Front Back
Which one of the following types of securities has no priority in a bankruptcy proceeding? Convertible bond Senior debt Common stock Preferred stock Straight bond
Common Stock
Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred? Cumulative common Noncumulative common Noncumulative preferred Cumulative preferred Senior commo…
Cumulative Preferred
Newly issued securities are sold to investors in which one of the following markets? -Proxy -Stated value -Inside -Secondary -Primary
Primary
An agent who buys and sells securities from inventory is called a: floor trader. dealer. commission broker. broker. floor broker.
Dealer
A broker is an agent who: -trades on the floor of an exchange for himself or herself. -buys and sells from inventory. -offers new securities for sale to dealers only. -who is ready to buy or sell at any time. -brings buyers and sellers together.
Brings buyers and sellers together
A specialist is a(n): -employee who executes orders to buy and sell for clients of his or her brokerage firm. -individual who trades on the floor of an exchange for his or her personal account. -NYSE member who functions as a dealer for a limited number of securities. -broker who bu…
NYSE member who functions as a dealer for a limited number of securities
Inside quotes are defined as the: -bid and asked prices presented by NYSE specialists. -last bid and asked price offered prior to the market close. -lowest asked and highest bid offers. -daily opening bid and asked quotes. -last traded bid and asked prices.
Lowest asked and highest bid offers
Which one of the following defines the internal rate of return for a project? -Discount rate that creates a zero cash flow from assets -Discount rate which results in a zero net present value for the project -Discount rate which results in a net present value equal to the project's i…
Discount rate which results in a zero net present values for the project.
Which one of the following indicates that a project is expected to create value for its owners? -Profitability index less than 1.0 -Payback period greater than the requirement -Positive net present value -Positive average accounting rate of return -Internal rate of return that is l…
Positive net present value.
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? -Payback -Profitability index -Accounting rate of return -Internal rate of return -Net present value
Net present value.
Which one of the following methods of analysis ignores cash flows? -Profitability index -Net present value -Average accounting return -Modified internal rate of return -Internal rate of return
Average accounting return.
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? -Internal rate of return -Profitability index -Average accounting return -Net present value -Payback
Average accounting return.
An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? -The internal rate of return exceeds the required rate of return. -The investment never pays back. -The net present value is equal to zero. -The average a…
The net present value is equal to zero.
The profitability index reflects the value created per dollar: -invested. -of sales. -of net income. -of taxable income. -of shareholders' equity.
Invested
Which one of the following statements is correct? -The internal rate of return is the most reliable method of analysis for any type of investment decision. -The payback method is biased towards short-term projects. -The modified internal rate of return is most useful when projects ar…
The payback method is biased towards short-term projects.
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following? -Eroded cash flows -Deviated projections -Incremental cash flows -Directly impacted flows -Assumed flows
Incremental cash flows.
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost? -Fixed -Forgotten -Variable -Opportunity -Sunk
Sunk
Which one of the following terms refers to the best option that was foregone when a particular investment is selected? -Side effect -Erosion -Sunk cost -Opportunity cost -Marginal cost
Opportunity cost.
Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project? -Opportunity cost -Sunk cost -Erosion -Replicated flows -Pirated flows
Erosion
Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of eight years. -New tires that will be purchased this winter -Costs of repairs n…
Money spent last month repairing a damaged front fender.
The managers of H.R Construction are considering remodeling plans for an old building the firm currently owns. The building was purchased 8 years ago for $689,000. Over the past 8 years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned …
I, II, and IV only
Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Mark conducting? -Sensitivity analysis -Erosion planning -Scenario analysis -Cost-benefit analysis -Opportunity cost a…
Sensitivity analysis.
Scenario analysis: -determines the impact a $1 change in sales has on the internal rate of return. -determines which variable has the greatest impact on a project's net present value. -helps determine the reasonable range of expectations for a project's anticipated outcome. -evaluat…
Helps determine the reasonable range of expectations for a project's anticipated outcome.
Sensitivity analysis: -looks at the most reasonably optimistic and pessimistic results for a project. -helps identify the variable within a project that presents the greatest forecasting risk. -is used for projects that cannot be analyzed by scenario analysis because the cash flows a…
Helps identify the variable within a project that presents the greatest forecasting risk.
