Answer:
Question: Suppose the U.S. Treasury issued $50 billion of short-term securities and sold them to the public. Other things held constant, what would be the most likely effect on short-term securities’ prices and interest rates?
Answer Options:
a. Prices and interest rates would both rise.
b. Prices would rise and interest rates would decline.
c. Prices and interest rates would both decline.
d. Prices would decline and interest rates would rise.
e. There is no reason to expect a change in either prices or interest rates.
Answer: d
Question: If on January 3, 2015, a company declares a dividend of $1.50 per share, payable on January 31, 2015, then the price of the stock should drop by approximately $1.50 on January 31.
Answer Options:
a. True
b. False
Answer: b. False
Question: One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm’s required return constant, other things held constant.
Answer Options:
a. True
b. False
Answer: b. False
Question: The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm’s stock, other things held constant.
Answer Options:
a. True
b. False
Answer: b. False
Question: Suppose a firm that has been earning $2 and paying a dividend of $1.00, or a 50% dividend payout, announces that it is increasing the dividend to $1.50. The stock price then jumps from $20 to $30. Some people would argue that this is proof that investors prefer dividends to retained earnings. Miller and Modigliani would agree with this argument.
Answer Options:
a. True
b. False
Answer: b. False
Question: Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.
Answer Options:
a. True
b. False
Answer: a. True
Question: Suppose the federal deficit increased sharply from one year to the next, and the Federal Reserve kept the money supply constant. Other things held constant, we would expect to see interest rates decline.
Answer Options:
a. True
b. False
Answer: b
Question: Since yield curves are based on a real risk-free rate plus the expected rate of inflation, at any given time there can be only one yield curve, and it applies to both corporate and Treasury securities.
Answer Options:
a. True
b. False
Answer: b
Question: Which of the following statements is CORRECT, other things held constant?
Answer Options:
a. If companies have fewer good investment opportunities, interest rates are likely to increase.
b. If individuals increase their savings rate, interest rates are likely to increase.
c. If expected inflation increases, interest rates are likely to increase.
d. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
e. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.
Answer: c
Question: The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) the skill level of the economy’s labor force.
Answer Options:
a. True
b. False
Answer: b
Question: The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes.
Answer Options:
a. True
b. False
Answer: b. False
Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the risk inherent in a given security. The higher the risk, the higher the security’s required return, other things held constant.
Answer Options:
a. True
b. False
Answer: a
Question: Which of the following would be most likely to lead to a higher level of interest rates in the economy?
Answer Options:
a. Households start saving a larger percentage of their income.
b. Corporations step up their expansion plans and thus increase their demand for capital.
c. The level of inflation begins to decline.
d. The economy moves from a boom to a recession.
e. The Federal Reserve decides to try to stimulate the economy.
Answer: b
Question: If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term U.S. Treasury bond should be equal to the real risk-free rate, r*.
Answer Options:
a. True
b. False
Answer: a
Question: A “reverse split” reduces the number of shares outstanding. a. True b. False
Answer: True
Question: If expectations for long-term inflation rose, but the slope of the SML remained constant, this would have a greater impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms. Therefore, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt. a. True b. False
Answer: b. False
Question: If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series. a. True b. False Correct Answer: b
Answer:
Question: Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18% The differences in these rates were probably caused primarily by:
Answer Options:
a. Tax effects.
b. Default and liquidity risk differences.
c. Maturity risk differences.
d. Inflation differences.
e. Real risk-free rate differences.
Answer: b
Question: If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate. a. True b. False Correct Answer: a
Answer:
Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the expected rate of inflation. If inflation is expected to be relatively high, then interest rates will tend to be relatively low, other things held constant.
Answer Options:
a. True
b. False
Answer: b
Question: The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.
Answer Options:
a. True
b. False
Answer: b. False
Question: The risk that interest rates will decline, and that decline will lead to a decline in the income provided by a bond
Answer Options:
a. True
b. False
Answer: b
Question: During periods when inflation is increasing, interest rates tend to increase, while interest rates tend to fall when inflation is declining.
Answer Options:
a. True
b. False
Answer: a
Question: If a retired individual lives on his or her investment income, then it would make sense for this person to prefer stocks with high payouts so he or she could receive cash without going to the trouble and expense of selling stocks. On the other hand, it would make sense for an individual who would just reinvest any dividends received to prefer a low-payout company because that would save him or her taxes and brokerage costs.
Answer Options:
a. True
b. False
Answer: a. True