Question

Having a large percentage of preferred stock has the following disadvantage: a. Preferred stock is more...

Having a large percentage of preferred stock has the following disadvantage: a. Preferred stock is more risky as a source of funds than common stock or debt. b. It is too expensive compared to the other alternatives. c. It is hard to estimate the actual cost of preferred stock. d. Preferred stockholders are more demanding than common stockholders. e. It takes the flexibility over payment of dividends away from the board.

10. Some, but not all of the risk associated with an investment can be eliminated by a. the capital asset pricing model b. the static theory of capital structure. b. staying away from the technology industry. d. investing in only industries that you have worked in. e. the principal of diversification.

11. Bankers are generally willing to negotiate terms when they see one of their customers struggling because a. Bankers are always trying to show the other creditors that they are the most openminded. b. It is in their interest to help a customer become profitable and pay off the loan. c. Bankers try to foreclose as quickly as possible to get the bad loan off the books. d. Customers are usually willing to offer some kind of “gift” if bankers will help them with their loan. e. Loan officers who make bad loans will generally be fired if their customer goes bankrupt.

12. Max has a portfolio with 100 shares of Allied Paper, Inc., 450 shares of United Paperworks and 75 shares of All Things Paper. What is the biggest weakness in Max’s portfolio? a. They are all small companies. b. They are all companies based in the northeast U.S. c. They are all companies in the same industry. d. They are all large companies. e. There is no weaknesses in Max’s portfolio.

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Answer #1

Answer 1 e

Preferred stock carries the preferred dividend which the company must pay. Thus the flexibility over payment of dividends has been taken away from the board.

Answer 2 e

The diversification of investemnt over a range of investment alternative will reduce the risk.

Answer 3 b

If the customers were helped and they get profitable there are more chances that they will pay off the loan

ANswer 4 c

Sice both the investments are in companies belonging the paper industry, it do not have the proper diversification.So it is the biggest risk in the portfolio

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