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##### 56 Finance Multiple Choice Questions

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Question;MULTIPLE CHOICE1. Once firms issue financial instruments in primary markets, these same stocks and bonds are thentraded in which of these?A direct transfers\.B) secondary marketsC. initial public offeringsD. over-the-counter stocks2. Which of the following is NOT a capital market instrument?A. U.S. Treasury billsB. Corporate stocks and bondsC. Ll.S, Treasury notes and bondsD. U.S. government agency bonds3. These provide a forum in which demanders of funds raise funds by issuing new financialinstruments, such as stocks and bonds.A. money marketsB. primary marketsC. investment banksD. secondary markets4. Primary market financial instruments include stock issues from firms allowing their equity shares tobe publicly traded on stock market for the first time. We usually refer to these first-time issues aswhich of the following?A. direct transfersB. initial public offeringsC. money market transfersD. over-the-counter stocks5. This is a security formalizing an agreement between two parties to exchange a standard quantityof an asset at a predetermined price on a specified date in the future.A. liquidity assetB. trading volumeC. derivative securityD. initial public offering6. This is the ease with which an asset can be converted into cash.A. liquidityB. direct transferc. primary marketD. secondary market7. This is the interest rate that is actually observed in financial markets.A. nominal interest ratesB. real interest ratesC. real risk free rateD. market premium8. According to this theory of term structure of interest rates, at any given point in time, the yieldcurve reflects the market's current expectations of future short-term rates.A. Expectations TheoryB. Unbiased Expectations TheoryC. Future Short-term Rates TheoryD. Term Structure of Interest Rates Theory9. This theory argues that individual investors and financial institutions have specific maturitypreferences, and to encourage buyers to hold securities with maturities other than their mostpreferred requires a higher interest rate.A. Unbiased Expectations TheoryB. Liquidity Premium HypothesisC. Market Segmentation TheoryD. Supply and Demand Theory10. This is the interest rate that would exist on a default free security if no inflation were expected.A. nominal interest rateB. real risk free rateC. real interest rateD. market premium11. This is the risk that a security issuer will miss an interest or principal payment or continue to misssuch payments.A. price riskB. default riskC. liquidity riskD. maturity risk12. This is a comparison of market yields on securities, assuming all characteristics except maturityare the same.A. market riskB. liquidity riskC. maturity riskD. term structure of interest rates13. This is defined as the volatility of an investment, which includes firm specific risk as well asmarket risk.C. standard deviationA. diversifiable riskB. market riskD. total risk14. This is defined as the portion of total risk that is attributable to firm or industry factors and canbe reduced through diversification.A. modern portfolio riskB. firm specific riskC. market riskD. total risk21. This is the average of the possible returns weighted by the likelihood of those returns occurring.A. market returnB. efficient returnC. required returnD. expected return15. This is defined as a combination-ofinvestment-assets-held-by-an1nvest~r.A. bundleB. portfolioC. market basketD. All of these22 This is...tpicall'l-consid..er:ed1he~etum..o.n...U...S.-glMilllrn.ent and bills and equals the realbondsinterest and the expected inflation premium.A. market risk premiumB. required returnc. risk-free rateD. risk premium16. This is the portion of total risk that is attributable to overall economic factors.A. modern portfolio riskB. firm specific riskC. market riskD. total risk17. This is the investor's combination of securities that achieves the highest expected return for agiven risk level.A. efficient portfolioB. modem portfolioC. opti mal portfolioD. total portfolio18. This is the term for portfolios with the highest return possible for each risk level.A. efficient portfoliosB. modern portfoliosC. opti mal portfoliosD. total portfolios19. This is a measurement of the co-movement between two variables that ranges between -1 and+1.A. coefficient of variationB. standard deviationC. correlationD. total risk20. Dominant Portfolios Determine which one of these three portfolios dominates another. Name thedominated portfolio and the portfolio that dominates it Portfolio Blue has an expected retum of 14percent and risk of 19 percent. The expected return and risk of portfolio Yellow are 15 percent and18 percent, and for the Purple portfolio are 16 percent and 21 percent.A. Portfolio Purple dominates Portfolio BlueB. Portfolio Blue dominates Portfolio YellowC. Portfolio Yellow dominates Portfolio BlueD. Portfolio Purple dominates Portfolio YellowPortfolio Yellow