FINC 341 Exam 1 Theory Guyton

When two of different size (of investment) are compared using ROE, the one with the lower ROE will add less value to the firm than the other one

False

ROE does not consider risk or the amount of invested capital

True

Trying to maximize a companies ROE leads managers to sometimes reject a project with a very acceptable ROE

True

ROE looks at return on the shareholders' investment, but maximization of ROE in not desirable

True

A firm's ROA will equal the firm's ROE if no debt is used as capital

True

Upper corporate managers are highly motivated to give their stockholders an appropriate return on the stock because in the stockholders start selling the stock, the company's stock price will decrease and the company can become a takeover target

True

Stock prices have increased significantly since President Trump was elected due to expectations that the U.S. economy will gain strength in the future from lower corporate tax rates, repatriation of corporate cash from abroad, and some deregulation of business

True

From World War I to 2000, the economy grew at a an average growth rate of 3.5 % per year. From 2000 until today, it has grown at about 1.5% on average per year

False

When interest rates are high, an investor should consider buying bonds and then selling them once interest rates go back down if they want to make capital gains on bonds

True

As U.S. rates go up, the dollar should strengthen and help U.S. companies that import goods

True

The repeal of the Glass Steagall Act of 1933 under President Clinton's administration has been partially blamed for the 2008-09 crisis

True

In 2015, the U.S. had a trade deficit of about $800 million

True

The Volcker Rule has never actually taken affect, even though it's in the Dodd Frank Bill. It was supposed to keep big banks from taking on investments that could put the bill in bankruptcy

True

When a company buys it's own stock, its P/E ratio is decreased, thus making its stock price decrease

False

The NASDAQ has acquired the Philadelphia Stock Exchange and 25% of the London Stock Exchange

True

If a stock's market price is more than the perceived intrinsic value of the stock, investor demand for purchasing the stock will decrease and the stock's market price will rise to seek equilibrium

False

The DJIA began with just 10 stocks, was expanded in 1916 to 20 stocks, and then was increased to 30 stocks in 1928. It is adjusted for stock splits

True

Since the NASDAQ is value-weighted, stock price movement of Apple, Microsoft, Google, Facebook, and/or Intel can move the entire index

True

The S&P 500 Index is made up of the leading companies in the leading industries, and the largest companies (value-wise) have the greatest influence on the index

True

When the Fed fights inflation by raising the interest rates, that is known as "shooting the gun"

False

If expected inflation decreases more than some foreign country than the United States, the value of that country's currency is likely to decrease compared to U.S. dollar

False

If the yield curve for treasury bonds is downward sloping, then inflation could be expected to decrease or increase in the future, depending on MRP

False

In trying to stimulate the economy after the 2008 Crisis, the Fed conducted three quantitative easing programs, with the last one ending in October of 2014

True

The spread between yield curves of corporate bonds and treasury bonds in smaller the longer the maturity because the MRP increases for both corporate and treasury bonds

False

If EVA is positive, then after-tax operating income exceeds the cost of the capital needed to produce that income, and management's actions are adding value for stockholdres

True

On Yahoo Finance, a recommendation rating of 5.0 indicates that the stock is a strong buy

False

A company does not want it's PEG to be greater than 1.0

False

A firm's MVA must be a positive value

False

Although EVA is important, ROA is still a better measure for establishing upper executives' bonuses

False

If a wealthy corporation owns real estate for 3 years and then sells it, the tax on the profit would be capped at 20% and most likely the corporation would have to pay an additional 3.8% on the profit for the healthcare tax

False

If an individual has $4,000 of capital gains and $17k of capital losses this year, that person will pay no tax on the capital gains, and will be able to keep $3,000 of his salary from being taxed this year and then carry $10k of capital losses for the next year

True

Individuals' capital losses are allowed to be carried forward up to 20 years

False

A man buys a house for $400k. he passes away 15 years later when his house is worth $900k. His heir sells the house and owes tax on a capital gain of $500k

False

A benefit of focusing on ROE is that it ensures that all profitable projects will be accepted so that the average ROE of the firm will be boosted

False

Since ROE is an important measure of performance, financial managers should try to maximize the company's ROE

False

EVA is different from Net Income because EVA reflects the cost of equity as well as the cost of debt

True

When two mutually exclusive projects are being considered, the one with the higher ROE should be chosen, regardless of project size

False

A firm's EPS is highly correlated with it's stock price

False

The higher the interest rate on a firm's debt, the lower its Basic Earning Power (BEP) ratio, other things held constant

False

If a firm's expected basic earning power (BEP) is constant for all constant for all of its assets and exceeds the interest rate on debt, adding assets and financing them with debt will raise the firm's expected ROE

True

The higher the dividend payout ratio, the lower basic earning power (BEP)

False

Since 2008, the U.S. government has approximately tripled the number of U.S. dollars in existence

True

The U.S. dollar exchange rates would have been greatly affected by the vast increase in currency in the other major countries had not been increasing their amount of currency as well

True

From 1971 to 2006 the purchasing power of the U.S. dollar dropped 60%

False

The value of any business other than a relatively small one will probably be maximized if it is organized as a corporation- it has less risk, can raise more capital, and the investment is liquid

