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35 terms

Business Finance Exam 3

STUDY
PLAY
A firm cannot change its beta through any managerial decision because betas are completely market determined.
False
In the real world, the type of security that generates a return that is nearest to a risk-free rate of return is a Treasury bill.
True
Risk is defined as the chance (probability) of actually observing outcomes that are less than expected, or unfavorable. Outcomes that are greater than expected are not considered when evaluating risk because such occurrences are desirable.
False
Risk is defined as the chance (probability) of actually observing outcomes that are greater than expected, or favorable. Such outcomes are more desirable than observing less-than-expected events, so the possibility that positive outcomes will occur must be emphasized when evaluating risk.
False
A listing of all possible outcomes, or events, with a probability assigned to each is called a probability distribution.
True
The expected rate of return of an asset will always equal one of the possible rates of return for that asset.
False
Because of differences in the expected returns of different securities, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation always will allow an investor to properly compare the relative risks of any two securities.
False
Assume Stock A has a standard deviation of 0.21 while Stock B has a standard deviation of 0.10. If both Stock A and Stock B must be held in isolation, and if investors are risk averse, we can conclude that Stock A will have a greater required return. However, if the assets could be held in portfolios, it is conceivable that the required return could be higher on the low standard deviation stock.
True
The only condition under which risk can be reduced to zero is to find securities that are perfectly negatively correlated (r = -1.0) with each other.
False
If I know for sure that the market will have a positive return over the next year, to maximize my rate of return, I should increase the beta of my portfolio.
False
Issuing zero coupon bonds might appeal toa company that is considering investing in a long-term project that will not generate positive cash flows for several years
True
In general, long-term unsecured debt is less costly than long-term secured for a particular firm
False
Foriegn debt is debt sold in a country other than the one in whose currency the debt is denominated
False
Eurobonds have a higher level of required disclosure than normally is found for bonds issued in domestic markets, particularly the United States.
False
Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located
True
Although common stock represents a riskier investment to an individual than do bonds, in the sense of exposing the firm to the risk of bankruptcy, bonds represent a riskier method of financing to a corporation than does common stock
True
Floating rate debt is advantageous to investors because the interest rate moves up if market rates rise. Floating rate debt shifts interest rate risk to companies and thus has no advantages for issuers
False
A bond with $100 annual interst payment and $1000 face value with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%
True
if the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be selling at a discount; i.e., the bond's market price should be less than its face (maturity) value
False
If we have two bonds with a simple interest rate yield of 9% where one bond is compounded quarterly and the other bond is compounded monthly, the bond compounded quarterly will have a higher effective annual yield.
False
After a new issue is brought to market it is the marginal investor who determines the price at which the stock will trade.
True
A stock's par value is equal to the market value of the stock on the last day of the fiscal year for a firm.
False
The book value per share is computed by taking the sum of common stock, additional paid in capital, and retained earnings and dividing the number by the number of shares outstanding.
True
A proxy fight is an attempt by a group to gain control of a firm by convincing its stockholders to give the group the authority to vote their shares in order to elect a new management team.
True
A preemptive right is a provision in the corporate charter or by laws that gives common stockholders the right to purchase on a pro rata basis new issues of common stock.
True
One advantage of using common stock as a source of funds is that common stock does not legally obligate the firm to make payments to stockholders.
True
When management controls more than 50% of the shares of the firm, they must be concerned with the potential of a proxy fights than can lead to takeovers of the firm and the replacement of management.
false
Risk is defined as the chance (probability) of actually observing outcomes that are greater than expected, or favorable. Such outcomes are more desirable than observing less-than-expected events, so the possibility that positive outcomes will occur must be emphasized when evaluating risk.
false
Risk really should not be a significant factor when making financial decision because all business decisions involve predictions about the future, which is unknown. As a result, all decisions automatically include some consideration of risk.
False
A listing of all possible outcomes, or events, with a probability assigned to each is called a probability distribution.
True
The primary function of the capital budget is to forecast the funds required for future investments that must be raised through external funding, that is, by selling stock or bonds.
False
One advantage of the payback period method of evaluating fixed asset investment possibilities is that it provides a rough measure of a project's liquidity and risk.
True
If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm will select X rather than Y if X has a NPV > 0.
False
In capital budgeting analyses, it is possible that NPV and IRR will both involve assuming reinvestment of the project's cash flows at the same rate.
True
Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased, thereby providing an opportunity to purchase and install assets before they are needed.
True