Liberty University BUSI 530 Exam 3
Liberty University BUSI 530 Exam 3
Item 1
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Item 1
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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.
Item 2
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Macro risks are faced by all common stock investors.
True or False
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Item 3
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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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Item 4
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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
Item 5
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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.
Item 6
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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.
Item 7
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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.
Item 9
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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.
Item 10
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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.
Item 11
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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
Item 12
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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
Item 13
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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.
Item 14
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Dividends represent an important component of a firm’s net book value.
True or False
15
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Item 15
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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.
Item 16
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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
Item 17
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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
Item 18
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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
Item 19
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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
Item 20
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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.
Item 21
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Debt usage will have an effect on:
Multiple Choice
•
business risk.
•
financial risk.
Correct
•
operating risk.
•
asset risk.
Item 22
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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
Item 23
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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
Item 24
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According to MM, debt restructuring will not change the firm’s overall value.
True or False
Item 25
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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.
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