Multiple Choice Answers

Which of the following statements is true?
A. A security is a claim issued by a firm that pays owners interest, not dividends.
B. A call option analyzes conflicts of interest and behavior in a principal-agent relationship.
C. An agent-manager can never make bad decisions.
D. The difference between the value of one action and the value of the best alternative is called an opportunity cost.
2) Book value, or net book value, refers to
A. the statement of a firm’s financial position at one point in time, including its assets and the claims on those assets by creditors and owners
B. the price for which something could be bought or sold in a reasonable length of time, where reasonable length of time is defined in terms of the item’s liquidity
C. an agent-manager never making bad decisions
D. the net of assets less liabilities shown in the accounting statements

3) Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9% and the current yield is 10%. Which of the following statements is true?
A. The current yield was less than 9% when the bond was first issued.
B. The current yield was greater than 9% when the bond was first issued.
C. The market value of the bond is more than $1,000.
D. The market value of the bond is less than $1,000.

4) If the yield to maturity for a bond is less than the bond’s coupon rate, the market value of the bond is __________.
A. greater than the par value
B. less than the par value
C. equal to the par value
D. cannot tell

5) For investors, the proper measure of a stock’s risk is its __________.
A. nondiversifiable risk
B. specific risk
C. nonsystematic risk
D. standard deviation

6) A company’s beta is -1.5. If the overall stock market decreases by 5%, what is the expected change in the firm’s stock price?
A. Share price decreases by 5%
B. Share price decreases by 6.5%
C. Share price increases by 7.5%
D. Share price decreases by 7.5%

7) Which of these investments would you expect to have the highest rate of return for the next 20 years?
A. U.S. Treasury bills
B. Long-term corporate bonds
C. Intermediate-term U.S. government bonds
D. Money market funds

8) Dimensions of risk include __________.
A. uncertainty about the future outcome
B. the certainty of a negative outcome
C. the impossibility of the same return
D. uncertainty about yesterday’s outcome

9) One problem with using negative values for the proportion invested in the riskless asset to represent a borrowed amount is that the implied borrowing rate of interest is the same as the __________.
A. prime rate of interest
B. current rate of interest
C. lending rate of interest
D. nominal rate of interest

10) If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in
A. high beta stocks
B. low beta stocks
C. stocks with large amounts of unique risk
D. stocks that plot below the security market line

11) Stony Products has an inventory conversion period (ICP) of about 70 days. The receivables collection period (RCP) is 30 days. The payables deferral period (PDP) is about 40 days. What is Stony’s cash conversion cycle (CCC)?
A. 100 days
B. 60 days
C. 140 days
D. 70 days

12) The main source of short-term operating capital is _________.
A. trade credit
B. bank loans
C. bonds
D. sale of treasury stock

13) An investor’s risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?
A. Each stock in the portfolio has its own beta.
B. Selling any stock in this portfolio will lower the beta of the portfolio.
C. An investor cannot change the risk of this portfolio by her choice about personal leverage.
D. Each stock in the portfolio will have a beta greater than 1.

14) An all-equity-financed firm would __________.
A. not pay any income taxes, because interest would exactly offset its taxable income.
B. pay corporate income taxes, because it would have interest expense.
C. not pay corporate income taxes, because it would have no interest expense.
D. pay corporate income taxes if its taxable income is positive.

15) If a firm wants to lower its weighted average cost of capital (WACC), one way to do so would be to
A. sell more common shares
B. sell more bonds
C. pay a cash dividend
D. issue a stock dividend