A fruit company has 20% returns in periods of normal rainfall and -3% returns in
droughts. The probability of normal rainfall is 60% and droughts 40%. What would the
fruit company’s expected returns be?
a. 24%
b. 10.8%
c. 0
d. cannot determine from the information given
____________ is money, debt instruments, equity securities, and other financial
contracts that are backed by real assets and the earning abilities of issuers.
a. financial assets
b. real assets
c. government investments
d. all of the above
e. none of the above
According to the definitions given in the text, if Stock A has a standard deviation of 4%
and expected returns of 9%, and Stock B has a standard deviation of 3% and returns of
1%, which stock is riskier?
a. Stock A
b. Stock B
c. they are equally risky
d. cannot determine from the information given
All of the following statements are correct except:
a. Relevant cash flows are incremental after-tax cash flows, which must be discounted
using an incremental after-tax cost of capital.
b. The firm’s relevant cost of capital is computed from after-tax financing costs.
c. A project’s incremental cash flows must be discounted at a cost of capital that
represents the incremental or marginal cost to the firm of financing the project, that is,
the cost of raising one additional dollar of capital.
d. In estimating the cost of capital, the firm’s analysts need to evaluate investors’
expected returns under likely market conditions and then use these expected returns to
compute the firm’s marginal future cost of raising funds.
e. All of the above statements are correct.
Which one of the following types of financial ratios does not get all of its information
from a firm’s income statements and balance sheets?
a. liquidity ratios
b. asset management ratios
c. capital structure ratios
d. profitability ratios
e. market value ratios
Owners’ equity may include:
a. par value of the common stock
b. retained earnings
c. capital paid in excess of par account
d. all the above
e. none of the above
In 1989, the Financial Institution Reform, Recovery and Enforcement Act provided for
all but which of the following?
a. strengthening the federal deposit insurance programs
b. the creation of the Resolution Trust Corporation
c. enhanced enforcing powers
d. stronger capital standards for thrift institutions
The federal debt is owned primarily by:
a. foreign and international investors
b. commercial banks
c. insurance companies
d. the sum of all private investors
The largest annual supply of external funds for business corporations comes from
issuance of which one of the following sources?
a. privately placed stocks
b. bonds
c. preferred stocks
d. common stocks
In purchasing a claim to foreign exchange:
a. it is necessary only to go to a local bank
b. a permit must first be received from a Federal Reserve Bank
c. a bank specializing in foreign exchange must be contacted
d. a cable, telephone call, or letter must be directed to a foreign bank
The Fed would be practicing contractionary monetary policy if, through open market
operations, it is a net seller of government securities.
Savings are impacted only by cyclical movements in the economy.
No other asset is as liquid as money, because money is itself, a medium of eXchange.
Credit risk is another term for default risk.
Speculative inflation is caused by the expectation that prices will continue to rise,
resulting in increased buying to avoid even higher future prices.