Question: Which of the following statements regarding stock dividends and stock splits is NOT CORRECT?

Answer Choices:
A. With a stock dividend, the company makes some incremental, percentage-based increase in the number of shares each of its shareholders has.
B. Stock dividends and stock splits both work the same way. They take all the stock owned by the company’s investors, and increase everybody’s number of shares. Each share of stock is now worth more, so the total dollar amount that each shareholder owns increases.
C. Stock dividends and stock splits are ways that a company can increase the number of its shares outstanding and reduce its share price.
D. The idea behind both stock dividends and stock splits is to make the shares more affordable for investors to trade the stock.

Answer: B. Stock dividends and stock splits both work the same way. They take all the stock owned by the company’s investors, and increase everybody’s number of shares. Each share of stock is now worth more, so the total dollar amount that each shareholder owns increases.

Question: The Beta of a stock measures:

Answer Choices:
A. How much dividends the corporation has paid in the past.
B. How many times the stock has split.
C. How the stock price moves relative to interest rate movements.
D. How the stock price moves relative to the rest of the market.

Answer: D. How the stock price moves relative to the rest of the market.

Question: Financial risk involves the risks that ________ may suffer loses if the corporations projects do not pay off as planned:

Answer Choices:
A. Communities.
B. Employees.
C. Managers.
D. Shareholders.

Answer: D. Shareholders.

Question: Which of the following statements regarding dividends and stock repurchases is NOT CORRECT?

Answer Choices:
A. With a stock repurchase, the company sets aside money to buy shares back from their investors. However, the investors can choose whether they want to sell their stock back to the company.
B. When a company has excess earnings to return to its shareholders, a firm can choose to either pay a dividend or to repurchase its own stock.
C. When a company pays a dividend, the firm pays out a set dollar amount per share to every shareholder—whether the investors want it or not. The shareholders then must pay income tax on those dividends they receive.
D. Stock repurchases can be used to shift a firm’s capital structure or to provide shares when employees exercise stock options.
E. Stock repurchases vary in size and frequency. Thus, they send adverse signals to investors regarding the health of the company, which lowers the company’s stock price.

Answer: E. Stock repurchases vary in size and frequency. Thus, they send adverse signals to investors regarding the health of the company, which lowers the company’s stock price.

Question: Corporate Risk, assumes which of the following:

Answer Choices:
A. The interest rate for the firm is zero.
B. The corporation faces no competition.
C. The cash flows of the project are not separate from the firm’s other assets.
D. All costs the firm faces are zero.

Answer: C. The cash flows of the project are not separate from the firm’s other assets.

Question: The key difference between investment grade bonds and junk bonds is:

Answer Choices:
A. Prepayment risk.
B. Default risk.
C. Length to maturity.
D. Liquidity risk.

Answer: B. Default risk

Question: Who tends to issue junk bonds?

Answer Choices:
A. Financially troubled firms.
B. The Federal Reserve.
C. Foreign governments.
D. Local governments in the United States.

Answer: A. Financially troubled firms

Question: Which of the following statements is CORRECT?

Answer Choices:
A. The yield to maturity is the return calculated on a bond that is held until it is called, which is a shorter period than the bond’s original life.
B. The main difference between the yield to call and the yield to maturity calculations is that the dollar coupon payment differs on a callable bond than on a non-callable bond.
C. The yield to call is the return calculated on a bond that is held to maturity.
D. There are 2 different ways to calculate a bond’s return. The main difference is with the life-span of the bond. If an issuer can call its bonds early, the relevant return calculation is the yield to call. However, if an issuer cannot call its bonds, the relevant return calculation is the yield to maturity.

Answer: D. There are 2 different ways to calculate a bond’s return. The main difference is with the life-span of the bond. If an issuer can call its bonds early, the relevant return calculation is the yield to call. However, if an issuer cannot call its bonds, the relevant return calculation is the yield to maturity.

Question: An exchange rate deals with the price of:

Answer Choices:
A. Equities sold at different times.
B. Bonds sold in the secondary market.
C. Commercial paper.
D. Currencies of different countries.

Answer: D. Currencies of different countries.

Question: A bond will sell at a premium if which of the following happened?

Answer Choices:
A. Interest rates fell below coupon rate.
B. The stock market increased.
C. Tax rates increased.
D. The borrower defaulted.

Answer: A. Interest rates fell below coupon rate

Question: Diversification is a fundamental investment tool. Which of the following is a key to diversification?

Answer Choices:
A. Variety—Invest in a wide range of financial products.
B. Correlation—Look at investments that are not closely correlated, meaning that their values don’t tend to move in the same direction at the same time.
C. Quantity—There’s no such thing as a diminishing return to diversification, so you should invest in the maximum number of investments as possible. If you can invest in thousands of different investments within your portfolio, you should.
D. Statements a, b, and c are all correct.
E. Statements a and b are correct.

Answer: E. Statements a and b are correct.

Question: A bond will sell at a discount if which of the following happened?

Answer Choices:
A. Market interest rates became negative.
B. Taxes increased.
C. Interest rates rose above coupon rate.
D. The bond was redeemed.

