Multiple Choice Answers

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1. The ________ rate of interest is typically the required rate of return on a three-month U.S. Treasury bill.
A) nominal
B) real
C) risk-free
D) premium

2. The cost of long-term debt generally ________ that of short-term debt.
A) is less than
B) is equal to
C) is greater than
D) has no relation to

3. If a bond pays $1,000 plus interest at maturity, $1,000 is called the
A) stated value.
B) market value.
C) par value.
D) long-term value.

4. ________ became popular vehicle used to finance mergers and takeovers during the 1980s.
A) Income bonds
B) Junk bonds
C) Floating rate bonds
D) Convertible debentures
5. An instrument that give their holders the right to purchase a certain number of shares of the firm’s common stock at a specified price over a certain period of time is called
A) stock purchase warrants.
B) call feature.
C) conversion feature.
D) none of the above.

6. A ________ bond generally has an interest rate that is higher than a similar risk ________ bonds, and a ________ bond generally has an interest rate that is lower than a similar risk ________ bond.
A) callable; non-callable; convertible; non-convertible
B) convertible; non-convertible; callable; non-callable
C) convertible; callable; non-convertible; non-callable
D) callable; non-callable; non-convertible; convertible

7. Bonds are
A) a series of short-term debt instruments.
B) a form of equity financing that pays interest.
C) long-term debt instruments.
D) a hybrid form of financing used to raise large sums of money from a diverse group of lenders.

8. Another term sometimes applied to a common shareholder is a
A) fundamental or basic owner of the firm.
B) residual owner of the firm.
C) net owner of the firm.
D) reciprocal owner of the firm.

9. ________ is hired by a firm to find prospective buyers for its new stock or bond issue.
A) A securities analyst
B) A trust officer
C) A commercial loan officer
D) Investment Banker

10. Identify whether the key characteristic describes common stock (CS) or preferred stock (PS).
1. Source of financing which places minimum constraints on the firm.
2. Used often in mergers.
3. Potential dilution of earnings and voting power.
4. Fixed financial obligation.
5. Increases the firm’s borrowing power.
6. May have cumulative and participating features.
7. May be convertible into another type of security.
8. Last to receive earnings or distribution of assets in the event of bankruptcy.
9. Frequently includes a call feature.

11. In the Gordon model, the value of the common stock is the
A) net value of all assets which are liquidated for their exact accounting value.
B) actual amount each common stockholder would expect to receive if the firm’s assets are sold, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.
C) present value of a non-growing dividend stream.
D) present value of a constant, growing dividend stream
12. If expected return is less than required return on an asset, rational investors will
A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return.
B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.
C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return.
D) buy the asset, since price is expected to increase.
13. ________ is the chance of loss or the variability of returns associated with a given asset.
A) Return
B) Value
C) Risk
D) Probability
14. Risk aversion is the behavior exhibited by managers who require a (n)
A) increase in return, for a given decrease in risk.
B) increase in return, for a given increase in risk.
C) decrease in return, for a given increase in risk.
D) decrease in return, for a given decrease in risk.
15. The ________ of an event occurring is the percentage chance of a given outcome.
A) dispersion
B) standard deviation
C) probability
D) reliability
16. The ________ measures the dispersion around the expected value.
A) coefficient of variation
B) chi square
C) mean
D) standard deviation
17. The goal of an efficient portfolio is to
A) maximize risk for a given level of return.
B) maximize risk in order to maximize profit.
C) minimize profit in order to minimize risk.
D) minimize risk for a given level of return.
18. In a period of rising sales utilizing past cost and expense ratios (percent-of-sales method), when preparing pro forma financial statements and planning financing, will tend to
A) understate retained earnings and understate the additional financing needed.
B) overstate retained earnings and overstate the additional financing needed.
C) understate retained earnings and overstate the financing needed.
D) overstate retained earnings and understate the financing needed.