Untitled Document (3) PDF - Finance Past Paper

1. 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 Answer: A) Common stocks 2. Jenn and her family have invested in ABC company that recently filed for...

1. 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 Answer: A) Common stocks 2. 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.​ C) Jenn.​ D) Jenn’s brother. Answer: A) Jenn’s parents. 3. 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 Answer: A) Determining the amount of the dividend to be paid per share 4. 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 rights 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. Answer: A) ABC company’s CEO owns twenty votes per share while the general shareholders of Facebook own one vote per share. 5. 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.​ D) Preferred dividends provide tax-free income to individual investors.​ E) Preferred shareholders prefer noncumulative dividends over cumulative dividends. Answer: A) From a legal perspective, preferred stock is a form of corporate equity. 6. Preferred stock may have all of the following characteristics in common with bonds with the exception of: A) Tax-deductible payments.​ B) The lack of voting rights.​ C) A possible conversion option into common stock.​ D) Annuity payments.​ E) A fixed stated value. Answer: A) Tax-deductible payments. 7. 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. Answer: A) Capital loss. 8. The standard deviation measures the _____________ of a security's returns over time. A) Volatility​ B) Average value​ C) Frequency​ D) Mean​ E) Arithmetic average Answer: A) Volatility 9. 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​ D) Long-term corporate bonds​ E) Long-term government bonds Answer: A) U.S. Treasury bills 10. 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. Answer: A) U.S. Treasury bills, government bonds, large-company stocks, small-company stocks. 11. 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? 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% Answer: A) 3.5% to 9.3% 12. 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% Answer: A) −3.4% to 25.8% 13. If markets are ________ form efficient, market prices reflect all forms of available information, including private, public, and past. A) Strong​ B) Semistrong​ C) Weak​ D) Semiweak​ E) Inefficient Answer: A) Strong 14. ________ form market efficiency 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 Answer: A) Weak 15. An efficient 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 Answer: A) All available information 16. Semistrong form market efficiency states that the value of a security is based on: A) All publicly available information​ 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 Answer: A) All publicly available information 17. If the financial markets are semistrong form efficient, then: A) Only individuals with private (inside) information have a marketplace advantage​ 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 offers the same rate of return Answer: A) Only individuals with private (inside) information have a marketplace advantage 18. In an efficient capital market: A) Security prices reflect all available information​ B) Brokerage commissions are zero​ C) Taxes are irrelevant​ D) Securities always offer a positive NPV​ E) All investments earn the market rate of return Answer: A) Security prices reflect all available information 19. Insider trading does not offer any advantages if the financial markets are: A) Strong form efficient​ B) Weak form efficient​ C) Semiweak form efficient​ D) Semistrong form efficient​ E) Inefficient Answer: A) Strong form efficient 20. In an efficient market, the price of a security will: A) React immediately to any new information that affects the value of the issuing firm​ B) Always rise immediately upon the release of new information with no further price adjustments related to that information​ C) Rise sharply when new information is first released and then decline to a new stable level by the following day​ 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​ E) React to new information over a two-day period after which time no further price adjustments related to that information will occur Answer: A) React immediately to any new information that affects the value of the issuing firm 21. Systematic risk is defined as: A) Any risk that affects 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 Answer: A) Any risk that affects a large number of assets 22. 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 Answer: A) Unexpected increase in the variable costs for a firm 23. 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 Answer: A) Diversification 24. 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 Answer: A) Eliminate asset-specific risk 25. 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​ B) Of zero​ C) Of one​ D) That is > 1 Answer: A) That is > 0 but < 1 26. Systematic risk is: A) Measured by beta​ B) Totally eliminated when a portfolio is fully diversified​ C) Risk that affects a limited number of securities​ D) Measured by standard deviation Answer: A) Measured by beta 27. 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 Answer: A) A portfolio comprised solely of U.S. Treasury bills 28. Standard deviation measures _____________ risk while beta measures _____________ risk. A) Total; systematic​ B) Systematic; unsystematic​ C) Unsystematic; systematic​ D) Total; unsystematic​ E) Asset-specific; market Answer: A) Total; systematic 29. 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. Answer: A) Spreading an investment across many diverse assets will eliminate some of the total risk. 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​ C) I and II only​ D) III and IV only​ E) I, II, and III only Answer: A) I and III only 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.​ B) ABC has a larger market risk than XYZ.