Final

MULTIPLE CHOICE

1. Which of the following is an example of unsystematic risk?

A) Inflation increases unexpectedly

B) The Bank of Canada increases interest rates

C) The federal government reduces the basic level of income tax

XD) A pharmaceutical company fails to have a recent drug approved.

E) GDP falls by 0.25%\

2. (Dt+1 / Pt) + [(Pt+1 – Pt)/ Pt] is the mathematical expression for the:

A) Dividend yield.

B) Capital gains yield.

C) Total risk premium.

XD)Total rate of return.

E) Real rate of return.

3. A policy under which the firm pays dividends only after its capital investment needs are met, and while maintaining a constant debt/equity ratio, is called a __________________.

A) homemade dividend

B) clientele effect

XC)residual dividend approach

D) bird-in-the-hand approach

E) constant dividend growth model

4. Loans provided directly from a limited number of investors to a corporation, with maturities typically in excess of five years, are called:

XA)Private placements.

B) Debt SEOs.

C) Notes payable.

D) Debt IPOs.

E) Term loans.

5. The target capital structure is the debt-equity mix that:

A) Maximizes the cost of capital.

XB)Maximizes the value of the firm.

C) Minimizes the cost of equity financing.

D) Minimizes the cost of debt financing.

E) Minimizes the overall debt level of the firm.

6. The hypothesis that market prices reflect all available public information is called efficiency in the:

A) Open form.

B) Strong form.

XC) Semi-strong form.

D) Weak form.

E) Stable form.

7. Which of the following is true about underwriting securities?

A) The issuing firm, not the underwriter, bears all the risk from adverse price movements in a firm commitment sale.

B) The method of marketing securities to the public is usually specified by the issuing firm, not the underwriter.

C) The issuing firm, not the underwriter, will generally set the price for the offering.

XD)The spread earned by the underwriter is the difference between the price the underwriter pays for the security and the offering price of the security.

E) It is common for a number of underwriters to form a syndicate so that the risk in marketing a security issue falls on the lead underwriter.

8. Which of the following statements regarding leverage is FALSE?

A) The ultimate effect of leverage depends on the firm's EBIT.

XB) If things go poorly for the firm, increased leverage provides greater returns to shareholders (as measured by ROE and EPS).

C) As a firm levers up, shareholders are exposed to greater risk.

D) The benefits of leverage will not be as great in a firm with substantial accumulated losses or other types of tax shields compared to a firm without many tax shields.

E) Beyond a certain point, the costs of financial distress outweigh the benefits of leverage.

9. In a world without taxes, M&M Proposition 1 contends that:

A) The cost of equity is dependent on the debt to equity ratio of the firm

B) A firm’s cost of equity varies with the cost of debt

XC)The total value of the firm remains the same regardless of the debt to equity mixture applied

D) A firm’s WACC also determines its cost of equity

E) The cost of capital is a linear function with a positive slope