Which of the following is a characteristic of an efficient financial market?

Absence of underpriced or overpriced securities

Abundance of bargain opportunities
Necessity of active portfolio management
Focus on security analysis

Primary market refers to the market ____________.

that attempts to identify mispriced securities and arbitrage opportunities.
in which investors trade already issued securities.
where new issues of securities are offered.
in which securities with custom-tailored characteristics are designed.

Which of the following observations concerning financial assets is true?

They generate net income to the economy.
They include the knowledge that can be used to produce goods and services.
They are claims to the income generated by real assets.
They contribute directly to the productive capacity of the economy.

Which of the following statements is true about derivative securities?

Derivatives are frequently used to hedge risks.
The term "derivatives" stems from the fact that these securities derive their value only
from options and futures contracts.
Only sellers of derivatives take speculative positions in the underlying assets.
Derivatives are used to reduce leveraging.

A stand-alone investment bank specializes in ____________.

identifying mispriced securities
purchasing securities on behalf of investors
managing investor funds
underwriting new securities

In the financial markets, financial intermediaries ____________.

are considered "major players" who are net lenders
are considered "major players" who are net borrowers
bring lenders and borrowers together
raise funds by borrowing in order to invest in real assets

A portfolio manager with a passive investment strategy manages a portfolio by

holding a diversified portfolio without expending effort to improve performance
selecting mispriced securities in order to improve performance
using a "bottom-up" strategy
emphasizing asset allocation and security selection

Agency problems within a corporation are _______________.

conflicts among stockholders with differing objectives
conflicts between stockholders and financial intermediaries
conflicts among managers with competing interests
conflicts between managers and stockholders

Which of the following is not a financial intermediary?

Credit unions
Insurance companies
Mutual funds
Investment bankers

Financial intermediaries which pool and manage the money of many investors are called
_________________.
financial engineers
investment companies
investment bankers
credit unions

If stock returns exhibit positive but small serial correlation, this means that ___________
returns tend to follow ______________ returns.
positive; positive
large positive; small positive
small negative; large negative
negative; positive

The strong-form of the efficient market hypothesis states that stock prices reflects
______________ information relevant to the firm.
all publicly available as well as company insider
all publicly available
all company insider
all publicly available financial and economic

The ______________ form of the efficient market hypothesis implies that there is little or
nothing to be gained from technical analysis.
weak
semi-weak
semi-strong
strong

The efficient market hypothesis suggests that investors should:

adopt an active portfolio management strategy.
adopt a passive portfolio management strategy.
use technical analysis as the basis for investment decisions.
use fundamental analysis as the basis for investment decisions.

Empirical tests of the strong-form version of the efficient market hypothesis indicate that
______________ are generally able to achieve superior returns.
hedge fund managers
professional money managers
stock exchange specialists
company insiders

Stock prices follow a random walk because ______________.

investors are irrational
new information is unpredictable
information is not efficiently disseminated
investors tend to rely on technical analysis

Some researchers have found that portfolios of stocks with low P/E ratios ____________.
outperform stocks with high P/E ratios
underperform stocks with high P/E ratios
tend to have the same returns as stocks with high P/E ratios
are uncorrelated with returns for high P/E stocks

In an efficient market hypothesis (EMH):

the strong form asserts that stock prices reflect all the information that can be derived by
examining market trading data.
the semi strong form states that a firm's stock price reflects all publicly available
information about a firm's prospects.
the weak form holds that current market prices reflect all information that can be relevant
to the valuation of the firm.
market is inefficient if security prices lately and fully reflect all available relevant
information.

Rising interest rates will cause:

Businesses to borrow more.
Government borrowing to fall.
Bond prices to rise to compensate for the higher rates.
Bond prices to fall.
none of the above

Which of the following is an example of financial intermediation?

An Internet company issues stock by selling shares directly to buyers.
A woman opening a new business borrows funds from her uncle.
A professor purchases shares of stock directly from a corporation.
A bank extends a mortgage loan to a household.

