1612chapter 6 PDF

Preview

Summary

testbank of fins 1612...

Description

Chapter 06 - Test Bank

Multiple Choice Questions 1.

Passive investment means building a portfolio of shares based on the strategy of: A. buy and hold. B. replicating a market index. C. following solely the advice of share brokers. D. investing in low-risk shares.

2.

Investors buy listed shares: A. to obtain fixed dividend payments. B. to obtain fixed capital growth. C. for the chance of capital growth only. D. for the chance of dividend payments and capital growth.

3.

Typically, a large stock exchange has ________ listed on it. A. preference shares B. shares C. exchange-traded funds D. all of the given choices

4.

Compared with fixed interest securities, shares offer: A. capital gain for lower risk. B. capital gain for higher risk. C. fixed dividends and capital gains for lower risk. D. periodic dividends and capital gains at higher risk.

5.

A diversified portfolio generally includes: A. 0-5 stocks. B. 5-10 stocks. C. 10-15 stocks. D. 10-25 stocks.

6.

According to the text, an investment portfolio that is well-diversified contains: A. a large range of term deposits. B. a large number of properties. C. a large number of future contracts. D. a large range of shares, fixed-interest securities and properties.

7.

Systematic risk means: A. risks that have an impact on all technology shares. B. risks that have an impact on all energy shares. C. risks that have an impact on all financial shares. D. risks that have an impact on the majority of shares in the market.

8.

The risk that impacts specifically on the share price of a particular company is called: A. economic risk. B. business risk. C. systematic risk. D. unsystematic risk.

9.

Which of the following is an example of systematic risk exposures for a company? A. Resignation of chief executive B. Change in future performance forecasts C. Rumour of financial difficulty in the company D. Introduction of new company legislation

10. Which of the following is an example of an unsystematic risk exposure for a company? A. A change in interest rates B. A change in foreign exchange rates C. Political instability in a country D. Change in future performance forecast for a company 11. When investors buy and sell shares based on receiving new information on shares and markets, this is known as: A. active investment. B. a diversified strategy. C. a market replication strategy. D. passive investment.

12. To track the S&P500, a fund manager can buy: A. all the stocks in the S&P500. B. an S&P500 index fund. C. a percentage of stocks that essentially tracks the index. D. all of the given answers. 13. Which of the following about share market indices is NOT correct? A. The FTSE 100 index tracks 100 shares in the UK. B. The Nikkei 225 index tracks 225 shares in Japan. C. The Hang Seng index tracks shares in Hong Kong. D. The Dow Jones tracks 50 shares in the USA. 14. The correlation of pairs of securities within a portfolio is called: A. co-association. B. correspondence. C. covariance. D. variance. 15. The correlation between two shares: A. can take on positive values. B. can take on negative values. C. is related to the covariance of a share. D. includes all of the given answers. 16. For a portfolio of stocks, portfolio risk is heavily based on: A. a simple average of the variance of the stocks in the portfolio. B. a weighted average of the variance of the stocks in the portfolio. C. a weighted average of the covariance of the stocks in the portfolio. D. the standard deviation of the stocks. 17. When an investor alters the mix of their portfolio to reflect market changes or their circumstances, this is called _____ asset allocation. A. market timing B. passive C. non-fixed D. tactical

18. For an investor, the mix of shares that satisfies their known cash-flow requirements, risk tolerance and future life cycle positions is called: A. tactical asset allocation. B. strategic asset allocation. C. systematic asset allocation. D. diversified asset allocation. 19. Stockbrokers act as _____ for an exchange. A. agents B. dealers C. negotiators D. intermediaries 20. Major differences between a discount stockbroker and a full-advisory stockbroker lie in: A. the level of fees. B. the amount of advice given. C. the quantity of share recommendations. D. all of the given answers. 21. Which of the following does NOT apply to full-advisory stockbrokers? A. Full-advisory stockbrokers provide investment advice on listed securities. B. Full-advisory stockbrokers monitor investors' financial plans. C. Full-advisory stockbrokers accept buy and sell orders from clients. D. Full-advisory stockbrokers' fees are competitive with discount brokers. 22. When an investor purchases units in a unit trust, this is known as ________ investing. A. absolute B. direct C. indirect D. value 23. When a share investor puts an order to buy shares through their stock broker via their internet share account, this is called: A. indirect investment. B. direct investment. C. index investment. D. passive investment.

