MGF301F24 Final Exam Practice Set- Ch.14 Dividends PDF

MGF301F24 Final Exam Prac ce Set- Ch.14 Dividends v0_ update: 12/4/24 Professor Wu MGF301 F24 Final Exam Prac ce Set—Ch.14 Dividends Tenta ve—Subject to the content covered on Wed 12/2/2024 lecture Use this as a study guide to help prepare for ﬁnal exam. 1. Which one of the following is a payment of either cash or shares of stock that is paid out of earnings to a ﬁrm's shareholders? A). Dividend B). Capital surplus C). Retained earnings D). Stock repurchase 2. Which one of the following is the date on which the board of directors agrees to pay a dividend and passes a resolu on to do so? A). Declara on date B). Record Date C). Ex-dividend date D). Payment date 3. On which one of the following dates is the determina on made as to which shareholders will receive a dividend payment? A). Record date B). Ex-dividend date C). Payment date D). Declara on date 4. On which one of the following dates are dividend checks mailed? A). Payment date B). Record date C). Ex-dividend date D). Declara on date 5. ABC Company has paid a quarterly dividend of $0.42 per share for the past two years. This quarter, the ﬁrm plans to pay $0.42 plus an addi onal $0.05 per share. The ﬁrm has stated that it is uncertain whether it will pay $0.42 or $0.47 per share next quarter. Which one of the following is the best descrip on of the addi onal $0.05 that is being paid this quarter? A). Extra dividend B). Liquida ng dividend C). Special dividend D). Regular cash dividend E). Stock dividend Page 1 | 3 MGF301F24 Final Exam Prac ce Set- Ch.14 Dividends v0_ update: 12/4/24 Professor Wu 6. Which one of the following is an example of a liquida ng dividend? A). ABC Company recently sold its grain storage facility and is distribu ng the proceeds of that sale to its shareholders. B). ABC Company has excess cash that it wishes to distribute to its shareholders in addi on to its normal cash dividend. This extra distribu on usually occurs about once every year. C). ABC Company is planning to increase its quarterly dividend by 3 percent. D). ABC Company is preparing to pay its ﬁrst annual dividend of $0.08 per share. E). ABC Company had an extraordinarily proﬁtable year and has decided to do a one- me only $10 per share cash dividend. 7. All else equal, on the __________, the market value of a stock will tend to decrease by roughly the a ertax value of the dividend. A). ex-dividend date B). dividend declara on date C). date of record D). date of payment E). day a er the date of payment 8. On Friday, March 4, ABC Company announced it would pay a dividend of $.63 per share on Friday, April 1. The ex-dividend date is Wednesday, March 23. What is the date of record? A). Thursday, March 24 (*Date of record is one business date AFTER ex-dividend date) B). Monday, March 21 C). Tuesday, March 22 D). Friday, March 25 9. ABC Company declared a dividend on Friday, November 13, that is payable on Friday, December 11, to holders of record on Monday, November 30. What is the latest date that you can purchase this stock if you wish to receive this dividend? Assume there are no holidays within this period of me. A). Thursday, November 26 (*the latest day to purchase stock with dividend: one business day prior to ex-dividend date) B). Friday, November 27 (*Ex-dividend date) C). Monday, November 30 D). Wednesday, November 25 10. ABC Company declared a dividend to holders of record on Thursday, October 15, that is payable on Monday, November 2. Susan purchased 200 shares of Davidson Interiors stock on Monday, October 12, and Jake purchased 100 shares of this stock on the following day. Which one of the following statements is correct given this informa on? Page 2 | 3 MGF301F24 Final Exam Prac ce Set- Ch.14 Dividends v0_ update: 12/4/24 Professor Wu A). Both Susan and Jake will receive this dividend. B). Susan will receive the dividend but Jake will not. C). Jake will receive the dividend but Susan will not. D). Neither Susan nor Jake will receive this dividend. [*Ex-dividend date: Wednesday October 15] [*Last day to purchase stock with dividends: Tuesday October 14] 11. Two weeks ago, ABC Company declared a dividend of $1.34 a share. The ex-dividend date is tomorrow. All else constant, which one of the following is the best es mate of ABC Company’s opening stock price tomorrow? A). Today's closing price minus an amount approximately equal to the a ertax value of the dividend B). $1.34 lower than today's closing price (*only in a perfect market- no tax/transaction cost/market friction…etc.) C). The same as today's closing price since the dividend is expected D). $1.34 higher than today's closing price E). Today's closing price plus an amount approximately equal to the a ertax value of the dividend 12. ABC Company has excess cash and has opted to buy some of its outstanding shares from the open market. What is this process of buying called? A). Stock repurchase B). Stock dividend C). Stock split D). Reverse stock split 13. ABC stock is currently selling for $22 per share. The ﬁrm just made an oﬀer to one of its major shareholders to repurchase all the shares owned by that shareholder for $26 per share. What type of oﬀer is being made? A). Targeted repurchase (*only to speciﬁc investors) B). Tender oﬀer C). Open market purchase D). Private issue Page 3 | 3 MGF301F24 Final Exam Practice Set- Ch.12 WACC v0_ update: 12/3/24 Professor Wu MGF301 F24 Final Exam Practice Set—Ch.12 WACC Use this as a study guide to help prepare for ﬁnal exam. 1. Jenn is the CFO of a major ﬁrm and has the job of assigning discount rates to each project under consideration. Jenn’s method of doing this is to assign an incrementally higher rate as the risk level of the project increases and a lower rate as the risk level declines. Jenn is applying the _____________ approach. A). subjective B). pure play C). divisional rating D). straight WACC 2. When calculating a ﬁrm’s weighted average cost of capital, the capital structure weights: A). are based on the market values of the outstanding securities. B). are based on the book values of debt and equity. C). depend upon the ﬁnancing obtained to fund each speciﬁc project. D). remain constant over time unless new securities are issued or outstanding securities are redeemed. 3. A ﬁrm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital asset pricing model. The market rate of return is 13.5 percent. What rate should the ﬁrm use as the cost of equity when computing the ﬁrm's weighted average cost of capital (WACC)? A). The arithmetic average of 12.4 percent and 18.7 percent B). 