Liberty University BUSI 530 Exam 3

Liberty University BUSI 530 Exam 3

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Which one of the following statements is incorrect concerning stock indexes?

Multiple Choice

•            

Indexes have been developed for foreign stocks.

•            

Some indexes cover only a specific market sector.

•            

Most indexes include all of the publicly-traded common stocks.

Correct

•            

Some indexes are equally weighted.

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Macro risks are faced by all common stock investors.

True or False

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Although several stock indexes are available to inform investors of market changes, the Dow Jones Industrial Average:

Multiple Choice

•            

is the broadest-based of the market indexes.

•            

is the only reliable market index.

•            

accounts for approximately 90% of U.S. market value.

•            

is one of the best-known of the U.S. market indexes.

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Which one of the following firms is likely to exhibit the least macro risk exposure?

Multiple Choice

•            

Construction company

•            

Airline company

•            

Gold mining company

Correct

•            

Auto manufacturer

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The average of the betas for all stocks is:

Multiple Choice

•            

greater than 1.0; most stocks are aggressive.

•            

less than 1.0; most stocks are defensive.

•            

unknown; betas are continually changing.

•            

exactly 1.0; these stocks represent the market.

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If the line measuring a stock’s historic returns against the market’s historic returns has a slope greater than 1.0, then the:

Multiple Choice

•            

stock is currently underpriced.

•            

market risk premium is increasing.

•            

stock has a significant amount of specific risk.

•            

stock has a beta exceeding 1.0.

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The security market line shows how the expected rate of return depends on beta.

True or False

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Item 8

If the slope of the line measuring a stock’s returns against the market’s returns is positive, then the stock:

Multiple Choice

•            

has a beta greater than 1.0.

•            

has no specific risk.

•            

has a positive beta.

Correct

•            

plots above the security market line.

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WACC can be used to determine the value of a firm by discounting the firm’s:

Multiple Choice

•             after-tax net profits.

•            

pretax profits.

•             cash inflows.

free cash flows.

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The company cost of capital is the return that is expected on a portfolio of the company’s:

Multiple Choice

•            

existing securities.

Correct

•            

equity securities.

•            

debt securities.

•            

proposed securities.

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If 100 million shares of common stock are issued with a par value of $2 and additional paid in capital is $800 million, the total par value of the issued shares is:

Multiple Choice

•            

$200 million.

Correct

•            

$600 million.

•            

$800 million.

•            

$1 billion.

Explanation

Total par value = 100m × $2 = $200m

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Companies sometimes sell the cash flows from a bundle of loans. Such bonds are known as asset-backed bonds.

True or False

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Funded debt refers to those liabilities that:

Multiple Choice

•            

have established a sinking fund for repayment.

•            

are not callable at the option of the firm.

•            

are secured by specific collateral.

•            

have a maturity of more than one year remaining.

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Dividends represent an important component of a firm’s net book value.

True or False

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A stock’s par value is the:

Multiple Choice

•            

maturity value of the stock.

•            

price at which each share is recorded.

Correct

•            

price at which an investor could sell the stock.

•            

price received by the firm when the stock was issued.

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Equity capital in young businesses is known as venture capital and it is provided by venture capital firms, wealthy individuals, and investment institutions such as pension funds.

True or False

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The SEC reviews the registration statement and determines whether or not an investment in the firm is advisable.

True or False

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The evidence indicates that industrial stock prices in the U.S. decrease by approximately 3%, on average, when new equity issues are announced.

True or False

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The SEC requires the sale of a private placement to be limited to a small number of knowledgeable investors.

True or False

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Prospective investors are advised of a stock’s potential risks by the:

Multiple Choice

•            

underwriter.

•            

underpricing laws.

•            

prospectus.

Correct

•            

initial public offering.

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Debt usage will have an effect on:

Multiple Choice

•            

business risk.

•            

financial risk.

Correct

•            

operating risk.

•            

asset risk.

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In the absence of taxes, which one of the following would not be expected to change with changes in the firm’s capital structure?

Multiple Choice

•            

Weighted-average cost of capital

•            

Expected return on equity

•            

Expected return on assets

Correct

•            

Expected earnings per share

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When asked about key factors of debt policy, financial managers commonly mention the tax advantage of debt and the importance of maintaining their credit rating.

True or False

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According to MM, debt restructuring will not change the firm’s overall value.

True or False

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A firm’s capital structure is represented by its mix of:

Multiple Choice

•            

assets.

•            

liabilities and equity.

Correct

•            

assets and liabilities.

•            

assets, liabilities, and equity.