
Corporate managers are expected to make corporate decisions that are in the best interest of:- top corporate management.- the corporation’s board of directors.- the corporation’s shareholders. the corporation’s shareholders.
The primary goal of corporate management should be to:- maximize the number of shareholders.- maximize the firm’s profits.- minimize the firm’s costs.- maximize the shareholders’ wealth. maximize the shareholders’ wealth.
How may a reduction in cash dividends be in the best interests of current shareholders?- A reduction of cash dividends is always in the best interests of current shareholders.- The firm will have available cash to increase current investment and future profits.- Reduced dividends increase managerial compensation, thus increasing their motivation.- A reduction of cash dividends cannot be in the best interests of current shareholders. The firm will have available cash to increase current investment and future profits.
Ethical decision making by management has a payoff for shareholders in terms of:- improved capital structure.- enhanced reputation value.- increased managerial benefits.- higher dividend payments. enhanced reputation value.
Agency problems can best be characterized as:- dislike of firm’s bondholders by its equity holders.- differing incentives between managers and owners.- spending of corporate resources.- friction between the primary and secondary markets. differing incentives between managers and owners.
Compared to buying stocks and bonds directly, what are the advantages of investing in a mutual fund?- Mutual funds are efficiently diversified and professionally managed.- Investment returns are never taxed until withdrawn from the fund.- You can buy additional shares in the fund or cash out at any time.- All of these. Mutual funds are efficiently diversified and professionally managed.
U.S. bonds and other debt securities are mostly held by:- institutional investors.- households.- foreign investors.- state and local governments. institutional investors.
The primary distinction between securities sold in the primary and secondary markets is the:- riskiness of the securities.- price of the securities.- previous issuance of the securities.- profitability of the issuing corporation. previous issuance of the securities.
A bond differs from a share of stock in that:- a bond represents a claim on the firm.- a bond has more risk.- a bond has guaranteed returns.- a bond has a maturity date. a bond has a maturity date.
Long-term financing decisions commonly occur in the:- option markets.- secondary markets.- capital markets.- money markets. capital markets.
You can buy silver in the:- capital markets.- foreign exchange markets.- commodities markets.- option markets. commodities markets.
Commodity and derivative markets:- are sources of financing.- enable the financial manager to adjust the firm’s exposure to various business risks.- are always over-the-counter markets.- all of these. enable the financial manager to adjust the firm’s exposure to various business risks.
The opportunity cost of capital:- is the interest rate that the firm pays on a loan from a financial institution.- is the maximum acceptable rate of return on a project.- is the minimum acceptable rate of return on a project.- is always less than 10%. is the minimum acceptable rate of return on a project.
U.S. corporate equities are mostly held by:- insurance companies.- households.- foreign investors.- state and local governments. households.
The cost of capital:- is the expected rate of return on capital investment.- is an opportunity cost determined by the risk-free rate of return.- is the interest rate that the firm pays on a loan from a bank or insurance company.- for risky investments is normally higher than the firm’s borrowing rate. for risky investments is normally higher than the firm’s borrowing rate.
A balance sheet portrays the value of a firm’s assets and liabilities:- over an annual period.- over any stated period of time.- at any stated point in time.- only at the end of the calendar year. at any stated point in time.
Which of the following assets is likely to be considered the most liquid?- Marketable securities- Net fixed assets- Accounts payable- Inventories Marketable securities
If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders’ equity, then the firm has:- no retained earnings.- long-term debt.- no accumulated depreciation.- current assets. long-term debt.
Net working capital is a measure of the company’s:- goodwill.- short-term liabilities.- estimated liquidity.- shareholders’ equity. estimated liquidity.
Net working capital is calculated by taking the difference between:- total assets and total liabilities.- inventory and accounts payable.- current assets and current liabilities.- cash and long-term debt. current assets and current liabilities.
A balance sheet may be considered backward-looking from the perspective that:- it works backward, starting with net income.- it records historic, not current values.- it cannot forecast the future.- it records costs over many previous periods. it records historic, not current values.
Depreciation expense is used to:- allocate costs to all departments of the firm.- determine when an asset is fully paid off.- allocate historical cost over the life of an asset.- equate the historical cost and market values of an asset. allocate historical cost over the life of an asset.
When subtracting an asset’s accumulated depreciation from its historic cost, the resulting value is termed the:- book value of the asset.- market value of the asset.- depreciation expense.- current asset value. book value of the asset.
