Davenport FIN510 final exam (both parts)

a. Company E trades at a higher P/E ratio.

b. Company E probably has fewer growth opportunities.

c. Company E must pay a lower dividend.

d. Company E must have a higher market-to-book ratio.

e. Company E is probably judged by investors to be riskier.

a. Strike price.

b. Variability of the stock price.

c. Option's time to maturity.

d. All of these.

e. None of these.

a. Typically, a firm's EBIT should exceed its EBITDA.

b. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.

c. Typically, a firm's DPS should exceed its EPS.

d. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.

e. The more depreciation a firm has in a given year, the higher its EPS, other things held constant.

a. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.

b. Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

c. Use cash to repurchase some of the company's own stock.

d. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.

e. Use cash to increase inventory holdings.

a. Only institutions, and not individuals, can participate in derivatives market transactions.

b. The IPO market is a subset of the secondary market.

c. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

d. If you purchased 100 shares of Disney stock from your brother-in-law, this would be an example of a primary market transaction.

e. s

a. If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.

b. One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.

c. Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.

d. Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.

e. Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.

a. Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.

b. Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be.

c. Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.

d. If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.

e. Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.

a. Adding more such stocks will increase the portfolio's expected rate of return.

b. Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.

c. Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.

d. Adding more such stocks will have no effect on the portfolio's risk.

e. Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.

a. Making the bond a first mortgage bond rather than a debenture.

b. Adding additional restrictive covenants that limit management's actions.

c. The rating agencies change the bond's rating from Baa to Aaa.

d. Adding a call provision.

e. Adding a sinking fund.

a. The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.

b. The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.

c. On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.

d. Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.

e. The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy.

a. The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.

b. Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.

c. Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.

d. The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

e. The outstanding balance declines at a slower rate in the later years of the loan's life.

a. Corporations cannot buy the preferred stocks of other corporations.

b. Preferred dividends are not generally cumulative.

c. A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.

d. Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.

e. The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.

a. The company issues new common stock.

b. The company pays a dividend.

c. The company gives customers more time to pay their bills.

d. The company purchases a new piece of equipment.

e. The company repurchases common stock.

a. Hedge funds have more in common with commercial banks than with any other type of financial institution.

b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.

c. The justification for the "light" regulation of hedge funds is that only "sophisticated" investors with high net worths and high incomes are permitted to invest in these funds, and such investors supposedly can do the necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

d. Hedge funds have more in common with investment banks than with any other type of financial institution.

e. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.