Capital Markets Exam Review
Course Introduction
Capital Markets is a comprehensive course that explores the structure, function, and dynamics of capital markets, which are crucial for the efficient allocation of financial resources in an economy. The course covers the key instruments traded in capital markets, such as equities, bonds, and derivatives, as well as the roles of market participants including investors, issuers, and intermediaries. Students will gain an understanding of primary and secondary markets, issuance processes, market regulation, risk management, and the impact of global economic factors on capital flows. Through case studies and real-world examples, the course equips students with analytical tools to evaluate investment opportunities and understand the implications of capital market developments for corporate finance and economic growth.
Recommended Textbook
Corporate Finance Asia 1st Global Edition by Stephen Ross
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16 Chapters
1174 Verified Questions
1174 Flashcards
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Page 2
Chapter 1: Introduction to Corporate Finance
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61 Verified Questions
61 Flashcards
Source URL: https://quizplus.com/quiz/74148
Sample Questions
Q1) Which one of the following statements concerning a sole proprietorship is correct?
A)A sole proprietorship is the least common form of business ownership.
B)The profits of a sole proprietorship are taxed twice.
C)The owners of a sole proprietorship share profits as established by the partnership agreement.
D)The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.
E)A sole proprietorship is often structured as a limited liability company.
Answer: D
Q2) What advantages does the corporate form of organization have over sole proprietorships or partnerships?
Answer: The advantages of the corporate form of organization over sole proprietorships and partnerships are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise more capital,and the opportunity of an unlimited life of the business.
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3
Chapter 2: Financial Statements and Cash Flow
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92 Verified Questions
92 Flashcards
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Sample Questions
Q1) Free cash flow is:
A)without cost to the firm.
B)net income plus taxes.
C)an increase in net working capital.
D)cash that the firm is free to distribute to creditors and stockholders.
E)None of the above.
Answer: D
Q2) What is a liquid asset and why is it necessary for a firm to maintain a reasonable level of liquid assets?
Answer: Liquid assets are those that can be sold quickly with little or no loss in value.A firm that has sufficient liquidity will be less likely to experience financial distress.
Q3) Earnings per share
A)will increase if net income increases and number of shares remains constant.
B)will increase if net income decreases and number of shares remains constant.
C)is number of shares divided by net income.
D)is the amount of money that goes into retained earnings on a per share basis.
E)None of the above.
Answer: A
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4
Chapter 3: Financial Statements Analysis and Long-Term Planning
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117 Verified Questions
117 Flashcards
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Sample Questions
Q1) The _____ breaks down return on equity into three component parts.
A)Du Pont identity
B)return on assets
C)statement of cash flows
D)asset turnover ratio
E)equity multiplier
Answer: A
Q2) Samuelson's has a debt-equity ratio of 40%,sales of $8,000,net income of $600,and total debt of $2,400.What is the return on equity?
A)6.25%
B)7.50%
C)9.75%
D)10.00%
E)11.25%
Answer: D
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Page 5
Chapter 5: Net Present Value and Other Investment Rules
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92 Flashcards
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Sample Questions
Q1) If a project has a net present value equal to zero,then:
I.the present value of the cash inflows exceeds the initial cost of the project.
II.the project produces a rate of return that just equals the rate required to accept the project.
III.the project is expected to produce only the minimally required cash inflows.
IV.any delay in receiving the projected cash inflows will cause the project to have a negative net present value.
A)II and III only
B)II and IV only
C)I,II,and IV only
D)II,III,and IV only
E)I,II,and III only
Q2) When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:
A)accepted because the internal rate of return is positive.
B)accepted because the profitability index is greater than 1.
C)accepted because the profitability index is negative.
D)rejected because the internal rate of return is negative.
E)rejected because the net present value is negative.
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Page 6
Chapter 8: Interest Rates and Bond Valuation
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67 Verified Questions
67 Flashcards
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Sample Questions
Q1) A bond with semi-annual interest payments,all else equal,would be priced _________ than one with annual interest payments.
A)higher
B)lower
C)the same
D)it is impossible to tell
E)either higher or the same
Q2) A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond.
A)par
B)discount
C)premium
D)zero coupon
E)floating rate
Q3) Explain why some bond investors are subject to liquidity risk,default risk,and/or taxability risk.How does each of these risks affect the yield of a bond?
Q4) Why do corporations issue 100-year bonds,knowing that interest rate risk is highest for very long-term bonds? How does the interest rate risk affect the issuer?
