Module 3 Honors Quiz >> Financial Markets

Module 3 Honors Quiz >> Financial Markets

1. Which of the following did Eugen von Böhm-Bawerk NOT believe caused the interest rate to be a small positive number?

• People value money more today than they do in a year.
• This is approximately the rate of technological progress.
• Financial knowledge and expertise accumulates at a societal level at approximately this rate.

2. If you put $1000 into an account with a 20% interest rate, how much money will you have at the end of the year if interest is compounded CONTINUOUSLY? (When inputting your answer, enter your rounded answer without decimal precision and do not type in the$)

1221

3. Suppose that a consol has a promised payment of 6 pounds per 100 pounds notional. This consol is now traded at 150 pounds. What it the current yield to maturity of the consol?

• 1%
• 2%
• 3%
• 4% ✅

4. You observe that on today’s yield curve, the one year rate is R1=6% and the two year rate is R2=6.5%. What is the one year forward rate one year from now ?

• 5%
• 6.5%
• 7%
• 6%

5. A tech company can make a 3% real return on an investment. It can borrow funds to finance the investment at a nominal rate of 6% and the inflation rate is 1%. Hence:

• The real rate of interest is 3%.
• The investment will be unprofitable.
• The investment will be profitable.
• The real rate of interest is 2%.

6. If expected inflation is less than actual inflation, then wealth will be redistributed from:

• Lenders to borrowers.
• The government to consumers.
• The consumers to the government.
• Borrowers to lenders.

7. The market capitalization of a company provides information on:

• The value of a company.
• The pension benefits provided by the company.
• The capital expenditures of the company.
• The industry the company operates in.

8. Which of the following are true for stock splits ? (check all that apply)

• Market price per share is reduced after the split.
• The total number of outstanding shares increases.
• Proportional ownership is unchanged.
• Retained earnings are changed.

9..A rationale for preferred stock:

• It lowers the cost of financing, as compared with debt issuance.
• The dividends associated with it are tax-deductible.
• It expands the capital base without diluting common equity.
• Its holder benefits from an increased ownership in the company.

10. The Pecking Order Theory indicates that firms prefer _______ financing to _______ financing.

• stock; debt
• internal; external
• stock; retained earning
• flexible; risky

11. If the company I invest in issues a stock dividend at 5%, the value of my original shares are ___________ by a factor ___________. I am ___________ since I have an additional ___________ of value in the new shares.

• raised, 1.05/1, worse off, 0.05/1.05
• lowered, 1/1.05, worse off, 0.05/1.05
• lowered, 1/1.05, better off, 0.05/1.05
• raised, 1.05/1, better off, 0.05/1.05

12. Which one of the following statements is correct?

• A cash dividend has no effect on the market value per share.
• A stock repurchase increases the market value per share.
• Stock repurchases are more tax advantageous than are cash dividends.
• Stock repurchases provide more income to shareholders compared to dividends.

13. A company whose stock is selling at a price-to-earnings (P/E) ratio that is greater than the P/E ratio of the market most likely has:

• An anticipated earnings growth rate which is less than that of the average traded firm within the market.
• An unpredictable future stream of earnings.
• A larger dividend yield compared to the dividend yield of an average traded firm within the market.
• A dividend yield which is smaller than that of an average traded firm within the market.

14. What are the main implications of John Lintner’s dividend model?

• A firm should always pay a dividend equal to its EPS (earnings per share).
• A firm has to strike a balance. It should pay a dividend to share some of its earnings with shareholders but its dividend should not be too high, because that might lead to a cut in the dividend in a following year, which leads to a negative reaction among shareholders.
• If the company’s EPS is smaller than last year’s dividend, the company should engage in share repurchases.
• A firm should never pay any dividends.