Question

True or False Questions:

Free cash flow calculation is possible using only the data in the Cash Flow Statement.

If you are interested in a company’s ability to meet its short-term obligations, you should calculate its equity multiplier.

Beta is an appropriate measure of risk when the investor holds an efficiently diversified (or well-diversified) portfolio.

Assume that Stock A has a standard deviation of 0.20 and Stock B has a standard deviation of 0.15. It is possible for Stock B to have a higher required rate of return than Stock A.

Even when the correlation between two stocks is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

Multiple Choice Questions:

Holding all else constant, a company’s current ratio would decrease due to a decrease in:

Accounts Payable Accounts Receivable Common Equity Net Fixed Assets Notes Payable

Assume that CAPM holds. Which of the following statements is TRUE?

Beta indicates a stock’s diversifiable risk Two stocks with the same stand-alone risk must have the same betas The slope of the security market line is given by the market risk premium If the beta of a Stock doubles, then its required rate of return must also double If the risk-free rate decreases, then the market risk premium must also decrease

For a stock that is in market equilibrium, dividends are expected to grow at a constant rate of 4% indefinitely. Which of the following statements about this stock is TRUE?

Its dividend yield is 4% Its expected rate of return is 4% Its required rate of return is less than 4% Its price is expected to decrease in the future Its price one year later is expected to be 4% above its current price

Answer 1

Q1:

False; cash flow statement can be calculated from data in income statement as well

Q2:

False; for calculating company's ability to handle short term debt we can use current ratio, quick ratio etc. Equity multiplier is for long term debt obligations

Q3:

True

Q4:

True

Q5:

False:

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Q6:

Account receivable; if it decreases holding all other constant, current ratio will decrease

Q7:

If the risk-free rate decreases, then the market risk premium must also decrease

Q8:

Its price one year later is expected to be 4% above its current price