Investors in the money market seek _____ and _____:

high returns on long-term investments, low default rise
high returns on long-term investments, liquidity
low default risk, liquidity
low exchange rate risk, high returns
high returns, moderate default risk
Determine whether the below statements are true or false.
I. Prices and returns for short-term bonds are less volatile than those for long-term
bonds.
II. The prices of longer-maturity bonds respond more dramatically to changes in
interest rates.
a) Both are true.
b) Both are false.
c) I is true, II false.
d) I is false, II true.

The rate which equates the purchase price of a security with the present value of all its
expected annual net cash inflows is the:
yield to maturity
coupon rate
simple interest rate
current yield
all of the above

Typically, yield curves are

gently upward-sloping.
gently downward-sloping.
flat.
mound shaped.
bowl shaped.

An investor gains from short selling by _________ and then later _________.
selling a stock; buying it back at a lower price
buying a stock; selling it at a lower price
buying a stock; selling it at a higher price
selling a stock; buying it back at a higher price

The problem created by asymmetric information before the transaction occurs is called
_____,while the problem created after the transaction occurs is called _____.
adverse selection; moral hazard
moral hazard; adverse selection
costly state verification; free-riding
free-riding; costly state verification

On a bank's balance sheet

bank capital equals assets minus liabilities.
assets are the bank's sources of funds.
liabilities are the bank's use of funds.
all of the above.

A mutual fund sold with no sales commissions, from which shares can be redeemed at
any time at a price based on the value of the fund's assets, is a _____, _____ fund.
load; closed-end
no-load; open-end
no-load; closed-end
load; open-end

Overpricing occurs when

Expected return on security is greater than required return
Expected return on security is less than required return
Expected return is equal to risk free rate of return
Expected return in equal to required return

Which one of the following portfolios would have the least systematic risk?
a portfolio of the common stocks of 100 different companies
a market portfolio
a portfolio half invested in the market portfolio and half invested in Treasury bills
a portfolio half invested in the market portfolio and half invested in stocks with betas of
1.50
a portfolio made up entirely of Treasury bills

Which of the following would NOT improve the current ratio?

Borrow short term to finance additional fixed assets.
Issue long-term debt to buy inventory.
Sell common stock to reduce current liabilities.
Sell fixed assets to reduce accounts payable.

The gross profit margin is unchanged, but the net profit margin declined over the same
period. This could have happened if
Cost of goods sold increased relative to sales.
Sales increased relative to expenses.
The Government increased the tax rate.
Dividends were decreased.

ABC industries has a debt-to-equity ratio of 1.6 compared with the industry average of
1.4. This means that the company
Will not experience any difficulty with its creditors.
Has less liquidity than other firms in the industry.
Will be viewed as having high creditworthiness.
Has greater than average financial risk when compared to other firms in its industry.

A company can improve (lower) its debt-to-total assets ratio by doing which of the
following?
Borrow more.
Shift from short-term to long-term debt.
Shift from long-term to short-term debt.
Sell common stock.
Which of the following statements (in general) is correct?
A low receivables turnover is desirable.
The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
An increase in net profit margin with no change in sales or assets means a poor ROI.
The higher the tax rate for a firm, the lower the interest coverage ratio.

Retained earnings for the "base year" equals 100.0 percent. You must be looking at
A common-size balance sheet.
A common-size income statement.
An indexed balance sheet.
An indexed income statement.

The _____ is a liquidity ratio.

return on assets
total asset turnover
cash ratio
times interest earned ratio
profit margin

_____ ratios are designed to determine a firm's long-run ability to meet its obligations.
Liquidity
Asset turnover
Financial leverage
Market value
Profitability

Which is not true of common-size comparative statements?

Each item is shown as percentage of some total of which it is a part
Dollar amounts are generally not shown.
The net change in each item, on a year-to-year basis, is not shown
Total assets are used as total against which all assets are measured
Retained earnings are shown as a percentage of total equity

Financial leverage can increase the return to common shareholders as long as:
the rate of return on assets equals the interest rate on creditors' funds.
the rate of return on assets is less than the interest rate on creditors' funds.
the rate of return earned on assets exceeds the interest rate on creditors' funds.
the rate of return on assets exceeds the rate of return on common shareholders' equity.