12.4 percent because it is lower than 18.7 percent C). 18.7 percent because it is higher than 12.4 percent D). The arithmetic average of 12.4 percent, 13.5 percent, and 18.7 percent E). 13.5 percent 4. The cost of preferred stock: A). is equal to the stock's dividend yield. B). increases when a ﬁrm's tax rate decreases. (*independent of) C). is constant over time. (*not constant but time-varying…) D). is una ected by changes in the market price of the stock. E). increases as the price of the stock increases. (*decreases as the…) 5. Which statement is true? A). The cost of preferred stock is una ected by the issuer's tax rate. B). Preferred stock is generally the cheapest source of capital for a ﬁrm. (*Debt is) C). The cost of preferred stock remains constant from year to year. (*Time-varying) Page 1 | 2 MGF301F24 Final Exam Practice Set- Ch.12 WACC v0_ update: 12/3/24 Professor Wu D). Preferred stock is valued using the capital asset pricing model. (*Common stock is) 6. When determining a ﬁrm’s weighted average cost of capital, the item with the least amount of impact is the: A). standard deviation of the company's common stock. B). company's beta. (*cost of common stock) C). coupon rate of the company's outstanding bonds. (*cost of debt) D). growth rate of the company's dividends. (*cost of common stock) E). company's marginal tax rate. (*cost of debt) 7. Which statement is correct, all else held constant? A). A decrease in a ﬁrm's WACC will increase the attractiveness of the ﬁrm's investment options. (*think of the relationship between discount interest rate and present value- they are inversely related) B). Beta is used to compute the return on equity and the standard deviation is used to compute the return on preferred stocks. (*nothing to do with STD) C). The aftertax cost of debt increases when the market price of a bond increases. (*they are inversely related) D). If you have both the dividend growth and the security market line's costs of equity, you should use the higher of the two estimates when computing WACC. (*use the average value) E). WACC is applicable only to ﬁrms that issue both common and preferred stock. 8. Jenn is trying to decide what discount interest rate she should assign to an investment project. Which one of the following should be her primary consideration in this decision? A). Risk level of the investment project B). Amount of debt used to ﬁnance the project C). Use, or lack, of preferred stock as a ﬁnancing option D). Length of the project's life Page 2 | 2 MGF301F24 Final Exam Practice Set- Ch.9 v0_ update: 12/1/24 Professor Wu MGF301 F24 Final Exam Practice Set—Ch.9 Estimating Project Cash Flow Use this as a study guide to help you prepare for ﬁnal exam. 1. Which one of the following terms refers to the best option that was foregone when a particular investment is selected? A). Opportunity cost B). Side e ect C). Erosion D). Sunk cost 2. ABC Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the ﬁrm rented out the building and used the rent to pay o the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following deﬁnes the opportunity cost of the remodeling project? A). Current market value of the building B). Present value of the future income C). Cost of the remodeling D). Initial cost of the building plus the remodeling costs E). Current market value of the building plus the remodeling costs 3. The Tattle Teller has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes old technology. The ﬁrm could get $480 for the press as scrap metal. The press is six years old and originally cost $174,000. The current book value is $3,570. The president of the ﬁrm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project? A). $480 (*opportunity cost) B). $0 C). $3,570 D). $3,570 + $480 4. 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 a(n): A). sunk cost. B). ﬁxed cost. C). variable cost. D). opportunity cost. Page 1 | 5 MGF301F24 Final Exam Practice Set- Ch.9 v0_ update: 12/1/24 Professor Wu 5. The analysis of a new project should exclude: A). sunk costs. B). tax e ects. C). erosion e ects. D). side e ects. E). opportunity costs. 6. The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all the following in its analysis with the exception of: A). the research and development costs to produce the current winter footwear samples. (*sunk cost) B). any expected changes in the sales levels of current products caused by adding the new product line. C). the cost of new display counters for the additional winter footwear. D). increased taxes from winter footwear proﬁts. E). the expected revenue from winter footwear sales. 7. ABC Company 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 ﬁve years. A). Money spent last month repairing a damaged front fender B). New tires that will be purchased this winter C). Costs of repairs needed so the truck can pass inspection next month D). Engine tune-up that is scheduled for this afternoon 8. Sunk costs include any costs that: A). have previously been incurred and cannot be changed. B). will change if a project is undertaken. C). will be incurred if a project is accepted. D). will be paid to a third party and cannot be refunded for any reason whatsoever. E). will occur if a project is accepted and once incurred, cannot be recouped. 9. Assume you spent $800 last week repairing your car. Now a new problem is occurring and you are trying to decide whether to ﬁx the car or trade it in for a newer model. In analyzing the situation, the $800 repair expense is a(n) ________ cost. A). sunk B). opportunity C). ﬁxed Page 2 | 5 MGF301F24 Final Exam Practice Set- Ch.9 v0_ update: 12/1/24 Professor Wu D). incremental E). relevant 10. Which one of the following terms is most commonly used to describe the cash ﬂows of a new project that are simply an o set of reduced cash ﬂows for a current project? A). Erosion B). Opportunity cost C). Sunk cost D). Pirated ﬂows 11. Of the following choices, which one is an example of erosion and should be included in a capital project analysis? A). The anticipated loss of current sales when a new product is launched. B). The expected decline in sales as the market for a product becomes saturated. C). The reduction in sales that occurs when a competitor introduces a new product. D). The sudden loss of sales due to a major employer in your community implementing massive layo s. E). The reduction in sales price that will most likely be required to sell inventory that has aged. 12. The net working capital of a ﬁrm will decrease if there is: A). a decrease in accounts receivable. B). a decrease in accounts payable. (* ↓CL ↑NWC) C). an increase in inventory. (* ↑CA↑ NWC) D). a decrease in ﬁxed assets. (*long term asset is not NWC) 13. The net working capital invested in a project is generally: A). recouped at the end of the project. B). a sunk cost. C). an opportunity cost. D). recouped in the ﬁrst year of the project. E). depreciated to a zero balance over the life of the project. 