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Flashcards in Textbook concept questions Deck (47)
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1
Q
The systematic risk of the market is represented by:
A beta of 0.0.
A beta of 1.0.
A standard deviation of 1.0.
A variance of 1.0.
A standard deviation of 0.0.
A

A beta of 1.0.

2
Q

Which of the following best defines the term overallotment option?
Allows shareholders to purchase unsubscribed shares in a rights offering at the subscription price.
A company’s first equity issue made available to the public. Also an unseasoned new issue.
The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock.
Loans, usually long term in nature, provided directly by a limited number of investors.
An underwriting provision that permits syndicate members to purchase additional shares at the original offering price.

A

An underwriting provision that permits syndicate members to purchase additional shares at the original offering price.

3
Q

The secondary market is:
a The market for the original sale of securities by governments and corporations.
b The market in which securities are bought and sold after original sale.
c The market in which dealers buy and sell for themselves, at their own risk.
d The market in which purchasers are matched with those who wish to sell.
e A market which has no central Location.

A

b

The market in which securities are bought and sold after original sale.

4
Q

Which one of the following statements is correct concerning the differences between preferred and common stock?
a Common stock is a form of equity while preferred stock is a form of debt from a legal standpoint.
b Common shareholders generally have more control over a corporation than preferred shareholders.
c Preferred shares carry voting rights while common shares do not.
d Common shareholders have first right of priority after creditors in liquidation.
e Common dividends in arrearage must be paid prior to any additional preferred stock dividends.

A

b

Common shareholders generally have more control over a corporation than preferred shareholders.

5
Q
Working capital management refers to:
The types of stock issued.
The amount of Long-term debt.
The levels of cash and inventory held.
The types of Long-term investments made.
The mixture of debt and equity.
A

The mixture of debt and equity.

6
Q

From a tax-paying investor’s point of view, a stock repurchase:
Creates a tax liability even if investors do not sell any of the shares they own.
Is more desirable than a cash dividend.
Is equivalent to a cash dividend.
Is more highly taxed than a cash dividend.
Has the same tax effects as a cash dividend.Is more desirable than a cash dividend.

A

Is more desirable than a cash dividend.

7
Q

The residual dividend approach is defined as the policy of paying dividends:
Only if excess funds remain after the net working capital requirements of the firm have been met while maintaining a constant debt-equity ratio.
Only after all the cash needs of the firm have been met and the debt-equity ratio has been reduced to zero.
Based on the operating cash flows which remain after all expenses and taxes have been paid.
Equal to the after-tax proceeds from the sale of a portion of the business entity.
Only after the investment needs of the firm are met while maintaining a constant debt-equity ratio.

A

Only after the investment needs of the firm are met while maintaining a constant debt-equity ratio.

8
Q

Which one of the following statements concerning bond ratings is correct?
Investment grade bonds include only those bonds receiving one of the highest three bond ratings.
Bond ratings are solely an assessment of the creditworthiness of the bond issuer.
Bond ratings evaluate the expected price volatility of a bond issue.
All bonds receive the same rating classification from all rating agencies.
Standard and Poor’s and Value Line are the primary bond rating agencies.

A

Bond ratings are solely an assessment of the creditworthiness of the bond issuer.

9
Q

Which of the following best defines the term lockup agreement?
A company’s first equity issue made available to the public. Also an unseasoned new issue.
Allows shareholders to purchase unsubscribed shares in a rights offering at the subscription price.
An underwriting provision that permits syndicate members to purchase additional shares at the original offering price.
Loans, usually long term in nature, provided directly by a limited number of investors.
The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock.

A

The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock.

10
Q
You have discovered from looking at charts of past stock prices that if you buy just after a stock price has declined for three consecutive days, you make money every time! This is a violation of \_\_\_\_\_\_\_\_ market efficiency.
semi-strong form
strong form
weak form
TSX stock
semi-weak form
A

weak form

11
Q

Individuals that continually monitor the financial markets seeking mispriced securities:
a Tend to make substantial profits on a daily basis.
b Are never able to find a security that is temporarily mispriced.
c Tend to make the markets more efficient.
d Are always quite successful using only well-known public information as their basis of evaluation.
e Are always quite successful using only historical price information as their basis of evaluation.

