Exam 2 Flashcards
Which of the following statements is FALSE?
A. The Gordon Growth Model assumes constant dividend growth and implies that stock prices grow at the same rate.
B. A stock’s price is the present value of the expected dividends and capital gains.
C. Dealers buy and sell securities from their own inventory, while brokers bring buyers and sellers together to complete transactions.
D. Holders of preferred stock have greater voting rights in corporate decisions than holders of common stock.
d
Which of the following statements is TRUE?
A. The Gordon Growth Model assumes constant dividend growth but implies that stock prices grow at a different rate.
B. A stock’s price is the present value of its future cash flows, namely, its expected capital gains and dividends.
C. Brokers buy and sell securities from their own inventory, while dealers bring buyers and sellers together to complete transactions.
D. Holders of common stock have greater voting rights in corporate decisions than holders of preferred stock, but they have less voting rights than creditors of the corporation.
b
Newly issued securities are sold to investors in which one of the following markets? A. Proxy B. Inside C. Secondary D. Primary
d
Which of the following statements is FALSE?
A. The bid price is the price that a dealer is willing to pay for a security and is lower than the ask price.
B. Bonds trade less frequently than stocks.
C. In the stock market, the secondary market is the market where new securities are originally sold to investors by the issuing company.
D. Dividends received by corporations have a 70% to 100% exclusion from taxable income.
c
A broker is an agent who:
A. Trades on the floor of an exchange for himself or herself.
B. Buys and sells from inventory.
C. Offers new securities for sale to dealers only.
D. Brings buyers and sellers together.
d
Fill in the blanks: Stock prices fall if investors either expect \_\_\_\_\_\_\_\_\_ growth rates or require \_\_\_\_\_\_\_\_\_ returns. A. higher, higher B. higher, lower C. lower, higher D. lower, lower
c
An agent who buys and sells securities from inventory is called a: A. Specialist B. Dealer C. Broker D. Floor Trader
b
Which of the following statements is FALSE?
A. Unlike equity holders, debt holders are not owners
B. Lenders can exert control over a company’s managers by voting for its board of directors.
C. A corporation cannot deduct its payments to preferred shareholders before it pays taxes
D. Holders of convertible bonds can force bankruptcy if their coupons are not paid
b
Which of the following statements is FALSE?
A. One reason why the Average Accounting Return is a flawed measure in making business decisions is that it is based on cash flows.
B. IRR measures the dollar-weighted return on an investment.
C. In order to use the Payback Rule as a tool to determine if an investment is acceptable, a manager needs to provide a pre-specified limit of time for recouping investment costs.
D. The Profitability Index measures the value created per dollar invested, based on the time value of money.
a
If any, which of the following statements is FALSE?
A. NPV measures the value created by taking on an investment
B. NPV indicates how much a project will improve owner wealth
C. NPV is the discounted present value of a project’s expected future accounting net income at the required return, subtracting the initial investment
D. None of the above statements is false
c
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? A. Average accounting return B. Payback C. Internal rate of return D. Profitability index
a
The average accounting return method of analyzing projects:
A. Incorporates cash flows.
B. Is similar to calculating the Return on Assets.
C. Is difficult to estimate using information from accounting statements.
D. Should accept all projects with positive AAR.
b
Which of the following statements is FALSE?
A. The internal rate of return is defined as the discount rate which results in a zero net present value for the project.
B. The primary advantage to payback analysis is that it biases companies to invest in long-term projects that require large current expenditures on research and development.
C. The average accounting return ignores cash flows is most similar to computing the return on assets (ROA).
D. The profitability index reflects the value created per dollar invested.
b
Which of the following statements is TRUE?
A. Opportunity costs are those values that have already been incurred, cannot be recouped, and should not be considered in an investment decision.
B. Under hard capital rationing, a business enforces limits on investment budgets because it prefers not to raise financing from the capital markets.
C. Managerial real options can be very valuable but difficult to measure, and ignoring them will underestimate a project’s true Net Present Value.
D. Forecasting risk is more troublesome when NPV estimates are particularly large.
c
If any, which of the following does NOT have the potential to increase the net present value of a proposed investment?
A. The ability to immediately shut down a project should the project become unprofitable
B. The ability to wait until the economy improves before making the investment
C. The option to increase production beyond that initially projected
D. All of the above have the potential to increase the NPV of a proposed investment
d
Which of the following should not be included in the analysis of a proposed investment?
A. The current market value of an existing building to be used in the project.
B. The amount paid 4 years ago for an existing building to be used in the project.
C. The expected after-tax salvage value at the end of a project of an existing building to be used in the project.
D. The net working capital balance remaining at the end of the project.
b
Which of the following statements is FALSE??
A. The impacts of estimation errors and forecasting risks are small when NPVs are large and positive.
B. Under intense competition, positive NPV projects are as common as negative NPV projects.
C. Scenario analysis helps determine the reasonable range of expectations for a project’s outcome.
D. Sensitivity analysis helps identify the variable within a project that presents the greatest forecasting risk.
b
