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College Questions
true or false: coupons on US bonds are usually paid out once a year.
true or false: long term bond prices are less volatile than short term bond prices.
true or false: long term bond yields are less volatile than short-term bond yields.
true or false: the holding period return is just another name for the bond yield they both measure the return to the investor.
true or false: as the bond yield increases, the bond becomes more valuable to the investors and therefore, the price increases.
true or false: the coupon rate on a bond measures the investors return on their investment.
true or false: managers acting on behalf of shareholders be less likely to pay excessive dividends when a firm is in trouble because the firm needs to keep all the financial resources it has.
true or false: leverage should have no impact on human resource manangement.
if transactions cost are zero, there is no information asymmetry or personal taxes and bankruptcy is cost less, but corporate taxes exist and interest payments are tax-deductible, what is the optimal amount of debt to have?
if corporate and personal taxes exist, and interest payments are tax-deductible for corporations, would firms take on as much debt as possible?
true or false: bondholders do not have to worry about opportunities managerial actions because they can always use bond covenants to specify what a manager can or cannot do.
what are the important disadvantages of debt in practice?
true or fasle: there is a lot of cross-sectional variation in debt-equity ratios, but they do not vary systematically across industries.
bankruptcy is bad for the following reasons:
if bankruptcy were costless and there were no information asymmetry, but interest payments are tax-deductible, what is the weighted average cost of capital?
true or false: firms selling durable goods are more affected by financial distress than firms selling nondurable goods.
q#1
true or false: according to the Modligliani-Miller hypothesis, if a firm does an equity-for-debt swap, but does not change the operations of the firm, the sum total of the firms debt and equity will not change.
true or false: according to the Modigliani- miller hypothesis, the value of the firm is determined by its operations, not by its financial structure
true or false: according to the Modigliani-Miller, choosing the right structure can increase the value of the firm.
the NY times in it's recent report on the sale of starwood hotels reported. "we do not believe Marriott is willing to incur earnings dilution to facilitate the transaction". Analysts at wellsfargo wrote in a research note on Monday. If earnings dilutions
true or false: under modigliani-miller , the value of the firm is independent of its capital structures, but the weighted average cost of capital still depends on the capital structures.
true or false: If the modigliani miller hypothesis holds, the firms cost of capital depends on how close is to the firms optimal leverage.
if there are no transactions costs or information assymmetry but interest on debt is deductible by the firm, then the value of the firm will be increasing in the amount of debt used in financing the firm.
true or false: if the MM(Modigliani-miller) hypothesis holds, the risk of equity does not change as we increase the leverage of the firm.
issuing equity is bad for existing shareholders because it dilutes earnings. new shareholders have claims to the firms earnings, so existing shareholders are worse off. as a result, stock prices drop. Is this true or false?
the Modigliani-miller hypothesis assumes that there are no:
true or false: according to the modligliani-Miller hypothesis, if a firm does an equity-for-debt swap, but does not change the operations of the firm, the value of the firm's equity will not change.
your friend makes the following argument: if there are no transaction costs, taxes or information asymmetry, as we increase the leverage of the firm, the risk of equity will increase. Consequently, stock holders will require a higher rate of return. the f
true or false: the following is idiosyncratic risk: the risk that your firm X's employees will be hired away by competitors.
a probability distribution is:
an asset with a beta less than 1:
firms in the following sectors tend to have high betas:
market wide risk is more relevant for asset pricing than idiosyncratic risk because:
true or false: the market risk premium is always positive.
true or false: an investor should not concern herself with firm-specific uncertainty even if she holds only equity of 1 particular firm.
true or false: the following is idiosyncratic risk: the risk that the new product firm X's manager expects his R&D division to produce will not materialize.
the crucial assumption that allows insurance to work is that:
which of the following is true? historical
true or false: the standard error of estimate of the expected return is higher than the standard deviation of returns.
it is often said to classify assets in different categories that vary in risk from a very safe class to very risky class. which of following is common list of such asset categories in order of increasing risk?
the following firms are likely to have high asset betas:
firms with the highest equity betas have:
true or false: the risk premium for every asset is positive.
true or false: standard deviation is a good measure of risk for somebody who is primarily worried about loss of capital.
which statement is true? empirical
true or false: the following is idiosyncratic risk: the risk that the economy slows, decreasing demand for firm X;s products
true or false: according to the CPM, the risk for a security with high diversifiable risk and high systematic risk is grater than the risk premium for a security with low diversifiable risk and high systematic risk.
true or false: the following is idiosynatic risk: the risk that the main production plant of company X is shut down due to a tornado
true or false: insurance policies are useful primary because they transfer risk from one party to another.
true or false: a theoretical probability distribution can be described using more parameters than an empirical frequency distribution.
the variance of asset returns is measured in the following units:
true or false: the geometric mean is greater than the arithmetric mean.
suppose we created portfolio of investments in different asset categories in 1925, with intial investment of $100, and dividends and interest reinvested in that same asset category, period after period. which of the following is an ordering of portfolio v
the CAPM is:
an efficient portfolio is one which:
a firms asset beta can be measured by:
an assets beta:
which of the following are true? finance
true or false: the following is idiosyncratic risk: the risk that the Fed will increase interest rates, thus decreasing demand for real estate company X's products.
true or false: stock market investors should read online or text publications to find out which stocks are overpriced and which are underpriced. this will allow them to increase the value of their portfolio.
true or false: if changes in prices are unpredictable, that is evidence against market hypothesis.
true or false: in practice, analyzing fundamental information about a stock from its financial statements or elsewhere is pointless because prices have already incorporated that information.
true or false: for the EMH to be true, all investors should have enough wealth to buy and sell.
true or false: for the EMH to be true, all investors would need to be sophisticated
true or false:according to the EMH, when a firm announces a new capital budgeting project, the price of the firms stock should increase.
true or false: empirically, it is true that stock prices incorporate privately held information even before they become public.
suppose the EMH holds. then, if the price of a given stock has been rising over the past 5 days.
the efficient markets hypothesis says that on assets current price reflects:
true or false: the efficient market hypothesie says that financial markets are efficient- they have minimum operational costs of running the market.
Statistics Question
the discount rate to be used for discount cashflows from a project is:
the WACC is computed as the weighted average of the cost of equity and the cost of debt. the firm does not have any recently issued bonds. which of these statements is correct?
the WACC is used to discount project cashflows because:
your project manager has forecast savings from a proposed investment to most likely be $10M a year for the next 10 years. however he believes that there is a 10% chance that it will be $12M and a 10% that it will be $8M. you run the number's and discover
a firm believes that demand and supply conditions are likely to remain the same for the next 5 years, so that the number of units sold will remain constant. it also expects inflation to be 5% a year for the next 5 years. sales for the year just ended with
The WACC computation requires you to use the weighted average of the after tax cost of debt and the cost of equity, using appropriate proportions for debt and equity. your frims balance sheet shows $30M of debt and $70 of equity. the market value of your
the WACC is computed as weighted average of the cost of equity and the cost of debt. what would you use to compute the cost of equity?
the WACC is computed as weighted average of the cost of equity and cost of debt. which of the statements is correct? the cost of debt is:
true or false: even if there are no frictions or transaction costs, the same good in 2 different locations can sell for different locations.
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