If people base their forecasts on rational expectations, their forecast is the:

Question 25 options:

A)	only forecast based on previous observations.

B)	best possible forecast based on all private information.

C)	best possible forecast based on past observations.

D)	best possible forecast based on all public information.

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Question 26 (2 points)

The concept of capital structure refers to the mix of:

Question 26 options:

A)	investments funded by cash flows and investments funded by raising funds in securities markets.

B)	stocks and bonds that firm issues.

C)	physical capital and financial capital in a firm's balance sheet.

D)	a firm's physical capital and managerial know-how.

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Question 27 (2 points)

According to the efficient markets hypothesis:

Question 27 options:

A)	it should be very easy to find undervalued stocks.

B)	stock prices should follow a random walk.

C)	changes in stock prices should be predictable.

D)	it should be very easy to find overvalued stocks.

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Question 28 (2 points)

Suppose the interest rate on a 10-year AAA rating bond is 4 percent and that the interest rate on a 10-year BBB rating bond is 6 percent. What is the high-yield spread?

Question 28 options:

A)	10 percent

B)	-2 percent

C)

2 percent

D)

5 percent

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Question 29 (2 points)

Finance companies only ________; they do not ________.

Question 29 options:

A)	issue bonds; accept savings

B)	accept checking deposits; make loans

C)	make loans; accept deposits

D)	underwrite pension funds; exchange foreign currency

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Question 30 (2 points)

Which of the following is an advantage of issuing bonds over issuing stock as a way to raise funds?

Question 30 options:

A)	adverse selection is lower

B)	tax advantages favor issuing bonds

C)	both of these are advantages for issuing bonds rather than stock.