24. Which of the following statements regarding dividends is incorrect? A. Dividends are usually received twice yearly from a company. B. The payments of dividends are at the company board of directors' discretion. C. An investor is generally required to pay taxation on the final dividend payment. D. The taxation of dividends varies from country to country. 25. Which of the following statements is NOT correct? A. In Australia taxation of individuals is based on a progressive tax system. B. The dividend imputation system effectively removes the double taxation of dividends in Australia. C. In relation to dividend imputation, a shareholder whose marginal tax is lower than the company tax rate will pay their marginal tax on the dividend received. D. In Australia dividends on which the company has already paid company tax are called franked dividends. 26. The capital structure of a company is one of the important indicators of performance. Which of the following statements regarding capital structure is incorrect? A. Debt to equity or shareholders' interest ratios are both measures of capital structure. B. Capital structure ratios are an indicator of longer term viability and stability. C. A company with a higher equity ratio is less dependent on external funding. D. The capital ratios of companies, and industry groupings, are generally similar. 27. When using indicators for a company's performance:

A. ratios for a company should be compared with others in the same industry. B. a single ratio should not be used to judge the company's overall performance. C. the dates of the financial statements being compared should be the same. D. all of the given answers are correct. 28. Compared with a company's current ratio, the shareholders' interest ratio gives information about a company's: A. interest expense. B. level of liquidity. C. long-term viability. D. future earnings. 29. Which of the following are current assets?

A. Accounts payable B. Bank overdraft facility C. Commercial paper D. Inventories

30. Which of the following are current liabilities of a company? A. Accounts receivable B. Inventories C. Bank overdraft facility D. Cash 31. The greater the proportion of debt financing compared with equity financing for a company the: A. lower the future earnings prospects for the company. B. greater the ability of the company to meet its interest payments. C. greater the degree of financial risk for the company. D. lower the expected earnings per share. 32. A company with a _____ ratio of equity to debt is _________ dependent on external financing. A. lower; less B. lower; not C. higher; less D. higher; more 33. The _______ ratio measures the proportion of total assets provided by the company's owners. A. shareholders' interest B. total asset turnover C. equity turnover D. debt 34. The indicator ratio that should be used to assess a company's ability to meet its short-term obligations is its: A. liquidity. B. debt. C. profitability. D. capital structure. 35. Which ratio is a measure of liquidity that excludes inventories? A. Current B. Liquid C. Debt to gross cash flow D. Interest cover

36. An example of a liquidity ratio for a company is: A. a fixed asset turnover. B. current ratio. C. earnings per share. D. share price to net tangible assets. 37. A company has a higher current ratio than the industry average. This implies that the company: A. has a higher P/E than other companies in the industry. B. is more likely to avoid insolvency in the short term than other companies in the industry. C. may be more profitable than other companies in the industry. D. operates with a much lower level of inventory than others in the industry. 38. If a company has a current ratio of 2, which of the following measures will increase the current ratio? A. Buying more inventory on short-term credit B. Buying more inventory with cash C. A customer paying an overdue account D. Paying off a short-term bank advance with long-term debt 39. If a company has a current ratio of 0.9, in order to improve its current ratio it might: A. increase its current assets by decreasing its inventory. B. use more long-term debt to decrease current liabilities. C. decrease its large amounts of accounts receivable. D. decrease its large amount of accounts to pay to increase its current liabilities. 40. If a company has a liquid ratio of 0.9, in order to improve its liquid ratio it might: A. increase its current assets by increasing its inventory. B. use more short-term debt to decrease current liabilities. C. increase its large amounts of accounts receivable to improve its cash position. D. increase its large amount of accounts to pay to decrease its current liabilities. 41. The ________ ratio is an indicator of the longer term viability and stability of a company. A. shareholders' interest B. P/E C. EBIT/total funds D. liquidity