​ C) Both ABC and XYZ are fairly priced based on CAPM.​ D) ABC expects a higher expected return than XYZ based on the Capital Asset Pricing Model. Answer: A) ABC has greater stock return volatility than XYZ. According to the capital asset pricing model, the expected return on a security will be affected 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. Answer: A) security’s standard deviation. 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.​ B) An underpriced security will plot below the security market line.​ C) A portfolio with a beta of 0.93 will plot to the right of the overall market.​ D) A security with a beta of 0.99 will plot above the security market line if it is correctly priced.​ E) A risk-free security will plot at the origin. Answer: A) A security with a beta of 1.54 will plot on the security market line if it is correctly priced. 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 effect​ C) Erosion​ D) Sunk cost Answer: A) Opportunity cost 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 layoffs.​ E) The reduction in sales price that will most likely be required to sell inventory that has aged. Answer: A) The anticipated loss of current sales when a new product is launched. The net working capital of a firm will decrease if there is: A) a decrease in accounts receivable.​ B) a decrease in accounts payable.​ C) an increase in inventory.​ D) a decrease in fixed assets. Answer: A) a decrease in accounts receivable. 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. Answer: A) a cash outflow at Time zero and a cash inflow at the end of the project. 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. Answer: A) scenario analysis. 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.​ 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. Answer: A) helps determine the reasonable range of expectations for a project's anticipated outcome. Jenn is analyzing a proposed project to determine how changes in the sales quantity would affect 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 Answer: A) Sensitivity analysis 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.​ 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. Answer: A) helps identify the variable within a project that presents the greatest forecasting risk. 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 Answer: A) subjective 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. Answer: A) are based on the market values of the outstanding securities. 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 Answer: A) The arithmetic average of 12.4 percent and 18.7 percent The cost of preferred stock: A) is equal to the stock's dividend yield.​ B) increases when a firm's tax rate decreases.​ C) is constant over time.​ D) is unaffacted by changes in the market price of the stock.​ E) increases as the price of the stock increases. Answer: A) is equal to the stock's dividend yield. 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.​ C) coupon rate of the company's outstanding bonds.​ D) growth rate of the company's dividends.​ E) company's marginal tax rate. Answer: A) standard deviation of the company's common stock. 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.​ B) Beta is used to compute the return on equity and the standard deviation is used to compute the return on preferred stocks.​ C) The aftertax cost of debt increases when the market price of a bond increases.​ 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.​ E) WACC is applicable only to firms that issue both common and preferred stock. Answer: A) A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. 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 Answer: A) Risk level of the investment project 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 Answer: A) Dividend On which one of the following dates are dividend checks mailed? A) Payment date​ B) Record date​ C) Ex-dividend date​ D) Declaration date Answer: A) Payment date 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 additional $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 description of the additional $0.05 that is being paid this quarter? A) Extra dividend​ B) Liquidating dividend​ C) Special dividend​ D) Regular cash dividend​ E) Stock dividend Answer: A) Extra dividend Which one of the following is an example of a liquidating dividend? A) ABC Company recently sold its grain storage facility and is distributing the proceeds of that sale to its shareholders.​ B) ABC Company has excess cash that it wishes to distribute to its shareholders in addition to its normal cash dividend. This extra distribution 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-time only $10 per share cash dividend. Answer: A) ABC Company recently sold its grain storage facility and is distributing the proceeds of that sale to its shareholders. All else equal, on the __________, the market value of a stock will tend to decrease by roughly the aftertax value of the dividend. A) ex-dividend date​ B) dividend declaration date​ C) date of record​ D) date of payment​ E) day after the date of payment Answer: A) ex-dividend date 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 information? 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. Answer: A) Both Susan and Jake will receive this dividend. 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 estimate of ABC Company’s opening stock price tomorrow? A) Today's closing price minus an amount approximately equal to the aftertax value of the dividend​ B) $1.34 lower than today's closing price​ 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 aftertax value of the dividend Answer: A) Today's closing price minus an amount approximately equal to the aftertax value of the dividend 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 Answer: A) Stock repurchase 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​ B) Tender offer​ C) Open market purchase​ D) Private issue Answer: A) Targeted repurchase