14. A proposed project will increase a ﬁrm's inventory. This increase is generally: A). a cash outﬂow at Time zero and a cash inﬂow at the end of the project. B). a cash inﬂow at Time zero and a cash outﬂow at the end of the project. C). treated as an erosion cost. D). treated as an opportunity cost. E). a sunk cost and should be ignored. Page 3 | 5 MGF301F24 Final Exam Practice Set- Ch.9 v0_ update: 12/1/24 Professor Wu 15. Jen is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jen is doing is best described as: A). scenario analysis. B). sensitivity analysis. C). erosion planning. D). opportunity evaluation. 16. Scenario analysis is best described as the determination of the: A). reasonable range of project outcomes. B). most likely outcome for a project. C). variable that has the greatest e ect on a project's outcome. (*sensitivity analysis) D). e ect that a project's initial cost has on the project's net present value. E). change in a project's net present value given a stated change in projected sales. (*sensitivity analysis) 17. Which one of the following is a correct value to use if you are conducting a best-case scenario analysis? A). Lowest expected value for ﬁxed costs B). Sales price that is most likely to occur (*for base-case) C). Lowest expected level of sales quantity (*highest) D). Highest expected need for net working capital 18. Scenario analysis asks questions such as: A). What is the best outcome that should reasonably be expected? B). How will changing the number of units sold a ect the outcome of this project? C). How much will a $1 increase in the variable cost per unit change the net present value? D). Will the net present value increase or decrease if the quantity sold increases by 100 units? E). How will the operating cash ﬂow change if the depreciation method is changed? 19. Scenario analysis: A). helps determine the reasonable range of expectations for a project's anticipated outcome. B). determines the impact a $1 change in sales has on a project’s internal rate of return. C). determines which variable has the greatest impact on a project's net present value. (*sensitivity analysis) D). evaluates a project's net present value while sensitivity analysis evaluates a project's internal rate of return. E). determines the absolute worst and absolute best outcome that could ever occur. Page 4 | 5 MGF301F24 Final Exam Practice Set- Ch.9 v0_ update: 12/1/24 Professor Wu 20. Jenn is analyzing a proposed project to determine how changes in the sales quantity would a ect the project's net present value. What type of analysis is being conducted? A). Sensitivity analysis B). Erosion planning C). Scenario analysis D). Beneﬁt-cost analysis E). Opportunity cost analysis 21. Sensitivity analysis: A). helps identify the variable within a project that presents the greatest forecasting risk. B). looks at the most reasonably optimistic and pessimistic results for a project. (*scenario analysis) C). is used for projects that cannot be analyzed by scenario analysis because the cash ﬂows are unconventional. D). is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable. E). illustrates how an increase in operating cash ﬂow caused by changing both the revenue and the costs simultaneously will change the net present value for a project. (*one variable changes at a time) Page 5 | 5 MGF301F24 Final Exam Practice Set- Ch.8 v0_ update: 12/1/24 Professor Wu MGF301 F24 Final Exam Practice Set—Ch.8 NPV, IRR and Other Tools Use this as a study guide to help you prepare for ﬁnal exam. 1. The payback period is the length of time it takes an investment to generate su icient cash ﬂows to enable the project to: A). recoup its initial cost. B). produce a positive annual cash ﬂow. C). produce a positive cash ﬂow from assets. D). o set its ﬁxed expenses. E). o set its total expenses. 2. The internal rate of return of an investment project is the: A). discount rate that results in a zero net present value for the project. B). discount rate that causes a project’s aftertax income to equal zero. C). discount rate that results in a net present value equal to the project's initial cost. D). rate of return required by the project's investors. E). project's current market rate of return. 3. Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? A). Mutually exclusive B). Conventional C). Multiple choice D). Independent 4. Which one of the following can be deﬁned as a beneﬁt-cost ratio? A). Proﬁtability index B). Net present value C). Internal rate of return D). Modiﬁed internal rate of return 5. Which one of the following indicates that a project is expected to create value for its owners? A). Positive net present value B). Proﬁtability index less than 1.0 C). Payback period greater than the requirement D). Internal rate of return that is less than the requirement 6. If an investment is producing a return that is equal to the required return, the investment's net present value will be: Page 1 | 5 MGF301F24 Final Exam Practice Set- Ch.8 v0_ update: 12/1/24 Professor Wu A). zero. B). positive. C). greater than the project's initial investment. D). equal to the project's net proﬁt. 7. Which one of the following indicates that a project should be rejected? Assume the cash ﬂows are normal, i.e., the initial cash ﬂow is negative. A). Proﬁtability index less than 1.0 B). Payback period that is shorter than the requirement period C). Positive net present value D). Internal rate of return that exceeds the required return 8. Which one of the following is the primary advantage of payback analysis? A). Ease of use B). Incorporation of the time value of money concept (*Disadvantage) C). Research and development bias D). Arbitrary cuto point (*Disadvantage) E). Long-term bias (*Disadvantage- bias toward short-term project) 9. Which one of the following methods of analysis ignores the time value of money? A). Payback B). Net present value C). Internal rate of return D). Proﬁtability index 10. Which one of the following methods of analysis has the greatest bias toward short-term projects? A). Payback B). Net present value C). Internal rate of return D). Average accounting return E). Proﬁtability index 11. The modiﬁed internal rate of return is speciﬁcally designed to address the problems associated with: A). unconventional cash ﬂows. B). mutually exclusive projects. C). long-term projects. D). negative net present values. Page 2 | 5 MGF301F24 Final Exam Practice Set- Ch.8 v0_ update: 12/1/24 Professor Wu E). crossover points. 12. Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? A). Net present value B). Internal rate of return C). Proﬁtability index D). Modiﬁed internal rate of return E). Average accounting return 13. Jen has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given su icient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? A). Net present value B). Internal rate of return C). Payback D). Proﬁtability index 14. You were recently hired by a ﬁrm as a project analyst. The owner of the ﬁrm is unfamiliar with ﬁnancial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which ﬁnancial method of analysis will provide the information that the owner requests? A). Proﬁtability index B). Internal rate of return C). Net present value D). Payback 15. ABC Co ee is considering a project with an initial cost of $53,200, and cash ﬂows of $19,600, $22,000, $38,000, and −$13,200 for Years 1 to 4, respectively. How many internal rates of return do you expect this project to have? A). 2 (*NOTE: sign of cash ﬂows changes twice 1st: -53200 to 19600; 2nd 38000 to -13200) B). 0 C). 1 D). 3 E). 4 16. Assume a ﬁrm accepts a positive net present value project. An analyst would be most justiﬁed in concluding that: Page 3 | 5 MGF301F24 Final Exam Practice Set- Ch.8 v0_ update: 12/1/24 Professor Wu A). the stockholders’ value in the ﬁrm is expected to increase. B). the project will pay back within the required payback period. C). the present value of the expected cash ﬂows is equal to the project’s cost. D). the inherent risks within the project have been ignored. E). that all the projected cash ﬂows will occur as expected. 17. The net present value method of capital budgeting analysis does all of the following except: A). provide a speciﬁc anticipated rate of return. B). incorporate risk into the analysis. C). consider all relevant cash ﬂow information. D). discount all future cash ﬂows to their current value. E). consider the initial cost of the project. 18. A conventional investment project should be accepted if the internal rate of return is: A). equal to or greater than the discount rate. B). equal to, and only if it is equal to, the discount rate. C). less than the discount rate. D). negative. E). positive. 19. The internal rate of return for a capital project is best deﬁned as the: A). discount rate that causes the net present value to equal zero. B). di erence between the market rate of interest and the discount rate. C). market rate of interest less the risk-free rate. D). minimum project acceptance rate set by management. E). maximum rate that can be earned for a project to be accepted. 20. A project will have more than one IRR if and only if the: A). cash ﬂow pattern exhibits more than one sign change. B). primary IRR is positive. C). primary IRR is negative. D). NPV is zero. E). cash ﬂow pattern exhibits exactly one sign change. 21. The payback method of analysis: A). has a timing bias. B). discounts cash ﬂows. C). ignores the initial cost. D). considers all project cash ﬂows. Page 4 | 5 MGF301F24 Final Exam Practice Set- Ch.8 v0_ update: 12/1/24 Professor Wu 22. Assume a ﬁrm is more concerned about quickly recovering its initial investment than it is about the amount of value created. Accordingly, the ﬁrm is most likely to employ the ________ method of capital project analysis. A). payback B). internal rate of return C). net present value D). modiﬁed internal rate of return E). proﬁtability index 23. An investment is acceptable if the payback period: A). is less than some pre-speciﬁed period of time. B). exceeds the life of the investment. C). is equal to or greater than some pre-speciﬁed period of time. D). is equal to, and only if it is equal to, the investment’s life. 24. An independent investment is acceptable if the proﬁtability index (PI) of the investment is: A). greater than 1.0. B). less than 1.0. C). greater than the internal rate of return. D). less than the internal rate of return. E). greater than a pre-speciﬁed rate of return. Page 5 | 5 MGF301F24 Final Exam Practice Set- Ch.11 v0_ update: 11/26/24 Professor Wu MGF301 F24 Final Exam Practice Set—Ch.11 Portfolio, Diversiﬁcation, CAPM, SML Use this as a study guide to help you prepare for ﬁnal exam. 1. Which statement is true? A). The weights of the securities held in any portfolio must equal 1.0. B). The expected rate of return on any portfolio must be positive. C). The arithmetic average of the betas for each security held in a portfolio must equal 1.0. D). The beta of any portfolio must be 1.0. E). The standard deviation of any portfolio must equal 1.0. 2. Systematic risk is deﬁned as: A). any risk that a ects a large number of assets. B). the total risk of an individual security. C). diversiﬁable risk. D). asset-speciﬁc risk. E). the risk unique to a ﬁrm's management. (*C,D,E same thing) 3. Unsystematic risk can be deﬁned by all of the following except: A). market risk. B). unrewarded risk. C). diversiﬁable risk. D). unique risk. E). asset-speciﬁc risk. 4. The capital asset pricing model states that the expected return on a risky asset depends only on the asset’s _____________ risk. A). market B). unique C). diversiﬁable D). asset-speciﬁc E). unsystematic 5. Which one of the following is the best example of unsystematic risk? A). A warehouse ﬁre B). Inﬂation exceeding market expectations C). Decrease in corporate tax rates D). Decrease in the value of the dollar E). Increase in consumer spending Page 1 | 7 MGF301F24 Final Exam Practice Set- Ch.11 v0_ update: 11/26/24 Professor Wu 6. Which one of these represents systematic risk? A). Increase in consumption created by a reduction in personal tax rates B). Major layo by a regional manufacturer of power boats C). Surprise ﬁring of a ﬁrm's chief ﬁnancial o icer D). Closure of a major retail chain of stores E). Product recall by one manufacturer 7. Which one of these is the best example of systematic risk? A). Decrease in gross domestic product B). Discovery of a major gas ﬁeld C). Decrease in textile imports D). Increase in agricultural exports E). Decrease in management bonuses for banking executives 8. Which one of the following best exempliﬁes unsystematic risk? A). Unexpected increase in the variable costs for a ﬁrm B). Unexpected economic collapse C). Unexpected increase in interest rates D). Sudden decrease in inﬂation E). Expected increase in tax rates 9. Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk? A). Diversiﬁcation B). Systematic C). Unsystematic D). Security market line E). Capital asset pricing model 10. Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversiﬁcation must do which one of the following? A). Reduce the portfolio's unique risks B). Increase the expected risk premium C). Reduce the beta of the portfolio to one D). Increase the security's risk premium E). Reduce the portfolio's systematic risk level Page 2 | 7 MGF301F24 Final Exam Practice Set- Ch.11 v0_ update: 11/26/24 Professor Wu 11. Portfolio diversiﬁcation eliminates: A). unsystematic risk. B). all investment risk. C). the portfolio risk premium. D). market risk. E). the reward for bearing risk. 12. The beta of a risky portfolio cannot be less than _____________ nor greater than _____________. A). the lowest individual beta in the portfolio; the highest individual beta in the portfolio (*weighted average betas of individual security) B). 0; 1 C). 1; the market beta D). the lowest individual beta in the portfolio; market beta E). the market beta; the highest individual beta in the portfolio 13. When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the: A). market value of the investment in each stock. B). number of shares owned of each stock. C). market price per share of each stock. D). cost per share of each stock held. 14. A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is.74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta: A). will be greater than or equal to.74 but less than or equal to 1.51. B). must be 1.0 because of the large number of securities in the portfolio. C). is the geometric average of the individual security betas. D). must be less than the market beta. E). will be between 0 and 1.0. 15. Which one of the following statements is accurate? A). A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. B). Portfolio betas range between −1.0 and +1.0. C). A portfolio of U.S. Treasury bills will have a beta of +1.0. (*zero) D). The beta of a market portfolio is equal to zero. (*=1) Page 3 | 7 MGF301F24 Final Exam Practice Set- Ch.11 v0_ update: 11/26/24 Professor Wu 16. The addition of a risky security to a fully diversiﬁed portfolio: A). may or may not a ect the portfolio beta. (*depending on the beta of the new security) B). must decrease the portfolio's expected return. C). must increase the portfolio beta. D). will increase the unsystematic risk of the portfolio. E). will have no e ect on the portfolio beta or its expected return. 17. The most important reason to diversify a portfolio is to: A). eliminate asset-speciﬁc risk. B). eliminate systematic risk. C). increase both returns and risks. D). increase returns only. 18. For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta: A). that is > 0 but < 1. (*beta of overall market =1; positive E(R) indicates positive beta) B). of zero. C). of one. D). that is > 1. 19. Systematic risk is: A). measured by beta. B). totally eliminated when a portfolio is fully diversiﬁed. (*cannot be eliminated) C). risk that a ects a limited number of securities. (*a ect a large number of securities) D). measured by standard deviation. (*STD measures total risk) 20. Which one of the following portfolios will have a beta of zero, theoretically? A). A portfolio comprised solely of U. S. Treasury bills B). A portfolio that is equally as risky as the overall market C). A portfolio that consists of a single stock D). A portfolio with a zero variance of returns (*zero total risk does not indicate zero market risk) 21. Standard deviation measures _____________ risk while beta measures _____________ risk. A). total; systematic B). systematic; unsystematic C). unsystematic; systematic D). total; unsystematic E). asset-speciﬁc; market Page 4 | 7 MGF301F24 Final Exam Practice Set- Ch.11 v0_ update: 11/26/24 Professor Wu 22. Which of the following statements best describes the principle of diversiﬁcation? A). Spreading an investment across many diverse assets will eliminate some of the total risk. B). Concentrating an investment in two or three stocks will eliminate all of the unsystematic risk. C). Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. D). Spreading an investment across multiple diverse companies will not lower the total risk. E). Spreading an investment across many diverse assets will eliminate all of the systematic risk. 23. Which of the following statements are accurate? I. Nondiversiﬁable risk is measured by beta. II. The risk premium increases as diversiﬁable risk increases. III. Systematic risk is another name for nondiversiﬁable risk. IV. Diversiﬁable risks are market risks you cannot avoid. A). I and III only B). II and IV only (*IV: Diversiﬁable risk= ﬁrm-speciﬁc risk= can be eliminated) C). I and II only (*II: as Nondiversiﬁable increases) D). III and IV only E). I, II, and III only 24. The amount of systematic risk present in a particular risky asset relative to that in a market portfolio is measured by the: A). beta coe icient. B). squared deviation. C). standard deviation. D). variance. 25. Use the ﬁnancial information below to choose the correct statement. Stock Standard deviation of returns Beta coefficient ABC 25% 0.85 XYZ 15% 1.25 A). ABC has greater stock return volatility than XYZ. (*STDABC>STDXYZ) B). ABC has a larger market risk than XYZ. (*Smaller) C). Both ABC and XYZ are fairly priced based on CAPM. (*insu icient information to assess) D). ABC expects a higher expected return than XYZ based on the Capital Asset Pricing Model. (*lower) Page 5 | 7 MGF301F24 Final Exam Practice Set- Ch.11 v0_ update: 11/26/24 Professor Wu 26. According to the capital asset pricing model, the expected return on a security will be a ected by all of the following except the: A). security’s standard deviation. B). market risk premium. C). risk-free rate. D). market rate of return. E). security’s beta. 27. According to the capital asset pricing model, the expected return on a security is not a ected by the: A). security’s unique risks. (*diversiﬁed away) B). risk-free rate. C). security’s risk premium. D). security’s beta. E). market rate of return. 28. The capital asset pricing model: A). considers the relationship between the ﬂuctuations in a security’s returns versus the market’s returns. (*this describes beta) B). assumes the market has a beta of zero and the risk-free rate is positive. C). rewards investors based on total risk assumed. (*based on market risk) D). applies to portfolios but not to individual securities. (*apply to both) 29. 