Fun Tyne plc declares a dividend payment of 20p per share. Ignoring taxes and the time value of money, and assuming that markets are efficient, you would expect stock price to: a. Immediately increase by 20p on the payment date b. Immediately increase by 20p on the ex-dividend date c. Immediately decrease by 20p on the declaration date d. Immediately decrease by 20p on the ex-dividend date e. Noneoftheabove 2. Lois selects securities to invest in after carefully examining the fundamentals of a company, using the accounting statements in its annual reports. Peter seeks to earn abnormal returns solely by studying stock price charts and investing based on the patterns he finds in the past prices. Which one of the following statements is correct? a. If Lois earns abnormal returns this violates weak-form market efficiency. If Peter earns abnormal returns this violates strong-form market efficiency. b. If Lois earns abnormal returns this violates strong-form market efficiency. If Peter earns abnormal returns this violates weak-form market efficiency. c. If Lois earns abnormal returns this violates semi-strong form market efficiency. If Peter earns abnormal returns this violates strong-form market efficiency. d. If Lois earns abnormal returns this violates semi-strong form market efficiency. If Peter earns abnormal returns this violates weak-form market efficiency. e. If Peter and Lois both earn abnormal returns this means that markets are strong-form efficient. 3. Suppose that a new government is elected and it changes the law applying to firms to: • Allow dividend payments to be tax deductible • Stop interest expense on debt from being tax deductible Holding other factors constant, and assuming that firms seek to maintain an optimal capital structure in accordance with trade-off theory, what would you expect to happen to the debt ratio of a firm with both equity and debt in its capital structure? a. Anincreaseinthedebtratio b. Adecreaseinthedebtratio c. The debt ratio would be unchanged d. Thedebtratiowoulddouble e. None of the above or it is not possible to say 4. Which one of the following statements is correct if the pecking order theory holds? a. Firms with the highest debt ratios can be expected to have the lowest profits owing to the lesser availability of internal finance b. Firms will be keen to undertake equity issues as this signals to investors that managers believe the firm is undervalued c. Firms will raise funds via equity issues in preference to debt issues d. Firms will raise funds via external finance in preference to internal finance e. Noneoftheabove 5. The covariance between the return on Apple stock and the S&P 500 is 0.12. The variance of the return on the S&P 500 is 0.09. Apple stock is: a. Riskier than the market b. Less risky than the market c. As risky as the market d. Expected to have a good return when the market is doing poorly e. Noneoftheabove 6. When a stock repurchase occurs, which of the following is not correct? a. EPSdecreases b. Shares are repurchased then cancelled c. Investors may regard this as a tax break compared to a dividend payment d. Costs in servicing small shareholders may be reduced e. All of the above are correct 7. Which of the following statements is true regarding the sensitivity analysis approach to investment appraisal? a. It involves changing many factors at the same time b. It provides an indication of the likelihood of changes in the key factors c. It provides managers with clear guidance concerning the investment decision d. It is commonly called ‘how-now’ analysis e. Noneoftheabovearetrue 8. Rho Ltd. has just paid a dividend of $0.25 on its stock. They expect dividends to grow at a rate of 6% in the first two years and 3% per year thereafter. Given a required rate of return of 10%, what is the value of Rho Ltd. common stock at the end of 2 years? a. $4.13 b. $3.70 c. $3.89 d. $4.25 e. Noneoftheabove

Fun Tyne plc declares a dividend payment of 20p per share. Ignoring taxes and the time value of money, and assuming that markets are efficient, you would expect stock price to: a. Immediately increase by 20p on the payment date b. Immediately increase by 20p on the ex-dividend date c. Immediately decrease by 20p on the declaration date d. Immediately decrease by 20p on the ex-dividend date e. Noneoftheabove 2. Lois selects securities to invest in after carefully examining the fundamentals of a company, using the accounting statements in its annual reports. Peter seeks to earn abnormal returns solely by studying stock price charts and investing based on the patterns he finds in the past prices. Which one of the following statements is correct? a. If Lois earns abnormal returns this violates weak-form market efficiency. If Peter earns abnormal returns this violates strong-form market efficiency. b. If Lois earns abnormal returns this violates strong-form market efficiency. If Peter earns abnormal returns this violates weak-form market efficiency. c. If Lois earns abnormal returns this violates semi-strong form market efficiency. If Peter earns abnormal returns this violates strong-form market efficiency. d. If Lois earns abnormal returns this violates semi-strong form market efficiency. If Peter earns abnormal returns this violates weak-form market efficiency. e. If Peter and Lois both earn abnormal returns this means that markets are strong-form efficient. 3. Suppose that a new government is elected and it changes the law applying to firms to: • Allow dividend payments to be tax deductible • Stop interest expense on debt from being tax deductible Holding other factors constant, and assuming that firms seek to maintain an optimal capital structure in accordance with trade-off theory, what would you expect to happen to the debt ratio of a firm with both equity and debt in its capital structure? a. Anincreaseinthedebtratio b. Adecreaseinthedebtratio c. The debt ratio would be unchanged d. Thedebtratiowoulddouble e. None of the above or it is not possible to say 4. Which one of the following statements is correct if the pecking order theory holds? a. Firms with the highest debt ratios can be expected to have the lowest profits owing to the lesser availability of internal finance b. Firms will be keen to undertake equity issues as this signals to investors that managers believe the firm is undervalued c. Firms will raise funds via equity issues in preference to debt issues d. Firms will raise funds via external finance in preference to internal finance e. Noneoftheabove 5. The covariance between the return on Apple stock and the S&P 500 is 0.12. The variance of the return on the S&P 500 is 0.09. Apple stock is: a. Riskier than the market b. Less risky than the market c. As risky as the market d. Expected to have a good return when the market is doing poorly e. Noneoftheabove 6. When a stock repurchase occurs, which of the following is not correct? a. EPSdecreases b. Shares are repurchased then cancelled c. Investors may regard this as a tax break compared to a dividend payment d. Costs in servicing small shareholders may be reduced e. All of the above are correct 7. Which of the following statements is true regarding the sensitivity analysis approach to investment appraisal? a. It involves changing many factors at the same time b. It provides an indication of the likelihood of changes in the key factors c. It provides managers with clear guidance concerning the investment decision d. It is commonly called ‘how-now’ analysis e. Noneoftheabovearetrue 8. Rho Ltd. has just paid a dividend of $0.25 on its stock. They expect dividends to grow at a rate of 6% in the first two years and 3% per year thereafter. Given a required rate of return of 10%, what is the value of Rho Ltd. common stock at the end of 2 years? a. $4.13 b. $3.70 c. $3.89 d. $4.25 e. Noneoftheabove