Which of the following expense categories is subtracted from total revenues to help arrive at a firm’s EBIT?- Cash dividends- Depreciation expense- Interest expense- Tax liability Depreciation expense
Retained earnings result from:- the sale of additional shares of stock to investors.- income not paid to shareholders.- an excess of assets over liabilities.- market values that exceed book values. income not paid to shareholders.
Which of the firm’s financial statements most clearly recognizes the payment for new equipment?- Balance sheet- Income statement- Statement of cash flows- Statement of condition Statement of cash flows
Which of the following changes in working capital will result in an increase in cash flows?- Increase in accounts payable- Increase in inventories- Increase in accounts receivable- Decrease in other current liabilities Increase in accounts payable
If a firm’s cash-flow statement shows that cash was used for investments, which of the following would seem most likely?- The inventory balance increased.- Common stock was repurchased.- New machines were acquired.- Cash dividends were paid. New machines were acquired.
Interest expense appears in the operations section of the cash-flow statement because:- firms cannot operate without incurring interest expense.- its payment is not within managerial discretion.- it is paid to finance a firm’s inventory.- none of these; interest expense appears in the financing section of the cash-flow statement. its payment is not within managerial discretion.
Which of the following values would most likely interest a shareholder?- Book value of equity- Market value of equity- Historical cost of equity- none of these Market value of equity
Return on assets is always a larger number than the return on equity. False
ROE is equal to ROA when the firm has no debt. True
EVA is the net profit of the firm adjusted for the cost of capital. True
Net working capital is determined from the difference between current assets and current liabilities. True
The asset turnover ratio and inventory turnover ratio are both efficiency ratios. True
The difference between the current and quick ratios is that inventory has been subtracted from current assets. True
The sum of the payout ratio and the plowback ratio will always equal 1.0. True
What is the book value per share for a firm with 2 million shares outstanding at a price of $50, a market-to-book ratio of .75, and a dividend payout ratio of 50%?Market-to-book ratio = stock price/book value per share.75 = $50/book value per shareBook value per share = $66.67 $66.67
Which of the following is correct?- Market value added measures the difference between the market value of the firm’s equity and its book value.- Residual income is also called economic value added.- EVA measures the net profit of a firm or division after deducting the cost of the capital employed.- All of these. All of these.
When a firm’s debt-equity ratio is 1.0, the firm:- has too much long-term debt in relation to leases.- has less long-term debt than equity.- is nearing insolvency.- has as much in long-term liabilities as in equity. has as much in long-term liabilities as in equity.
Compound interest pays interest for each time period on the original investment plus the accumulated interest. True
The more frequent the compounding, the higher the future value, other things equal. True
To calculate present value, we discount the future value by some interest rate r, the discount rate. True
You should never compare cash flows occurring at different times without first discounting them to a common date. True
The Excel function for Future value is FV (rate, nper, pmt, PV). True
An annuity due must have a present value at least as large as an equivalent ordinary annuity. True
A mortgage loan is an example of an amortizing loan. “Amortizing” means that part of the monthly payment is used to pay interest on the loan and part is used to reduce the amount of the loan. True
What is the future value of $10,000 on deposit for five years at 6% simple interest?FV = PV + (PV x r x t)(10,000) + ((10,000 x .06) x 5) = $13,000.00 $13,000.00
How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest compounded annually?100 x (1.07)2 = $1,144.90 after 2 years.$1,144.90 x .07 = $80.14 $80.14
How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for three years?FV = PV (1 + r)2100 (1.025)12 = 134.49 $134.49
The coupon rate of a bond equals:- its yield to maturity.- a percentage of its face value.- the maturity value.- a percentage of its price. a percentage of its face value.
Periodic receipts of interest by the bondholder are known as:- the coupon rate.- a zero-coupon.- coupon payments.- the default premium. coupon payments.
The discount rate that makes the present value of a bond’s payments equal to its price is termed the:- rate of return.- yield to maturity.- current yield.- coupon rate. yield to maturity.
What happens to the coupon rate of a bond that pays $80 annually in interest if interest rates change from 9% to 10%?- The coupon rate increases to 10%.- The coupon rate remains at 9%.- The coupon rate remains at 8%.- The coupon rate decreases to 8%. The coupon rate remains at 8%.
