Distinguish between the concepts of the maturity-risk premium and the liquidity-risk premium. What will be an ideal response? ANSWER Maturity-risk premium is the additional return required by investors in longer-term securities to compensate them for greater risk of price fluctuations on those securities caused by interest rate changes. Liquidity-risk premium is the additional […]
Financial progress is measured more appropriately by an increase in net worth rather than by an increase in total assets. Indicate whether the statement is true or false ANSWER TRUE
Corporations tend to be MORE reluctant to increase dividends than to cut them. Indicate whether the statement is true or false ANSWER FALSE
How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return? A) Increase the amount of money invested in the portfolio. B) Purchase a variety of securities; i.e., diversify. C) Purchase stocks that have exceptionally high standard deviations. D) Wait until the stock market rises. […]
Big City Lumber Inc. has a levered beta of 1.70, a debt-equity ratio of 0.40, and a tax rate of 25%. What is the value of the firm’s unlevered beta? A) 0.78 B) 1.00 C) 1.31 D) 1.70 ANSWER C Explanation: C) βU = βL / (1 + (D/E) (1-t)) = 1.70/(1 + […]
Comparing a credit card with a debit card indicates that A) they are identical except that debt card can be used in more places. B) they are identical except some lenders prefer the name “debit card” over “credit card.” C) debit cards charge higher rates of interest. D) consumer protection with a credit card is […]
In the United States, financial statements are prepared following the Financial Accounting Standards Board’s generally accepted accounting principles (GAAP). Indicate whether the statement is true or false ANSWER TRUE
A limited partnership provides limited liability to: A) all general partners. B) only limited partners responsible for day-to-day management of the firm’s operations. C) only to limited partners who do not participate in the management of the business. D) all partners. ANSWER C
What are the limitations of financial statements? What will be an ideal response? ANSWER When reviewing financial statements, keep in mind that accounting rules give managers discretion; thus, they may take advantage of the leeway, as long as it doesn’t violate GAAP, to produce the high or stable earnings that investors are looking […]
Why should we be more concerned with the marginal tax rate rather than the average tax rate? What will be an ideal response? ANSWER For financial decision making, it’s the marginal tax rate rather than the average tax rate that we are concerned with. Why? Because, generally speaking, the marginal rate is the […]
