Question 1) Common stockholders are sometimes referred to as ________. A. managers B. creditors C. non preemptive right holders D. residual owners 2) Risk that affects all firms is called ________. A. maturity risk B. unsystematic risk C. nondiversifiable risk D. reinvestment risk 3) Asset P has a beta of 0.9. The risk free rate of return is 8 percent, while the return on the market portfolio of assets is 14 percent. The asset’s required rate of return is ________. A. 6.0 percent B. 22.0 percent C. 13.4 percent D. 15.4 percent Equation: 5.8 4) An increase in the Treasury Bill rate ________. A. has no effect on the required rate of return of a common stock B. doubles the required rate of return of a common stock C. increases the beta of a common stock D. increases the required rate of return of a common stock 5) An efficient portfolio is one that ________. A. maximizes return for a given level of risk B. consists of a single asset, which gives maximum return C. maximizes return at all risk levels D. guarantees a predetermined rate of return 6) Which of the following is a marketable security? A. provident fund B. forward contracts C. Treasury bill D. mutual funds 7) Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are ________. A. convertible B. participating C. nonparticipating D. cumulative 8) Preferred stock is valued as if it were a ________. A. perpetuity B. bond C. fixed income obligation D. common stock 9) Rational buyers and sellers use their assessment of an asset’s risk and return to determine its value. Relative to this concept, which of the following is true? A. To a seller the asset’s value represents the price at which he acquired the asset. B. To a buyer the asset’s value represents the minimum price that he or she would pay to acquire it. C. To a seller the asset’s value represents the maximum sale price. D. To a buyer the asset’s value represents the maximum price that he or she would pay to acquire it. 10) The use of the ________ is especially helpful in valuing firms that are not publicly traded. A. present value of the dividends B. book value C. liquidation value D. P/E multiple 11) If bankruptcy were to occur, ________ would have the first claim on assets. A. unsecured creditors B. secured creditors C. preferred stockholders D. equity stockholders 12) Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that ________. A. remains unchanged B. increases to a level above that of either asset C. decreases to a level below that of either asset D. stabilizes to a level between the asset with the higher risk and the asset with the lower risk 13) If a manager prefers investments with greater risk even if they have lower expected returns, then he is following a ________ strategy. A. risk averse B. risk seeking C. risk neutral D. risk indifferent 14) Review Question? 8-11 How are total risk, nondiversifiable risk, and diversifiable risk related? Why is nondiversifiable risk the only relevant risk? 15) Milton Glasses recently paid a dividend of $1.70 per share, is currently expected to grow at a constant rate of? 5%, and has a required return of 11%. Milton Glasses has been approached to buy a new company. Milton estimates if it buys the company, its constant growth rate would increase to 6.5%, but the firm would also be riskier, therefore increasing the required return of the company to? 12%. Should Milton go ahead with the purchase of the new company? A. Yes, because the value of the Milton Co. will increase by $4..59 per share B. Yes, because the value of the Milton Co. will increase by $3.17 per share C. No, because the value of the Milton Co. will decrease by $3.17 per share D. Yes, because the value of the Milton Co. will increase by $2.56 per share 16) An increase in the beta of a corporation,
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