2/10, n30 implies
a. a 10% discount if the bill is paid in 30 days
b. a 2% discount if the bill is paid in 30 days
c. a 10% discount if the bill is paid in 10 days
d. a 2% discount if the bill is paid in 10 days
If the federal government runs a surplus,
a. expenditures exceed taxes
b. receipts exceed disbursements
c. debt must be issued
d. the Federal Reserve buys bonds
The members of the Board of Governors are
a. elected by the member banks
b. appointed by the Senate
c. appointed by the President of the United States
d. elected by the Federal Open Market Committee
Recession is a period of
a. declining prices
b. declining employment
c. declining unemployment
d. rising interest rates
Two stocks each pay a $1 dividend that is growing annually at 8 percent. Stock A’s beta
= 1.3; stock B’s beta = 0.8.
a. Which stock is more volatile?
b. If Treasury bills yield 9 percent and you expect the market to rise by 13 percent, what
is your risk-adjusted required return for each stock?
c. Using the dividend-growth model, what is the maximum price you would be willing
to pay for each stock?
d. Why are their valuations different?
The value of a convertible bond as stock depends in part upon
a. interest rates
b. the maturity date
c. the exercise price
d. the call penalty
Flotation costs of issuing new securities
a. decrease the cost of capital
b. encourage the retention of earnings
c. encourage external financing
d. do not affect the cost of capital
If interest rates rise, a firm may retire a bond issue by
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 2
According to the dividend-growth model, the value of a common stock depends on
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all three
Retained earnings
a. have no cost
b. are the firm’s cheapest source of funds
c. have a cost that equals the cost of capital
d. are cheaper than the cost of new common stock
Management may prefer not paying dividends to
a. reduce corporate income taxes
b. finance growth and increase the value of their shares
c. use the money to reduce investments in assets
d. increase the firm’s liabilities
Term loans are
a. usually for twenty years
b. generally lack collateral (i.e., unsecured)
c. made by insurance companies
d. short-term obligations
Entering a sell order at $18.50 when the bid is 18-19
a. is a market order
b. illustrates a short sale
c. requires a margin payment
d. is a limit order
The volatility index (VIX)
a. is derived from stock valuations
b. combines stocks and call options
c. combines bonds and put options
d. is derived from put and call index options
A firm should not make an investment if the internal rate of return is
a. greater than the cost of capital
b. less than the cost of capital
c. greater than the interest rate
d. less than the interest rate
Higher fixed costs are associated with
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
The value of a stock should decline if
a. the risk-free rate declines
b. the return on the market declines
c. the firm’s beta rises
d. the earnings multiple rises
The effective cost of credit depends upon
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Commercial banks may borrow reserves from each other in the
a. reserves market
b. stock market
c. bank market
d. federal funds market
If a lender agrees to lend a firm $1,000,000 after six months at the going rate, that
individual can hedge against the loss from a decline in interest rates by
a. buying a financial futures contract
b. selling a financial futures contract
c. taking a short position
d. making the loan now
Stock repurchases
a. increase per share earnings
b. decrease per share earnings
c. increase liabilities
d. decrease liabilities
If the federal government runs a deficit,
a. taxes exceed expenditures
b. expenditures exceed taxes
c. receipts exceed taxes
d. taxes exceed revenues
When risk analysis is introduced into the dividend growth model, the required rate of
return considers
a. the firm’s growth rate
b. the firm’s dividend
c. the firm’s beta coefficient
d. the firm’s past dividends
Features of a term loan include
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 2
If commercial banks grant loans,
a. the money supply is increased
b. total reserves are increased
c. excess reserves are increased
d. the money supply is reduced
The risk-adjusted required rate of return excludes
a. the stock’s standard deviation
b. the stock’s beta
c. the risk-free rate
d. the anticipated return on the market
A financial lease is similar to an operating lease, since
a. the firm owns the asset
b. the lease contract lacks a maintenance clause
c. the lessor owns the asset
d. the lease may not be canceled
If interest rates rise after a bond is issued,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
If interest rates rise,
a. the future value of a dollar declines
b. the present value of a dollar rises
c. the present value of an annuity falls
d. the future value of an annuity falls
The tools of monetary policy include
a. open market operations
b. the purchase of corporate stock
c. the federal government deficit
d. taxation
Sources of risk include
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all three
According to accountants, assets should be recorded at
a. the selling price
b. the market value
c. the lower of market value or cost
d. the cost of the asset
The present value of a dollar
1) is larger the longer the time period
2) is larger the shorter the time period
3) is larger the greater the interest rate
4) is larger the smaller the interest rate
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
The optimal capital structure is the firm’s best combination of debt and equity funds.
Writers of call options anticipate earning the time premium the call demands.
Under a system of fluctuating exchange rates, a currency will depreciate if supply
exceeds the demand for the currency.
Realized returns frequently differ from expected returns.
The dividend-growth model may be applied only if it is assumed that the growth in
dividends will be constant.
Corporate bylaws specify the relationship between the corporation and a state.
The current yield considers not only the interest paid but also any price change during
the current year.
The shares of mutual funds cannot sell for a discount from their net asset value.
Leverage ratios indicate the extent to which the firm uses debt financing.
If interest rates rise after a bond is issued, the yield to maturity will exceed the current
yield.
An investment banker specializes in corporate loans.
Persons owning stock on the day a dividend is declared receive the dividend.
Regression analysis assumes that equity as a percent of total assets is fixed.
It takes longer than 8 years to retire a $24,000 loan at 8% if the annual payment is
$3,000.
Risk adjustments favor the use of net present value over the internal rate of return.