Where does a “convertible bond” get its name?- The option of converting into shares of common stock- The option of increasing its coupon payments when interest rates increase- The option of converting from zero-coupon to coupon-paying bond- The option of increasing yield without decreasing price The option of converting into shares of common stock
Many investors may be drawn to municipal bonds because of the bonds’:- speculative grade ratings.- high coupon payments.- long periods until maturity.- exemption from federal taxes. exemption from federal taxes.
What happens when a bond’s expected cash flows are discounted at a rate lower than the bond’s coupon rate?- The price of the bond increases.- The coupon rate of the bond increases.- The par value of the bond decreases.- The coupon payments are adjusted to the new discount rate. The price of the bond increases.
How much does the $1,000 to be received upon a bond’s maturity in 4 years add to the bond’s price if the appropriate discount rate is 6%?$1,000/(1.06)4 = $792.09 $792.09
Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?- The face value of the bond has decreased.- The bond’s maturity value exceeds the bond’s price.- The bond’s internal rate of return is 7%.- The bond’s maturity value is lower than the bond’s price. The bond’s maturity value is lower than the bond’s price.
What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price of $750?$60/750 = 8% 8.0%
The value of common stock will likely decrease if:- the investment horizon decreases.- the growth rate of dividends increases.- the discount rate increases.- dividends are discounted back to the present. the discount rate increases.
What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?- $22.86- $28.00- $42.00- $43.75P0 = Div / r = 3.50 / .08 = $43.75 $43.75
What constant-growth rate in dividends is expected for a stock valued at $32.00 if next year’s dividend is forecast at $2.00 and the appropriate discount rate is 13%?5.00%6.25%6.75%15.38%$32.00 = (2.00 / (.13 – g))$4.16 – 32g = $2.00$2.16 = 32g.0675 = g6.75% = g 6.75%
What happens to a firm that reinvests its earnings at a rate equal to the firm’s required return?- Its stock price will remain constant.- Its stock price will increase by the sustainable growth rate.- Its stock price will decline unless dividend payout ratio is zero.- Its stock price will decline unless plowback rate exceeds required return. Its stock price will remain constant.
What should be the current price of a share of stock if a $5 dividend was just paid, the stock has a required return of 20%, and a constant dividend growth rate of 6%?$19.23$25.00$35.71$37.86P = $5(1.06)/(.20-.06)P = $5.30/.14P = $37.86 $37.86
What stock price reaction would you expect from a firm that unexpectedly raises its dividend permanently and by a substantial amount?- Price should rise, given dividend discount models.- Price should decline, given discounted cash flow analysis.- Price will remain constant, due to market efficiency.- Price will remain constant, due to random-walk behavior. Price should rise, given dividend discount models.
Which of the following is inconsistent with a firm that sells for very near book value?- Low current earning power- No intangible assets- High future earning power- Low, unstable dividend payment High future earning power
The expected return on a common stock is composed of:- dividend yield.- capital appreciation.- both dividend yield and capital appreciation.- capital appreciation minus the dividend yield. both dividend yield and capital appreciation.
A positive value for PVGO suggests that the firm has:- a positive return on equity.- a positive plowback ratio.- investment opportunities with superior returns.- a high rate of constant growth. investment opportunities with superior returns.
If a stock’s P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock’s current price?$4.50$18.00$22.22$40.50P/E = 13.5xThen P = 13.5 x $3Price = $40.50 $40.50
According to the semistrong form of market efficiency, when new information becomes available in the market:- stock prices will remain unchanged because they already reflect this information.- stock prices will accurately and rapidly adjust to reflect this new information.- stock prices will adjust to accurately reflect this new information over the course of the next few days.- stock prices will most likely increase because all new information has a positive effect on stock prices. stock prices will accurately and rapidly adjust to reflect this new information.
Research indicates that the correlation coefficient between successive days’ stock price changes is:- quite close to +1.- quite close to -1.- quite close to zero.- directly related to the stock’s beta. quite close to zero.
If it proves possible to make abnormal profits based on information regarding past stock prices, then the market:- is weak-form efficient.- is not weak-form efficient.- is semistrong-form efficient.- is strong-form efficient. is not weak-form efficient.
Given that markets are efficient, what is the most logical explanation of the fact that a portfolio manager can outperform the S&P 500 by 5% annually?- The manager is an expert stock selector.- The manager has relied on insider information.- Stocks do not follow a random-walk pattern.- The manager’s results have not been adjusted for the riskiness of the portfolio. The manager’s results have not been adjusted for the riskiness of the portfolio.
