Finance Questions

3. You have just purchased shares in the Hi-Tech Long-Term Bond Fund, a mutual fund that invests in long-term corporate bonds. Your purchase constitutesa.A direct transfer of funds.b.An indirect transfer through an investment banker.c.An indirect transfer through a financial intermediary.d.A money market transaction.e.All of the above.

2. Money markets are markets fora.Foreign currency exchange.b.Consumer automobile loans.c.Corporate stocks.d.Long-term bonds.e.Short-term debt securities.

18. Financial markets are important because theya.allow individuals to transfer purchasing power over time.b.provide for the efficient transfer funds to businesses.c.facilitate exchanges between the providers and users of capital.d.all of the above

10. ____ efficiency states that all publicly available information is reflected in current market prices.a.Weak-formb.Semistrong-formc.Strong-formd.Economic

17. Students emerging from college and entering the work force typically consume ____ than their income resulting in ____.a.less; savingb.more; borrowingc.less; borrowingd.more; saving

6. Which of the following is not a task that investment bankers perform?a.They buy securities from corporations trying to raise funds.b.They take deposits from investors and make loans to corporations.c.They resell securities purchased from corporations to investors.d.They help corporations design securities with the features that are most attractive to investors given existing market conditions.

8. Machina Corporation is financing an ongoing construction project. The firm needs $8 million of new capital during each of the next three years. The firm has a choice of issuing new debt and equity each year as the funds are needed, or issuing the debt now and the equity later. The firm's capital structure is 40 percent debt and 60 percent equity. Flotation costs for a single debt issue would be 1.6 percent of the gross debt proceeds. Yearly flotation costs for three separate issues of debt would be 3.0 percent of the gross amount. Ignoring time value effects due to timing of the cash flows, what is the absolute difference in dollars saved by raising the needed debt all at once in a single issue rather than in three separate issues?a.$0b.$171,387c.$140,809d.$156,098e.$134,400

15. ____ are individuals employed by brokerage firms that are members of the exchange.a.Commission brokersb.Floor brokersc.Competitive tradersd.Specialists

19. ____ represent(s) ownership in a company and entitle(s) the holder to future cash distributions from the operations of the firm.a.Equityb.Debtc.Swapsd.Options

5. Which of the following statements about listing on a stock exchange is most correct?a.Listing is a decision of more significance to a firm than going public.b.Any firm can be listed on the NYSE as long as it pays the listing fee.c.Listing provides a company with some "free" advertising, and status as a listed company may enhance the firm's prestige.d.Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC.e.Statements b and c are both correct.

4. Which of the following statements is correct?a.The SEC must approve the price at which a stock is to be offered to the public when a company "goes public."b.If a company's stock is listed, then it trades in the over-the-counter (OTC) market.c.If the "preemptive right" exists in a company's charter, then the holders of its Class A shares have the right to receive a specified amount of dividends before dividends can be paid on Class B shares.d.A "prospectus" is a document which describes a company and the securities it plans to offer, and the prospectus generally must be approved by the SEC before a public offering of new securities can be made.e.The decision to list a company's stock generally is more important to the company than the decision to go public, i.e., listing has a larger impact on the way the firm is operated than does going public.

13. Here are the expected returns on two stocks:ReturnsProbability/X/Y0.1/−20%/10%0.8/20/150.1/40/20If you form a 50−50 portfolio of the two stocks, what is the portfolio's standard deviation?a. 8.1%b. 10.5%c. 13.4%d. 16.5%e. 20.0%

12. Oakdale Furniture Inc. has a beta coefficient of 0.7 and a required rate of return of 15 percent. The market risk premium is currently 5 percent. If the inflation premium increases by 2 percentage points, and Oakdale acquires new assets which increase its beta by 50 percent, what will be Oakdale's new required rate of return?a. 13.5%b. 22.8%c. 18.75%d. 15.25%e. 17.00%

10. HR Corporation has a beta of 2.0, while LR Corporation's beta is 0.5. The risk-free rate is 10%, and the required rate of return on an average stock is 15%. Now the expected rate of inflation built into rRF falls by 3 percentage points, the real risk-free rate remains constant, the required return on the market falls to 11%, and the betas remain constant. When all of these changes are made, what will be the difference in required returns on HR's and LR's stocks?a. 1.0%b. 2.5%c. 4.5%d. 5.4%e. 6.0%

11. You hold a diversified portfolio consisting of a $10,000 investment in each of 20 different common stocks (i.e., your total investment is $200,000). The portfolio beta is equal to 1.2. You have decided to sell one of your stocks which has a beta equal to 0.7 for $10,000. You plan to use the proceeds to purchase another stock which has a beta equal to 1.4. What will be the beta of the new portfolio?a. 1.165b. 1.235c. 1.250d. 1.284e. 1.333

7. Inflation, recession, and high interest rates are economic events which are characterized asa. Company specific risk that can be diversified away.b. Market risk.c. Systematic risk that can be diversified away.d. Diversifiable risk.e. Unsystematic risk that can be diversified away.

14. Assume there are only three possible states of nature for the economy in the future: boom, normal, and recession. If there is a 25% chance of a recession and a 30% chance of a boom, then what is the probability of a normal economy in the future?a. 45%b. 30%c. 25%d. 100%

19. Which type of risk can be eliminated through diversification?a. total riskb. market riskc. firm specific riskd. none of the above

18. ____ is the appropriate measure for stand-alone risk and ____ is the appropriate measure of risk when adding an asset to a diversified portfolio.a. beta; varianceb. beta; standard deviationc. standard deviation; betad. standard deviation; variance

3. A highly risk-averse investor is considering the addition of an asset to a 10-stock portfolio. The two securities under consideration both have an expected return equal to 15 percent. However, the distribution of possible returns associated with Asset A has a standard deviation of 12 percent, while Asset B's standard deviation is 8 percent. Both assets are correlated with the market with ρ = 0.75. Which asset should the risk-averse investor add to his/her portfolio?a. Asset A.b. Asset B.c. Both A and B.d. Neither A nor B.e. Cannot tell without more information.