FINC 306 Final Exam CORRECT 100%
Consider a perpetuity with a positive payment and discount rate. All else equal, what
happens to PV if the payment decreases? - ANSWERPV increases
The goal of the financial manager is - ANSWERmaximize shareholder wealth
In the agency problem we discussed in class, who is the principal? - ANSWERthe
shareholder
what is the primary function of an indenture in a bond issue? - ANSWERit is a written
agreement between the bond issuer and bondholders
what is the primary function of credit rating agencies? - ANSWERto assess and assign
a formal opinion on the default risk of debt securities
which is true regarding bond rating and interest rate risk? - ANSWERbond ratings do
not account for interest rate risk
the probability that a stock will earn a return that exceeds 2 standard deviations from the
mean is closest to: - ANSWER2.5%
which asset class had the highest annualized rate of return since 1925? -
ANSWERsmall-cap stocks
if a stock has an expected return that plots above the SML, then it is: -
ANSWERunderpriced
diversification primarily reduces: - ANSWERidiosyncratic risk
a portfolio with a higher sharpe ratio: - ANSWERmore efficient
In a financial calculator, if FV is positive and PV is zero, PMT must be negative -
ANSWERTrue
For an amortized loan, each payment is a different amount. - ANSWERFalse
if the payment and discount rate are both positive, an annuity due has a lower present
value than an otherwise equivalent ordinary annuity - ANSWERFalse
How can you determine the value of common stock using the dividend discount model?
- ANSWERby dividing the expected dividend by the difference between the required
return and growth rate
What happens to a stock's price when the discount rate decreases? - ANSWERthe
Stock's price increases as future cash flows become more valuable
Consider a perpetuity with a positive payment and discount rate. All else equal, what
happens to PV if the payment decreases? - ANSWERPV increases
The goal of the financial manager is - ANSWERmaximize shareholder wealth
In the agency problem we discussed in class, who is the principal? - ANSWERthe
shareholder
what is the primary function of an indenture in a bond issue? - ANSWERit is a written
agreement between the bond issuer and bondholders
what is the primary function of credit rating agencies? - ANSWERto assess and assign
a formal opinion on the default risk of debt securities
which is true regarding bond rating and interest rate risk? - ANSWERbond ratings do
not account for interest rate risk
the probability that a stock will earn a return that exceeds 2 standard deviations from the
mean is closest to: - ANSWER2.5%
which asset class had the highest annualized rate of return since 1925? -
ANSWERsmall-cap stocks
if a stock has an expected return that plots above the SML, then it is: -
ANSWERunderpriced
diversification primarily reduces: - ANSWERidiosyncratic risk
a portfolio with a higher sharpe ratio: - ANSWERmore efficient
In a financial calculator, if FV is positive and PV is zero, PMT must be negative -
ANSWERTrue
For an amortized loan, each payment is a different amount. - ANSWERFalse
if the payment and discount rate are both positive, an annuity due has a lower present
value than an otherwise equivalent ordinary annuity - ANSWERFalse
How can you determine the value of common stock using the dividend discount model?
- ANSWERby dividing the expected dividend by the difference between the required
return and growth rate
What happens to a stock's price when the discount rate decreases? - ANSWERthe
Stock's price increases as future cash flows become more valuable