dannete:PatfDlio Blue becease it hiJS both " highEr expectedreturn l1d" /ower risk level.23. In theory, this is a combination of securities that places the portfolio on the efficient frontier andon a line tangent from the risk-free rate.A. efficient marketB. market portfolioC. stock market bubbleD. probability distribution24. The use of debt to increase an investment position.A. stock market bubbleB. behavioral financeC. financial leverageD. probability25. A measure of the sensitivity of a stock or portfolio to market risk.A. behavioral financeB. efficient marketC. hedgeD. beta26. This is the reward investors require for taking risk.A. market risk premiumB. required returnC. risk premiumD. risk-free rate27. Which of these is the measurement of risk for a collection of stocks for an investor?A. betaB. portfolio betaC. efficient marketD. expected return28. Which of the following is NOT a necessary condition for an efficient market?A. Many buyers and sellers.B. No trading or transaction costs.e. No prohibitively high barriers to entry.D. Free and readily available information available to all participants.29. The constant growth model assumes which of the following?A. ThatB. Thate. ThatD. Thatthere are executive stock options available to managers.there is privately held information.the stock is efficiently priced.there is no restricted stock.30. A theory that describes the types of information that are reflected in current stock prices.A. asset pricingB. behavioral financee. public informationD. efficient market hypothesis31. When calculating the weighted average cost of capital, weights are based onA. book values.B. book weights.e. market values.D. market betas.32. Which of the following is a true statement regarding the appropriate tax rate to be used in theWACC?A. One would use the marginal tax rate that the firm paid the prior year.B. One would use the average tax rate that the firm paid the prior year.C. One would use the weighted average of the marginal tax rates that would have been paid on thetaxable income shielded by the interest deduction.D. One would use the marginal tax rates that would have been paid on the taxable income shieldedby the interest deduction.48. The Net Present Value decision technique may not be the onlfirm is faci ngA. time or resource constraints.B. a labor union.e. the election of a new board of directors.D. a major investment.34. These are fees paid by firms to investment bankers for issuing new securities.A. floatation costsB. interest expenseC. seller financing chargesD. user fees35. This is a principle of capital budgeting which states that the calculations of cash flows shouldremain independent of financing.A. generally accepted accounting principleB. financing principleC. separation principleD. WACCprinciple36. This is the process of estimating expected future cash flows of a project using only the relevantparts of the balance sheet and income statements.A. incremental cash flowsB. cash flow analysise. pro forma analysisD. substitutionary analysisflowsn as37. Conceming incremental project cash flow, this is a cost one would never count as an expense ofthe project.A. initial investmentB. taxes paide. operating expenses of the projectD. financing costs49. Neither payback period nor discounted payback period technaccounts forA. time value of money.B. market rates of return.C. cash flows that occur after payback.D. cash flows that occur during payback.50. Which rate-based decision statistic measures the excess retithe cost of capital for a project, rather than the gross return?A. Internal Rate of Retum, IRRB. Modified Internal Rate of Return, MIRRe. Profitability Index, PID. Net Present Value, NPV51. These are groups or pairs of projects where you can acceptA. dependentB. independentC. mutually exclusiveD. mutually dependent52. A capital budgeting technique that converts a project's castreinvestment rate prior to applying the Internal Rate of Return,A. discounted paybackB. net present valueC. modified internal rate of returnD. profitability index38. This is used as a measure of the total amount of available cash flow from a project.A. free cash flowB. operating cash flowe. investment in operating capitalD. sunk cash flow39. When calculating operating cash flow for a project, one would calculate it as being33. Which of these is the basic intuition behind calculating the cost of capital?A. Firms need to know what the cost of all their current sources of capital cost them.B. When firms use multiple sources of capital, they need to calculate the current expenditures in adollar amount format.e. When firms use multiple sources of capital, they need to calculate the appropriate interest rate forvaluing their firm's cash flows as a weighted average of the capital components.D. When firms use multiple sources of capital, they need to calculate the appropriate interest rateafter taxes for estimating current cash outflows.mathematically equal to which of the following?A. EBIT - Interest - Taxes + DepreciationB. EBIT - TaxesC. EBIT + DepreciationD. EBlT - Taxes + Depreciation40. A decrease in net working capital (NWC) is treated as aA. cash inflowB. cash outflowe. sunk costD. historical coston-53. Investing in stocks can be like gambling when:A. Both have a short time horizonB. Both involve riskC. Both involve an initial outflow of cashD. Both have a positive expected returnE. Both result in long-term loses.54. Which of the following is false?A. Incremental costs can be Opportunity costs.B. Opportunity costs can be Incremental cost.e. Of the three categories of Opportunity costs, only one is usD. Opportunity costs and Incremental cost may be discountedE. Some Opportunity costs are not Incremental costs.55. If the risk of an investment project is different than the firm's risk then:A. you must adjust the discount rate for the project based on the firm's risk.B. you must adjust the discount rate for the project based on the project risk.C. you must exercise risk aversion and use the market rate.D. an average rate across prior projects is acceptable because estimates contain errors.E. one must have the actual data to determine any differences in the calculations.56. Insider trading does not offer any advantages if the financial markets are:A. strong form efficient.B. semi-strong fomn efficient.C. semi-weak form efficient.D. weak form efficient.E. inefficient.PROBLEMS1. (3 points) A particular security's default risk premium is 5 percent. For all securities, the inflationrisk premium is 4 percent and the real interest rate is 3 percent. The security's liquidity risk premiumis 1 percent and maturity risk premium is 2 percent. The security has no special covenants. What isthe security's equilibrium rate of return?2. (3 points) Suppose that the current one-year rate (one-year spot rate) and expected one-year Tbill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:IRI= 5.0%,E(2RI)= 5.5%,E(3RI)= 6.5%,E(4RI)= 7.0%,Using the unbiased expectations theory, what is the current (long-term) rate for four-year-maturityTreasury securities?3. (3 points) One-year Treasury bills currently earn 5.50 percent. You expect that one year fromnow, one-year Treasury bill rates will increase to 5.75 percent. The liquidity premium on two-yearsecurities is 0.75 percent. If the liquidity premium theory is correct, what should the current rate beon two-year Treasury securities?4. (5 points) HydroTech Corp stock was $32 per share at the end of last year. Since then, it paid a$1 per share dividend. The stock price is currently $45. If you owned 500 shares of MedTech, whatwas your percent return?5. (3 points) Year-to-date, Company X had earned a -2 percent return. During the same timeperiod, Company Yearned 8 percent and Company Z earned 6 percent. If you have a portfolio madeup of 40 percent Company X, 30 percent Company Y, and 30 percent Company Z, what is yourportfolio return?6. (3 points) If the annual return on the S&P 500 Index was 15 percent. The annual T-bill yieldduring the same period was 6 percent. What was the market risk premium during that year?8. (3 points) TAB Inc. has a $100 million (face value), 10 year bond issue selling for 95 percent ofpar that pays an annual coupon of 8.5 percent. What would be TAB's before-tax component cost ofdebt?r the firm shouldof capital is 10).507. (7 points) You hold the positions in the table below.---- ~=-:'--=-~IP':,~~I 1- -Bcl,,-l ISI,ar,"Website.cornBudaet StoresManufacturing CorpPharmacy CorpIII$20.50$36.20$60.70$28.40III100L5075200III3.21.52.40.759. (4 points) Team Sports has 4 million shares of common stock outstanding, 2 million shares ofpreferred stock outstanding, and 20 thousand bonds ($1,000 par). If the oommon shares are sellingfor $5 per share, the preferred share are selling for $20 per share, and the bonds are selling for 99percent of par, what would be the weight used for equity in the oomputation of Team's WACC?Iou Id accept orlI is 10 percent.I2.A. What is the beta of your portfolio?5010. (6 points) An all-equity firm is considering the projects shown below. The T-bill rate is 3 percentand the market risk premium is 6 percent.. P.ojectAnCDExpectedReturn10.0%17.0%12.0%.15.0%.Beta0.91.11.42.2rojects with theisk class is 8liefor the projectsA. If the firm uses its current WACCof 12 percent to evaluate these projects, which project(s), ifany, will be incorrectly rejected?000,000B. If you expect the market to earn 14 percent and the risk-free rate is 5 percent, what is thereq uired return of the portfolio?PI for eachB. If the firm uses its current WACCof 12 percent to evaluate these projects, which project(s), ifany, will be inoorrectly accepted?11. (3 points) Suppose that TipsNToes, Inc.'s capital structure features 40 percent equity, 60 percentdebt, and that its before-tax cost of debt is 9 percent, while its cost of equity is 15 percent. If theappropriate weighted average tax rate is 34 percent, what will be TipsNToes's WACC?

Paper#47981 | Written in 18-Jul-2015

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