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? A). Zero B). Security beta multiplied by the market rate of return (*beta does not measure unsystematic risk) C). Market risk premium D). Security beta multiplied by the market risk premium (*beta does not measure unsystematic risk) E). Risk-free rate of return 30. The slope of the security market line represents the: A). market risk premium. B). risk-free rate. (*the intercept of SML to the y-axis) C). beta coe icient. (*x-axis) D). risk premium on an individual asset. E). market rate of return. Page 6 | 7 MGF301F24 Final Exam Practice Set- Ch.11 v0_ update: 11/26/24 Professor Wu 31. The security market line is deﬁned as a positively sloped straight line that displays the relationship between the: A). expected return and beta of either a security or a portfolio. B). beta and standard deviation of a portfolio. C). systematic and unsystematic risks of a security. D). nominal and real rates of return. E). risk premium and beta of a portfolio. 32. If a security plots to the right and below the security market line, then the security has _____________ systematic risk than the market and is _____________. A). more; overpriced B). more; underpriced C). less; overpriced D). less; underpriced E). less; correctly priced NOTE: right (left) to the market portfolio: beta > ( 1) D). A risk-free security plots at the origin on a security market line graph. (*not necessarily, only if rf=0) 34. Which statement is correct? A). A security with a beta of 1.54 will plot on the security market line if it is correctly priced. (*“plot on the SML” = correctly priced) B). An underpriced security will plot below the security market line. (*above) C). A portfolio with a beta of 0.93 will plot to the right of the overall market. (*to the left) D). A security with a beta of 0.99 will plot above the security market line if it is correctly priced. (*on the SML) E). A risk-free security will plot at the origin. (*not necessarily, only if rf=0) Page 7 | 7 MGF301F24 Final Exam Practice Set- Ch.10 EMH v0_ update: 12/2/24 Professor Wu MGF301 F24 Final Exam Practice Set—Ch.10 E icient Market Hypothesis Use this as a study guide to help prepare for ﬁnal exam. 1. If markets are ________ form e icient, market prices reﬂect all forms of available information, including private, public, and past. A). strong B). semistrong C). weak D). Semiweak (*there is no “semi-weak” form…) 2. The hypothesis that market prices reﬂect all publicly available information is called _____ form e iciency. A). weak B). strong C). semistrong D). Semiweak 3. ________ form market e iciency is the only form that asks questions that whether past market returns are useful in predicting future market returns. A). Weak B). Semiweak C). Strong D). Semistrong 4. An e icient capital market is best deﬁned as a market in which security prices reﬂect which one of the following? A). All available information B). Current inﬂation C). A risk premium D). The historical arithmetic rate of return E). The historical geometric rate of return 5. Semistrong form market e iciency states that the value of a security is based on: A). all publicly available information. (*best answer among the ﬁve) B). all public and private information. C). historical information only. D). all publicly available information plus any data that can be gathered from insider trading. E). random information with no clear distinction as to the source of that information. Page 1 | 3 MGF301F24 Final Exam Practice Set- Ch.10 EMH v0_ update: 12/2/24 Professor Wu 6. Jen is a chemist for ABC, a major drug manufacturer. Jen cannot earn abnormal proﬁts on ABC stock based on the knowledge she has related to his experiments if the ﬁnancial markets are: A). strong form e icient. (*She possesses inside information. If one cannot earn abnormal returns based on private information, stock prices already reﬂect private information. Thus the market is strong form e icient.) B). weak form e icient. C). semistrong form e icient. D). e icient at any level. E). aware that the trader is an insider. 7. If the ﬁnancial markets are semistrong form e icient, then: A). only individuals with private (inside) information have a marketplace advantage. (*stock prices only reﬂect public and past, but not private information) B). only the most talented analysts can determine the true value of a security. C). technical analysis provides the best tool to use to gain a marketplace advantage. D). no one individual has an advantage in the marketplace. E). every security o ers the same rate of return. 8. In an e icient capital market: A). security prices reﬂect all available information. B). brokerage commissions are zero. C). taxes are irrelevant. D). securities always o er a positive NPV. E). all investments earn the market rate of return. 9. Insider trading does not o er any advantages if the ﬁnancial markets are: A). strong form e icient. B). weak form e icient. C). semiweak form e icient. D). semistrong form e icient. E). ine icient. 10. In an e icient market, the price of a security will: A). react immediately to any new information that a ects the value of the issuing ﬁrm. (*see solid line in the Figure 10.14 or below) B). always rise immediately upon the release of new information with no further price adjustments related to that information. (*depending on the type of information, price will “drop” upon the release of bad news) Page 2 | 3 MGF301F24 Final Exam Practice Set- Ch.10 EMH v0_ update: 12/2/24 Professor Wu C). rise sharply when new information is ﬁrst released and then decline to a new stable level by the following day. (* dotted line- ine icient market) D). be slow to react for the ﬁrst few hours after new information is released allowing time for that information to be reviewed and analyzed. (* dashed line- ine icient market) E). react to new information over a two-day period after which time no further price adjustments related to that information will occur. Page 3 | 3 MGF301F24 Final Exam Practice Set- Ch.7 v0_ update: 11/25/24 Professor Wu MGF301 F24 Final Exam Practice Set—Ch.7 Stock Use this as a study guide to help you prepare for ﬁnal exam. 1. The dividend yield is deﬁned as: A). next year's expected dividend divided by the current market price per share. B). the last annual dividend divided by the current market price per share. C). next year's expected dividend divided by the current book value per share. D). next year's expected dividend divided by the par value per share. 