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The most important function of a financial market is to: A. facilitate the flow of funds between lenders and borrowers B. provide a market for

  1. The most important function of a financial market is to:
  2. A. facilitate the flow of funds between lenders and borrowers
  3. B. provide a market for shares
  4. C. provide information about an issuing company's financial situation D. secure profits for brokers and agents
  5. E. provide information about shares

  1. 2)An annuity for which the cash flows occur at the beginning of each period is called a(n):
  2. A. ordinary annuity
  3. B. beginning annuity
  4. C. annuity due
  5. D. perpetuity
  6. E. perpetuity delayed

  1. 3)The required rate of return on a bond that trades in the market is called the:
  2. A. risk premium
  3. B. current yield
  4. C. yield to maturity D. call yield
  5. E. liquidity premium

  1. 4)The name given to the model that computes the present value of a share by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount is:
  2. A. dividend growth model
  3. B. capital gain model
  4. C. present value model
  5. D. equity pricing model E. share pricing model

  1. 5)The net present value rule states that you should accept a project if the NPV:
  2. A. is equal to zero or negative
  3. B. exceeds the required rate
  4. C. is less than 1.0
  5. D. is not negative
  6. E. exceeds the initial cost

  1. 6)Which one of the below methods of analysis is most appropriate to use when two investments are mutually exclusive?
  2. A. internal rate of return
  3. B. profitability index
  4. C. net present value
  5. D. modified internal rate of return E. average accounting return

  1. 7)The incremental cash flows of a project can best be defined as the difference between a firm's _____ with and without the project.
  2. A. net worth
  3. B. net income
  4. C. present cash flows
  5. D. future cash flows E. operating cash flow

2

  1. 8)The analysis of the effect that a single variable has on the net present value of a project is called ________ analysis
  2. A. sensitivity
  3. B. erosion
  4. C. cost reduction D. scenario
  5. E. benefit

  1. 9)When a financial market reflects all the available information in the prices of the securities, the market is referred to as a(n):
  2. A. normal distribution
  3. B. primary market
  4. C. efficient market
  5. D. delayed reaction market E. current yield market

  1. 10)The higher the systematic standard deviation of a security, the _____ the expected rate of return and the _____ the risk.
  2. A. lower; lower
  3. B. lower; higher
  4. C. higher; lower
  5. D. higher; higher
  6. E. more constant; more constant

  1. 11)If the financial markets are efficient then:
  2. A. share prices should remain constant
  3. B. share prices should increase or decrease slowly as new events are analysed and the information is absorbed by the markets
  4. C. an increase in the value of one security should be offset by a decrease in the value of another security
  5. D. share prices will only change when an event actually occurs, not at the time the event is anticipated
  6. E. share prices should only respond to unexpected news and events

  1. 12)Which one of the below is the best definition of the term 'expected return' as it applies to the concept of risk and return?
  2. A. guaranteed return on a short-term security which will be earned in the future
  3. B. difference between expected return on a risky asset and expected rate of inflation
  4. C. certain return on a risk-free asset which is going to be earned in the future
  5. D. return on an asset which is certain in the future E. return on a risky asset expected in the future.

  1. 13)Which one of the below is considered an example of systematic risk?

A. a higher inflation rate than predicted

  1. B. an increase in overseas sales for a manufacturing firm
  2. C. resignation of a firm's chief financial officer
  3. D. higher company profits than those forecasted E. lower company sales than predicted

  1. 14)The principle of diversification tells us that:
  2. A. there is no risk in investing in a portfolio of shares
  3. B. spreading your investment across many assets will eliminate some risk C. all risk can be eliminated
  4. D. unsystematic risk cannot be reduced
  5. E. systematic risk can always be eliminated by diversification

3

  1. 15)An annuity in which the first cash flow occurs at some time period after the time of valuation is known as a/an:
  2. A. deferential annuity
  3. B. growth annuity
  4. C. perpetuity due
  5. D. annuity due
  6. E. none of the above.

