MULTIPLE CHOICE QUESTIONS

QUESTION 1

If there is an increase in the market yield, the price of short-term bond will ________ and that of long-term bond will ________

1. decrease, decrease
2. decrease, increase
3. increase, decrease
4. increase, increase

Question 2

A pure residual dividend policy requires:

1. that dividends be paid on a constant year-to-year basis.
2. dividends to be paid only if profits are in excess of investment needs.
3. extra finance to be raised externally to meet dividend needs.
4. franked dividends to be paid if a positive balance exists in the franking account

Question 3

The relationship between the required rate of return for a security and market risk is:

1. non-linear
2. concave
3. linear
4. denoted by the capital market line

Question 4

Sensitivity analysis can be defined as:

1. analysis of the amount by which one input variable falls before a project ceases to be profitable.
2. analysis of the effect of changing only one input variable at a time on the project outcome.
3. analysis of the effect of changing one or more input variables at a time on the project outcome.
4. none of the given options.

Question 5

Of the four (4) alternatives below, which correlation of security returns achieves the greatest diversification benefit.

1. -0.2
2. 0.2
3. -0.8
4. 0.5

Question 6

The total risk of a risk-free asset is ________, while the systematic risk of the market portfolio is ________.

1. 0, 1
2. 1, 1
3. 1, 0
4. none of the options given

Question 7

Which of the following statements is true?

1. a risk-averse investor attaches increasing utility to each increment in wealth.
2. a risk-averse investor will refuse to bear any risk at all.
3. a risk-averse investor attaches increasing utility to each increment in risk.
4. none of the options given.

Question 8

Which of the following investments does a (rational) risk averse investor prefer?

1. Investment A: E(R) = 10%, = 3%
2. Investment B: E(R) = 11%, = 3%
3. Investment C: E(R) = 9%, = 5%
4. Investment D: E(R) = 13%, = 2%

Question 9

Assume that XYZ Ltd has a current growth rate of 12% p.a. that is expected to be maintained for only another three (3) years and then fall to 5% p.a., where it is expected to remain indefinitely. Given that the required return on ABC's shares is 10% and that the last dividend of $1 has just been paid, the price of ABC's shares will be:

1. $18.02
2. $21.76
3. $23.62
4. $25.28

Question 10

From a purely tax view point, which of the following statements under the classical tax system assumption is correct?

1. Investors subject to high personal tax rates would prefer shares of companies that pay low dividends.
2. Investors subject to high personal tax rates would prefer shares of companies that pay high dividends.
3. Investors subject to high personal tax rates are indifferent to the dividend payout rate.
4. Investors subject to high personal tax rates would prefer shares of companies that promise low capital gains.