FIN 332 Lecture Notes - Lecture 1: Lead, Efficient-Market Hypothesis, Savings Account
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Question 5
The coefficient of variation is a better measure of risk than the standard deviation if the expected returns of the securities being compared differ significantly.
True |
False |
Question 6.
In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.
True |
False |
Question 7
Typically, debentures have higher interest rates than mortgage bonds primarily because the mortgage bonds are backed by assets while debentures are unsecured.
True |
False |
Question 8
If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.
True |
False |
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Question 9
Which of the following is the best measure of the wealth of a firm's stockholders?
The firm's Net Income during the past year |
Expected Earnings per Share during the coming year |
Book Value (or Net Worth) as recorded on the balance sheet |
The price of the firm's stock on the open market |
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Question 10
Consider the following firms:
Net Income | Stock Price at | Stock Price at | |
this year | Beg of Year | End of Year | |
Firm A: | $10,000,000 | $20 | $10 |
Firm B: | $(10,000,000) | $10 | $20 |
The manager of Firm A is doing a better job than B |
The manager of Firm B is doing a better job than A |
Neither manager is doing a good job |
Both managers are doing a good job |
Question 11
A company has the following income statement. What is its net operating profit after taxes (NOPAT)?
Sales $1,000
Costs 700
Depreciation 100
EBIT $ 200
Interest expense 50
EBT $ 150
Taxes (40%) 60
Net income $ 90
$ 90 |
$120 |
$150 |
$180 |
$200 |
Question 12
Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?
2.40% |
3.60% |
4.50% |
5.25% |
6.00% |
Question 13
If a firm's current ratio is less than 1.0, it indicates that:
The firm had negative net income for the year |
The firm will be unable to pay its shortterm loans which come due this year |
Current Assets are less than Current Liabilities |
The firm is insolvent |
Question 14
A firm which has a relatively large amount of cash and receivables in its current assets accounts and a relatively small amount of current liabilities would be considered:
liquid |
profitable |
risky |
nuts |
Question 15
In November 2011 you bought 100 shares of Microsoft stock for $35.375 a share. In November 2013 you sold your stock for $92.5625 a share. What was your average annual rate of return on your Microsoft investment? (disregard dividends and commissions)
262% |
62% |
585% |
1.6% |
Question 16
You deposit $2,000 in a savings account that pays 10 percent interest, compounded annually. How much will your account be worth in 15 years?
$2,030.21 |
$5,000.00 |
$8,091.12 |
$8,354.50 |
$9,020.10 |
Question 17
You can earn 8 percent interest, compounded annually. How much must you deposit today to withdraw $10,000 in 6 years?
$5,402.69 |
$6,301.70 |
$6,756.76 |
$8,432.10 |
$9,259.26 |
Question 18
Calculate the required rate of return for Mercury, Inc., assuming that the real rate of interest is 3 percent, investors expect a 5 percent rate of inflation in the future, and they expect the rate of return on the overall stock market to be 13 percent. Mercury has a beta of 2.0.
15% |
16% |
17% |
18% |
None of the above |
Question 19
Which is the best measure of risk for an asset held in isolation? Which is the best measure for an asset held in a diversified portfolio?
Variance; correlation coefficient |
Standard deviation; correlation coefficient |
Beta; variance |
Coefficient of variation; beta |
Beta; beta |
Question 20
You have three stocks in your portfolio. $10,000 is invested in a stock with a beta of 1.50 and $15,000 is invested in a stock with a beta of 1.00, and $25,000 is invested in a stock with a beta of 0.50. What is the beta of your portfolio?
0.28 |
0.85 |
1.00 |
3.00 |
Question 21
A corporate bond with a $1,000 face value pays a $50 coupon every six months. The bond will mature in ten years, and has a nominal yield to maturity of 9 percent. What is the price of the bond?
$ 634.86 |
$1,064.18 |
$1,065.04 |
$1,078.23 |
$1,094.56 |
Question 22
The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20 percent, what should be the stock's market value?
$150 |
$100 |
$ 50 |
$ 25 |
$ 10 |
Question 23
A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?
$57.50 |
$62.25 |
$71.86 |
$64.00 |
$44.92 |
Question 24
A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share (i.e., D5 = $1.00). Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company's beta is 1.2, and the market risk premium is 5 percent. The required rate of return on the companyâs stock is expected to remain constant. What is the current stock price?