Which one of the following refers to the option to expand into related businesses in the future? -Strategic option -Contingency option -Soft rationing -Hard rationing -Capital rationing option
Strategic option
Turner Industries started a new project three months ago. Sales arising from this project are exceeding all expectations. Given this, which one of the following is management most apt to implement? -Option to wait -Soft rationing -Strategic option -Option to abandon -Option to expa…
Option to expand
Ignoring the option to wait: -may overestimate the internal rate of return on a project. -may underestimate the net present value of a project. -ignores the ability of a manager to increase output after a project has been implemented. -is the same as ignoring all strategic options. …
May underestimate the net present value of a project.
Which of the following have the potential to increase the net present value of a proposed investment? I. ability to immediately shut down a project should the project become unprofitable II. ability to wait until the economy improves before making the investment III. option to place th…
I, II, III, and IV
Marcos Enterprises has three separate divisions. The firm allocates each division $1.5 million per year for capital purchases. Which one of the following terms applies to this allocation process? -Soft rationing -Hard rationing -Opportunity cost -Sunk cost -Strategic planning
Soft rationing
The Blackwell Group is unable to obtain financing for any new projects under any circumstances. Which term best applies to this situation? -Contingency planning -Soft rationing -Hard rationing -Sensitivity analysis -Scenario analysis
Hard rationing.
Which one of the following is defined as the average compound return earned per year over a multiyear period? -Geometric average return -Variance of returns -Standard deviation of returns -Arithmetic average return -Normal distribution of returns
Geometric average return.
Which one of the following best describes an arithmetic average return? -Total return divided by N - 1, where N equals the number of individual returns -Average compound return earned per year over a multiyear period -Total compound return divided by the number of individual returns …
Return earned in an average year over a multiyear period.
An efficient capital market is best defined as a market in which security prices reflect which one of the following? -Current inflation -A risk premium -Available information -The historical arithmetic rate of return -The historical geometric rate of return
Available information
Over the period of 1926-2008: -the risk premium on large-company stocks was greater than the risk premium on small- company stocks. -U.S. Treasury bills had a risk premium that was just slightly over 2 percent. -the risk premium on long-term government bonds was zero percent. -the r…
The risk premium on stocks exceeded the risk premium on bonds.
Which one of the following statements is correct? -The risk-free rate of return has a risk premium of 1.0. -The reward for bearing risk is called the standard deviation. -Risks and expected return are inversely related. -The higher the expected rate of return, the wider the distribu…
The higher the expected rate of return, the wider the distribution of returns.
Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2008? -U.S. Treasury bills -Large-company stocks -Long-term government debt -Small-company stocks -Long-term corporate debt
Small-company stocks.
Which one of the following categories has the widest frequency distribution of returns for the period 1926-2008? -Small-company stocks -U.S. Treasury bills -Long-term government bonds -Inflation -Large-company stock
Small company stocks.
New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficien…
The price of New Labs stock increases rapidly to a higher price and the remains at that price.
If the financial markets are efficient then: -stock prices should remain constant. -stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets. -an increase in the value of one security should be offset by a decrease in t…
Stock prices should only respond to unexpected news and events.
Semi-strong form market efficiency states that the value of a security is based on: -all public and private information. -historical information only. -all publicly available information. -all publicly available information plus any data that can be gathered from insider trading. -…
All publicly available information.
If the financial markets are semi-strong form efficient, then: -only the most talented analysts can determine the true value of a security. -only individuals with private information have a marketplace advantage. -technical analysis provides the best tool to use to gain a marketplace…
Only individuals with private information have a marketplace advantage.
Which one of the following describes systemic risk? -Risk that affects a large number of assets -An individual security's total risk -Diversifiable risk -Asset specific risk -Risk unique to a firm's management
Risk that affects a large number of assets
Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk? -Systematic -Unsystematic -Diversification -Security market line -Capital asset pricing model
Diversification
The systematic risk principle states that the expected return on a risky asset depends only on which one of the following? -Unique risk -Diversifiable risk -Asset-specific risk -Market risk -Unsystematic risk
Market risk
The security market line is a linear function which is graphed by plotting data points based on the relationship between which two of the following variables? -Risk-free rate and beta -Market rate of return and beta -Market rate of return and the risk-free rate -Risk-free rate and t…
Expected return and beta
Which one of the following is the slope of the security market line? -Risk-free rate -Market risk premium -Beta coefficient -Risk premium on an individual asset -Market rate of return
Market risk premium
Which one of the following is an example of systematic risk? -Major layoff by a regional manufacturer of power boats -Increase in consumption created by a reduction in personal tax rates -Surprise firing of a firm's chief financial officer -Closure of a major retail chain of stores …
Increase in consumption created by a reduction in personal tax rates.