2. The capital gains yield equals which one of the following? A). Dividend growth rate B). Total yield C). Required rate of return D). Dividend yield 3. Which one of the following must equal zero if a ﬁrm pays a constant annual dividend? A). Capital gains yield B). Dividend yield C). Total return D). Par value per share 4. The ________ equals the total return on a stock. A). dividend yield plus the dividend growth rate B). dividend yield minus the capital gains yield C). dividend growth rate minus the dividend yield D). growth rate of the dividends E). dividend divided by the sum of the dividend yield and capital gains yield 5. Of the following choices, which one applies to the dividend growth model (Gordon Model) of stock valuation? A). The growth rate must be less than the discount rate. B). The rate of growth must be positive. (*negative growth rate also works for the model) C). The model is not applicable if the growth rate is zero. D). The dividend amount must be a constant number over time. 6. The dividend yield on a stock will increase if the: A). stock price decreases. B). dividend growth rate decreases. C). capital gains rate decreases. D). stock price increases. Page 1 | 4 MGF301F24 Final Exam Practice Set- Ch.7 v0_ update: 11/25/24 Professor Wu 7. Which one of the following will increase the current value of a stock? A). Increase in the capital gains yield B). Decrease in the dividend growth rate C). Increase in the required return D). Increase in the market rate of return E). Decrease in the expected dividend for next year 8. Which one of the following types of securities has the lowest priority in a bankruptcy proceeding? A). Common stocks B). Junior debts C). Senior debts D). Preferred stocks E). Subordinated bonds 9. Jenn and her family have invested in ABC company that recently ﬁled for bankruptcy. In the bankruptcy proceeding, who had the lowest priority to claim ABC’s assets? I. Jenn owns the preferred stocks. II. Jenn’s parents own common stocks. III. Jenn’s brother owns the subordinated bonds. IV. Jenn’s sister owns the senior debts. A). Jenn’s parents. B). Jenn’s sister. (*highest) C). Jenn. D). Jenn’s brother. 10. Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? A). Determining the amount of the dividend to be paid per share B). Electing the board of directors C). Voting important corporate issues via proxy D). Voting executive compensation E). Voting either for or against a proposed merger or acquisition Page 2 | 4 MGF301F24 Final Exam Practice Set- Ch.7 v0_ update: 11/25/24 Professor Wu 11. Which statement regarding stocks is correct? A). From a legal perspective, preferred stock is a form of corporate equity. B). Non-cumulative preferred dividends are carried forward as an arrearage. (*Cumulative preferred dividends) C). Common shareholders elect the corporate directors while the preferred shareholders vote on mergers and acquisitions. (*Preferred shareholders lack of voting rights) D). Preferred dividends provide tax-free income to individual investors. 12. Jenn could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the ﬁrm. Which term applies to this granting of authority? A). Proxy B). Straight C). Cumulative D). Consent-form 13. Which of the following examples best describes the structure of “dual-class” common stock? A). ABC company’s CEO owns twenty votes per share while the general shareholders of Facebook own one vote per share. B). ABC company splits each of its common stock into two shares this year. C). ABC company has both common stocks and preferred stocks outstanding. Common stock shareholders have voting right but preferred stock shareholders do not. D). Only one third of ABC Company’s board of directors are up for election in a given year. (*called “Staggered board”) 14. Which statement is true? A). From a legal perspective, preferred stock is a form of corporate equity. B). All classes of stock must have equal voting rights per share. C). Common shareholders elect the corporate directors while the preferred shareholders vote on mergers and acquisitions. (*M&A is approved at the annual meeting of shareholders) D). Preferred dividends provide tax-free income to individual investors. (*not tax-free) E). Preferred shareholders prefer noncumulative dividends over cumulative dividends. (*prefer cumulative dividends) Page 3 | 4 MGF301F24 Final Exam Practice Set- Ch.7 v0_ update: 11/25/24 Professor Wu 15. Which one of the following statements is correct? A). Preferred stock can be convertible to common stocks. B). Preferred stock generally has a stated value of $1,000 per share. (*$100) C). Dividend payments to preferred shareholders are tax-deductible expenses for the issuing ﬁrm. (*not tax-deductible expenses!) D). Preferred dividends are generally variable in amount. (*Fixed amount) E). Preferred shareholders receive preferential treatment over bondholders in a liquidation. (*over common stockholders) 16. Which one of these statements related to preferred stock is correct? A). Cumulative preferred shares are more valuable than comparable noncumulative shares. B). Preferred shareholders normally receive one vote per share of stock owned. (*normally no voting rights) C). Preferred shareholders determine the outcome of any election that involves a proxy ﬁght. (*no voting rights) D). Preferred shareholders are considered to be the residual owners of a corporation. (*Common stockholders are) E). Preferred stock normally has a stated liquidating value of $1,000 per share. (*$100) 17. Which of the following statements is true about preferred stock? A). Preferred stock pays ﬁxed cash ﬂows, similar to bonds. B). Preferred stock dividends are tax-deductible for the company. C). Missing a preferred stock dividend is considered an event of default. D). Preferred stock dividends are superior to interest payments. E). Preferred stock has voting rights, similar to common stock. 18. Preferred stock may have all of the following characteristics in common with bonds with the exception of: A). tax-deductible payments. (*dividends are not tax-deductible) B). the lack of voting rights. C). a possible conversion option into common stock. D). annuity payments. E). a ﬁxed stated value. Page 4 | 4 MGF301F24 Final Exam Practice Set- Ch.10 Risks and Returns (EMH separate ﬁle) v0_ update: 11/25/24 Professor Wu MGF301 F24 Final Exam Practice Set—Ch.10 Risks and Returns (EMH - in a separate ﬁle) Use this as a study guide to help prepare for ﬁnal exam. 1. The ABC stock sold for $53 per share at the beginning of the year. During the year, the company paid a dividend of $2.50 per share and then ended the year with a stock price of $51.75. The change in the stock price is best described as: A). capital loss. B). positive total dollar return. C). negative total dollar return. D). negative dividend yield. 