A primary purpose of restricting the investment of idle cash balances to money market
instruments is to:
obtain government guarantees on the investment.
minimize transaction costs.
carry a minimal amount of interest-rate risk.
have a continual market for selling the investment.
Assuming that the firm can either hold cash paying no interest or invest in marketable
securities, which of the following might induce the manager to hold higher cash
balances?
The cost of borrowing is high relative to interest rates on marketable securities.
Future cash flows are relatively predictable.
The cost of cash balances is relatively high.
Bank interest rates are expected to increase.

If the intrinsic value of a share of common stock is less than its market value, which of
the following is the most reasonable conclusion?
The stock has a low level of risk.
The stock offers a high dividend payout ratio.
The market is undervaluing the stock.
The market is overvaluing the stock.

Which of the following accurately describes the behavior of bond prices?

For a given change in market required rate of return, the price of a bond will change by
proportionally less, the lower the coupon.
For a given change in the market required rate of return, the price of a bond will change
by a smaller amount, the longer its maturity.
If interest rates rise so that the market required rate of return increases, the bond's price
will fall.
When the market required rate of return equals the stated coupon rate, the price of the
bond be greater than its face value. (Assume annual interest payments and
discounting.)

If a coupon bond sells at a large discount from par, then which of the following
relationships holds true? (P0 > represents the price of a bond and YTM is the bond's yield
to maturity.)
P0 < par and YTM > the coupon rate.
P0 > par and YTM > the coupon rate.
P0 > par and YTM < the coupon rate.
P0 < par and YTM < the coupon rate.

__________ is a high-risk, high-yield bond rated below investment grade; while a/(an)
__________ bond has its interest payment contingent on sufficient earnings of the
firm.
A subordinated debenture; mortgage
A debenture; subordinated debenture
A junk bond; income
An income bond; mortgage

All else constant, the present value _____ when the discount rate increases.
increases
decreases
remains constant
can either increase or decrease
can either remain constant or decrease

Which of the following statements is most correct?

The future value of an annuity due is greater than an otherwise identical ordinary annuity.
A reduction in the discount rate will increase the future value of an otherwise identical
cash flow stream.
Continuous compounding will result in a higher present value relative to an otherwise
identical investment that is compounded monthly at the same nominal rate.
The FVIFA (i%, N periods) equals the sum of the PVIF(i%, n) for n=1 to N periods.

You expect to deposit the following cash flows at the end of years 1 through 5, $1,000;
$4,000; $9,000; $5,000; and $2,000 respectively. What is the future account value at the
end of year 6 if you can earn 10% compounded annually?
$15,633.62
$21,000.00
$25,178.10
$27,695.91

You are considering borrowing $100,000 for 30 years at a compound annual interest rate
of 9 percent. The loan agreement calls for 30 equal annual payments, to be paid at the end
of each of the next 30 years. (Payments include both principal and interest.) What is the
annual payment that will fully amortize the loan?
$3,333.33
$6,400.30
$9,733.63
$12,333.33

Ann is considering buying an office building at a cost of $199,900. She estimates that she
can resell the building after one year at a price of $229,500. What discount rate
approximately equates those two prices?
83 percent
60 percent
14.81 percent
10 percent
33 percent

The Corner Art Store owns a painting which they display in their showroom. The
painting is currently valued at $1,350 but is currently not for sale. The value of the
painting is increasing by 7.4 percent annually. Which one of the following prices
best represents the value of the painting next year should the store decide to sell it at
that time?
$1,350
$1,400
$1,450
$1,500
$1,550

On your 5th birthday, your grandparents opened an investment account in your name and
made an initial deposit of $2,500. The account pays 4.5 percent interest. How much
will you have in the account on your 21st birthday if you don't add or withdraw any
money before then?
$4,711.68
$5,002.10
$5,055.93
$5,207.19
$5,211.14

Your goal is to have $15,000 in your savings account 3 years from now so that you can
purchase a home. Which one of the following statements is correct given this
situation? Assume that you only make one initial deposit into the savings account.
The higher the interest rate on your savings, the larger the amount that you need to
deposit today to fund this account.
If you deposit $7,500 today and earn 7 percent interest, you will reach your goal in 3
years.
If you have $10,000 to deposit today, you will need to earn at least 15 percent interest to
reach your goal.
The less money you have to deposit today into the account, the greater the interest rate
must be if you are to reach your goal of $15,000.
You will have to deposit $12,460 today if the interest you can earn is 4.7 percent.