  1. 16)The interest rate where the period for which interest is charged matches the compounding period is the:
  2. A. nominal interest rate
  3. B. real interest rate
  4. C. compound interest rate D. effective interest rate E. none of the above

  1. 17)An opportunity cost is best defined as the:
  2. A. increased sales of a product if a new product is added to a firm's offerings
  3. B. cost that has been incurred and cannot be recouped
  4. C. potential lost sales that are forfeited when a project is rejected
  5. D. most valuable alternative that is given up if a particular investment is undertaken E. increased cost incurred when a new project is accepted

  1. 18)Besides using capital budgeting techniques on projects, managers:
  2. A. have to ignore project reviews
  3. B. have to conduct ongoing reviews
  4. C. should evaluate the staff responsible for implementing a capital project D. should not change their initial project plans
  5. E. none of the above

  1. 19)Variance measures:
  2. A. The yield on an investment
  3. B. The uncertainty surrounding an outcome C. The expected return of an investment
  4. D. The difference in prices of securities
  5. E. none of the above

  1. 20)Which one of the following best expresses two mutually exclusive investments?
  2. A. building either a gas station or a restaurant on a corner lot
  3. B. building a parking lot for the benefit of both restaurant and theatre patrons
  4. C. constructing a theatre and a restaurant side by side
  5. D. building both a restaurant and a parking lot on a vacant lot E. locating a restaurant inside a theatre building

  1. 21)The internal rate of return identifies the:
  2. A. discount rate at which the net present value equals zero
  3. B. benefit-cost ratio
  4. C. minimum acceptable discount rate
  5. D. crossover rate
  6. E. average profit from a project

4

  1. 22)A project that may be accepted or rejected without affecting the acceptability of another project is known as a(n):
  2. A. mutually exclusive project
  3. B. mutually independent project
  4. C. independent project
  5. D. independently mutual project E. exclusively independent project

  1. 23)You are considering a project that has an internal rate of return that is equal to the required return. This means that the:
  2. A. average accounting return exceeds the project's required return
  3. B. project will lower the value of the firm
  4. C. profitability index is greater than unity
  5. D. project is returning the minimum amount that is acceptable to you E. NPV is negative in an amount equal to the initial investment

  1. 24)Which one of the following statements is correct concerning the payback rule?
  2. A. it's biased in favour of longer-term projects
  3. B. it's flawed as it ignores all cash flows after some arbitrary point in time
  4. C. it says that you should accept a project if the payback period is greater than 1.0 D. it's computed using the present value of each of the cash flows
  5. E. it works best when comparing mutually exclusive projects

  1. 25)The legal document provided to prospective investors which describes details of the issuer and the proposed securities offering is called a:
  2. A. formal filing
  3. B. public statement
  4. C. security agreement
  5. D. prospectus
  6. E. registration statement

  1. 26)A public issue of securities which are first offered to existing shareholders is best defined as a(n):
  2. A. initial public offer
  3. B. rights offer
  4. C. private placement
  5. D. general cash offer
  6. E. general offer

27)The investment firms which act as intermediaries between the issuer of securities and the general public are called:

  1. A. investment advisors
  2. B. facilitators
  3. C. brokers
  4. D. underwriters E. red herrings

28)APortfoliois a(n):

A. term commonly used to refer to systematic risk

B. type of risk-free asset

C. group of assets held by an investor

D. asset that has a standard deviation less than 1

E. new issue of securities that are being offered to the public

29)The Efficient Markets Hypothesis (EMH) argues:

A. some fairly sizeable inefficiencies will exist even in efficient markets, but only over the long-term

B. markets which fluctuate noticeably from one day to the next cannot be efficient

C. efficient markets do not incorporate public information into the market prices

D. all investments in an efficient market have a net present value of zero

E. market prices rarely reflect the true value of a security

30)Assume the securities markets are strong-form efficient. Given this assumption, you should expect which one of the following to occur?

A. The return for accepting risk on a security in that market will be zero

B. The price of any one security in that market will remain constant at its current level C. A security in the market has an annual rate of return equal to the risk-free rate

D. The price of each security in that market will frequently fluctuate

E. The prices of each security will fall to zero because the net present value of the investments will be zero

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