Question 1

Laura is analyzing several investment possibilities.She thinks that some options have better chances of a good payback but those paybacks are smaller.She is exploring the

Accepted Answer

Laura is considering the risk-return relationship, which involves balancing the potential risks of an investment with the expected returns. She is weighing options with better chances of payback (lower risk) but smaller returns, which is a classic example of this relationship.

Question 2

Len is working with a discount broker.Which service would he be least likely to receive?

Accepted Answer

Discount brokers typically offer online or phone-based services, which means Len would be unlikely to receive face-to-face consultations. However, he may still be able to access stock research, industry analysis, screening tools, and investment suggestions through the broker's platform.

Question 3

From a company's perspective,which of the following is the riskiest mix of long-term funding?

Accepted Answer

The riskiest mix of long-term funding is 100% debt because it means the company has a high level of financial leverage and is more vulnerable to fluctuations in market conditions or changes in interest rates. With all debts, the company also has a higher risk of defaulting on its loans, which could have severe consequences such as bankruptcy.

Question 4

Mega Computer's financial statements show 1000 shares of common stock with a par value of $10 000,retained earnings of $20 000,additional paid in capital of $10 000,and long-term debt of $30 000.What is the book value of a share of stock?

Accepted Answer

The book value of a share of stock is calculated by adding the common stock's par value, additional paid-in capital, and retained earnings, then dividing by the number of shares. Here, ($10,000 + $10,000 + $20,000) / 1000 = $40.00 per share. Long-term debt is not included in this calculation.

Question 5

From a company's perspective,which of the following is the most conservative mix of long-term funding?

Accepted Answer

C) 100% equity is the most conservative mix of long-term funding from a company's perspective because it does not involve taking on debt, thus avoiding interest payments and reducing financial risk.

Question 6

Dennis can compute the market capitalization of the company he works for by

Accepted Answer

The market capitalization of a company is calculated by multiplying the market price of one share of the company's stock by the total number of shares outstanding. This method takes into account the market's perception of the company's value, rather than just its assets or liabilities.

Question 7

Regarding the issue of investor relations,it is correct to say that

Accepted Answer

Investor relations involve a range of activities that aim to provide important information to investors, shareholders, and financial analysts. One of these activities may include inviting financial analysts to one of the operating sites of a firm to gain a better understanding of its operations and growth prospects. This can have an impact on the stock price as analysts may revise their earnings forecasts or provide positive recommendations to their clients. Therefore, option B is the correct answer. Options A, C, D, and E are incorrect as they either provide incorrect information or are not supported by the text.

Question 8

Which of the following is correct with respect to retained earnings?

Accepted Answer

Retained earnings represent profits that have been reinvested into the firm rather than paid out as dividends. By retaining earnings, a firm may decrease the amount of dividends paid to shareholders, which could lead to a decrease in demand for the company's stock and a decrease in price.

Question 9

Javier wants to invest but wants to reduce his risk of loss by spreading the total investment across more stocks.Javier would be most interested in which of the following?

Accepted Answer

Diversification is the strategy of spreading investments across different stocks or asset classes to reduce the risk of loss. By diversifying, Javier can potentially mitigate the impact of negative performance in any one particular stock or sector on his overall investment portfolio.

Question 10

Rosella is financial manager who is comparing the effects of debt and equity financing.She finds that

Accepted Answer

Debt financing requires regular payments in the form of interest and principal, which make a regular claim on income. Equity financing, on the other hand, is not entitled to regular payments and does not make a regular claim on income.

Question 11

Mega Computer's financial statements show 1000 shares of common stock with a par value of $10 000,retained earnings of $20 000,additional paid in capital of $10 000,and long-term debt of $30 000.What is the market value of a share of Mega's stock?

Accepted Answer

The market value of a share of stock cannot be determined from the financial statement figures provided (par value, retained earnings, additional paid-in capital, and long-term debt) as these figures do not directly relate to the current market price of a share. Market value is determined by the stock market based on supply and demand, investor perceptions, and other external factors.

Question 12

All of the following are features of debt financing except

Accepted Answer

The answer of All of the following are features of...

Question 13

Corporation B had sales revenue last year of $20 million,operating expenses of $16 million,and net profit of $4 million.There are 2 million shares of stock outstanding.What is the par value of the company's stock?

Accepted Answer

The par value of a stock is a nominal value assigned to shares and is not determined by the company's sales revenue, operating expenses, net profit, or the number of shares outstanding. The information provided does not include the par value.

Question 14

Preferred stock with a $100 par value and a 5 percent dividend is currently trading on the market at $90 per share.What is the amount of the dividend the holder is entitled to receive each year on each share?

Accepted Answer

The dividend is calculated as 5 percent of the par value, which is $100. Therefore, the dividend is $5 per share.

Question 15

Which of the following is correct with regard to market capitalization?

Accepted Answer

This statement is true based on the composition of the Canadian economy which heavily relies on the financial and resource sectors. The other statements are either false or not agreed upon universally.

Question 16

Which of the following is a function performed by an investment bank?

Accepted Answer

Underwriting purchases of stocks and bonds is a primary function of investment banks, meaning that they assume the risk of selling new securities to the public. They also help corporations and governments to organize and sell securities to investors.

Other options such as handling a client's portfolio or establishing relationships with commercial banks are typically performed by wealth management or commercial banking divisions, respectively. Arranging travel or providing insurance services are not within the scope of an investment bank's services.

Question 17

Mega Computer issued stock with a face value of one cent and then sold the shares to the public for $20.00 each.Ted bought 10 shares at that price.Today,Ted sold his shares to Deirdre for $25.00 each.What are Ted's capital gains?

Accepted Answer

Ted's capital gains are calculated as the difference between the selling price and the purchase price, multiplied by the number of shares. He bought 10 shares at $20.00 each and sold them at $25.00 each, resulting in a gain of ($25.00 - $20.00) * 10 = $50.00.

Question 18

Which of the following is correct?

Accepted Answer

Market capitalization is calculated by multiplying the number of outstanding shares by the market value per share. The other options are incorrect. The par value of a stock is an arbitrary value set by the company, and has little to do with its actual value. The market value of a share of stock is influenced by a variety of factors, including financial considerations as well as subjective factors such as rumours and stockbroker recommendations. The book value of a share of stock is calculated by dividing stockholders' equity by the number of outstanding shares. There are no laws preventing subjective factors from influencing the market price of a stock.

Question 19

Preferred stock with a $100 par value and a 6 percent dividend is currently trading on the market at $110 per share.What is the amount of the dividend the holder is entitled to receive each year?

Accepted Answer

The amount of the dividend the holder is entitled to receive each year is calculated based on the par value of the preferred stock, not the market value. Therefore, the holder is entitled to receive a dividend of 6 percent of the $100 par value, which is $6 per year.

Question 20

What is the difference between debt and equity financing?

Accepted Answer

The answer of What is the difference between debt and...

Quiz 15: Financial Decisions and Risk Management