A

Tend to make the markets more efficient.

12
Q

The risk premium for an individual security is computed by:
Dividing the market risk premium by the beta of the security.
Adding the risk-free rate to the security’s expected return.
Multiplying the security’s beta by the risk-free rate of return.
Multiplying the security’s beta by the market risk premium.
Dividing the market risk premium by the quantity (1 - beta).

A

Multiplying the security’s beta by the risk-free rate of return.

13
Q

Which of the following is a possible motivation for a reverse stock split?
Avoid falling below the minimum listing requirements of a stock exchange.
Force out minority shareholders.
Decrease the stock price and, thereby, increase the stock’s marketability.
Increase the transaction costs of shareholders.
Decrease the book value of the stock.

A

Avoid falling below the minimum listing requirements of a stock exchange.

14
Q

Which of the following is the best definition for the concept of efficient capital market?
The hypothesis is that actual capital markets are efficient.
The excess return required from an investment in a risky asset over a risk-free investment.
A symmetric, bell-shaped frequency distribution that can be defined by its mean and standard deviation.
The average compound return earned per year over a multi-year period.
Market in which security prices reflect available information.

A

Market in which security prices reflect available information.

15
Q
The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.
Date of declaration.
Date of ex-rights.
Date of payment.
Date of record.
Date of ex-dividend.
A

Date of record.

16
Q

Which of the following best defines the term venture capital?
Underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility.
A group of underwriters formed to reduce the risk and help to sell an issue.
Financing for new, often high-risk ventures.
Direct business loans of, typically, one to five years.
Loans made by a group of banks or other institutions.

A

Financing for new, often high-risk ventures.

17
Q
Diversifiable risks:
Affect the entire market.
Are measured by beta.
Are rewarded in the market place.
Are also referred to as unique risks.
Are systematic in nature.
A

Are also referred to as unique risks.

18
Q
If investors are uncertain that a corporate bond issuer will make all of the bond payments as promised, the investors will demand a higher yield in the form of:
An increased interest rate risk premium.
An increased liquidity risk premium.
An increased inflation premium.
An increased default risk premium.
An increased real rate of interest.
A

An increased default risk premium.

19
Q

The best definition of corporate governance is:
a The possibility of conflicts between shareholders and management in a large corporation.
b The manner in which shareholders agree on corporate capital structure.
c The process of planning and managing a firm’s long-term investments.
d The mechanisms and processes by which corporations are directed and controlled.
e The actions that are deemed as socially responsible.

A

c

The process of planning and managing a firm’s long-term investments.

20
Q
The market's reaction to the announcement of a change in the firm's dividend payout is the:
Clientele effect.
M&M Proposition I.
M&M Proposition II.
Information content effect.
Efficient Markets Hypothesis.
A

Information content effect.

21
Q

If an underwriter buys securities from an issuing firm and sells them directly to a small number of investors, the underwriter has:
A bought deal.
Used best efforts underwriting.
A firm commitment offer.
A larger bid-ask spread on the securities.
Used regular underwriting to sell the securities.

A

A bought deal.

22
Q

What was the intent of the Sarbanes Oxley Act?
a It was intended to protect investors from corporate abuses.
b It was intended to protect employees through better corporate codes of conduct.
c It was intended to increase corporate social responsibility of publicly listed organizations.
d It was intended to harmonize accounting standards in North America.
e It was intended to provide consumer protection on product quality.

A

a

It was intended to protect investors from corporate abuses.

23
Q
The agency problem is best defined as a conflict of interest between a firm's:
Various employees.
Managers and the firm's employees.
Stockholders and the firm's debtors.
Various managers.
Stockholders and the firm's managers.
A

Stockholders and the firm’s managers.

24
Q

Which one of the following is most apt to be a nondiversifiable risk?
A lawsuit arising from faulty refrigeration units.
A shortage of peaches cane due to a hail storm.
An airline pilot’s strike.
A sudden increase in inflation.
A fire at a petroleum refinery.

A

A sudden increase in inflation.

