Fin 589 Quiz 2

subject Type Homework Help
subject Pages 9
subject Words 973
subject Authors Edgar A. Norton, Ronald W. Melicher

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A firm's stock is expected to pay a $3 annual dividend next year, the current stock price
is $60, and the expected growth rate in dividends is 8%. Using the Gordon approach,
what is the expected return?
a. 5%
b. 8%
c. 13.4%
d. 13%
The National Banking Acts of 1863 and 1864 provided that:
a. national banks could issue their own notes only against U.S. government bonds the
banks held on deposit with the Treasury
b. national banks could issue their own notes only against cash held in their vaults
c. national banks could issue their own notes only against U.S. government bonds the
banks held on deposit with the Federal Reserve Bank
d. none of the above
Between 1928 and 2008, the average annual return on common stocks averaged _____
%, while the average annual return on Treasury bonds averaged _____%.
a. 11.1, 5.4
b. 11.1, 3.8
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c. 11.1, 3.2
d. none of the above
A (n) ________ in current liabilities ________ net working capital, thereby ________
the risk of technical insolvency.
a. decrease; increases; increasing
b. decrease; decreases; reducing
c. increase; decreases; increasing
d. increase; increases; reducing
The attitude of central banks and commercial banks toward bankers' acceptances:
a. has been favorable regarding bankers' acceptances as attractive short-term
commitments
b. has never been constructive and has, in fact, been in opposition to their use at times
c. is one of approval provided that before investing in such instruments guarantees can
be obtained from the Export-Import Bank
d. is irrelevant, since they are prevented from investing in such instruments by
regulations or laws
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Which of the following statements is most correct?
a. The variance of a portfolio is a weighted average of asset variances.
b. The benefits of diversification are greatest when asset returns have zero correlations.
c. The market portfolio truly eliminates all unsystematic risk.
d. eta is the measure of an asset's unsystematic risk.
Positive NPV projects may originate from cost saving projects such as those that
a. create economies of scale.
b. generate absolute cost advantages.
c. exploit advantages in distribution channels.
d. all of the above statements are correct
Travelers' checks are included in which of the following money supply definitions?
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a. M1
b. M2
c. M3
d. all of the above
The effective annual interest rate on a loan in which a company borrows $1,000,000 for
one year at 8 percent and requires a compensating balance of 20 percent is:
a. 8.5%
b. 9.5%
c. 10%
d. 28%
e. none of the above
The seller of an option contract is called a (n) ____________ and the price paid for the
option itself is the called the ___________.
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a. option broker, option price
b. sales agent, call option
c. sales agent, option premium
d. option writer, option price
e. none of the above.
The Federal Reserve System and the New York Stock Exchange regulations currently
require the short seller to have an initial margin of at least _______ of the price of the
stock:
a. 10%
b. 25%
c. 30%
d. 50%
Which of the following is not a component of the Gordon (or constant dividend growth
rate) model for valuing stocks?
a. next year's expected dividend
b. a constant dividend growth rate
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c. next year's expected earnings
d. a discount rate that reflects the riskiness of the stock
Capital market securities include all of the following EXCEPT:
a. Corporate bond
b. Treasury bond
c. Certificate of deposit
d. Common Stock
e. Municipal bond
What is the most important overall source of short-term business financing both in the
U.S. and worldwide?
a. lines of credit
b. trade credit
c. notes
d. commercial paper
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Commercial banks are aggressive and often assume large amounts of risk.
An effective financial system must have:
1. several sets of policy makers who pass laws and make decisions relating to fiscal
and monetary policies
2. an efficient monetary system for creating and transferring money
3. financial markets that facilitate the transfer of financial assets amongst individuals,
institutions, and businesses
4. all of the above
5.
The bank holding company may not engage in direct banking activities.
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Years of budget surpluses during the Reagan and first Bush presidencies changed into
deficits under the Clinton presidency.
Investment companies sell shares in their firms to individuals and invest the pooled
proceeds in corporate and government securities.
A savings deficit occurs when investment in real assets exceeds current income.
The size of the accounts payable is affected by the level of the firm's cost of goods sold
and the average payment period.
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5. Under a best-effort agreement, investment bankers try to sell the securities of the
issuing corporation, but they assume no risk for a possible failure of the flotation.
Mutually exclusive projects are projects that are not in direct competition with one
another.
An underwriting agreement is a contract in which the investment banker agrees to do its
best to sell securities to investors at the highest price it can; the investment banker
assumes no risk for the possibility that it may fail to issue all authorized shares .

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