Assignment
Question 1
Which of the following is true?
A. Most empirical evidence is consistent with strong form efficiency.
B. Most empirical evidence is inconsistent with weak form efficiency.
C. Strong form market efficiency is not supported by the empirical evidence.
D. Both Most empirical evidence is consistent with strong form efficiency; and Strong form market efficiency is not supported by the empirical evidence.
E. Both Most empirical evidence is inconsistent with weak form efficiency; and Strong form market efficiency is not supported by the empirical evidence.
Question 2
If the market is weak form efficient:
A. semistrong form efficiency holds.
B. strong form efficiency must hold.
C. semistrong form efficiency may hold.
D. markets are not weak form efficient.
E. None of these.
Question 3
If a market is strong form efficient, it also implies that:
A. semistrong form efficiency holds.
B. weak form efficiency holds.
C. one cannot earn abnormal returns with inside information.
D. Both semistrong form efficiency holds; and one cannot earn abnormal returns with inside information.
E. semistrong form efficiency holds; and weak form efficiency holds; and one cannot earn abnormal returns with inside information.
Question 4
The abnormal return in an event study is described as:
A. the return earned on the day of announcement for the stock.
B. the excess return earned on the day of announcement for the stock.
C. the total return earned for the investment holding period.
D. All of these.
E. None of these.
Question 5
Evidence on stock prices finds that the sudden death of a chief executive officer causes stock prices to fall and the sudden death of an active founding chief executive officer causes stock price to rise. This contrary evidence happens because:
A. markets are inefficient and unsure of the real value of the events.
B. death is inevitable and market prices are random.
C. things simply happen.
D. the value of the founding executive was a negative to the firm.
E. None of these.
Question 6
Which of the following is true?
A. A random walk for stock price changes is inconsistent with observed patterns in price changes.
B. If the stock market follows a random walk, price changes should be highly correlated.
C. If the stock market is weak form efficient, then stock prices follow a random walk.
D. All of these.
E. Both If the stock market follows a random walk, price changes should be highly correlated; and If the stock market is weak form efficient, then stock prices follow a random walk.
Question 7
Ritter's study of Initial Public Offerings (IPOs) showed that the post offering stock performance was:
A. less than the control group by about 2% in the five years following the IPO.
B. incorrectly priced at issuance because over the next five years the abnormal returns were greater than zero on average.
C. immaterial to the pricing of the IPO because future market performance is unknown at issuance.
D. equal across IPOs, irrespective of risk or which year they were issued.
E. All of these.
Question 8
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.
Question 9
Salmon Inc. has debt with both a face and a market value of $3,000. This debt has a coupon rate of 7% and pays interest annually. The expected earnings before interest and taxes is $1,200, the tax rate is 34%, and the unlevered cost of capital is 12%. What is the firm's cost of equity?
A. 13.25%
B. 13.89%
C. 13.92%
D. 14.14%
E. 14.25%
Question 10
Bryan invested in Bryco, Inc. stock when the firm was financed solely with equity. The firm is now utilizing debt in its capital structure. To unlever his position, Bryan needs to:
A. borrow some money and purchase additional shares of Bryco stock.
B. maintain his current position as the debt of the firm did not affect his personal leverage position.
C. sell some shares of Bryco stock and hold the proceeds in cash.
D. sell some shares of Bryco stock and loan it out such that he creates a personal debt-equity ratio equal to that of the firm.
E. create a personal debt-equity ratio that is equal to exactly 50% of the debt-equity ratio of the firm.
Question 11
Thompson & Thomson is an all equity firm that has 500,000 shares of stock outstanding. The company is in the process of borrowing $8 million at 9% interest to repurchase 200,000 shares of the outstanding stock. What is the value of this firm if you ignore taxes?
A. $20.0 million
B. $20.8 million
C. $21.0 million
D. $21.2 million
E. $21.3 million
Question 12
Aspen's Distributors has a cost of equity of 13.84% and an unlevered cost of capital of 12%. The company has $5,000 in debt that is selling at par value. The levered value of the firm is $12,000 and the tax rate is 34%. What is the pre-tax cost of debt?
A. 7.92%
B. 8.10%
C. 8.16%
D. 8.84%
E. 9.00%
Question 13
Joe's Leisure Time Sports is an unlevered firm with an after-tax net income of $86,000. The unlevered cost of capital is 10% and the tax rate is 34%. What is the value of this firm?
A. $567,600
B. $781,818
C. $860,000
D. $946,000
E. $1,152,400
Question 14
The increase in risk to equityholders when financial leverage is introduced is evidenced by:
A. higher EPS as EBIT increases.
B. a higher variability of EPS with debt than all equity.
C. increased use of homemade leverage.
D. equivalence value between levered and unlevered firms in the presence of taxes.
E. None of these.
Question 15
Anderson's Furniture Outlet has an unlevered cost of capital of 10%, a tax rate of 34%, and expected earnings before interest and taxes of $1,600. The company has $3,000 in bonds outstanding that have an 8% coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?
A. 8.67%
B. 9.34%
C. 9.72%
D. 9.99%
E. 10.46%