The risk associated with dispersion around an expected value (e.g., expected return) is
measured by the
a. beta coefficient
b. range (i.e., high-low values)
c. standard deviation
d. debt to total assets (i.e., the debt ratio)
A diversified portfolio
a. increases systematic risk
b. reduces systematic risk
c. increases unsystematic risk
d. reduces unsystematic risk
An increase in the average collection period implies
a. an increase in inventory
b. receivables turn into cash more rapidly
c. receivables turn into cash more slowly
d. the price of the product has been reduced
Dividend reinvestment plans are
a. a convenient means to accumulate shares
b. a means to defer federal income taxes on the dividends
c. available only if the corporation distributes stock dividends
d. more expensive than buying the stock through brokers
When a commercial bank receives a cash deposit,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
The optimal economic order quantity depend on
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
The individual (or firm) who makes a market
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
The term structure of interest rates indicates the
a. relationship between risk and yields
b. relationship between the time and yields
c. the difference between borrowing and lending
d. the difference between the yield (interest rate) on government and corporate debt
A financial intermediary transfers
a. savings to households
b. savings to borrowers
c. stocks to brokers
d. new stock issues to buyers
The New York Stock Exchange
a. is a financial intermediary
b. is a secondary market
c. transfers funds to businesses
d. forbids buying stock on margin
According to the dividend-growth model, the value of a stock does not depend on
a. future dividends
b. past dividends
c. future growth
d. investors’ required rate of return
A three-month call option with a strike price of $30 is currently selling for $4 when the
price of the underlying stock is selling for $32.
a. What is the call’s intrinsic value?
b. What is the time premium?
c. What is the maximum possible loss to the buyer of the call?
d. What is the maximum possible profit to the seller of the option?
e. Would you buy the call if you expected the price of the stock to fall?
Three months later the stock is selling for $39.
If the numerical value of the VIX rises,
a. investor fear has diminished
b. investors are becoming more complacent
c. securities prices are more volatile
d. yields on securities have increased
If a term loan requires equal annual payments that retire the loan and pay the interest,
that is similar to
a. lease payments
b. mortgage payments
c. dividend payments
d. a sinking fund
A firm with excess cash needs the funds for a payment after two months, the funds
should not be invested in
a. commercial paper and repurchase agreements
b. Treasury bills and Treasury bonds
c. negotiable certificates and Treasury bills
d. bankers’ acceptances and commercial paper
Studies of rates of return on large stocks suggest
a. the average return is about 7.4 percent annually
b. over a period of years, the rate is approximately 10 percent
c. equity investors rarely sustain losses
d. dividends account for over half the return
M-2 includes
a. 1 and 2
b. 2 and 3
c. 1 and 3
d. all three
According to the risk-adjusted net present value, an investment should be made if
a. the net present value is positive
b. the internal rate of return is positive
c. the cost of capital is positive
d. the cost of equity is positive
A company may pay
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Generally it is not wise to use
a. long-term debt to finance long-term assets
b. short-term debt to finance long-term assets
c. long-term debt to finance short-term assets
d. short-term debt to finance short-term assets
The retention of earnings instead of paying dividends
a. may result in greater growth and higher prices
b. is advantageous for all stockholders
c. is favored by stockholders in lower income tax brackets
d. leads to lower future dividends
Performance is measured by
a. liquidity ratios
b. leverage ratios
c. profitability ratios
d. turnover ratios
As the price of common stock rises,
a. the value of convertible bonds and convertible preferred stock declines
b. the value of convertible bonds falls but convertible stock rises
c. the value of convertible bonds rises but convertible preferred stock falls
d. the value of convertible bonds and convertible preferred stock rises
Withdrawing cash from a checking account does not decrease
a. the money supply
b. demand deposits
c. total reserves
d. excess reserves
If the initial offer price for new securities is too high, the underwriters may
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
A firm may obtain financial leverage by
a. 1 and 2
b. 1 and 3
c. 2 and 4
d. 3 and 4
This problem concerns the choice between owning and leasing.
The structure of the Federal Reserve includes
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
A new issue of bonds is
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
The cost of debt is
a. less than the cost of equity
b. greater than the cost of equity
c. equal to the firm’s interest rate
d. greater than the cost of preferred stock
The internal rate of return will be higher if
a. the cost of capital is lower
b. the cost of the investment is higher
c. the cost of the investment is lower
d. the cost of capital is higher
The more rapidly receivables turn over
a. the more rapidly the firm is receiving cash
b. the larger are the firm’s sales
c. the smaller is the firm’s inventory
d. the larger are the firm’s accounts payable
Naked option writing is more risky than covered call option writing.
Purchasing a put is similar to selling a stock short. Both positions anticipate that the
price of the stock will fall.
Commercial paper is usually secured by inventory.
You are offered two jobs. One initially pays $25,000 annually, and your salary will
grow annually at 10%. The other pays $22,000 annually, but your salary will grow at
12%. After 10 years, which job pays the higher salary?
Operating leases are examples of off-the-balance-sheet financing.
An increase in the required return on the market will tend to decrease stock prices.
An annuity offers $1,000 for 10 years. If you can earn 12 percent annually on your
funds, what is the maximum amount you should pay for this annuity?
The required return for an investment in a stock increases if the firm’s beta declines.
The matching principle suggests that long-term assets should not be financed with
short-term sources.
The International Monetary Fund is the global central bank that controls international
interest rates.
Depreciation expense produces a cash outflow of funds, because it reduces the firm’s
earnings.
Arrearage means that a cumulative preferred stock’s dividend is not being paid.
If a lease is capitalized, the liability is carried on the lessor’s balance sheet.
If a firm’s optimal capital structure is 45 percent debt financing, then the firm may
borrow $55 for every $45 of equity financing.
Cumulative voting concentrates voting power in the hands of a majority of corporate
voters.
A firm with the following investment opportunities has a capital budget of $10,000.
According to the net present value technique, which investment(s) should the firm make
if the firm’s cost of capital is 10%?
The net present value of an investment cannot be negative.