$ 7.36 |
$ 8.62 |
$ 9.89 |
$10.98 |
$11.53 |
Question 1
Financial investments are made in efficient markets. The existence of these markets suggests that:
a. | Investors cannot earn superior returns. | |
b. | Investors cannot expect to outperform the market consistently. | |
c. | Security prices are random. | |
d. | Bearing additional risk will not increase return. |
2 points
Question 2
A new issue of corporate securities sold to the general public must be:
a. | Registered with the SEC. | |
b. | Initially sold through brokers. | |
c. | Offered initially to existing stockholders. |
2 points
Question 3
Money market mutual funds invest in which of the following?
Commercial paper.
Repurchase agreements.
Corporate bonds.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | All of the choices are correct. |
3 points
Question 4
FDIC insures:
a. | U.S. Treasury bills. | |
b. | Money market mutual funds. | |
c. | Saving accounts. | |
d. | Repurchase agreements. |
3 points
Question 5
Which of the following does not have default risk?
a. | Money market mutual funds. | |
b. | Commercial paper. | |
c. | Negotiable certificates of deposit. | |
d. | U.S. Treasury bills. |
2 points
Question 6
The spread is the:
a. | Difference between the bid and ask prices. | |
b. | Commission charged by the broker. | |
c. | Difference between the purchase and sale prices. | |
d. | Difference between the commissions charged by full-service and discount brokers. |
3 points
Question 7
Securities regulations protect investors by:
a. | Requiring disclosures of information by firms. | |
b. | Stopping investors from buying overpriced stock. | |
c. | Reducing competition among brokers. | |
d. | Establishing commission schedules. |
3 points
Question 8
If a stock is bought on margin:
a. | The full amount of the cost of the investment is borrowed. | |
b. | The commissions on the investment are increased. | |
c. | The cost of the investment is reduced. | |
d. | The interest on the borrowed funds is set by the SEC. |
3 points
Question 9
Sarbanes-Oxley, the latest important securities law:
a. | Reduces potential conflicts between securities analysts and investment bankers. | |
b. | Legalizes the sale of securities by investment brokers. | |
c. | Requires corporate boards of directors to own stock. | |
d. | Mandates that security analysts file their recommendations with the SEC. |
2 points
Question 10
Which of the following are true about the present value of a dollar?
It increases as the interest rate increases.
It decreases as the interest rate increases.
It increases as the time period increases.
It decreases as the time period increases.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
3 points
Question 11
Time value concepts may not be used to determine:
a. | The present value of an annuity. | |
b. | The margin required on a stock purchase. | |
c. | The future value of $100 deposited in a bank. | |
d. | The present value of a lump sum. |
2 points
Question 12
What is the marginal tax rate?
a. | The tax rate paid on investment gains from items purchased on margin. | |
b. | The tax rate paid on an additional dollar of taxable income. | |
c. | The margin required on a stock purchase. | |
d. | The present value of a lump sum. |
2 points
Question 13
Examples of capital gains include sales of which of the following?
IRA accounts.
Stocks sold for a profit.
Real estate sold for a profit.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | All of these choices. |
3 points
Question 14
With a Roth IRA, the individual:
a. | May deduct annual contributions. | |
b. | Earns tax-free income. | |
c. | Defers taxes. | |
d. | Avoids estate taxes. |
2 points
Question 15
Sources of unsystematic risk include which of the following?
A firms financing decisions.
A firms operations.
Fluctuating market prices.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | All of these choices. |
2 points
Question 16
For diversification to reduce risk:
a. | The returns on the individual securities should be highly correlated. | |
b. | The prices of the stocks should be stable. | |
c. | The returns on the individual securities should be negatively correlated. | |
d. | One firm should offer dividends and the other should offer capital gains. |
2 points
Question 17
Which of the following are true about beta coefficients?
They are a measure of systematic risk.
They relate the return on an individual security to the return on the market.
They measure the variability of an assets return.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | All of these choices. |
3 points
Question 18
Which of the following does an efficient portfolio do?
Maximizes risk for a given return.
Minimizes risk for a given return.
Maximizes return for a given level of risk.
