a. True
b. False
Answer: True
Question: Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.
Answer Options:
a. True
b. False
Answer: a. True
Question: A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.
Answer Options:
a. True
b. False
Answer: True
Question: According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.
Answer Options:
a. True
b. False
Answer: b. False
Question: Each stock’s rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (average of those returns, which gives equal weight to each company in the S&P 500) is then calculated. That average is called “the return on the S&P Index,” and it is often used as an indicator of the “return on the market.”
Answer Options:
a. True
b. False
Answer: False
Question: When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.
Answer Options:
a. True
b. False
Answer: a. True
Question: Other things held constant, the higher a firm’s total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + common equity)), the higher its TIE ratio will be.
a. True
b. False
Answer: b. False
Question: The more conservative a firm’s management is, the higher its total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)) is likely to be.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
a. Payments lags.
b. Depreciation.
c. Cumulative cash.
d. Repurchases of common stock.
e. Payment for plant construction.
Answer Options:
a. Payments lags.
b. Depreciation.
c. Cumulative cash.
d. Repurchases of common stock.
e. Payment for plant construction.
Answer: b
Question: If a stock’s intrinsic value is greater than its market price, then the stock is overvalued and should be sold.
a. True
b. False
Answer: False
Question: The corporate valuation model can be used only when a company doesn’t pay dividends.
Answer Options:
a. True
b. False
Answer: b. False
Question: The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.
e. Maximize the stock price on a specific target date.
Answer Options:
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.
e. Maximize the stock price on a specific target date.
Answer: d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.