Finance Questions

Portfolio diversification eliminates which of the following?A. Total investment riskB. Reward for bearing riskC. Market-wide riskD. Unsystematic risk

BNM is comparing different capital structures. Plan A is all equity with 20m (million)shares outstanding. Plan B would result in 14m shares and $150m in debt. Plan C would result in 11m shares and $225m in debt. The interest rate on the debt is 8 percent.Ignoring taxes, compare these plans assuming that expected EBIT is $45m. Of the three plans, the firm will have the highest expected EPS with _____ and the lowest expected EPS with _____.A. Plan A; Plan BB. Plan A; Plan CC. Plan C; Plan AD. Plan B; Plan C

Which of the following statements is FALSE?A. Interest expense reduces taxable income and net income but not EBIT.B. When a company repurchases its shares using proceeds from new issues of debt, its future expected earnings per share increases.C. 'Homemade leverage' is the use of personal borrowing to adjust the overall amount of financial leverage to which the individual investor is exposed.D. Under M&M assumptions which ignore special benefits and costs of debt, leverage has a substantial impact on total firm value and on WACC

Which of the following statements is TRUE?A. If a portfolio has a positive investment in every asset, the standard deviation on the portfolio can be less than that on every asset in the portfolio.B. Labor strikes and part shortages are examples of market-wide systematic risks.C. Market-wide systematic risks can be significantly reduced by diversification.D. Asset-specific unsystematic risks can be substantially reduced with less numerous and less correlated assets in a portfolio.

Under Munich, a footwear manufacturer, recently announced that they have just designed a new footwear product which includes the latest technology. This news is totally unexpected and viewed as a major advancement in the footwear industry. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient?A. The price of Under Munich doesn't change, but then it increases one week after the announcement.B. The price of all stocks quickly increase in value and then all but Under Munich stock fallback to their original values.C. The price of Under Munich's stock suddenly increases, and then remains at that price.D. The price of Under Munich's stock increases rapidly, and then settles back to its pre-announcement level.

Which of the following statements is FALSE?A. The cost of debt for bonds is the same as the yield implied by their market quoted prices, except when that promised yield is too high due, for example, to the high default probabilities for junk bonds.B. The cost of preferred stock equals its dividend yield as a percent of the current price, rather than the preferred dividend as a percent of its stated liquidating value, which is usually $100.C. Judgment is typically required when estimating the cost of equity, particularly when a company pays no dividends and when its beta estimate is imprecise.D. Due to its lower priority and greater risk, a firm's cost of equity can sometimes be, andoften is, less that its after-tax cost of debt.

A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. By doing so, the firm:A. Automatically gives preferential treatment in the allocation of funds to its riskiest divisionB. Encourages the division managers to only recommend their most conservative projectsC. Maintains the current risk level and capital structure of the firmD. Automatically maximizes the total value created for its shareholders

Which of the following statements is TRUE?A. By investing in varied and numerous assets, an investor is able to virtually eliminate all asset-specific risks in her portfolio, both easily and cheaply.B. It is possible, but not very easy, for an investor to control market-wide risks in his portfolio, and increases in these market-wide risks are costly because they reduce expected returns.C. The most important characteristic in determining the expected return of a well-diversified portfolio is the total variance risks of the individual assets in the portfolio.D. When a portfolio has a positive investment in every one of its assets, its standarddeviation cannot be less than that on every asset in the portfolio.

If the financial markets are semi-strong form efficient, then:A. only the most talented analysts can determine the true value of a security.B. only individuals with private information have a marketplace advantage.C. technical analysis provides the best tool to use to gain a marketplace advantage.D. no one individual has an advantage in the marketplace

Which of the following statements is FALSE?A. The cost of capital is the minimum required return to compensate financial investors.B. The cost of capital for a project depends primarily on the source of funds.C. The cost of equity is the return required by equity investors given the risk of the cash flows from the firm.D. A firm's WACC reflects the average risk of the existing projects undertaken by the firm.

Fill in the blanks: Standard deviation measures ______ risk, while beta measures ______risk.A. Asset-specific; market-wideB. Market-wide; totalC. Total; market-wideD. Total; asset-specific

Which of the following statements is TRUE?A. Leverage reduces the expected values of both EBIT and net income.B. Leverage increases expected ROE but decreases expected EPS.C. Leverage decreases the volatility of both ROE and EPS.D. Investors can create their own leverage within their own portfolios

Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic firm-specific risk associated with an individual security?A. Security beta multiplied by the market rate of returnB. Market risk premiumC. Risk-free rate of returnD. Zero

Newly issued securities are sold to investors in which one of the following markets?A. ProxyB. InsideC. SecondaryD. Primary

Which of the following statements is FALSE?A. A bond's yield represents the annualized return that an investor would earn by holding it to maturity, if it does not default.B. Over time as a bond's maturity grows closer, if it does not default and if market yields do not change, then the price on a discount bond will decrease.C. When interest rates increase, then bond prices fall, and more so the longer their maturity and the smaller their coupons.D. If a bond is held to maturity and it does not default, then the reinvestment rate risk will offset the price risk.

Which of the following statements is FALSE?A. Unlike equity holders, debt holders are not ownersB. Lenders can exert control over a company's managers by voting for its board of directors.C. A corporation cannot deduct its payments to preferred shareholders before it pays taxesD. Holders of convertible bonds can force bankruptcy if their coupons are not paid

Which one of the following statements is TRUE?A. The risk-free rate of return has a risk premium of 1.0.B. The reward for bearing risk is called the standard deviation.C. Risks and expected return are inversely related.D. The higher the expected rate of return, the wider the distribution of returns.

Which of the following statements is FALSE?A. Since errors of commission are often readily apparent, managers have a tendency to be cautious when evaluating new projectsB. Errors of omission can result in lost potential value as much as errors of commission can destroy value.C. Type 1 errors occur when managers reject projects whose true NPVs are positiveD. Errors in projected cash flows create large forecasting risks when their net present values are particularly small in magnitude.

Which of the following statements is FALSE?A. Asset-specific risks can be easily diversified with highly correlated assets in a portfolioB. Asset-specific risks can be easily diversified with numerous assets in a portfolioC. Bearing risk is rewarded with higher expected returnsD. Only market-wide risks, not asset-specific risks, should earn rewards

When is a firm insolvent from an accounting perspective?A. When the firm is unable to meet its financial obligations in a timely mannerB. When the firm's debt exceeds the value of the firm's equityC. When the firm has a negative net worthD. When the firm's revenues cease