25
Q

Which of the following best defines the term red herring?
A public issue of securities in which securities are first offered to existing shareholders. Also called a rights offering.
A preliminary prospectus distributed to prospective investors in a new issue of securities.
The creation and sale of securities on public markets.
Legal document describing details of the issuing corporation and the proposed offering to potential investors.
The purchase of securities from the issuing company by an investment banker for resale to the public.

A

A preliminary prospectus distributed to prospective investors in a new issue of securities.

26
Q

Which of the following is not a capital budgeting question?
The percentage return obtained by putting long-term assets to use.
Credit policy to provide.
The dollar obtained by putting long-term assets to use.
What type of business a firm wants to operate.
The choice of which long-term assets to purchase.

A

Credit policy to provide.

27
Q

Which of the following best defines the term prospectus?
The creation and sale of securities on public markets.
The purchase of securities from the issuing company by an investment banker for resale to the public.
Legal document describing details of the issuing corporation and the proposed offering to potential investors.
A preliminary prospectus distributed to prospective investors in a new issue of securities.
A public issue of securities in which securities are first offered to existing shareholders. Also called a rights offering.

A

Legal document describing details of the issuing corporation and the proposed offering to potential investors.

28
Q

Financial managers should strive to maximize the current value per share of the existing stock because:
a Doing so guarantees the company will grow in size at the maximum possible rate.
b They have been hired for the purpose of representing the interest of the current shareholders.
c Doing so increases the salaries of all the employees.
d The managers often receive shares of stock as part of their compensation.
e Doing so means the firm is growing in size faster than its competitors.

A

They have been hired for the purpose of representing the interest of the current shareholders.

29
Q

The Board of Directors of Beeline, Inc. has decided to base the salary of its financial manager entirely upon the market share of the firm. Accordingly,
a The firm may incur some agency costs since the manager will be focused on the market share of the firm rather than acting to maximize earnings.
b The firm will incur some agency costs if the manager acts to maximize market share.
c The financial manager will always act in the best interest of the shareholders since all agency costs have been eliminated through salary incentives.
d The manager may not act to maximize the current value of the firm’s stock, resulting in agency costs for the firm’s stockholders.
e This arrangement may be unnecessary, since the goal of the firm is to maximize earnings for shareholders, and that is most likely accomplished through larger market shar

A

a
The firm may incur some agency costs since the manager will be focused on the market share of the firm rather than acting to maximize earnings.

30
Q

Financial markets fluctuate daily because they:
Are inefficient.
Are continually reacting to new information.
Slowly react to new information.
Offer tremendous arbitrage opportunities.
Only reflect historical information.

A

Are continually reacting to new information.

31
Q

The term capital structure describes:
a The mix of preferred stock and common stock that makes up the equity account of a firm.
b The mixture of short-term liabilities a firm uses to finance its short-term assets.
c The firm’s short-term assets and short-term liabilities.
d The mixture of debt and equity a firm uses to finance its operations.
e The mixture of long-term investments a firm has made.

A

e

The mixture of debt and equity a firm uses to finance its operations

32
Q

A supernormal growth stock generally:
Is associated with a company that is experiencing rapid contraction.
Has high growth dividends only for a limited number of years.
Has dividends that grow at a high rate for the life of the stock.
Is valued using the preferred stock valuation technique.
Tends to increase its dividends per share by 30% or more for an extended number of years.

A

Has high growth dividends only for a limited number of years.

33
Q

Which of the following is the correct chronology of a dividend payment?
Declaration date, Ex-dividend date, Date of payment, Date of record.
Declaration date, Date of payment, Date of record, Ex-dividend date.
Declaration date, Ex-dividend date, Date of record, Date of payment.
Declaration date, Date of record, Date of payment, Ex-dividend date.
Declaration date, Date of record, Ex-dividend date, Date of payment.

A

Declaration date, Ex-dividend date, Date of record, Date of payment.

34
Q

Stock splits, stock dividends, and reverse stock splits are often pursued with the objective of _____________________.
Avoiding the need to pay a regular cash dividend.
Decreasing the owners’ equity of the firm.
Enhancing the cash flow of the firm.
Benefiting shareholders since regular dividends are irrelevant.
Making the firm’s stock more desirable to the average investor.

A

Making the firm’s stock more desirable to the average investor.

