Question

1. A stock repurchase may be a signal that

a. a firm’s stock is overvalued

b. a firm’s stock is undervalued

c. a firm is short on funds

d. a firm’s bonds are overvalued

e. none of the above are accurate

2. If you are a tax paying investor you would generally

a. prefer capital gains over dividends even if they were both taxed at the same rate because the effective tax rate on capital gains is lower due to your ability to defer capital gains.

b. prefer dividends over capital gains because everyone knows dividends are critical to building personal wealth

c. be indifferent between dividends and capital gains.

d. prefer dividends over capital gains because everyone knows “a bird in the hand is worth two in the bush”

e. none of the above are correct

3. If a firm has a lot of great ideas and projects to invest in, the firm would prefer which dividend policy below?

Low dividend payout

High dividend payout

Either, since dividend policy has nothing to do with capital budgeting (projects the firm is investing in)

4. If an investor purchases a stock after the "ex-dividend" date, then

the investor receives the currently declared dividend since the seller is "ex-dividend" (i.e. without dividend)

the investor does not receive the currently declared dividend since the seller sold the stock "ex-dividend" (i.e. without dividend)

the investor has to report the dividend as taxable income

none of the above

5. Which of the following statements is (are) true regarding the signaling view (aka informational content) of dividend policy?

Stock market (prices) generally react positively to dividend increases (above expected)

Stock market (prices) generally react positively to dividend decreases (cuts)

Stock market (prices) generally react negatively to dividend increases (above expected)

Stock market (prices) generally react negatively to dividend decreases (cuts)

Both a & d

Both b & c

None of the above

6. Buying a put option would protect you from

a. the price of the underlying asset rising

b. the price of the underlying asset falling

c. having to buy the underlying asset at a higher price in the future.

d. none of the above.

7. Which of the following leases is (are) non-cancelable?
A. operating leases
b. financial (a.k.a. capital) leases
c. both are non-cancelable

8. The price at which the holder of a call option may buy the underlying asset is know as the

option price

exercise price

market price

common price

9. Limited liability makes the payoff (at liquidation of the firm) of a common stock look like the payoff of a

put option

forward contract

futures contract

call option

none of the above

10. If a firm executed a 3-for-1 stock split, you would expect that the value of
a. an investment in the firm should increase because having 3 stocks is clearly better than 1.
b. each new stock should be approximately 3 times the value of the original stock
c. each new stock should be approximately equal to the value of the original stock
d. each new stock should be approximately one-third of the value of the original stock
e. all of the above would be essentially equally probable outcomes

Answer 1

Answer to 1.

b. the stock is undervalued- a company may feel its shares are under valued and buy them back to provide investors with return.

Answer to 2.

e. None of the above, since keeping dividends or capital gains is dependent on how the stock markets are forming and the economin scenario in which the companies are operating.

Answer to 3.

High Dividend payout- as for capital budgeting process and capital rationing, cost of equity would be considered and dividend is made to be a part of it.

Answer to 4.

The investor does not receive the currently declared dividend since the seller sold the stock ex-dividend.

Answer to 5.

Both a & d. Stock prices tend to increase if dividend declared has increased and they decrease if the dividend declared has decreased. (dividend delcared signifies the dividend pay out ratio)

Answer to 6.

b. price of the underlying asset falling. A put option gives the buyer the right to sell the asset at a certain price, hence he would benefit as the price of underlying asset goes down.

Answer to 7.

b. financial aka capital leases. Finance lease is an agreement in which the lessor agrees to transfer the ownership rights to the lessee after the completion period. They are long term and are non cancellable.

Answer to 8.

Excercise Price. It is the price at which the holder of call option buys and is also called strike price.

Answer to 9.

call option. A call option gives the right but not an obligation to buy the underlying asset. Hence, it would be beneficial only if the price of the underlying asset increases. If a person invests in common stock, he would want the stock price to rise and thus similarly it applies to call option.

Answer to 10.

d. each new stock should be approximately one third of the value of the original stock. Stock split means the number of shares increases but the market capitalization remains the same. Hence, value of stock decreases.