Question 1

Core Concepts Inc,.has experienced a stock price increase from $100.00 to $131.59 in only three years.Over this time period,what has been the firm's geometric average annual rate of return?
A)9.58%
B)9.63%
C)9.88%
D)9.92%

Accepted Answer

The geometric average annual rate of return is calculated using the formula:Geometric average annual rate of return = (Ending value / Beginning value)^(1/n) - 1where:Ending value = $131.59Beginning value = $100.00n = 3 yearsPlugging these values into the formula, we get:Geometric average annual rate of return = ($131.59 / $100.00)^(1/3) - 1 = 9.58%Therefore, the correct answer is A) 9.58%.

Question 2

Rank the order of standard deviation of returns from highest to lowest for the following classes of U.S.securities for the time period 1926 - 2011.
A)small stocks,large stocks,30-year Treasury bonds,and 90-day T-bills
B)large stocks,small stocks,30-year Treasury bonds,and 90-day T-bills
C)90 -day T-bills,large stocks,30-year Treasury bonds,small stocks
D)30-year Treasury bonds,large stocks,small stocks,90-day T-bills

Accepted Answer

According to historical data, the order of standard deviation of returns from highest to lowest for the given classes of U.S. securities for the period 1926-2011 is as follows:
1. Small stocks
2. Large stocks
3. 30-year Treasury bonds
4. 90-day T-bills
Therefore, option A is the correct answer as it arranges the securities in the correct order. Option B and D have swapped the order of small and large stocks. Option C has only one security in the correct order.

Question 3

The cumulative feature of preferred stock means that preferred dividends cannot be paid until all common dividends have been paid.

Accepted Answer

The cumulative feature of preferred stock means that if any preferred dividends are skipped, they must be paid out before any dividends can be paid to common shareholders, but it does not require common dividends to be paid first.

Question 4

In the event of bankruptcy and liquidation by a firm,all preferred shareholders receive any claims before common shareholders but after both secured and unsecured creditors.

Accepted Answer

Preferred shareholders have a higher priority in the claim of assets in case of bankruptcy and liquidation compared to common shareholders, but they have lower priority compared to both secured and unsecured creditors. Therefore, they receive payment after the creditors are paid but before the common shareholders receive any payment.

Question 5

In what ways are preferred shares like debt and in what ways are they like common equity?

Accepted Answer

The answer of In what ways are preferred shares like...

Question 6

If the firm has earnings available to common shareholders,it has two choices of what to do with these earnings: it can either ________ or ________.
A)pay dividends to the common shareholders; retain the earnings to finance future projects and investments.
B)pay dividends to the preferred shareholders; repurchase common stock.
C)pay dividends to the bondholders; retain the earnings to finance future projects and investments.
D)pay dividends to the common shareholders; pay dividends to the bondholders.

Accepted Answer

The best choice for a firm with earnings available to common shareholders is typically to retain the earnings to finance future projects and investments. This allows the firm to continue to grow and increase its value, which should ultimately benefit the common shareholders in the long run. Paying dividends may provide short-term benefits, but may limit the firm's ability to invest in future growth opportunities.

Question 7

Firms must make regular payments to ________ but are under no contractual obligation to pay dividends to ________.
A)common stockholders; preferred stockholders.
B)preferred stockholders; bondholders.
C)bondholders; common stockholders.
D)common stockholders,bondholders.

Accepted Answer

Firms are contractually obligated to make regular interest payments to bondholders, but they are not required to pay dividends to common stockholders.

Question 8

In the United States,a corporation's board of directors is elected by:
A)bondholders only.
B)bondholders and preferred stockholders
C)bondholders,preferred stockholders,and common stockholders.
D)common stockholders only.

Accepted Answer

In the United States, a corporation's board of directors is elected by common stockholders only. Common stockholders have voting rights to elect the board of directors and determine the direction of the company. Preferred stockholders may have voting rights on specific issues, but not for the election of board members. Bondholders do not have any voting rights as they are lenders to the company and not owners.

Question 9

Rank the order of returns from highest to lowest for the following classes of U.S.securities for the time period 1926 - 2011.
A)large stocks,small stocks,30-year Treasury bonds,and 90-day T-bills
B)small stocks,large stocks,30-year Treasury bonds,and 90-day T-bills
C)30-year Treasury bonds,large stocks,small stocks,90-day T-bills
D)90 -day T-bills,large stocks,30-year Treasury bonds,small stocks

Accepted Answer

Over the time period of 1926-2011, small stocks have had the highest returns, followed by large stocks, 30-year Treasury bonds, and finally, 90-day T-bills. This is consistent with the general principle that higher risk investments tend to yield higher returns over the long run. Therefore, choice B is the best answer as it correctly ranks the securities in the order of decreasing returns.

Question 10

Core Concepts Inc,.has experienced stock returns of 8.4%,6.3%,and 14.2% over the last three years.Over this time period,what has been the firm's arithmetic average annual rate of return?
A)9.58%
B)9.63%
C)9.88%
D)9.92%

Accepted Answer

The arithmetic average annual rate of return is calculated by summing the annual returns and then dividing by the number of years. So, (8.4% + 6.3% + 14.2%) / 3 = 28.9% / 3 = 9.63%.

Question 11

Which of the following have payments that are tax deductible for the corporation?
A)bond interest payments
B)preferred dividends
C)common dividends
D)retained earnings

Accepted Answer

Bond interest payments are tax deductible for corporations.

