final exam prep: test 3

Question 1

A measure that indicates the average return minus the risk free return divided by the standard deviation of return on an investment

Answer 1

The Sharpe Ratio

Question 2

A beta coefficient for a stock of -0.8 indicates

Answer 2

A return of 10% on the market will cause a return on this stock to be -8%

Question 3

t/f An aggressive investor will tend to prefer stocks with low betas

Answer 3

False

Question 4

t/f The risk premium in the CAPM rises with expected return on the market

Answer 4

True

Question 5

You bought a stock with a beta of 1.5 and earned a return of 9%. Did you outperform the market if during the same period the market rose by 10.4% and you could have earned 5.4% by investing in the treasury bill

Answer 5

No

Question 6

t/f A 5% stock dividend reduces a firms total equity

Answer 6

False

Question 7

t/f A cash dividend reduces the firms assets

Answer 7

True

Question 8

t/f A constant payout ratio implies dividends vary with earnings

Answer 8

True

Question 9

t/f Once a firm has earnings, management has essentially two choices: distribute or retain them

Answer 9

True

Question 10

t/f A stock dividend does not affect retained earnings

Answer 10

False

Question 11

t/f Dividend reinvestment plans permit the stockholder to reinvest dividends as they are received

Answer 11

True

Question 12

t/f When a stock goes ex dividend, its price tends to rise by the amount of the cash dividend

Answer 12

False

Question 13

An investor may reduce risk by

Answer 13

Selecting low betas

Constructing a diversified portfolio

Question 14

Assets equal

Answer 14

Liabilities plus equity (L=a-e)

Question 15

Management may prefer not paying dividends to

Answer 15

use the money to reduce investments in assets

Question 16

Dividends may be paid in

Answer 16

cash

stock

Question 17

t/f Valuation of stock depends on past dividends

Answer 17

False

Question 18

The value of a stock may increase if

Answer 18

risk is decreased

investors required rate of return decreases

Question 19

Your broker recommends that you purchase Good Mills at $39. The stock pays a $2.20 annual dividend, which (like its per share earnings) is expected to grow annually at 3 percent. If you want to earn 9% on your funds if this a good stock to buy

Answer 19

No

Question 20

t/f If a firm sells inventory at cost for cash, its total assets rise

Answer 20

False

Question 21

t/f Additional paid in capital is part of the stockholders equity

Answer 21

True

Question 22

When risk analysis is introduced into the dividend growth model, the required rate of return considers

Answer 22

the firms beta coefficient

Question 23

If the valuation of a stock is $25 and it currently sells for $20, then

Answer 23

the stock is undervalued

the investor should establish a long position