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Chapter 10: Risk and Return: Lessons From Market History
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81 Flashcards
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Sample Questions
Q1) Six months ago,you purchased 100 shares of stock in ABC Co.at a price of $43.26 a share.ABC stock pays a quarterly dividend of $.10 a share.Today,you sold all of your shares for $46.71 per share.What is the total amount of your capital gains on this investment?
A)$0.4
B)$40
C)$45
D)$345
E)$385
Q2) The dollar value of the world stock market capitalization,from largest to smallest is:
A)Europe and Middle East,Americas,Asia-Pacific
B)Americas,Europe and Middle East,Asia-Pacific
C)Americas,Asia-Pacific,Europe and Middle East
Q3) The variance of returns is computed by dividing the sum of the:
A)squared deviations by the number of returns minus one.
B)average returns by the number of returns minus one.
C)average returns by the number of returns plus one.
D)squared deviations by the average rate of return.
E)squared deviations by the number of returns plus one.
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Page 8
Chapter 11: Return and Risk: the Capital Asset Pricing Model
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125 Verified Questions
125 Flashcards
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Sample Questions
Q1) The stock of Martin Industries has a beta of 1.43.The risk-free rate of return is 3.6% and the market risk premium is 9%.What is the expected rate of return on Martin Industries stock?
A)11.3%
B)14.1%
C)16.5%
D)17.4%
E)18.0%
Q2) Which one of the following is an example of a nondiversifiable risk?
A)a well-respected president of a firm suddenly resigns
B)a well-respected chairman of the Federal Reserve suddenly resigns
C)a key employee suddenly resigns and accepts employment with a key competitor
D)a well-managed firm reduces its work force and automates several jobs
E)a poorly managed firm suddenly goes out of business due to lack of sales
Q3) A portfolio will usually contain:
A)one riskless asset.
B)one risky asset.
C)two or more assets.
D)no assets.
E)None of the above.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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45 Verified Questions
45 Flashcards
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Sample Questions
Q1) Discuss the Fama-French three factor model;both what it means and the factors of the model.
Q2) An investor is considering the three stocks given below: A.
Stock B and C: R<sub>p</sub> = .5(13.3%)+ .5(9.2%)= 11.25%
C.Demonstrate that holding stock A actually reduces risk by comparing the risk of a portfolio equally weighted between stock B and T-Bills with a portfolio equally weighted between stocks B and
Q3) The Fama-French three factor model predicts the expected return on a portfolio increases:
A)linearly with its factor loading of the size factor.
B)linearly with its factor loading of the volume.
C)exponentially with its factor loading of the size factor.
D)exponentially with its factor loading of the volume factor.
E)None of the above.
Q4) You have a 3 factor model to explain returns.Explain what a factor represents in the context of the APT? Each factor is multiplied by a beta.What do these represent and how do they relate to the actual return?
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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50 Verified Questions
50 Flashcards
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Sample Questions
Q1) Which one of the following statements is correct concerning market efficiency?
A)Real asset markets are more efficient than financial markets.
B)If a market is efficient,arbitrage opportunities should be common.
C)In an efficient market,some market participants will have an advantage over others.
D)A firm will generally receive a fair price when it sells shares of stock.
E)New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.
Q2) The hypothesis that market prices reflect all historical information is called _____ form efficiency.
A)open
B)strong
C)semistrong
D)weak
E)stable
Q3) Explain why it is that in an efficient market,investments have an expected NPV of zero.
Q4) Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?
11
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Chapter 15: Long-Term Financing: an Introduction
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Sample Questions
Q1) Holden Bicycles has 2,000 shares outstanding each with a par value of $0.50.If they are sold to shareholders at $12 each,what would the capital surplus be?
A)$1,000
B)$12,000
C)$15,000
D)$23,000
E)$24,000
Q2) The book value of the shareholders' ownership is represented by:
A)the sum of the par value of common stock,the capital surplus and the accumulated retained earnings.
B)the total assets minus the net worth.
C)the sum of the preferred stock,debt and the capital surplus.
D)the sum of the total assets minus the current liabilities.
E)None of the above.
Q3) Preferred Stock,as a hybrid security,presents somewhat of a puzzle as to why they are issued.What elements give rise to the puzzle and how is it explained?
Q4) Rework the shareholder's equity as it appears on the books if the company issues 40,000 new shares of common at $70 per share.
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Page 12
Chapter 20: Raising Capital
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Sample Questions
Q1) The market for venture capital refers to the:
A)private financial marketplace for servicing small,young firms.
B)bond markets.
C)market for selling rights to individuals who already own shares.
D)market for selling equity securities for firms with equity already outstanding.
E)None of the above.