42. For a company, a rule of thumb for the interest cover financial ratio is in the range: A. 0 to 1. B. 1 to 2. C. 2 to 3. D. 3 to 4. 43. Which financial ratio provides information essential for assessing the long-run operation of the company? A. Debt B. Liquidity C. Profitability D. Share price 44. The financial ratio that indicates the number of years required for a company to repay its total debt is: A. debt to equity. B. debt to depreciation. C. debt to gross cash flow. D. debt to net cash flow. 45. The financial ratio that measures operating profit after tax to shareholders funds is: A. EBIT to long-term funds. B. Return on equity. C. EBIT to total funds. D. interest cover. 46. Compared with a company's interest cover ratio, earnings before interest and tax measures its: A. amount of earnings for dividend payments. B. expected earnings. C. profitability. D. return on equity. 47. Which of the following groups of financial ratios provide information on the short-run operation of the company? A. Capital structure and debt servicing B. Capital structure and profitability C. Debt servicing and profitability D. Liquidity and profitability

48. Which financial ratio links long-term funds provided by the company's owners and those of the creditors? A. Debt B. Debt to equity C. Times interest cover D. Earnings to price 49. Which financial ratio is used to measure a company's ability to meet its short-term financing? A. Debt B. Liquidity C. Capital structure D. Profitability 50. Which financial ratio measures a company's ability to service its interest commitments? A. Debt B. Equity to debt C. Profitability D. Interest cover 51. The higher the value of the _______ ratio, the better able the firm is to meet its short-term financial obligations. A. debt to equity B. liquidity C. earnings per share D. EBIT to long-term funds 52. The _______ is an indicator of investors' evaluation of a company's future earnings potential. A. debt to equity ratio B. price/earnings ratio C. interest cover ratio D. return on shareholders' funds

53. The following is a simplified financial position statement for a company: Assets Cash Trading securities Accounts receivable Inventory Property Equipment

$ 250 000 350 000 1 360 000 2 470 000 3 350 000 450 000

Liabilities Accounts payable Accrued expenses payable Taxes payable Long-term debt Shareholders' funds

$ 1 480 000 420 000 140 000 3 850 000 2 340 000

Calculate the liquidity ratio. A. 0.85 B. 0.96 C. 1.51 D. 1.32 54. Which of the following statements regarding the debt servicing capacity of a company is incorrect? A. The debt to gross cash flow ratio is an indicator of debt servicing capacity. B. The debt to gross cash flow ratio indicates years required for cash flows to repay total debt. C. The interest cover ratio is an indicator of a company's capacity to service debt. D. The lower the interest cover ratio, the greater the company's ability to cover interest commitments. 55. If a share currently sells for $20 and has annual earnings per share of 8.0, the price/earnings ratio is:

A. 0.4 B. 2.5 C. 4.0 D. 160 56. The _______ ratio is an indicator of the share market's evaluation of a company. A. debt/equity B. price/earnings C. debt to gross cash flow D. shareholders' interest 57. Systematic risk is also referred to as: A. economic risk. B. diversifiable risk. C. market risk. D. financial risk.

58. The risk that affects the whole market is called: A. total risk. B. systematic risk. C. diversifiable risk. D. financial risk. 59. In modern portfolio theory, investment risk is divided into two components: systematic risk and unsystematic risk. Which of the following risks is an example of systematic risk? A. Increase in the corporate tax rate B. Productivity and cost of labour C. The effectiveness of the management of the company D. Gearing and the impact of interest rate changes 60. Increased competition, increased costs of labour, lawsuits, and unfavourable exchange rates are all examples of: A. diversifiable risk. B. systematic risk. C. total risk. D. economic risk. 61. Which of the following is NOT an example of unsystematic risk for a company? A. The company announces a merger with a competitor. B. The chief financial officer resigns. C. The company loses competitiveness relative to other companies. D. Changes occur in the level of company tax rates. 62. Estimating systematic risk involves comparing the price history of a particular share relative to movements on_____ stock listed on an exchange. A. an average B. the median weighted C. the most volatile D. the least volatile 63. The higher the beta of a share the: A. greater the systematic risk. B. lower the systematic risk. C. lower the expected return. D. less responsive it is to changing share market movements.