Standard deviation measures _____ risk while beta measures _____ risk. -systematic; unsystematic -unsystematic; systematic -total; unsystematic -total; systematic -asset-specific; market
total; systematic
Which one of the following best exemplifies unsystematic risk? -Unexpected economic collapse -Unexpected increase in interest rates -Unexpected increase in the variable costs for a firm -Sudden decrease in inflation -Expected increase in tax rates
Unexpected increase in the variable costs for a firm.
The risk premium for an individual security is based on which one of the following types of risk? -Total -Surprise -Diversifiable -Systematic -Unsystematic
Systematic
Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security? -Security beta multiplied by the market rate of return -Market risk premium -Security beta multiplied by t…
Zero
Portfolio diversification eliminates which one of the following? -Total investment risk -Portfolio risk premium -Market risk -Unsystematic risk -Reward for bearing risk
Unsystematic risk
The beta of a risky portfolio (assuming no borrowing or shortselling) cannot be less than _____ nor greater than _____. -0; 1 -1; the market beta -the lowest individual beta in the portfolio; market beta -the market beta; the highest individual beta in the portfolio -the lowest ind…
The lowest individual beta in the portfolio; the highest individual beta in the portfolio.
Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio: -for the portfolio must equal 1.0. -for the portfolio must be less than the market risk premium. -for each security must equal zero. -of each security is equal to …
Of each security must equal the slope of the security market line.
Based on the capital asset pricing model, investors are compensated based on which of the following? I. market risk premium II. portfolio standard deviation III. portfolio beta IV. risk-free rate -I and III only -II and IV only -I, II, and III only -I, III, and IV only -I, II, …
I, III, and IV only
Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision? -Amount of debt used to finance the project -Use, or lack thereof, of preferred stock to finance the project -Mix of funds used…
Risk level of the project.
Which of the following are weaknesses of the dividend growth model? I. market risk premium fluctuations II. lack of dividends for some firms III. reliance on historical beta IV. sensitivity of model to dividend growth rate -II only -I and II only -I and III only -II and IV only …
II and IV only
All else constant, which of the following will increase the aftertax cost of debt for a firm? I. increase in the yield to maturity of the firm's outstanding debt II. decrease in the yield to maturity of the firm's outstanding debt III. increase in the firm's tax rate IV. decrease in t…
I and IV only
Which one of the following is the pre-tax cost of debt? -Average coupon rate on the firm's outstanding bonds -Coupon rate on the firm's latest bond issue -Weighted average yield-to-maturity on the firm's outstanding debt -Average current yield on the firm's outstanding debt -Annual…
Weighted average yield-to-maturity on the firm's outstanding debt.
The cost of preferred stock: -increases when a firm's tax rate decreases. -is constant over time. -is unaffected by changes in the market price. -is equal to the stock's dividend yield. -increases as the price of the stock increases.
Is equal to the stock's dividend yield.
Which one of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities? -Cost of equity -Internal rate of return -Aftertax cost of debt -Weighted average cost of capital -Debt-equity ratio
Weighted average cost of capital.
Which one of the following statements is correct, all else held constant? -Beta is used to compute the return on equity and the standard deviation is used to compute the return on preferred. -A decrease in a firm's WACC will increase the attractiveness of the firm's investment options…
A decrease in a firm's WACC will increase the attractiveness of the firm's investment options.
A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, and an aftertax cost of debt of 6 percent. Given this, which one of the following will increase the firm's weighted average cost of capital? -Increasing the firm's tax rate -Issuing new bonds at par -Redeem…
Increasing the firm's beta.
Old Town Industries has three divisions. Division X has been in existence the longest and has the most stable sales. Division Y has been in existence for five years and is slightly less risky than the overall firm. Division Z is the research and development side of the business. When allo…
Assign the highest cost of capital to division Z because it is most likely the riskiest of the three divisions.
A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. By doing so, the firm: -automatically gives preferential treatment in the allocation of funds to its riskiest division. -encourages the division managers to only recomm…
Automatically gives preferential treatment in the allocation of funds to its riskiest division.
Boone Brothers remodels homes and replaces windows. Ace Builders constructs new homes. If Boone Brothers considers expanding into new home construction, it should evaluate the expansion project using which one of the following as the required return for the project? -Boone Brothers' co…
Ace Builder's cost of capital.

Access the best Study Guides, Lecture Notes and Practice Exams

Login

Join to view and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?