Q2) Discuss the stages of venture capital financing,defining each in detail.
Q3) Dilution refers to:
A)the increase in stock value due to wider ownership of stock.
B)the loss in existing shareholder's equity.
C)the loss in new shareholder's equity.
D)the loss in all shareholder's equity,both existing shareholders and new shareholders.
E)None of the above.
Q4) Discuss what a Dutch auction is and how it works.
Q5) Calculate the ex-rights price that would make a new stockholder indifferent between buying shares at the old stock price and exercising the rights or buying the shares ex-rights.
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Chapter 22: Options and Corporate Finance
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93 Flashcards
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Sample Questions
Q1) You purchased six TJH call option contracts with a strike price of $40 when the option was quoted at $1.30.The option expires today when the value of TJH stock is $41.90.Ignoring trading costs and taxes,what is your total profit or loss on your investment?
A)$60
B)$320
C)$360
D)$420
E)$540
Q2) Which one of the following statements correctly describes your situation as the owner of an American call option?
A)You are obligated to buy at a set price at any time up to and including the expiration date.
B)You have the right to sell at a set price at any time up to and including the expiration date.
C)You have the right to buy at a set price only on the expiration date.
D)You are obligated to sell at a set price if the option is exercised.
E)You have the right to buy at a set price at any time up to and including the expiration date.
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Page 14
Chapter 23: Options and Corporate Finance: Extensions and Applications
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42 Flashcards
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Sample Questions
Q1) Which of the following is not part of the Black Scholes option pricing model?
A)Standard deviation
B)Time to maturity
C)Exercise price
D)Par value of the company's stock
E)Interest rate
Q2) The Nu-Tech Company has a new project available to it at a cost of $6,000,000.If the project is accepted,the company will be able to sell 13,000 personal organizers at $172 in net cash flow for each of the next five years.Nu-Tech's discount rate is 15%.What is the NPV of the investment? The executives of Nu-Tech are concerned about the potential of future competition and a subsequent drop in sales and price.If after two years you can dispose of the asset for $1,000,000 at what price would it make sense to abandon the project?
Q3) Calculate N(d<sub>2</sub>).
A).5000
B).5988
C).6164
D).7468
E).7595
Q4) Why would the company pay the executive in options as opposed to salary?
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Chapter 24: Warrants and Convertibles
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Sample Questions
Q1) BrightView Windows issued warrants with an exercise price of $17 for one share per warrant.On May 1,BrightView's common stock is at $20 per share.The lower and upper limits on the warrant value on May 1 are:
A)$0 and $3
B)$0 and $17
C)$3 and $17
D)$3 and $20
E)$17 and $20
Q2) What is the conversion premium?
A)10.00%
B)27.58%
C)33.32%
D)103.23%
E)None of the above.
Q3) What is the conversion value of the bond?
A)$25
B)$40
C)$750
D)$1,000
E)No conversion premium is given.
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Chapter 25: Derivatives and Hedging Risk
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Sample Questions
Q1) Duration of a pure discount bond:
A)is equal to its half-life.
B)is less than a zero coupon bond.
C)is equal to the liabilities hedged.
D)is equal to its maturity.
E)None of the above.
Q2) What new asset duration will immunize the balance sheet?
Q3) The futures markets are labeled as pure speculation and even gambling.Why is this an inaccurate portrayal of the market's function?
Q4) You hold a forward contract to take delivery of U.S.Treasury bonds in 9 months.If the entire term structure of interest rates shifts down over the 9-month period,the value of the forward contract will have _____ on the date of delivery.
A)risen
B)fallen
C)not changed
D)either risen or fallen,depending on the maturity of the T-bond
E)collapsed
Q5) Calculate the duration of Tiger State Bank's assets and liabilities.
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Chapter 31: International Corporate Finance
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Sample Questions
Q1) "The rate of change in commodity price levels between two countries determines the rate of change in exchange rates between the two countries." This is a statement of:
A)Absolute Purchasing Power Parity.
B)Relative Purchase Power Parity.
C)International Fisher Effect.
D)Interest Rate Parity.
E)Unbiased Forward Rates.
Q2) You want to invest in a project in Canada.The project has an initial cost of C$1.2 million and is expected to produce cash inflows of C$600,000 a year for 3 years.The project will be worthless after the first 3 years.The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S.The applicable interest rate in Canada is 8 percent.The current spot rate is C$1 = $.69.What is the net present value of this project in Canadian dollars using the foreign currency approach?
A)C$335,974
B)C$342,795
C)C$346,258
D)C$349,721
E)C$356,750
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Page 18