Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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1). Two companies operate in the same industry and tend to follow practically identical patterns of performance. Which statement describes the relationship between the returns of the two companies?
(a). They show perfect negative correlation.
(b). They show imperfect correlation.
(c). They are uncorrelated.
(d). They show perfect positive correlation.
2). What is meant by the term ‘junk bond’?
(a). It is a financial security issued by retail chains selling inexpensive items.
(b). It is a financial instrument with predominantly debt characteristics but offering high rate and high risk, and sometimes offering an equity kicker.
(c). It is a worthless bond.
(d). It is a financial instrument with predominantly equity characteristics but offering high dividends and high risk, and sometimes offering a linked debt kicker.
3). Which of the following best describes what determines the cost of debt capital?
(a). The cost to the firm of income less taxable profits
(b). The expected returns required by investors buying corporation bonds in competing companies
(c). The current market rate of return for a risk class of debt
(d). The expected returns required by shareholders buying new shares in a firm
4). Which two terms correctly complete the following statement: “The NAV approach to valuation focuses on _______ values, which may be adjusted to reflect ________ values.”?
(a). balance sheet ; current market
(b). fixed asset; discounted values
(c). fixed asset; future
(d). balance sheet; discounted values
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- Which of the following statements is false? A. Internal controls are the processes by which the firm ensures that it presents accurate financial statements. B. Greenfield investments provide uncertain cash flows with high yields and high growth potential. C. Footnotes allow investors or any users to improve their assessments of the amount, timing, and uncertainty of the estimates reported in financial statements. D. Secondary markets are the markets in which existing, already outstanding securities are traded among investors.arrow_forwardWhich of the following statements is NOT true? A. Debt contracts tend to impose more restrictions on the actions of the borrower than the lender B. Larger corporations have easier access to the securities market C. The financial sector is one of the least regulated industries in the US economy D. Collateral is used to secure debt contractsarrow_forwardWhich statement is most correct? * A. Since debt financing raises the firm’s financial risk, increasing debt ratio will increase WACC. B. Since debt financing is cheaper than equity financing, increasing debt ratio will reduce WACC. C. Increasing a firm’s debt ratio will typically reduce the marginal costs of both debt and equity financing; however, it still may raise the firm’s WACC. D. Statements a and c are correct. E. None of the abovearrow_forward
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- Which of the following events would make it less likely that a company would choose to call its outstanding callable bonds? O The company's financial situation improves significantly. O Ratings on the company's bonds are upgraded. O Inflation decreases significantly. Market interest rates decline sharply. O Market interest rates rise sharply.arrow_forwardWhich of the following statements is false?(a) The quickest way to determine whether a firm has too much debt is to calculate the debt-to-equity ratio.(b) The best guideline to determine the firm's liquidity is to calculate the current ratio.(c) From the investor's point of view, the rate of return on common equity is a good indicator of whether the firm is generating an acceptable return to the investor.( d) We can determine the operating margin by expressing net income as a percentage of total sales.arrow_forward
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