True

Management's goal should be to take actions designed to maximize a firm's current market price, not the firm's intrinsic value

False

All of an S corp's income is reported as personal income by it's stockholder, on a pro rata basis, and thus is taxed at the stockholders' individual rates

True

An S Corporation cannot have more than 100 shareholders and only natural persons and non-aliens may be shareholders. A corporation may not be a shareholder of an S corp

True

The way the corporate tax system is structured favors debt financing over equity financing since interest expense is tax-deductible and dividends are not

True

The companies in the S&P 500 Index are leading companies in the leading industries, and the largest companies have the greatest influence on the index

True

The NASDAQ Composite Index measures the performance of all stocks listed in the NASDAQ

True

The larger companies on the NASDAQ index move the index more than the smaller companies

True

Apple recently replaced AT&T on the Dow Jones Industrial Average (DJIA)

True

Since 2009, the S&P 500 Index has outperformed the Dow and the NASDAQ

False

If the Fed lowers rates, it could cause foreigners to sell their U.S. bonds. They would be paid in dollars, which they would then sell, lowering the value of the dollar and helping U.S. manufacturing export goods

True

The U.S. trade deficit is currently almost $800 billion and climbing

True

When the Fed fights a recession by reducing the interest rate, that is known as "loading the gun" to protect the economy

False

The spread between yield curves of corporate bonds and treasury bonds is larger the longer the maturity because the corporate bonds are considered riskier if they have a long time to maturity, and because of this extra risk, they are less liquid

True

The U.S. had large trade surpluses for about 25 years following World War II, but has had trade deficits since the mid-1970s

True

A benefit of focusing on ROE is that it ensures that all profitable projects will be accepted so that the average ROE of the firm will be boosted

False

Since ROE is an important measure of performance, managers should try to maximize the company's ROE

False

EVA is different from Net Income because EVA reflects the cost of equity as well as the cost of debt

True

While the NASDAQ trades more dollar volume than the NYSE, the NYSE has the higher share volume traded than the NASDAQ

False

In 1792, 68 brokers created the New York Stock & Exchange Board under the Buttonwood Agreement

False

In a dutch auction, stocks are sold at the highest bid price that would sell all of the shares in the offering

True

When a company puts out a bond issue and then two years later puts out another issue, the second bond issue is being sold on the secondary market

False

A dealer's profit is the bid-ask spread, and this generally becomes larger when the stock is traded more often

False

When interest rates are low, an investor should consider buying bonds and then selling them once interest rates go back up if they want to make capital gains on bonds

False

As U.S. rates go up, the dollar should strengthen and help U.S. companies that import goods

True

The repeal of the Glass Steagall Act of 1933 under president Clinton's administration has been partially blamed for the 2008-09 crisis

True

Upper corporate managers are highly motivated to give their stockholders an appropriate return on the stock because if the stockholders start selling the stock, the company's stock price will decrease and the company can become a takeover target

True

Stock prices have increased significantly since President Trump was elected due to expectations that the U.S. economy will gain strength in the future from low corporate tax rates, repatriation of corporate cash from abroad, and some deregulation of business

True

The spread between yield curves of corporate bonds and treasury bonds is larger the longer the maturity spread because corporate bonds are considered riskier if they have a long time to maturity, and because of this extra risk, they are less liquid

True

If the Fed lowers rates, it could cause foreigners to sell their U.S. bonds. They would be paid in dollars, which they would then sell, raising the value of the dollar and helping U.S. manufacturers export goods

False

The U.S. had large trade surpluses for about 25 years following World War II, but has had trade deficits since the mid-1970s

True

The U.S. trade deficit is about $800 billion for 2017

True

If a corporation owns real estate for 10 years or more and then sells it, the tax on the profit would be capped at 20%

False

If an individual has $12,000 of capital gains and $19,000 of capital losses this year, that person will pay no tax on the capital gains, and will be able to keep $3,000 of his salary from being taxed this year and then carry the other $7,000 of capital losses forward to the next year

False

Individuals' capital losses are allowed to be carried forward for up to 15 years

False

A man buys a house for $340,000. He passes away 36 years later when his house is worth $740,000. His heir sells the house and owes tax on only 30% of the capital gain of $400,000

False

The prices of long-term bonds decline whenever interest rates rise, meaning they have "interest rate risk"

True

If a yield curve is inverted, inflation is definitely expected to decrease since the MRP is always trying to lift the L-T end of the yield curve

True

Three quantitative easing programs were conducted between November 2008 and October of 2014 and a fourth QE Program as considered but was not initiated

True

When the Fed raises the reserve requirement, interest rates are pushed upward

True

A quantitative easing program exists when the Fed purchases securities off of the open market in order to increase the money supply and help companies get access to cheaper capital

True

The Fed's job is to promote economic growth while keeping inflation at bay, but what we've seen from the Fed this year is that they think 1.6% inflation is a healthy level

False

The first rate hike since the Financial Crisis in 07-08 was in December of 2015

True

The Fed cut interest rates 10 times from September 2007 to December 2008

True

The Fed Funds rate remained in the 0-.25% range for 7 years

True

When the Fed fights a recession by reducing the interest rate, that is known as "firing the gun" to protect the economy

True