Answer: C. Interest rates rose above coupon rate

Question: Which of the following statements is NOT CORRECT?

Answer Choices:
A. When new stock is issued, the company pays an investment bank to handle the expenses and fees involved with selling the stock. These expenses are called flotation costs.
B. There are two ways to raise common equity. One source is retained earnings, which means that the firm has set aside some of its annual profits to reinvest in the firm instead of paying a dividend to stockholders. The second source is the issue of new stock, which involves selling stock to the public.
C. The cost of retained earnings is less than the cost of new common stock due to flotation costs. While retained earnings may appear to be free money on the surface, there is an opportunity cost to them as these funds could be invested elsewhere and earning a return for shareholders. Due to the lower cost of retained earnings, companies generally prefer to use retained earnings to finance their projects, and only issue new common stock when they absolutely must.
D. There are two ways to raise common equity. One source is retained earnings that involves bringing in new funds from outside the company, which represents external equity. The second source is new stock issues that involves bringing in new funds from current stockholders of the company, which represents internal equity.
E. Flotation costs reduce the amount of capital the firm receives from a new stock issue. The company must make each dollar of the new issue work harder, so new investors earn their required rate of return. The new stock has a higher return (a higher cost), which is the stock’s base “required rate of return” plus an adjustment for flotation costs.

Answer: D. There are two ways to raise common equity. One source is retained earnings that involves bringing in new funds from outside the company, which represents external equity. The second source is new stock issues that involves bringing in new funds from current stockholders of the company, which represents internal equity.

Question: Which of the following statements is NOT CORRECT?

Answer Choices:
A. For a fixed-rate bond, the coupon interest rate is set for the life of the bond. Unlike a fixed-rate bond’s coupon interest rate, the market interest rate changes throughout the life of the bond and has a huge impact on the bond’s price.
B. Bonds are basically loans, so they usually make regular interest payments to the bondholders. The percentage of this interest payment relative to the bond’s face value is called the coupon interest rate.
C. When a bond’s coupon rate is equal to the market interest rate, the bond will sell for its face value, or what is known as selling at par.
D. When a bond’s coupon interest rate is less than the market interest rate, the bond will sell at a value less than its par value and is known as a discount bond.
E. When the market interest rate is higher than the coupon interest rate, the bond price rises above the par value and is called a premium bond.

Answer: E. When the market interest rate is higher than the coupon interest rate, the bond price rises above the par value and is called a premium bond.

Question: A stock with a Beta of more than one:

Answer Choices:
A. Has paid out more than the rate of inflation.
B. Has experienced price changes that are more volatile than the over market.
C. Will reduce the overall volatility of a stock portfolio.
D. Has paid more dividends than the average stock in the market.

Answer: B. Has experienced price changes that are more volatile than the over market.

Question: Which of the following statements is NOT CORRECT?

Answer Choices:
A. The dividend yield, the capital gains yield, and the total return are three key components of the Discounted Dividend Model.
B. The capital gains yield is calculated as the dollar amount of the year’s dividend payments divided by the current stock price.
C. The capital gains yield is the annual percentage of a stock’s change in price.
D. The total return is equal to the dividend yield plus the capital gains yield.
E. The dividend yield is the percentage of how much of the stock’s return is received as dividends.

Answer: B. The capital gains yield is calculated as the dollar amount of the year’s dividend payments divided by the current stock price.

Question: If the value of the dollar falls in the foreign exchange market most likely we can expect to see:

Answer Choices:
A. The government budget deficit to increase.
B. Prices of imports in the US increase.
C. Bond prices in the US to fall.
D. The stock market in the US will collapse.

Answer: B. Prices of imports in the US increase.

Question: Market or Beta risk is the point of view of:

Answer Choices:
A. The managers of the firm.
B. The government regulator.
C. The investor in the firm.
D. The customer of the firm.

Answer: C. The investor in the firm.

Question: Which of the following lists the correct order of the dividend payment process dates?

Answer Choices:
A. Declaration date, holder-of-record date, payment date, and ex-dividend date
B. Declaration date, ex-dividend date, holder-of-record date, and payment date
C. Ex-dividend date, holder-of-record date, declaration date, and payment date
D. Declaration date, payment date, holder-of-record date, and ex-dividend date
E. Ex-dividend date, declaration date, holder-of-record date, and payment date

Answer: B. Declaration date, ex-dividend date, holder-of-record date, and payment date

Question: In stand alone risk analysis sensitivity analysis involves changing the ________ of the model.

Answer Choices:
A. number of sellers in the market
B. time frame
C. variance
D. assumptions

Answer: D. assumptions

Question: Stand alone risk in capital budgeting the assumption is:

Answer Choices:
A. The cash flows of the project are not being taxed.
B. The project is the only project currently being undertaking.
C. The project is independent of the country where it takes place.
D. The cash flow of the project is separate from the firm’s other assets.

Answer: B. The project is the only project currently being undertaking.

Question: Business risk involves corporations that have a capital structure with:

Answer Choices:
A. No debt.
B. No assets.
C. No cash flows.
D. No equity.

Answer: A. No debt.