What is the future value of $12,000 received today if it is invested at 10.5 percent
compounded annually for 25 years?
$131,484.77
$145,625.76
$147,475.83
$152,521.75
$153,374.89

Why is debt financing said to include a tax shield for the company?
Taxes are reduced by the amount of the debt.
Taxes are reduced by the amount of the interest.
Taxable income is reduced by the amount of the debt.
Taxable income is reduced by the amount of the interest.

Market values are often used in computing the weighted average cost of capital because
This is the simplest way to do the calculation.
This is consistent with the goal of maximizing shareholder value.
This is required by the Securities and Exchange Commission.
This is a very common mistake.
From a theoretical perspective the risk free interest rate is equal to:
The 30-year government bond
The 10-year government bond
The expected return on a zero-beta portfolio
None of the above

A beta equal to 1.2 indicates that the risk:

Is above the market level
Is below the market level
Is at the market level
None of the above

The cost of equity capital is all of the following EXCEPT:

the minimum rate that a firm should earn on the equity-financed part of an investment.
a return on the equity-financed portion of an investment that, at worst, leaves the market
price of the stock unchanged.
by far the most difficult component cost to estimate.
generally lower than the before-tax cost of debt.

What will be the effect of using book value of debt in WACC decisions if interest rates
have decreased substantially since a firm's long-term bonds were issued?
The debt-to-value ratio will be overstated.
The debt-to-value ratio will be understated.
There will be no effect on WACC decisions.
Cannot be determined without knowing interest rates.

If a company's weighted average cost of capital is less than the required return on equity,
then the firm:
is financed with more than 50% debt.
is perceived to be safe.
has debt in its capital structure.
cannot be using any debt.

Which of the following changes would tend to increase the weighted average cost of
capital for a traditional firm?
Decrease the proportion of equity financing.
Increase the market value of the debt.
Decrease the proportion of debt financing.
Decrease the market value of the equity.

Under the idealized conditions of MM, which statement is correct when a firm issues new
stock in order to pay a cash dividend on existing shares?
The new shares are worth less than the old shares.
The old shares drop in value to equal the new price.
The value of the firm is reduced by the amount of the dividend.
The value of the firm is unaffected.

Why are dividend changes and not the absolute level of dividends perceived to be more
important to shareholders?
Managers only change dividends under threatening conditions.
Dividend changes are thought to signal future expectations.
MM state that the absolute level of dividends is irrelevant.
Changes determine whether borrowing must occur.

Investors may prefer lower dividends to higher dividends because:

the low dividends are more predictable.
capital gains may be taxed less heavily than dividends.
of the "bird in the hand" logic.
low dividends indicate heavy investment for the future.

Which of the following events initiated by a firm will usually result in a share price
increase, everything else held constant?
A dividend decrease.
A stock split.
A stock dividend.
A stock repurchase.

The conservative firm will utilize:

a high degree of operating leverage
a low degree of operating leverage
high fixed costs
a higher profit margin

The more aggressive firm:

substitutes higher fixed costs for variable costs
substitutes lower fixed costs for variable costs
has lower potential profit above the break-even point
is normally more effectively managed

The highly financially leverage firm will typically:

has a higher EPS figure than the conservative firm
has a lower EPS figure than the conservative firm
uses less debt than the conservative firm
will produce the same EPS figure as the conservative firm

A higher degree of financial leverage may be desirable for:

a stable firm, with positive growth, under favorable economic conditions
an unstable firm operating in an uncertain environment
a stable firm operating in an uncertain environment
neither the stable nor unstable firm under any circumstances
In estimating "after-tax incremental operating cash flows" for a project, you should
include all of the following except __________.
changes in costs due to a general appreciation in those costs
the amount (net of taxes) that we could realize from selling a currently unused building of
ours that we intend to use for our project
changes in working capital resulting from the project, net of spontaneous changes in
current liabilities
costs that have previously been incurred that are unrecoverable

Which of the following statements is incorrect regarding a normal project?