64. In modern portfolio theory, an investor should not be concerned with unsystematic risk when calculating expected rates of return because: A. there is no way to measure unsystematic risk. B. unsystematic risks are assumed to be removed by diversification. C. unsystematic risks are generally insignificant. D. beta includes a portion to compensate for unsystematic risk. 65. Which of the following about beta coefficient is incorrect? A. A stock of beta 1.25 indicates the share price will perform 25% better than the overall market when prices are rising. B. A stock of beta 1.25 indicates the share price will perform 25% worse than the overall market when prices are falling. C. A stock with a beta of 1.25 will move more than a stock with a beta of 1.25. D. A stock with a beta of 0.50 will rise at only half the rate at which the overall market index will rise. 66. What should be the price of a share that constantly pays $2.50 annually in dividends, if the growth rate is zero and the required rate of return is 8% per annum? A. $22.86 B. $28.00 C. $31.25 D. $33.75 67. What should be the price of a share if it paid $1.75 in dividends in the last financial year, its dividend growth rate is 4%, and the required rate of return is 11%? A. $25.00 B. $26.00 C. $30.28 D. $43.75 68. The majority of companies pay dividends twice a year to their: A. bond holders. B. secured bond holders. C. shareholders. D. board of directors.

69. When a share goes ex-rights, assuming everything else remains the same, its price should: A. increase, as the company no longer has the right to make the shareholder convert. B. decrease, as the shareholder is losing an option. C. remain the same, as the market knows about it in advance. D. increase, as a successful rights issue will raise a large amount of cash. 70. After a company has made an announcement about a forthcoming dividend, then at a specified date when the share begins to trade ex-dividend: A. the buyer of the share will now receive the due dividend. B. the share price will adjust upwards by the amount of the forthcoming dividend. C. the seller of the share will receive the next dividend payment. D. the ex-dividend share price will be unaffected by the forthcoming dividend. 71. When a share is trading for a period with a cash dividend entitlement, then the share is said to trade: A. bonus dividend. B. pro dividend. C. cum-dividend. D. ex-dividend. 72. If a dividend is declared on 1 November, has a cum-dividend date of 19 November and a record date of 26 November, which of the following shareholders will NOT receive the dividend? A. A buyer of the share on 31 October B. A buyer of the share on 11 November C. A buyer of the share on 26 November D. A buyer of the share on 29 November 73. On the day that a share goes ex-dividend, the price should theoretically: A. increase by the extent of the dividend. B. decrease by the extent of the dividend. C. decrease by a small fraction of the dividend. D. remain constant. 74. The decision to pay cash dividends to shareholders is made by the: A. company management. B. shareholders at the annual meeting. C. board of directors. D. bond holders.

75. A company declares a dividend of 35 cents per share, which was payable on 14 September. Immediately prior to the declaration of the dividend, the share price was $4.79. At the close of trading on the stock exchange on 13 September, the share price was $5.44. What is the theoretical ex-dividend price of the share? A. $4.44 B. $4.79 C. $5.09 D. $5.79 76. A rights issue differs from a bonus issue of shares in that: A. after a bonus issue there is a greater number of shares in existence, unlike rights. B. shares that are cum-bonus are renounceable. C. the purpose of a bonus issue for a company is not to raise more funding. D. only listed companies have rights issues. 77. Which of the following statement about bonus shares is NOT correct? A. Bonus shares are generally issued at no cost to the shareholders. B. If a company offers a 1 for 4 bonus issue this means for every 1 share a shareholder owns they get four extra shares. C. When shares go ex-bonus there should be a downward adjustment in the share price. D. If a company declares a bonus share issue this can be viewed by the market as a positive signal about the company's future profitability. 78. When shares are purchased cum-rights it means the purchaser of the share: A. cannot usually sell the right separately. B. may take part in the rights offer. C. cannot take part in the rights offer. D. can take up the offer of the right without having to pay extra for the subscription price. 79. If a company offers a one-for-five bonus issue and the current share price cum-bonus is $7.50, the theoretical value of each share ex-bonus is: A. $7.50 B. $6.25 C. $6.00 D. $5.00

80. A company whose share is selling for $24 announces a stock split of four-for-three. Which of the following statements is correct? A. There will be four times as many shares on issue and they will sell for $96. B. There will be three times as many shares on issue, and they will sell for $8. C. There will be one-third more shares on issue and they will sell for $18. D. There will be three-quarters more shares on issue and they will sell for $32. 81. A company whose shares are currently trading at $3.60 propo...