BLOCK TWO 2025: TUTORIAL ONE QUESTIONS
CHAPTER 12
1. If capital markets are efficient, then the sale or purchase of any security at the prevailing
market price is generally:
a) a positive-NPV transaction.
b) a zero-NPV transaction.
c) a negative-NPV transaction.
d) No general trend exists for such transactions.
2. Financing decisions differ from investment decisions for which of the following reasons?
I) you cannot use NPV to evaluate financing decisions
II) markets for financial assets are more active than for real assets
III) it is easier to find financing decisions with positive NPV than to find investment decisions
with positive NPV
a) I only
b) II only
c) III only
d) I and III only
3. The statement that stock prices follow a random walk implies that:
I) successive price changes are independent of each other
II) successive price changes are positively related
III) successive price changes are negatively related
IV) the auto correlation coefficient is either +1.0 or −1.0
a) I only
b) II and III only
c) IV only
d) III only
4. A random walk process for a single stock consists of the toss of a fair coin at the end of each
day. If the outcome is heads, the stock price increases by 1.25 percent. If the outcome is tails,
the stock price decreases by 0.75 percent. What is the drift of such a process?
a) +1.25 percent
b) −0.75 percent
c) +0.25 percent
d) +2 percent
Drift = (0.5)(1.25%) + (0.5)(−0.75%) = +0.25%.
5. Which of the following is a statement of weak-form efficiency?
I) If markets are efficient in the weak form, then it is impossible to make consistently superior
profits by using trading rules based on past returns.
II) If markets are efficient in the weak form, then prices will adjust immediately to public
information.
III) If markets are efficient in the weak form, then prices reflect all information.
a) I only
b) II only
c) II and III only
d) III only
6. Which of the following statements is (are) true if the strong-form efficient market hypothesis
holds?
I) Analysts can easily forecast stock price changes.
II) Financial markets are irrational.
III) Stock returns follow a particular pattern.
IV) Stock prices reflect all available information.
a) I only
b) II only
c) I and III only
d) IV only
7. If markets are efficient, which of the following investors should achieve superior returns over
time?
a) Investors who choose stocks by throwing darts at a list of stocks in the financial pages of
a newspaper
b) Analysts who spend considerable time evaluating the best stocks to buy
c) Mutual fund managers who manage other people's money for a living
d) None of these options.
8. Analysis of past monthly movements in Walmart's stock price has produced the following
estimates: α = −0.45 percent and β = 0.5. If the market index subsequently rises by 5 percent
while Walmart's stock price rises by 3 percent, what is the abnormal change in Walmart's stock
price?
a) −0.45 percent
b) +0.95 percent
c) +0.05 percent
d) +2.50 percent
Expected change: −0.45% + 0.5(+5%) = 2.05%; Abnormal return = 3% − 2.05% = +0.95%.
9. Investors are particularly averse to the possibility of even a very small loss and need a high
return to compensate for it. Such a concept is related to which theory?
a) Market efficiency theory
b) Random walk theory
c) Convergence trading
d) Prospect theory
CHAPTER 13
10. Generally, managers of corporations prefer internally generated cash to finance their capital
expenditures because:
I) they can avoid the discipline of financial markets
II) the costs of issuing new securities are high
III) the announcement of a new equity issue is usually bad news for investors
a) I only
b) II only
c) II and III only
d) I, II, and III
11. A firm has $100 million in current liabilities, $200 million in long-term debt, $300 million in
stockholders' equity, and total assets of $600 million. Calculate the firm's ratio of long-term
debt to long-term debt plus equity.
a) 40 percent
b) 20 percent
c) 50 percent
d) 17 percent
Ratio = 200/500 = 0.4, or 40%.
12. As a provider of funds to a corporation, owning which of the following corporate securities will
give you the most control rights?
a) Short-term bank loan
b) Long-term bond
c) Preferred stock
d) Common stock
13. Shares held by investors are known as:
a) issued but not outstanding.
b) issued and outstanding.
c) authorized shares.
d) treasury stock.
14. Which of the following are not financial intermediaries?
a) Insurance companies
b) Mutual funds
c) Banking regulators
d) Venture capital funds
15. The following are typical characteristics of preferred stock except it:
I) pays fixed dividends
II) can demand payments of cumulative dividends
III) has voting rights
a) I only
b) I and II only
c) III only
16. Which of the following characteristics do not apply to financial intermediaries?
I) They raise money from investors
II) They invest in financial assets
III) They mainly invest in real assets
a) I only
b) I and II only
c) II only
d) III only
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