If the NPV of a project is greater than 0, then its PI will exceed 1.
If the IRR of a project is 8%, its NPV, using a discount rate, k, greater than 8%, will be
less than 0.
If the PI of a project equals 0, then the project's initial cash outflow equals the PV of its
cash flows.
If the IRR of a project is greater than the discount rate, then its PI will be greater than 1.

The net present value of a project is equal to

The present value of all net cash flows that result from the project.
The present value of all revenues minus the present value of all costs that result from the
project.
The present value of all future net cash flows that result from the project minus the initial
investment required to start the project.
All of the above are correct.

What will happen to retained earnings when a corporation issues 1,000 shares of $1 par
stock for $10 per share?
It will increase by $1,000.
It will increase by $9,000.
It will decrease by $9,000.
It will remain unchanged.

Which of the following forms of debt would be likely to offer debt holders the lowest
interest rate?
Secured debt that is not callable.
Secured debt with a sinking fund.
Subordinated debt that is callable.
Subordinated debt with a sinking fund.

_____________ are most commonly classified as a direct foreign investment.

Foreign acquisitions
Licensing agreements
Purchases of international stocks
Export transactions
Which of the following is true of options?
The writer decides whether the option will be exercised.
The writer pays the buyer the option premium.
The buyer decides if the option will be exercised.
More than one of these.

The purchase of a currency put option would be appropriate for which of the following?
Investors who expect to buy a foreign bond in one month.
Corporations who expect to buy foreign currency to finance foreign subsidiaries.
Corporations who expect to collect on a foreign account receivable in one month.
all of the above

Which of the following is true of call options?

A call is a right to sell for the holder of the call.
A call is an obligation to sell for the holder of the call if exercised.
A call is an obligation to buy for the writer of the call if exercised.
A call is an obligation to sell for the writer of the call if exercised.

Which of the following are true about futures?

A firm hedging an account payable should sell futures.
A firm can lose money while hedging with futures.
A firm hedging an account receivable should buy futures.
A speculator who expects the price of the underlying currency to go up should sell
futures.

Which of the following are true of options?

They allow both buyers and sellers to limit loss to the option premium.
The price is called an option premium.
They can only be traded at expiration.
None of the answers are correct.

Which of the following is true for a put option?

If the strike price is higher than the spot, the option is in the money.
If the strike price is lower than the spot, the option is in the money.
If the strike price is higher than the spot, the option is out of the money.
If the strike price is lower than the spot, the option is at the money.

Arbitrage is:
the process of taking risks and making profits off of trading.
the process of trading to offset risks on a cash market position.
the process of making a riskless profit.
None of the answers are correct.

Currency swaps:
are techniques for hedging one-time, short-term exposure.
are techniques that lock in an exchange rate for recurrent payments over a long time
period.
cannot result in an opportunity loss if spot rates turn out to be more favorable.
None of the answers are correct.

Which of the following statements are true?

Speculators and arbitragers take risk to make a profit while hedgers do not.
Hedgers and speculators take positions only to make a profit while arbitragers do not.
Arbitragers and speculators make riskless profits while hedgers do not.
Arbitragers make riskless profits while hedgers take positions to reduce risk.

If a country experiences high inflation relative to the UK, its exports to the UK should
_______________, its imports should ___________, and there is __________ pressure
on its currency's equilibrium value.
decrease; increase; upward
decrease; decrease; upward
increase; decrease; downward
decrease; increase; downward
increase; decrease; upward

According to the information effect, why might an announced increase in a firm's

dividend be perceived as a bad signal?
Investors might think that it signals that future dividend growth rates have been revised
upwards.
Investors might think that it's due to the state of the economy, and not due to managerial
expertise.
Investors might think that the firm has run out of profitable investment projects.
Investors might think that it's simply a response to an expectation of higher personal tax
rates in the future.

If a firm pays total dividends of $475,000 out of net income of $3,000,000, what is its
retention ratio?
15.83%
18.81%
81.19%
84.17%