STR Finance Section A

Finance Section




Finance

Corporate finance

Capital budgeting

Cost of capital

Capital structure

Dividend policy

Working capital management

International finance

Investments

Financing instruments

Risk and return

Securities valuation and analysis

Options, futures, and other derivatives

Financial markets and institutions

Capital markets

Money market

Market efficiency

Investment banking





34. Pursuing valuable ideas is the best way

a. 0 to achieve extraordinary returns

b. 0 to get yourself in trouble

c. 0 to restrain your spending

d. 0 to avoid risk



35. An investor's risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?

a. 0 The beta of this portfolio is negative if all stocks are positively correlated.

b. 0 All stocks in this portfolio will have a beta greater than one.

c. 0 All stocks in this portfolio will have a beta less than one.

d. 0 None of these



36. Which of the following represents the perfect capital market view of capital structure?

a. 0 The value of the leveraged firm is equal to the value of the unleveraged firm plus the tax rate times the amount of debt.

b. 0 Corporate taxes cause debt to be cheaper than equity.

c. 0 Maximum firm value results from being essentially all-debt financed.

d. 0 None of these





37. Bank term loans represent

a. 0 long-term loans that look like short-term debt

b. 0 loans for specified amounts that require borrowers to repay them according to specified schedules

c. 0 the pledge of receivables

d. 0 all of these



38. says to calculate the net advantage of a foreign project on the basis of the incremental after-tax cash flows the project will provide.

a. 0 The Behavioral Principle

b. 0 The Principle of Comparative Advantage

c. 0 The Principle of Incremental Benefits

d. 0 The Time Value of Money Principle



39. Which of the following forms of ownership are purchased in the capital markets?

a. 0 Stocks

b. 0 Bank debt

c. 0 Computer equipment

d. 0 Research and development



40. The Principle of implies that the expected return for an asset equals its required return.

a. 0 Capital Market Efficiency

b. 0 Risk-Return Trade-Off

c. 0 Comparative Advantage

d. 0 Signaling



41. says to look for opportunities to develop derivatives that enable firms to cope better with the financial risks they face.

a. 0 The Principle of Incremental Benefits

b. 0 The Principle of Valuable Ideas

c. 0 The Principle of Two-Sided Transactions

d. 0 The Behavioral Principle



42. Which of the following statements is false?

a. 0 Like a call option, a warrant specifies the underlying common stock, the number of shares, a strike price, an expiration date, and the option type (American or European).

b. 0 Dividing the face amount of the convertible bond by the conversion price gives the conversion ratio.

c. 0 Convertible preferred stock is usually perpetual, whereas convertible debt has a stated maturity and usually has a sinking fund.

d. 0 Conversion of PERCs into common stock is voluntary, not mandatory.



43. Which statement is true?

a. 0 The Principle of Comparative Advantage states that capital market efficiency allows a firm to concentrate its primary efforts on its comparative advantage, rather than on its day-to-day financing.

b. 0 The Principle of Signaling states that new ideas can provide value when first introduced, even in an efficient capital market.

c. 0 The Principle of Valuable Ideas suggests that self-interested capital market transactions force market prices toward being fair prices.

d. 0 None of these



44. You work for ABC, Inc. in the finance department. You own 200 shares in ABC that are selling at $20 per share on the NYSE. You just found out they will publicly announce a new stock offering. The costs from the offering will be 10% of the new offering. The new offering will increase the number of outstanding share by 30%. The new offering is not expected to have any positive or negative impact on firm value due to increasing the firm’s cash flows. There are currently 20,000,000 shares of ABC outstanding. Once the announcement is made public, what will be the expected impact on the value of your shareholdings due to the transaction (or issuance) costs of the new offering?

a. 0 There will no loss because new money will be taken in.

b. 0 You will lose $120

c. 0 You will lose $400.

d. 0 None of these



45. Which of the following is NOT a disadvantage of going public?

a. 0 Going public involves significant expenses, generally from 6 to 13% of the amount of the offering, and even more for very small offerings.

b. 0 Going public can also take a substantial amount of valuable management time.

c. 0 Going public lessens estate tax obligations.

d. 0 Going public can cause existing shareholders to lose voting control.