2. For any given stock, the capital gains yield plus the dividend yield equals the: A). total return. B). variance of returns. C). geometric average return. D). arithmetic average return. E). current yield. 3. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called? A). Risk premium B). Inﬂation premium C). Required return D). Real return E). Average return 4. The standard deviation measures the _____________ of a security's returns over time. A). volatility B). average value C). frequency D). mean E). arithmetic average 5. For the period 1926-2020, which one of the following had the smallest risk premium? A). U.S. Treasury bills B). Large-company stocks C). Small-company stocks (*largest) D). Long-term corporate bonds E). Long-term government bonds Page 1 | 4 MGF301F24 Final Exam Practice Set- Ch.10 Risks and Returns (EMH separate ﬁle) v0_ update: 11/25/24 Professor Wu 6. Over the period of 1926-2020, which one of the following is the most apt to have the largest risk premium? A). Small-company stocks B). U.S. Treasury bills (*smallest) C). Large-company stocks D). Long-term government debt E). Long-term corporate debt 7. Over the period of 1926-2020, which one of the following tended to outperform other securities over the long-term? A). small-company stocks B). U.S. Treasury bills C). large-company stocks D). long-term corporate bonds E). long-term government bonds 8. Over the period of 1926-2020, which one of the following investment classes had the highest volatility of returns? A). Small-company stocks B). Large-company stocks C). U.S. Treasury bills D). Long-term corporate bonds E). Long-term government bonds 9. Over the period of 1926-2020, which one of the following categories has the widest frequency distribution of returns? A). Small-company stocks B). U.S. Treasury bills C). Long-term government bonds D). Large-company stock 10. Over the period of 1926-2020: A). the risk premium on stocks exceeded the risk premium on bonds. B). the risk premium on large-company stocks was greater than the risk premium on small- company stocks. C). the risk premium on long-term government bonds was zero percent. D). U. S. Treasury bills had a negative risk premium. (*zero risk premium) Page 2 | 4 MGF301F24 Final Exam Practice Set- Ch.10 Risks and Returns (EMH separate ﬁle) v0_ update: 11/25/24 Professor Wu 11. Which one of the following statements is true regarding the period 1926-2020? A). U.S. Treasury bills had a positive average real rate of return. B). The returns on small-company stocks were less volatile than the returns on large- company stocks. C). The risk-free rate of return remained constant over the time period. D). Bonds had an average rate of return that exceeded the average return on stocks. 12. Which one of the following is a correct ranking of securities based on their volatility during the period from 1926 to 2020? Rank from highest to lowest volatility. A). Small-company stocks, large-company stocks, long-term corporate bonds B). Large-company stocks, intermediate-term government bonds, long-term government bonds C). Small-company stocks, long-term corporate bonds, large-company stocks D). Long-term government bonds, long-term corporate bonds, small-company stocks E). Long-term corporate bonds, large-company stocks, U.S. Treasury bills 13. Capital market history shows us that a reasonable ordering of the average return by asset class, from lowest to highest, is: A). U.S. Treasury bills, government bonds, large-company stocks, small-company stocks. B). corporate bonds, U.S. Treasury bills, small-company stocks, large-company stocks. C). U.S. Treasury bills, small-company stocks, large-company stocks, government bonds. D). government bonds, U.S. Treasury bills, large-company stocks, small-company stocks. E). U.S. Treasury bills, long-term government bonds, intermediate-term government bonds, small-company stock. 14. The rate of return on which one of the following has a risk premium of 0%? A). U.S. Treasury bills B). Long-term government bonds C). Long-term corporate bonds D). Intermediate-term government bonds E). Large-company stocks 15. One year ago, you purchased 600 shares of ABC stock. This morning you sold those shares and realized a total return of 3.1 percent. Given this information, you know for sure the: A). sum of the dividend yield and the capital gains yield is 3.1 percent. B). stock price increased by 3.1 percent over the last year. C). stock increased in value over the past year. D). stock paid a dividend. E). dividend yield is greater than zero. Page 3 | 4 MGF301F24 Final Exam Practice Set- Ch.10 Risks and Returns (EMH separate ﬁle) v0_ update: 11/25/24 Professor Wu 16. Which one of the following statements concerning the standard deviation is correct? A). In general, the higher the standard deviation, the higher the expected return. B). The standard deviation is a measure of total return. (*measure of risk) C). In general, the higher the standard deviation, the lower the risk. D). The lower the standard deviation, the less certain the rate of return in any one given year. (*the more certain) 17. Suppose that long-term corporate bonds had an average return of 6.4 percent and a standard deviation of 2.9 percent for a 90-year period. What range of returns would you expect to see on these bonds 68 percent (~ mean value plus/minus ONE standard deviation) of the time, assuming returns following normal distribution? [Very simple addition and subtraction math. This is the only thing I expect junior/senior students to calculate without a calculator or Excel.] A). 3.5% to 9.3% B). 3.5% to 10.9% C). 2.9% to 6.4% D). 0.6% to 11.9% E). 0.6% to 12.2% [NOTE: one standard deviation range would be 6.4% ± 2.9%  6.4-2.9=3.5; 6.4+2.9=9.3] 18. A bond has an average return of 11.2 percent and a standard deviation of 14.6 percent. What range of returns would you expect to see 68 percent (~ mean value plus/minus ONE standard deviation) of the time on this security, assuming returns following normal distribution? A). −3.4% to 25.8% B). −18% to 43.9% C). −18% to 40.1% D). −3.4% to 27.8% E). −2.5% to 13.9% [NOTE: one standard deviation range would be 11.2% ± 14.6% 11.2-14.6=-3.4; 11.2+14.6=25.8] Page 4 | 4

MGF301F24 Final Exam Practice Set- Ch.14 Dividends PDF

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