The statement that there are no free lunches on Wall Street suggests that:- the market is strong-form efficient.- there is no return to technical or fundamental analysis.- security prices reflect all available information.- food purveyors are capitalists. security prices reflect all available information.
Which of the following statements is correct for a project with a positive NPV?- The IRR must be greater than 0.- Accepting the project has an indeterminate effect on shareholders.- The discount rate exceeds the cost of capital.- The profitability index equals 1. The IRR must be greater than 0.
If the net present value of a project that costs $20,000 is $5,000 when the discount rate is 10%, then the:- project’s IRR equals 10%.- project’s rate of return is greater than 10%.- net present value of the cash inflows is $4,500.- project’s cash inflows total $25,000. project’s rate of return is greater than 10%.
The decision rule for net present value is to:- accept all projects with cash inflows exceeding initial cost.- reject all projects with rates of return exceeding the opportunity cost of capital.- accept all projects with positive net present values.- reject all projects lasting longer than 10 years. accept all projects with positive net present values.
What should occur when a project’s net present value is determined to be negative?- The discount rate should be decreased.- The profitability index should be calculated.- The present value of the project cost should be determined.- The project should be rejected. The project should be rejected.
Which of the following changes will increase the NPV of a project?- A decrease in the discount rate- A decrease in the size of the cash inflows- An increase in the initial cost of the project- A decrease in the number of cash inflows A decrease in the discount rate
If the IRR for a project is 15%, then the project’s NPV would be:- negative at a discount rate of 10%.- positive at a discount rate of 20%.- negative at a discount rate of 20%.- positive at a discount rate of 15%. negative at a discount rate of 20%.
Given a particular set of project cash flows, which of the following statements is correct?- There can be only one NPV for the project, even with multiple discount rates.- There can be only one IRR for the project.- There can be more than one IRR for the project.- There can be only one profitability index for the project, even with multiple discount rates. There can be more than one IRR for the project.
When projects are mutually exclusive, selection should be made according to the project with the:- longer life.- larger initial size.- highest IRR.- highest NPV. highest NPV.
Which of the following investment criteria takes the time value of money into consideration?- Net present value- Profitability index- Internal rate of return for borrowing projects- All of these All of these
For mutually exclusive projects, the IRR can be used to select the best project:- by calculating the modified internal rate of return.- by calculating the IRR based on incremental cash flows.- by using the discount rate to calculate the IRR.- never. IRR cannot be utilized for mutually exclusive projects. by calculating the IRR based on incremental cash flows.
The opportunity cost of capital is equal to:- the discount rate that makes project NPV equal zero.- the return offered by other projects of equal risk.- a project’s internal rate of return.- the average rate of return for a firm’s projects. the return offered by other projects of equal risk.
If two projects offer the same positive NPV, then:- they also have the same IRR.- they have the same payback period.- they are mutually exclusive projects.- they add the same amount to the value of the firm. they add the same amount to the value of the firm.
According to the NPV rule, all projects should be accepted if NPV is positive when discounted at the:- internal rate of return.- opportunity cost of capital.- risk-free interest rate.- accounting rate of return. opportunity cost of capital.
When a project’s internal rate of return equals its opportunity cost of capital, then:- the project should be rejected.- the project has no cash inflows.- the net present value will be positive.- the net present value will be zero. the net present value will be zero.
Firms that make investment decisions based on the payback rule may be biased toward rejecting projects:- with short lives.- with long lives.- with late cash inflows.- that have negative NPVs. with long lives.
Which of the following investment decision rules tends to improperly reject long-lived projects?- Net present value- Internal rate of return- Payback period- Profitability index Payback period
The use of a profitability index will always provide results consistent with selecting the project with the:- highest NPV.- highest IRR.- largest dollar invested per rate of return.- largest return per dollar invested. largest return per dollar invested.
What is the percentage return on a stock that was purchased for $50.00, paid a $3.00 dividend after one year, and was then sold for $49.00?-2.50%2.50%4.00%7.50%Percentage Return = capital gain + dividend / initial share price= (1.00) + 3.00 / 50.00= 4.00% 4.00%
How is it possible for real rates of return to increase during times when the rate of inflation increases?- Inflation increased more than the real return.- Nominal returns actually decreased.- Nominal returns increased more than inflation.- Nominal returns increased less than inflation. Nominal returns increased more than inflation.