35
Q

If the stock market is weak form efficient, then an investor can NOT earn excess profits by:
Studying financial statements as they become available.
Studying historical price patterns.
Identifying mispriced securities.
Trading on insider information.
Trading on newly released public information.

A

Studying historical price patterns.

36
Q

The semi-strong form of market efficiency is best described as a market where _____ reflected in the current security prices.
all insider information is
all information of every kind is
all public information is
all information, publicly known or not, is
all historical market prices are

A

all public information is

37
Q
Nu Tech, Inc. is a technology firm with good growth prospects. The firm wishes to do something to acknowledge the loyalty of its shareholders but needs all of its available cash to fund its rapid growth. The market price of its stock is currently trading in the middle of the preferred trading range. The firm could consider:
Issuing a liquidating dividend.
A reverse stock split.
A stock split.
Issuing a stock dividend.
A special stock dividend.
A

Issuing a stock dividend.

38
Q

The discounted payback period (DPP) is better than the ordinary payback (PP) period because
The DPP is biased towards liquidity.
The DPP does not reject positive NPV projects.
The DPP takes into account time value of money.
The DPP is easy to understand and use.
The DPP is not biased against long-term projects.

A

The DPP takes into account time value of money.

39
Q

Which of the following is the best definition of systematic risk?
a A risk that influences a large number of assets. Also called market risk.
b Positively sloped straight line displaying the relationship between expected return and beta.
c A theory showing that the expected return on any risky asset is a linear combination of various factors.
d A risk that affects at most a small number of assets. Also called unique or asset-specific risks.
e Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk.

A

A risk that influences a large number of assets. Also called market risk.

40
Q

Which of the following is implied by the evidence regarding market efficiency?
It is difficult to predict future price movements based on public information.
Prices in well-organized capital markets are unfair.
Insiders cannot make money from their private information.
Prices don’t respond rapidly to new information.
There is a simple way to identify mispriced stocks when they exist.

A

It is difficult to predict future price movements based on public information.

41
Q

The triple bottom line measures:
a Measures a company’s performance within the primary, secondary and tertiary markets.
b Measures a company’s performance of its revenues, gross profit and net income against its annual strategic plan.
c Measures a company’s economic, social and environmental performance.
d Measures a company’s performance within its three financial statements.
e Measures a company’s performance against the top three competitors in the market.

A

c

Measures a company’s economic, social and environmental performance.

42
Q

Which of the following is a type of agency cost?
a The cost of a corporate jet needed to keep tabs on foreign operations.
b The cost of an audit of the firm’s financial statements.
c Salaries paid to the firm’s managers.
d The cost of buying insurance on the firm’s assets.
e The costs of financing the firm.

A

b

The cost of an audit of the firm’s financial statements.

43
Q
\_\_\_\_\_\_\_\_\_\_ included in the bond indenture to protect bondholders from certain actions by the company.
Articles of incorporation are.
Debentures are.
Covenants are.
A description of dedicated capital is.
Indentures are.
A

Covenants are.

44
Q

Which of the following is considered a “primary market” transaction?
a You buy shares in Apple from an online brokerage
b You purchase warrants issued by General Motors Corporation.
c You buy shares in the public offering of a start-up company in the computer industry.
d Your mother sells you the shares she purchased in your uncle’s latest business venture.
e You purchase call options issued by Ford Motor Company.

A

c

You buy shares in the public offering of a start-up company in the computer industry.

45
Q
First stage financing is also commonly known as \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.
Balcony level financing.
Mezzanine level financing.
Vulture capital.
Seed money.
A university endowment fund.
A

Seed money.

46
Q
The legal document that includes the basic terms and details of a bond is called the:
Registration form.
Indenture agreement.
Call provision.
Debenture agreement.
Marketing form.
A

Indenture agreement.

47
Q

The ideal capital structure:
Is that of an unlevered firm.
Produces the lowest weighted average cost of capital.
Is generally unobtainable as it exists only in a firm financed solely with debt.
Is that combination of debt and equity which yields the highest level of sales growth.
Is that combination of debt and equity which results in a debt-equity ratio of 1.0.

A

Produces the lowest weighted average cost of capital.