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1 | |
Which three of the following are given as possible means of creating valuable financing opportunities? I. get investors to believe a security is worth more than it actually is
II. convert existing debt into equity
III. reduce taxes and the cost of issuing securities
IV. create a new security to meet the needs of an unsatisfied clientele |
| | A) | I, II, and III |
| | B) | I, III, and IV |
| | C) | I, II, and IV |
| | D) | II, III, and IV |
| | E) | There is no 5th combination of options. |
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2 | |
A subsidy provided by the local government to entice a firm to locate in its community is considered one means of _____ in an attempt to create a valuable _____ opportunity. |
| | A) | increasing revenues; financing |
| | B) | increasing revenues; capital budgeting |
| | C) | reducing costs; financing |
| | D) | reducing costs; capital budgeting |
| | E) | creating a new security; financing |
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3 | |
Laketown has agreed to provide Lakeside Industries $1.5 million in industrial, tax-exempt bonds if the firm will agree to build a new facility within the boundaries of the city. The bonds will have a coupon rate of 4.5% and pay interest annually. Lakeside normally has a cost of debt of 9 percent. What is the net present value of this subsidy? |
| | A) | $121,603 |
| | B) | $141,414 |
| | C) | $158,009 |
| | D) | $170,862 |
| | E) | $172,607 |
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4 | |
Which one of the following statements is correct if the financial markets are efficient? |
| | A) | Stock prices take an average of 24 hours to adjust to new information. |
| | B) | If you hear an announcement by a firm and place a trade within the next twenty minutes, you can earn an abnormal rate of return. |
| | C) | Firms can only receive an overvalued price for their securities if they fool the investors. |
| | D) | Investors should expect to earn a normal rate of return. |
| | E) | Investors on average will earn less than the normal rate of return. |
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5 | |
Which one of the following pricing patterns reflects an overreaction and reversion in an inefficient stock market? Assume the prices occur over six days and only one event occurred which affects the stock price. That event occurred at the beginning of day two. |
| | A) | $20, $23, $24, $25, $25, $25 |
| | B) | $20, $25, $24, $23, $23, $23 |
| | C) | $20, $20, $20, $23, $23, $23 |
| | D) | $20, $18, $18, $18, $18, $18 |
| | E) | $20, $20, $20, $22, $22, $22 |
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6 | |
A delayed response indicates that: |
| | A) | investors are slow to react to new information. |
| | B) | investors jump to conclusions and then modify those conclusions over time. |
| | C) | investors trade on rumors rather than delay until an actual announcement is made. |
| | D) | firms delay making official announcements until the market has corrected its overadjustment to the news as leaked through informal outlets. |
| | E) | the markets are fully efficient as investors need time to analyze new data as it becomes available. |
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7 | |
According to Andrei Shleifer, you can assume that investors are: |
| | A) | irrational but still manage to act in their own best interests all of the time. |
| | B) | irrational but that the actions of one irrational investor are offset by the actions of another irrational investor at all times. |
| | C) | rational and always act in a rational manner. |
| | D) | at times irrational but arbitrage can still maintain an efficient marketplace. |
| | E) | more rational if they are individual investors rather than professional investors. |
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8 | |
Assume the capital markets are efficient. If you research a stock and identify a specific trading pattern: |
| | A) | you will be able to earn excess profits for an extended period of time. |
| | B) | that pattern will exist for a period of time but will slowly diminish in intensity. |
| | C) | you can delay responding to the opportunity since no one else has spotted the pattern. |
| | D) | that pattern will rapidly disappear. |
| | E) | you should earn excessive profits as the same pattern should exist with similar securities. |
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9 | |
Which one of the following statements is NOT correct concerning the efficient markets hypothesis (EMH)? |
| | A) | The EMH suggests that there are no positive net present value investments. |
| | B) | The EMH asserts that public information is reflected in the stock prices. |
| | C) | The EMH refers to well-organized capital markets. |
| | D) | The EMH suggests that the prices on the NYSE are fair. |
| | E) | The EMH suggests that markets in which prices fluctuate a great deal cannot be efficient. |
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10 | |
Which one of the following statements is consistent with the efficient market hypothesis? |
| | A) | Technical analysis, or the study of historical prices, leads to excess profits. |
| | B) | There is a simple way to identify mispriced stocks. |
| | C) | Prices respond slowly to new information. |
| | D) | It is easy to predict future price movements based on public information. |
| | E) | Firms should expect to receive a fair price when they sell securities to the public. |
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