Question: The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.
Answer Options: a. True b. False Correct Answer: a. True
Question: The SML relates required returns to firms’ systematic (or market) risk. The slope and intercept of this line can be influenced by a manager’s actions.
Answer Options: a. True b. False Correct Answer: b. False
Question: The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.
Answer Options: a. True b. False Correct Answer: b. False
Question: If the price of money (e.g., interest rates and equity capital costs) increases due to an increase in anticipated inflation, the risk-free rate will also increase. If there is no change in investors’ risk aversion, then the market risk premium (rM – rF) will remain constant. Also, if there is no change in stocks’ betas, then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.
Answer Options: a. True b. False Correct Answer: a. True
Question: Since the market return represents the expected return on an average stock, the market return reflects a certain amount of risk. As a result, there exists a market risk premium, which is the amount over and above the risk-free rate that is required to compensate stock investors for assuming an average amount of risk.
Answer Options: a. True b. False Correct Answer: a. True
Question: The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders’ equity.
Answer Options: a. True b. False Correct Answer: a. True
Question: The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows.
Answer Options: a. True b. False Correct Answer: a. True
Question: Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement.
Answer Options: a. True b. False Correct Answer: b. False
Question: On the balance sheet, total assets must always equal the sum of total liabilities and equity.
Answer Options: a. True b. False Correct Answer: a. True
Question: Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.
Answer Options: a. True b. False Correct Answer: a. True
Question: The amount shown on the December 31, 2015, balance sheet as “retained earnings” is equal to the firm’s net income for 2015 minus any dividends it paid.
Answer Options: a. True b. False Correct Answer: b. False
Question: The income statement shows the difference between a firm’s income and its costs—i.e., its profits—during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm’s reported profits and its actual cash flow for the same period.
Answer Options: a. True b. False Correct Answer: a. True
Question: If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.
Answer Options: a. True b. False Correct Answer: a. True
Question: EBIT stands for earnings before interest and taxes, and it is often called “operating income.”
Answer Options: a. True b. False Correct Answer: a. True
Question: EBITDA stands for earnings before interest, taxes, debt, and assets.
Answer Options: a. True b. False Correct Answer: b. False
Question: Consider the following balance sheet for Games Inc. Because Games has $800,000 of retained earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000.
Answer Options: a. True b. False Correct Answer: b. False a. True b. False Correct Answer b. False
Question: An increase in a firm’s expected growth rate would cause its required rate of return to a. increase. b. decrease. c. fluctuate less than before. d. fluctuate more than before. e. possibly increase, possibly decrease, or possibly remain constant. Answer Options a. increase. b. decrease. c. fluctuate less than before. d. fluctuate more than before. e. possibly increase, possibly decrease, or possibly remain constant. Correct Answer e. possibly increase, possibly decrease, or possibly remain constant.
Question: If in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that the investor thinks a. the stock is experiencing supernormal growth. b. the stock should be sold. c. the stock is a good buy. d. management is probably not trying to maximize the price per share. e. dividends are not likely to be declared. Answer Options a. the stock is experiencing supernormal growth. b. the stock should be sold. c. the stock is a good buy. d. management is probably not trying to maximize the price per share. e. dividends are not likely to be declared. Correct Answer c. the stock is a good buy.