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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1. Fun Tyne plc declares a dividend payment of 20p per share. Ignoring taxes and the time value of money, and assuming that markets are efficient, you would expect stock price to: a. Immediately increase by 20p on the payment date b. Immediately increase by 20p on the ex-dividend date c. Immediately decrease by 20p on the declaration date d. Immediately decrease by 20p on the ex-dividend date e. Noneoftheabove 2. Lois selects securities to invest in after carefully examining the fundamentals of a company, using the accounting statements in its annual reports. Peter seeks to earn abnormal returns solely by studying stock price charts and investing based on the patterns he finds in the past prices. Which one of the following statements is correct? a. If Lois earns abnormal returns this violates weak-form market efficiency. If Peter earns abnormal returns this violates strong-form market efficiency. b. If Lois earns abnormal returns this violates strong-form market efficiency. If Peter earns abnormal returns this violates weak-form market efficiency. c. If Lois earns abnormal returns this violates semi-strong form market efficiency. If Peter earns abnormal returns this violates strong-form market efficiency. d. If Lois earns abnormal returns this violates semi-strong form market efficiency. If Peter earns abnormal returns this violates weak-form market efficiency. e. If Peter and Lois both earn abnormal returns this means that markets are strong-form efficient. 3. Suppose that a new government is elected and it changes the law applying to firms to: • Allow dividend payments to be tax deductible • Stop interest expense on debt from being tax deductible Holding other factors constant, and assuming that firms seek to maintain an optimal capital structure in accordance with trade-off theory, what would you expect to happen to the debt ratio of a firm with both equity and debt in its capital structure? a. Anincreaseinthedebtratio b. Adecreaseinthedebtratio c. The debt ratio would be unchanged d. Thedebtratiowoulddouble e. None of the above or it is not possible to say 4. Which one of the following statements is correct if the pecking order theory holds? a. Firms with the highest debt ratios can be expected to have the lowest profits owing to the lesser availability of internal finance b. Firms will be keen to undertake equity issues as this signals to investors that managers believe the firm is undervalued c. Firms will raise funds via equity issues in preference to debt issues d. Firms will raise funds via external finance in preference to internal finance e. Noneoftheabove 5. The covariance between the return on Apple stock and the S&P 500 is 0.12. The variance of the return on the S&P 500 is 0.09. Apple stock is: a. Riskier than the market b. Less risky than the market c. As risky as the market d. Expected to have a good return when the market is doing poorly e. Noneoftheabove 6. When a stock repurchase occurs, which of the following is not correct? a. EPSdecreases b. Shares are repurchased then cancelled c. Investors may regard this as a tax break compared to a dividend payment d. Costs in servicing small shareholders may be reduced e. All of the above are correct 7. Which of the following statements is true regarding the sensitivity analysis approach to investment appraisal? a. It involves changing many factors at the same time b. It provides an indication of the likelihood of changes in the key factors c. It provides managers with clear guidance concerning the investment decision d. It is commonly called ‘how-now’ analysis e. Noneoftheabovearetrue 8. Rho Ltd. has just paid a dividend of $0.25 on its stock. They expect dividends to grow at a rate of 6% in the first two years and 3% per year thereafter. Given a required rate of return of 10%, what is the value of Rho Ltd. common stock at the end of 2 years? a. $4.13 b. $3.70 c. $3.89 d. $4.25 e. Noneoftheabove

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