Both the APT and the CAPM imply a positive relationship between expected return and risk. The APT
A. very similarly to the CAPM via the beta of the security.
B. in terms of individual intersecurity correlation versus the bet
Financial planning is concerned with the basic policy elements of:
A investment decision, decisions on the amount of cash payments to shareholders, and the decision of
. which investment banker to choose.
B. the method of raising capita
Net working capital is defined as:
A. the current assets in a business.
B. the difference between current assets and current liabilities.
C. the present value of short-term cashflows.
D. the difference between all assets and liabilities
If a firm has achieved its target cash balance the new present value is:
A. positive because the cash balance is positive.
B. zero because increasing the cash balance increases the interest cost.
C. negative because the cash balance has
Bond Prices and Yields
1. Drexel Burnham Lambert filed for bankruptcy in 1990 due to _.
a. large losses in gold futures
b. an insider trading scandal
c. large underwriting losses
d. none of the above
2. Sinking funds are commonly viewed as protecting the
Selling goods and services on credit is:
A. an investment in a customer.
B. necessary because customers cannot pay for the goods.
C. a decision independent of customers.
D. permissible if your bank lends the money.
When credit is gra
A warrant gives the owner:
A. the obligation to sell securities directly to the firm at a fixed price for a specified time.
B. the right to purchase securities directly from the firm at a fixed price for a specified time.
C. the obligat
1. If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium, that standard deviation would be called the _.
c. implied volatility
When a security is added to a portfolio the appropriate return and risk contributions are:
A. the expected return of the asset and its standard deviation.
B. the most probable return and the beta.
C. the expected return and the beta.
A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is not true?
A. NPV is positive if the interest rate is less than 10%.
B. NPV is negative if the interest rate is less than 10%.
C. NPV is zero
The acceptance of a capital budgeting project is usually evaluated on its own merits. That is, capital
budgeting decisions are treated separately from capital structure decisions. In reality, these decisions may
be highly interwoven. Th
An equity issue sold directly to the public is called:
A. a rights offer.
B. a general cash offer.
C. a restricted placement.
D. a fully funded sales.
E. a standard call issue.
An equity issue sold to the firm's existing stockholders
1. The _ is the result of applying a set of arbitrary accounting rules to spread the acquisition cost of assets over a specified number of years.
a. book value
b. market value
c. liquidation value
d. Tobin's q
2. In general, firms in the
The capital gains yield plus the dividend yield on a security is called the:
A. geometric return.
B. average period return.
C. current yield.
D. total return.
The expected return on a security in the market context is:
A. a negative
Indirect costs of financial distress:
A. effectively limit the amount of equity a firm issues.
B. serve as an incentive to increase the financial leverage of a firm.
C. include direct costs such as legal and accounting fees.
In an efficient market, the price of a security will:
A. always rise immediately upon the release of new information with no further price adjustments related
to that information.
B.react to new information over a two-day period after w
In a lease arrangement, the owner of the asset is:
A. the lesser.
B. the lessee.
C. the lessor.
D. the leaser.
In a lease arrangement, the user of the asset is:
A. the lesser.
B. the lessee.
C. the lessor.
D. the leaser.
Distributions to shareholders from capital are called:
A. earnings dividends.
B. a stock split.
C. liquidating dividends.
D. stock dividends.
E. regular cash dividends.
A dividend is usually a cash distribution from:
A. current earni
A derivative is a financial instrument whose value is determined by:
A. regulatory body such as the FTC.
B. a primitive or underlying asset.
C. hedging a risk
D. hedging a speculation.
Derivatives can be used to either hedge or specu
A stock certificate often has a stated value on it. This amount is the:
A. book value.
B. stated book value.
C. subordinated liquidation value.
D. par value.
The total shareholders' equity of a corporation is determined by:
A. the su
The time value of money concept can be defined as:
A. the time in your life when you receive an inheritance.
B. the relationship between money spent versus money received.
C. the relationship between a dollar to be received in the futur
The firm's capital structure refers to:
A. the way a firm invests its assets.
B. the amount of equity or capital in the firm.
C. the amount of dividends a firm pays.
D. the way in which a firm's assets are financed.
E. how much cash the
1. You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date when IBM stock sells for $123 per share. You will realize a _ on the investment.
a. $200 profit
b. $200 loss
c. $300 profit
Which one of the following statements is correct assuming that exchange rates are quoted as units of
foreign currency per dollar?
A. The exchange rate moves opposite to the value of the dollar.
B. The exchange rate rises when the U.S. i
Financial distress can be best described by which of the following situations in which the firm is forced to
take corrective action:
A. cash payments are delayed to creditors.
B. the market value of the stock declines by 50%.
C. the fir
In a merger or acquisition, a firm should be acquired if:
A. it generates a positive net present value to the shareholders of an acquiring firm.
B. it is a firm in the same line of business, in which the acquirer has expertise.
C. it is
The NPV approach must be:
A. augmented by added analysis if there are a few imbedded options.
B. augmented by added analysis if a decision has significant imbedded options.
C. jettisoned if there are any embedded options.
D. computed ca
The special contractual nature giving the owner the right to buy or sell an asset at a fixed price on or
before a given date is the basis of:
A. a common stock.
B. a capital investment.
C. a futures.
D. an option.
In general, an opti
The length of time debt remains outstanding with some unpaid balance is called:
A. the funded period.
B. the sinking fund period.
C. the deferred call period.
D. the maturity.
Long-term debt is sometimes called:
A. funded debt.
The NPV formula for risky projects evaluates _ using the _.
A. riskless discount rate, expected incremental cashflows.
B. certain cashflows, riskless discount rate.
C. expected incremental cashflowsm riskless discount rate.
D. certain c