Exam 2 Flashcards
(34 cards)
Chapter 4
Financial ratios that measure a firm’s ability to pay its bills over the short run without undue
stress are known as _____ ratios.
a. asset management
b. long-term solvency
c. short-term solvency
d. profitability
e. market value
c. short-term solvency
Chapter 4
- Net income divided by sales is known as a firm’s:
a. profit margin.
b. return on assets.
c. return on equity.
d. asset turnover.
e. earnings before interest and taxes
a. profit margin.
Chapter 4
- Ratios that measure a firm’s financial leverage are known as _____ ratios.
a. asset management
b. long-term solvency
c. short-term solvency
d. profitability
e. book value
b. long-term solvency
Chapter 4
- If a firm’s debt ratio is greater than 0.5, then:
a. its current liabilities are quite high.
b. its debt-equity ratio exceeds 1.0.
c. it has too few total assets.
d. it has more long-term debt than equity.
b. its debt-equity ratio exceeds 1.0.
Chapter 4
- If a firm’s quick ratio is equal to its current ratio:
a. It has a low level of current liabilities.
b. It has no inventory.
c. It faces a potentially serious liquidity crisis.
d. It is in a loss-making position.
b. It has no inventory
Chapter 6
Assume a bond is currently selling at par value. What will happen in the future if the yield
on the bond is lower than the coupon rate?
A. The price of the bond will increase.
B. The coupon rate of the bond will increase.
C. The par value of the bond will decrease.
D. The coupon payments will be adjusted to the new discount rate.
A. The price of the bond will increase.
Chapter 6
Which of the following statements is correct for a 10% coupon bond that has a current
yield of 7%?
A. The face value of the bond has decreased.
B. The bond’s maturity value exceeds the bond’s price.
C. The bond’s internal rate of return is 7%.
D. The bond’s market value is higher than its face value.
D. The bond’s market value is higher than its face value.
Chapter 6
The discount rate that makes the present value of a bond’s payments equal to its price is
termed the:
A. dividend yield.
B. yield to maturity.
C. current yield.
D. coupon rate.
B. yield to maturity.
Chapter 6
Which one of the following bond values will change when interest rates change?
A. The expected cash flows
B. The present value
C. The coupon payment
D. The maturity value
B. The present value
Chapter 6
What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in
interest if market interest rates change from 9% to 10%?
A. The coupon rate increases to 10%.
B. The coupon rate remains at 9%.
C. The coupon rate remains at 8%.
D. The coupon rate decreases to 8%.
C. The coupon rate remains at 8%.
Chapter 6
If a bond is priced at par value, then:
A. it has a very low level of default risk.
B. its coupon rate equals its yield to maturity.
C. it must be a zero-coupon bond.
D. the bond is quite close to maturity.
B. its coupon rate equals its yield to maturity.
Chapter 6
If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the:
A. bond is selling at a discount.
B. bond has a high default premium.
C. promised yield is not likely to materialize.
D. bond must be a Treasury Inflation-Protected Security.
A. bond is selling at a discount.
Chapter 6
When market interest rates exceed a bond’s coupon rate, the bond will:
A. sell for less than par value.
B. sell for more than par value.
C. decrease its coupon rate.
D. increase its coupon rate.
A. sell for less than par value.
Chapter 6
What causes bonds to sell for a premium?
A. Investment-quality ratings
B. Long periods until maturity
C. Coupon rates that exceed market rates
D. Speculative-grade ratings
C. Coupon rates that exceed market rates
Chapter 7
The statement that there are no free lunches on Wall Street suggests that:
A. the market is strong-form efficient.
B. there is no return to technical or fundamental analysis.
C. security prices reflect all available information.
D. food stocks offer the lowest rates of return
C. security prices reflect all available information.
Chapter 7
If it proves possible to make abnormal profits based on information regarding past stock prices, then the
market is:
A. weak-form efficient.
B. not weak-form efficient.
C. semi strong-form efficient.
D. strong-form efficient
B. not weak-form efficient.
Chapter 7
With respect to the notion that stock prices follow a random walk, many researchers have
concluded that:
A. stock prices reflect a majority of available information about the firm.
B. successive price changes are predictable.
C. past stock price changes provide little useful information about future stock price
changes.
D. stock prices always rise excessively in January
C. past stock price changes provide little useful information about future stock price
changes.
Chapter 7
The semi-strong form of the efficient market hypothesis states that:
A. the efficient market hypothesis is only half true.
B. professional investors make superior profits but amateurs can’t.
C. stock prices do not follow a random walk.
D. prices reflect all publicly available information.
D. prices reflect all publicly available information.
Chapter 7
If markets are efficient, when new information about a stock becomes available, the price
will:
A. remain unchanged because it already reflects this information.
B. accurately and rapidly adjust to include this new information.
C. adjust to accurately reflect this new information over the course of the next few days.
D. most likely increase because all new information has a positive effect on stock prices.
B. accurately and rapidly adjust to include this new information.
Chapter 7
An analyst who relies on past cycles of stock pricing to make investment decisions is:
A. performing fundamental analysis.
B. relying on strong-form market efficiency.
C. assuming that the market is not even weak-form efficient.
D. relying on the random walk of stock prices
C. assuming that the market is not even weak-form efficient.
Chapter 7
The expected return on a common stock is equal to:
A. [(1 + dividend yield) × (1 + capital appreciation rate)] − 1.
B. the capital appreciation rate + dividend yield.
C. (1 + capital appreciation rate)/(1 + dividend yield).
D. the capital appreciation rate − dividend yield
B. the capital appreciation rate + dividend yield.
Chapter 7
Based on the random walk theory, if a stock’s price decreased last week, then this week the price:
A. will reverse last week’s loss and go up.
B. will continue last week’s decline.
C. will stand still until new information is released.
D. has an equal chance of going either up or down.
D. has an equal chance of going either up or down.
Chapter 7
Someone says to you, “I can pick stocks as well as any professional stock analyst by just
throwing darts at the NYSE listings in the Wall Street Journal.” This philosophy is
____________ with the efficient markets hypothesis.
a. consistent
b. inconsistent
c. not related
a. consistent
Chapters 11&12
The principle of diversification tells us that:
a. concentrating an investment in two or three large stocks will eliminate all of the unsystematic
risk.
b. concentrating an investment in three companies all within the same industry will greatly
reduce the systematic risk.
c. spreading an investment across five diverse companies will not lower the total risk.
d. spreading an investment across many diverse assets will eliminate all of the systematic risk.
e. spreading an investment across many diverse assets will eliminate some of the total risk
E. spreading an investment across many diverse assets will eliminate some of the total risk
