Test 1 & 2 Notes

Test 1 & 2 Notes - Multiple Choice *Which of the...

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Multiple Choice *Which of the following work to reduce agency conflicts between stockholders and bondholders? - Including restrictive covenants in the company’s bond contract. *Which of the following statements is most correct? -The threat of takeover is one way in which the agency problem between stockholders and managers can be alleviated. -Managerial compensation can be structured to reduce agency problems between stockholders and managers. * Which of the following statements is most correct? - The SML relates required returns to firms’ market risk. The slope and intercept of this line cannot be controlled by the financial manager. *The main purpose of an economy’s financial system is to facilitate the transfer of funds from: -Consumer savers to business investors. *Firms raise capital by issuing various types of __________, such as __________. - Securities; stocks and bonds. *Which of the following equations is correct? -Dividends = Net Income – Change in Retained Earnings. *Inflation, recession, and high interest rates are economic events which are characterized as: - Market Risk. * Which of the following statements is most correct? - The beta coefficient of a stock is normally found by running a regression of past returns on the stock against past returns on a stock market index. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as its beta. *Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium). - The expected return on Stock A will be greater than that on Stock B. *Diversifiable risk, which is measured by beta, can be lowered by adding more stocks to a portfolio: - False. *If investors become more averse to risk, the slope of the Security Market Line (SML) will increase: - True. * Which of the following statements is most correct? - A security’s beta measures it’s non-diversifiable (systematic, or market) risk relative to that of an average stock. *Assume that investors become increasingly risk averse, so that the market risk premium increases. Also, assume that the risk-free fate and expected inflation remain the same. Which of the following is most likely to occur? - The required rate of return on each security will increase by an amount equal to the amount of risk in the security times the market risk premium. * Which of the following statements is most correct? - The distance of the plot points from the characteristic line is a measure of the stock’s diversifiable risk. * Which of the following statements is most correct? - The slope of the security market line is the market risk premium (Rm – Rrf).
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*Which of the following is not considered a capital component for the purpose of calculating the WACC as it applies to capital budgeting? -
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Test 1 & 2 Notes - Multiple Choice *Which of the...

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