Which one of the following statements is incorrect concerning stock indexes?

Liberty University BUSI 530 Exam 3

Liberty University BUSI 530 Exam 3

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Which one of the following statements is incorrect concerning stock indexes?

Multiple Choice

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Indexes have been developed for foreign stocks.

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Some indexes cover only a specific market sector.

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Most indexes include all of the publicly-traded common stocks.

Correct

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Some indexes are equally weighted.

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Macro risks are faced by all common stock investors.

True or False

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Although several stock indexes are available to inform investors of market changes, the Dow Jones Industrial Average:

Multiple Choice

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is the broadest-based of the market indexes.

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is the only reliable market index.

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accounts for approximately 90% of U.S. market value.

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is one of the best-known of the U.S. market indexes.

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Which one of the following firms is likely to exhibit the least macro risk exposure?

Multiple Choice

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Construction company

•

Airline company

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Gold mining company

Correct

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Auto manufacturer

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The average of the betas for all stocks is:

Multiple Choice

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greater than 1.0; most stocks are aggressive.

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less than 1.0; most stocks are defensive.

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unknown; betas are continually changing.

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exactly 1.0; these stocks represent the market.

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If the line measuring a stock’s historic returns against the market’s historic returns has a slope greater than 1.0, then the:

Multiple Choice

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stock is currently underpriced.

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market risk premium is increasing.

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stock has a significant amount of specific risk.

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stock has a beta exceeding 1.0.

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The security market line shows how the expected rate of return depends on beta.

True or False

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If the slope of the line measuring a stock’s returns against the market’s returns is positive, then the stock:

Multiple Choice

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has a beta greater than 1.0.

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has no specific risk.

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has a positive beta.

Correct

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plots above the security market line.

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WACC can be used to determine the value of a firm by discounting the firm’s:

Multiple Choice

•             after-tax net profits.

•

pretax profits.

•             cash inflows.

free cash flows.

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The company cost of capital is the return that is expected on a portfolio of the company’s:

Multiple Choice

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existing securities.

Correct

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equity securities.

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debt securities.

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proposed securities.

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If 100 million shares of common stock are issued with a par value of $2 and additional paid in capital is $800 million, the total par value of the issued shares is:

Multiple Choice

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$200 million.

Correct

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$600 million.

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$800 million.

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$1 billion.

Explanation

Total par value = 100m × $2 = $200m

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Companies sometimes sell the cash flows from a bundle of loans. Such bonds are known as asset-backed bonds.

True or False

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Funded debt refers to those liabilities that:

Multiple Choice

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have established a sinking fund for repayment.

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are not callable at the option of the firm.

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are secured by specific collateral.

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have a maturity of more than one year remaining.

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Dividends represent an important component of a firm’s net book value.

True or False

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A stock’s par value is the:

Multiple Choice

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maturity value of the stock.

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price at which each share is recorded.

Correct

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price at which an investor could sell the stock.

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price received by the firm when the stock was issued.

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Equity capital in young businesses is known as venture capital and it is provided by venture capital firms, wealthy individuals, and investment institutions such as pension funds.

True or False

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The SEC reviews the registration statement and determines whether or not an investment in the firm is advisable.

True or False

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The evidence indicates that industrial stock prices in the U.S. decrease by approximately 3%, on average, when new equity issues are announced.

True or False

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The SEC requires the sale of a private placement to be limited to a small number of knowledgeable investors.

True or False

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Prospective investors are advised of a stock’s potential risks by the:

Multiple Choice

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underwriter.

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underpricing laws.

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prospectus.

Correct

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initial public offering.

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Debt usage will have an effect on:

Multiple Choice

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business risk.

•

financial risk.

Correct

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operating risk.

•

asset risk.

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In the absence of taxes, which one of the following would not be expected to change with changes in the firm’s capital structure?

Multiple Choice

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Weighted-average cost of capital

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Expected return on equity

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Expected return on assets

Correct

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Expected earnings per share

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When asked about key factors of debt policy, financial managers commonly mention the tax advantage of debt and the importance of maintaining their credit rating.

True or False

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According to MM, debt restructuring will not change the firm’s overall value.

True or False

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A firm’s capital structure is represented by its mix of:

Multiple Choice

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assets.

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liabilities and equity.

Correct

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assets and liabilities.

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assets, liabilities, and equity.