Minimizes return for a given level of risk.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
3 points
Question 19
The security market line does not:
a. | Indicate the relationship between risk and return. | |
b. | Relate the market return and beta to a stock's return. | |
c. | Identify the optimal portfolio for the investor. | |
d. | Use beta coefficients as a measure of risk. |
3 points
Question 20
Mutual funds ____ realized capital gains and income (for example, dividends received):
a. | Retain. | |
b. | Reinvest. | |
c. | Distribute. | |
d. | Distribute or reinvest. |
2 points
Question 21
An index fund limits its portfolio to:
a. | High quality securities. | |
b. | Stocks that respond to changes in the consumer price index. | |
c. | Stocks included in an aggregate measure of stock prices. | |
d. | Stocks of firms in a particular industry. |
2 points
Question 22
Mutual funds with beta coefficients greater than 1.0:
a. | Have outperformed the market. | |
b. | Have underperformed the market. | |
c. | Have more systematic risk than the market. | |
d. | Have less systematic risk than the market. |
3 points
Question 23
Which of the following will tend to cause a stock's price to fall?
The firms beta declines.
The firms beta increases.
The risk-free rate declines.
The risk-free rate increases.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
2 points
Question 24
The use of P/E ratios to select stocks suggests that:
a. | High P/E stocks should be purchased. | |
b. | Low P/E ratio stocks are overvalued. | |
c. | A stock should be purchased if it is selling near its historic low P/E. | |
d. | A stock should be purchased if it is selling near its historic high P/E. |
2 points
Question 25
What does the efficient market hypothesis require?
Financial markets to be competitive.
Prices to adjust rapidly.
Prices of undervalued securities to fall.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | All of these choices. |
3 points
Question 26
Which of the following does the strong form of the efficient market hypothesis suggest?
Inside information will not lead to superior investment results.
Inside information will lead to superior investment results.
Studying financial statements will not lead to superior investment results.
Studying financial statements will lead to superior investment results.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
3 points
Question 27
Which of the following is the least broad-based measure of stock prices?
a. | NASDAQ market index. | |
b. | Dow Jones industrial average. | |
c. | S&P 500 stock index. | |
d. | AMEX market value index. |
3 points
Question 28
What is dollar-cost averaging?
a. | Periodically buying a round lot of stock. | |
b. | Periodically investing a specified dollar amount in a stock. | |
c. | A means to increase the average cost basis. | |
d. | A means to ensure a positive return. |
2 points
Question 29
Stock dividends cause:
a. | The price of a share of stock to rise. | |
b. | The price of a share of stock to fall. | |
c. | The value of the firm to rise. | |
d. | The value of the firm to fall. |
2 points
Question 30
Which of the following occurs when a stock has a two-for-one split?
a. | The price of the stock doubles. | |
b. | The firm's assets increase. | |
c. | The firm's liabilities decrease. | |
d. | The par value of the stock is reduced. |
3 points
Question 31
Dividend reinvestment plans offer which of the following advantages?
Deferment of federal income taxes.
A convenient means to accumulate shares.
Dollar-cost averaging.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | 2. |
3 points
Question 32
When the Federal Reserve seeks to expand the money supply, it:
a. | Sells securities. | |
b. | Buy securities. | |
c. | Runs a deficit. | |
d. | Runs a surplus. |
2 points
Question 33
The sum of cash, currency, and demand deposits is:
a. | M1. | |
b. | M2. | |
c. | M3. | |
d. | M4. |
3 points
Question 34
If the Federal Reserve lowers the target federal funds rate:
a. | The discount rate rises. | |
b. | Liquidity in the banking system is increased. | |
c. | Security prices fall. | |
d. | Required reserves are also decreased. |
3 points
Question 35
The anticipation of inflation suggests that the investor should:
a. | Buy bonds. | |
b. | Anticipate higher interest rates. | |
c. | Avoid real estate investments. | |
d. | Sell stocks of gold companies. |
3 points
Question 36
The current ratio is unaffected by:
a. | Using cash to pay a dividend. | |
b. | The collection of an account receivable. | |
c. | Selling inventory for a profit. | |
d. | Selling bonds and using the funds to finance inventory. |
2 points
Question 37
Which of the following are true as the debt ratio increases?
Fewer assets are debt financed.
More assets are debt financed.
The ratio of debt equity increases.
The ratio of debt equity decreases.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
2 points
Question 38
The technical approach suggests that future stock prices are forecasted by:
a. | Past stock rates. | |
b. | Financial ratios. | |
c. | Accounting statements. | |
d. | Monetary policy. |
2 points
Question 39
The Dogs of the Dow strategy:
a. | Forecasts the direction of the Dow Jones averages. | |
b. | Suggests buying the Dow stocks with the highest dividend yields. | |
c. | Outperforms the S&P 500. | |
d. | Suggests buying the lowest-priced Dow stocks. |
3 points
Question 40
Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?
a. | Accounting and finance. | |
b. | Finance and psychology. | |
c. | Physics and finance. | |
d. | Finance and marketing. |