FINC 341 EXAM 1 QUESTIONS WITH VERIFIED SOLUTIONS LATEST UPDATE 2026
Nominal risk free rate - Answers real risk-free rate + expected inflation rate
K*+IP
long term bonds have - Answers MRP
Treasury Bonds don't have - Answers LP or DRP
Long Term Treasury Bond - Answers K=K*+IP+MRP
When expectation theory fully explains the yield curve - Answers MRP = 0
K - Answers quoted, or nominal interest rate
K* - Answers Real (without inflation) risk free rate
Krf=K*+IP - Answers Nominal risk free rate of interest (haven't added risk)
Nominal means - Answers use IP
IP is - Answers Inflation premium
DRF - Answers Default Risk Premium
LP - Answers Liquidity Premium
MRP - Answers Maturity risk premium; exists on long term bonds becayse of interest rate risk
Interest income - Answers Taxed as ordinary income
Dividend Income - Answers -50% (was 70%) dividend exclusion if less than 20% ownership
- 65% (was 80%) dividend exclusion if >20% but <80% ownership
- 100% dividend exclusion if >80% ownership
corporation flat tax rate after 2018 TC&J act - Answers .21
Higher PEG - Answers Stocks look more overvalued compared to growth
Lower PEG - Answers Stocks look more undervalued compared to growth
What does a peg of ~ 1 mean - Answers Means it is fairly valued
when increasing notes payable (or any other debt) - Answers you must increase liabilities
Which of the following is most FALSE?
a. Robo-Advisors utilize algorithmic technology to create relatively low-cost optimal investment
portfolios for investors.
b. Technology has allowed crowdfunding where some firms raise money directly from investors.
c. The Glass Steagall Act helped the U.S. economy recover after the 2008 financial recession.
d. Google used a Dutch auction method to allocate its IPO shares.
e. The rise of ECNs accelerated the move toward 24-hour trading. - Answers c. The glass Steagall act
was repealed in 1999
Which of the following is most FALSE regarding the two agency relationships discussed in Ch 1?
a. When managers do not work hard, the firm's stock price will probably fall, making the firm a
prospect for a takeover by a corporate raider.
b. In recent years, major shareholders have felt empowered to push on companies to act in the best
interest of the shareholders.
c. Managers have the duty to protect existing creditors from detrimental changes in the amount of
debt used by the company.
d. The threat of firing helps to get managers to do their best for the shareholders.
e. Studies have shown that tying a manager's compensation to productivity only has minimal effect. -
Answers e. Managers compensation to productivity has a large effect
The numerator for the ratio ROIC is EBIT(1-T). Why isn't it EBT(1-T)?
a. It is because the interest expense is not available to give to the shareholders.
b. It is because the interest expense is a definite part of the "return" to give to investors, and should
not have been taken out.
c. It is because only operating cash flow should be considered.
d. Since shareholders invest capital into the equity of the firm, interest expense should not be
considered.
e. Because ROIC is part of the cash flow that will be put on a timeline and discounted back to t=0
using the weighted average cost of capital. - Answers c. interest expense is a definite part of the
return to give to investors and should not be taken out
revenue is the same as - Answers ebit or operating income
Which of the following is most CORRECT?
a. If a firm's total capital remains the same, but its level of debt increases, the ROA will go up a little,
but the ROE will decrease.
Nominal risk free rate - Answers real risk-free rate + expected inflation rate
K*+IP
long term bonds have - Answers MRP
Treasury Bonds don't have - Answers LP or DRP
Long Term Treasury Bond - Answers K=K*+IP+MRP
When expectation theory fully explains the yield curve - Answers MRP = 0
K - Answers quoted, or nominal interest rate
K* - Answers Real (without inflation) risk free rate
Krf=K*+IP - Answers Nominal risk free rate of interest (haven't added risk)
Nominal means - Answers use IP
IP is - Answers Inflation premium
DRF - Answers Default Risk Premium
LP - Answers Liquidity Premium
MRP - Answers Maturity risk premium; exists on long term bonds becayse of interest rate risk
Interest income - Answers Taxed as ordinary income
Dividend Income - Answers -50% (was 70%) dividend exclusion if less than 20% ownership
- 65% (was 80%) dividend exclusion if >20% but <80% ownership
- 100% dividend exclusion if >80% ownership
corporation flat tax rate after 2018 TC&J act - Answers .21
Higher PEG - Answers Stocks look more overvalued compared to growth
Lower PEG - Answers Stocks look more undervalued compared to growth
What does a peg of ~ 1 mean - Answers Means it is fairly valued
when increasing notes payable (or any other debt) - Answers you must increase liabilities
Which of the following is most FALSE?
a. Robo-Advisors utilize algorithmic technology to create relatively low-cost optimal investment
portfolios for investors.
b. Technology has allowed crowdfunding where some firms raise money directly from investors.
c. The Glass Steagall Act helped the U.S. economy recover after the 2008 financial recession.
d. Google used a Dutch auction method to allocate its IPO shares.
e. The rise of ECNs accelerated the move toward 24-hour trading. - Answers c. The glass Steagall act
was repealed in 1999
Which of the following is most FALSE regarding the two agency relationships discussed in Ch 1?
a. When managers do not work hard, the firm's stock price will probably fall, making the firm a
prospect for a takeover by a corporate raider.
b. In recent years, major shareholders have felt empowered to push on companies to act in the best
interest of the shareholders.
c. Managers have the duty to protect existing creditors from detrimental changes in the amount of
debt used by the company.
d. The threat of firing helps to get managers to do their best for the shareholders.
e. Studies have shown that tying a manager's compensation to productivity only has minimal effect. -
Answers e. Managers compensation to productivity has a large effect
The numerator for the ratio ROIC is EBIT(1-T). Why isn't it EBT(1-T)?
a. It is because the interest expense is not available to give to the shareholders.
b. It is because the interest expense is a definite part of the "return" to give to investors, and should
not have been taken out.
c. It is because only operating cash flow should be considered.
d. Since shareholders invest capital into the equity of the firm, interest expense should not be
considered.
e. Because ROIC is part of the cash flow that will be put on a timeline and discounted back to t=0
using the weighted average cost of capital. - Answers c. interest expense is a definite part of the
return to give to investors and should not be taken out
revenue is the same as - Answers ebit or operating income
Which of the following is most CORRECT?
a. If a firm's total capital remains the same, but its level of debt increases, the ROA will go up a little,
but the ROE will decrease.
