General Section A

Question 1

When a firm buys capital equipment the cost of the transaction cannot be used like an operating expense to reduce corporation tax because

Answer 1

Purchasing capital equipment makes no change in total value of the firm, it simply changes it from one form to another.

Question 2

The directors of a company need not worry about their shareholder’s wishes with regard to dividend payments because:

Answer 2

shareholders can effectively adjust dividend levels themselves

Question 3

A Z-score is created from a company’s financial data and used to:

Answer 3

assess the risk of failure in the near future.

Question 4

Any member of the public can buy or sell shares at the London Stock Exchange:

Answer 4

By using a member of the exchange, acting as a broker.

Question 5

A future cash flow is given in real terms if:

Answer 5

it is given in terms of today’s money values and ignores inflation.

Question 6

The weak form of the efficient market hypothesis (EMH) states that investors will get no evidence to indicate that the market price of a traded security is not correct by analysing

Answer 6

its price history.

Question 7

A company decides to change its capital structure so that a smaller proportion is in the form of debt. If the ideas of Modigliani and Miller are correct how do you expect this decision to be reflected in the cost of capital of equity?

Answer 7

It will decrease.

Question 8

The efficient market paradox is that:

Answer 8

large numbers of investors need to believe they can find inefficiencies. Trading to exploit these is what makes the market efficient.

Question 9

The risk premium is:

Answer 9

The additional return to the risk-free rate required to compensate the investor for taking the risk.

Question 10

The advantage of the Pay-back Period method is.

Answer 10

Quick and easy to apply.

Question 11

Order of paying creditors when the company is bankrupt

Answer 11

Inland revenue, Employees, Bond holders and Share-holders.

Question 12

The semi-strong form of the efficient market hypothesis (EMH) states that

Answer 12

All publicly available information (not just the price history) is accounted for in the current market price.

Question 13

The existence of potential bankruptcy costs, when coupled with Modigliani and Miller’s (with taxes) assertion on capital gearing, tends to mean that:

Answer 13

capital gearing has little or no effect on the firm’s weighted average cost of capital.

Question 14

The systematic risk (beta) of a portfolio is ________ by holding more stocks with the same systematic risk.

Answer 14

Unchanged

Question 15

The security market line is a graph of the expected return from a security plotted against

Answer 15

Beta of the security

Question 16

According to portfolio theory, a portfolio is said to be on the efficient frontier if:

Answer 16

it provides an optimal return for the given level of risk.

Question 17

Strong-form market efficiency states that the market incorporates all information into stock prices. Strong-form efficiency implies that:

Answer 17

an insider or corporate officer cannot outperform the market by trading on the inside information

Question 18

If investors use technical analysis and get higher returns than investors who simply select random investments, then the market is best described as:

Answer 18

not efficient in any form.