Question 12

The ________ feature found with many issues of preferred stock requires that all current and past due preferred dividends must be paid prior to any dividend payout to common shareholders.
A)cumulative
B)participating
C)convertible
D)historical

Accepted Answer

The feature being described is the cumulative feature, which means that all missed dividends must be paid to preferred shareholders before common shareholders can receive a dividend. The participating feature would allow preferred shareholders to receive additional dividends beyond their fixed rate, while the convertible feature allows preferred shares to be converted into common shares. The historical feature is not a term used in the context of preferred stock.

Question 13

Which of the following classes of U.S.securities have NOT averaged an annual rate of return that exceeds the average annual rate of inflation? (Data from 1926 - 2011)
A)small company stocks
B)large company stocks
C)90-day Treasury bills
D)All of these classes of securities have averaged higher average annual rates of return than that of the average annual rate of inflation.

Accepted Answer

The answer of Which of the following classes of U.S.securities...

Question 14

Ransom Industries Inc,has issued preferred stock that pays $3.00 dividends annually.If the market requires a 12.5% rate of return on the shares,what is the current price of the firm's preferred shares?
A)$21.33
B)$24.00
C)$41.67
D)There is not enough information to answer this question.

Accepted Answer

The answer of Ransom Industries Inc,has issued preferred stock that...

Question 15

Which of the following statements comparing preferred stock to other financial instruments is NOT true?
A)Like common shares,preferred dividends are after-tax payments for the firm.
B)Like bonds,preferred shares are issued with a face value.
C)Like bonds,most preferred shares have maturities of up to 30 years.
D)Like common shares,preferred dividends are typically paid quarterly.

Accepted Answer

Unlike bonds, most preferred shares do not have a maturity date as they are considered perpetual securities.

Question 16

Preferred shares earn their name in part because they have priority payment over:
A)short-term debt obligations.
B)long-term debt obligations.
C)common stock dividends.
D)all of the above.

Accepted Answer

Preferred shares have priority payment over common stock dividends. They do not have priority payment over debt obligations. Therefore, A and B are incorrect.

Question 17

Due to regulatory capital requirements,there tends to be a concentration of preferred shares in the ________ industry.
A)airline
B)railroad
C)power generation
D)banking

Accepted Answer

Preferred shares are a type of hybrid security that combines features of both debt and equity. They are considered Tier 1 capital for banks and other financial institutions and contribute significantly to their regulatory capital. Therefore, due to regulatory capital requirements, there tends to be a concentration of preferred shares in the banking industry.

Question 18

Preferred shares are a form of SHORT-TERM financing available to the firm.

Accepted Answer

Preferred shares are a form of LONG-TERM financing available to the firm.

Question 19

________ are the residual claimants of a firm's cash flows.
A)Preferred shareholders
B)Common shareholders
C)Bondholders
D)Bankers

Accepted Answer

Common shareholders are the residual claimants of a firm's cash flows, meaning they receive any remaining cash after all other stakeholders (such as preferred shareholders, bondholders, and bankers) have been paid their share.

Question 20

From a firm's perspective,preferred shares are at least as desirable as bonds because the firm is able to deduct preferred dividend payments for tax purposes like it can bond interest expenses.

Accepted Answer

Preferred dividends are paid out of after-tax profits and are not tax-deductible for the firm, unlike bond interest expenses which are tax-deductible.

Quiz 9: Overview of Capital Markets: Long-Term Financing Instruments

Core Concepts Inc,.has experienced a stock price increase from $100.00 to $131.59 in only three years.Over this time period,what has been the firm's geometric average annual rate of return?

Rank the order of standard deviation of returns from highest to lowest for the following classes of U.S.securities for the time period 1926 - 2011.

The cumulative feature of preferred stock means that preferred dividends cannot be paid until all common dividends have been paid.

In the event of bankruptcy and liquidation by a firm,all preferred shareholders receive any claims before common shareholders but after both secured and unsecured creditors.

In what ways are preferred shares like debt and in what ways are they like common equity?

If the firm has earnings available to common shareholders,it has two choices of what to do with these earnings: it can either or .

Firms must make regular payments to but are under no contractual obligation to pay dividends to .

In the United States,a corporation's board of directors is elected by:

Rank the order of returns from highest to lowest for the following classes of U.S.securities for the time period 1926 - 2011.

Core Concepts Inc,.has experienced stock returns of 8.4%,6.3%,and 14.2% over the last three years.Over this time period,what has been the firm's arithmetic average annual rate of return?

Which of the following have payments that are tax deductible for the corporation?

The ________ feature found with many issues of preferred stock requires that all current and past due preferred dividends must be paid prior to any dividend payout to common shareholders.

Which of the following classes of U.S.securities have NOT averaged an annual rate of return that exceeds the average annual rate of inflation? (Data from 1926 - 2011)

Ransom Industries Inc,has issued preferred stock that pays $3.00 dividends annually.If the market requires a 12.5% rate of return on the shares,what is the current price of the firm's preferred shares?

Which of the following statements comparing preferred stock to other financial instruments is NOT true?

Preferred shares earn their name in part because they have priority payment over:

Due to regulatory capital requirements,there tends to be a concentration of preferred shares in the ________ industry.

Preferred shares are a form of SHORT-TERM financing available to the firm.

________ are the residual claimants of a firm's cash flows.

From a firm's perspective,preferred shares are at least as desirable as bonds because the firm is able to deduct preferred dividend payments for tax purposes like it can bond interest expenses.