The Dow Jones Industrial Average is:- the most representative of stock market indexes.- an index of America’s 500 major corporations.- an index of 30 major industrial stocks.- an equally weighted index of all stocks traded on the New York Stock Exchange. an index of 30 major industrial stocks.
Stock A has 10 million shares issued and stock B has 5 million shares issued. What is their relative weighting if both stocks are represented in the S&P 500?- They have equal weighting, like all S&P 500 stocks.- B has twice the weighting, to account for having fewer shares.- A has twice the weighting, to account for having more shares.- They are weighted according to their expected performance. A has twice the weighting, to account for having more shares.
Although Standard and Poor’s Composite Index contains a small number of U.S. publicly traded stocks, the Index represents:- all stocks that prefer to be equally weighted.- all stocks that prefer to be value-weighted.- approximately 50% of U.S. stocks traded, in value.- approximately 75% of U.S. stocks traded, in value. approximately 75% of U.S. stocks traded, in value.
Which of the following guarantees is offered to common stock investors?- Guaranteed to receive dividends- Guaranteed to receive capital gains- Guaranteed only to receive a refund of principal- No guarantees of any form No guarantees of any form
The variance of an investment’s returns is a measure of the:- volatility of the rates of return.- probability of a negative return.- historic return over long periods.- average value of the investment. volatility of the rates of return.
The appropriate opportunity cost of capital is the return that investors give up on alternative investments with:- the same risk.- the risk-free return.- the expected return on the S&P 500 index.- the normal, common stock risk premium. the same risk.
What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks?- The individual stock’s standard deviation will be lower.- The individual stock’s standard deviation will be higher.- The standard deviations should be equal.- There is no way to predict this relationship. The individual stock’s standard deviation will be higher.
The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:- offer higher returns.- have more systematic risk.- have no diversification of risk.- do not have unique risk. have no diversification of risk.
The benefits of portfolio diversification are highest when the individual securities have returns that:- vary directly with the rest of the portfolio.- vary proportionally with the rest of the portfolio.- are less than perfectly correlated with the rest of the portfolio.- are countercyclical. are less than perfectly correlated with the rest of the portfolio.
A firm is said to be countercyclical if its returns:- continue to decrease, year after year.- continue to increase, year after year.- are better when most firms do poorly.- are negative in real terms. are better when most firms do poorly.
Which of the following concerns is likely to be most important to portfolio investors seeking diversification?- Total volatility of individual securities- Standard deviation of individual securities- Correlation of returns between securities- Achieving the risk-free rate of return Correlation of returns between securities
Which of the following risks is most important to a well-diversified investor in common stocks?- Market risk- Unique risk- Idiosyncratic risk- Diversifiable risk Market risk
The risk premium that is offered on common stock is equal to the:- expected return on the stock.- real rate of return on the stock.- excess of expected return over a risk-free return.- expected return on the S&P 500 index. excess of expected return over a risk-free return.
Which of the following risk types can be diversified by adding stocks to a portfolio?- Systematic risk- Unique risk- Market risk- All of these Unique risk
The capital asset pricing model (CAPM) assumes that the stock market is dominated by well-diversified investors who are concerned only with market risk. True
If a low-risk company invests in a high-risk project, those cash flows should be discounted at a high cost of capital. True
Empirical evidence suggested that over a long period of time returns did indeed increase with beta. True
The beta of an investment in U.S. Treasury bills is:0.0.0.5.1.0.meaningless; only common stocks have betas. 0.0.
One of the easiest methods of diversifying away firm-specific risks is to:- buy only stocks with a beta of 1.0.- build a portfolio with 40 to 55 individual stocks.- purchase the shares of a mutual fund.- purchase stocks that plot above the security market line. purchase the shares of a mutual fund.
If a company with low credit rating invests in a low-risk project, it should discount the cash flows at a correspondingly high cost of capital. False
If Treasury bills yield 6.0% and the market risk premium is 9.0%, then a portfolio with a beta of 1.5 would be expected to yield:12.0%.17.0%.19.5%.21.5%.Expected return = 6.0% +1.5(9.0%) = 19.5% 19.5%.
