MULTIPLE CHOICE (25%) circle correct answer(s) 1. A diversified portfolio may in

Question

MULTIPLE CHOICE (25%) circle correct answer(s) 1. A diversified portfolio may include 1. only stocks of airline companies 2. bonds of utilities 3. stocks and bonds 4. only shares of money market mutual funds 2. If a company fails to meet the terms of the indenture, it is 1. bankrupt 2. in default 3. profitable 4. in registration 3. Which of the following is not equity 1. paid-in-capital 2. retained earnings 3. preferred stock 4. convertible bonds The risk associated with dispersion around the expected value (e.g., expected return) is measured by the 1. beta coefficient 2. range (i.e., high-low values) 3. standard deviation 4. debt ratio 4. The beta coefficient of 1.2 implies 1. the stock is more risky than the market 2. the stock's return is 1.2 times the return on the market. 3. the stock is less risky than the market 4. the market's return is 1.2 times the return on the stock 5. (a) 1 and 2: (b) 1 and 4 (c) 2 and 3: (d) 3 and 4 As a firm uses excessive amounts of debt financing 1. its debt ratio increases 2. the value of its stock declines 3. its cost of capital increases 6. (a) 1 and 2: (b) 1 and 3: (c) 2 and 3; (d) all (1,2 &3) nterest rate isS 128 annually 1. $100 compounded for three years. 2. $100 annuity compounded for three years. 3. the present value received after three years. 4. the answer can't be determined. A firm should not make an investment if the IRR is 1. grater than the cost of capital. 2. less than the cost of capital. 3. grater than the interest rate. 4. less than the interest rate. 8.

Explanation / Answer

Solving first four questions:

Reason: The generally failure to follow terms and conditions of indenture is construed as default. Defaulting can be indicator of bankruptcy in abstract sense. Other options like profitable and registration don’t make sense.

3. Which of the following is not equity – Correct option is 4. Convertible bonds
Reason: Broadly equity is consisting of common stock, preferred stock, contributed surplus, additional paid-in capital, retained earnings, other comprehensive earnings, and treasury stock. The option convertible bonds is only odd in list of the options.

4. The risk associated with dispersion around the expected value (e.g expected return) is measured by the Correct option is 3. Standard Deviation
Reason: Standard deviation represents the movement of data either in positive or negative direction. Standard deviation refers to total risk. The expected return is mean value of plotted returns and standard deviations helps to study that how much dispersion can happen from a particular point of return.

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