If the slope of the line measuring a stock’s historic returns against the market’s historic returns is positive, then the stock:- has a beta greater than 1.0.- has no unique risk.- has a positive beta.- plots above the security market line. has a positive beta.
Based on the following information, make an estimate of the stock’s beta: Month 1 = Stock +1.5%, Market +1.1%; Month 2 = Stock +2.0%, Market +1.4%; Month 3 = Stock -2.5%, Market -2.0%.- Beta is greater than 1.0.- Beta is less than 1.0.- Beta equals 1.0.- There is no consistent pattern of returns. Beta is greater than 1.0.
The CAPM is a theory of the relationship between risk and return that states that the expected risk premium on any security equals its beta times the market return. False
Stock returns can be explained by the stock’s _________ and the stock’s _________.- beta; unique risk- beta; market risk- unique risk; firm-specific risk- aggressive risk; defensive risk beta; unique risk
What is the most logical explanation for a +2.0% return on a stock with a beta of 1.0 in a month where the market returned +1.0%?- The stock is aggressive.- The market is undervalued.- Favorable firm-specific news was reported.- The beta is incorrect. Favorable firm-specific news was reported.
If an investor’s portfolio is allocated 75% to the market portfolio and 25% to Treasury bills, then the investor should expect to receive:- the risk-free rate plus 75% of the expected return on the market.- the risk-free rate plus 75% of the expected market risk premium.- 75% of the expected return on the market.- 25% of the risk-free rate plus 75% of the expected market risk premium. the risk-free rate plus 75% of the expected market risk premium.
Which of the following statements is more likely to be correct concerning the statement, “Stock A has a higher expected return than stock B”?- Stock A has more unique risk.- Stock B plots below the security market line.- Stock B is a cyclical stock.- Stock A has a higher beta. Stock A has a higher beta.
The line plotted to fit observations of a stock’s returns versus the market’s returns determines the:- security market line.- beta of the stock.- market risk premium.- capital asset pricing model. beta of the stock.
When corporations need to raise funds through stock issues, they rely on the:- primary market.- secondary market.- tertiary market.- centralized NASDAQ exchange. primary market.
Which of the following is least liquid?- Foreign currency- U.S. Treasury bonds- Rare coins- Savings deposit Rare coins
Previously issued securities are traded among investors in the secondary markets. True
In 2010, U.S. corporate and foreign bonds totaled:- less than $500 billion.- about $3 trillion.- about $7 trillion.- more than $11 trillion. more than $11 trillion.
If a firm generates $2,600 in sales and has a $560 increase in accounts receivable during an accounting period, based on these two categories cash flow will increase by:$2,040.$2,600.$3,160.$560.Increase in cash flow = sales − increase in accounts receivable= $2,600 − $560 = $2,040 $2,040.
What is the marginal tax rate for a corporation with $96,000 taxable income and an average tax rate of 15% if the next-lowest marginal tax rate of 10% covers taxable incomes up to $50,000?10.00%16.50%15.00%20.43%$96,000 x .15 = $14,400Income $0 – $50,000 10% tax rate = $5,000 taxes$50,001 – $96,000 ? tax rate = $9,400 taxesSum of Taxes above = ($5,000 + $9,400) = $14,400Therefore, $14,400 × marginal tax rate = $9,400Marginal tax rate = 20.43%(which isn’t adding up by the way) 20.43%
A firm’s net profit margin when ignoring the effects of financing is 25% with an EBIT of $1.44 million and sales of $4.4 million. How much did the firm pay in taxes?$394,000$340,000$360,000$34,000net profit margin = (EBIT−taxes)/sales.25 = ($1.44 million − taxes) / $4.4 million$1.10 million = 1.44 million − taxestaxes = $.34 million $340,000
What is the book value per share for a firm with 1.4 million shares outstanding at a price of $44, a market-to-book ratio of .70, and a dividend payout ratio of 60%?$57.20$30.80$37.14$62.86Market-to-book ratio = stock price/book value per share.70 = $44/book value per shareBook value per share = $62.86 $62.86
Firms can alter their capital structure by:- not accepting any capital budgeting projects.- investing in intangible assets.- issuing stock to repay debt.- becoming a limited liability company. issuing stock to repay debt.
One corporate activity that is specifically reserved for the board of directors is the:- declaration of dividends.- custody of records.- preparation of budgets.- day-to-day operation of the firm. declaration of dividends.

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