Click On The Link Below to
Purchase A+ Graded Material
Instant Download
Chapters 24 Through 30
CHAPTER
24—BANKRUPTCY, REORGANIZATION, AND LIQUIDATION
TRUE/FALSE
1. A
central question that must be addressed in bankruptcy proceedings is whether
the firm's inability to meet scheduled interest payments results from a
temporary cash flow problem or from a potentially permanent problem caused by
falling asset values.
2. In
the event of bankruptcy under the federal bankruptcy laws, debtholders have a
prior claim to a firm's income and assets before both common and preferred
stockholders. Moreover, in a bankruptcy all debtholders are treated equally as
a single class of claimants.
3. The
basic doctrine of fairness under bankruptcy provisions states that claims must
be recognized in the order of their legal and contractual priority.
4. The
primary test of feasibility in a reorganization is whether the firm's fixed
charges after reorganization can be covered by its projected cash flows.
5. Bankruptcy
plays no role in settling labor disputes and product liability suits. Such
issues are outside the bounds of bankruptcy law and are covered by other
statutes.
6. Bankruptcy
laws have been used to help reach settlements in major product liability
lawsuits. By using financial projections to show that contingent claims against
the company jeopardize its existence, agreements are reached, partially
satisfying claimants, and allowing the firm to continue operating.
7. Even
if a firm's cash flow projections indicate that it will soon be unable to meet
its interest payments, a bankruptcy case cannot begin until the firm actually
defaults on a scheduled payment.
8. One
of the actions that can be taken in bankruptcy under the standard of feasibility
is to replace existing management with a new team if the quality of management
is judged to have been substandard.
MULTIPLE
CHOICE
9. Chapter
7 of the Bankruptcy Act is designed to do which of the following?
|
a.
|
Establish the rules of reorganization for firms
with projected cash flows that eventually will be sufficient to meet debt
payments.
|
|
b.
|
Ensure that the firm is viable after emerging from
bankruptcy.
|
|
c.
|
Allow the firm to negotiate with each creditor
individually.
|
|
d.
|
Provide safeguards against the withdrawal of
assets by the owners of the bankrupt firm and allow insolvent debtors to
discharge all of their obligations and to start over unhampered by a burden
of prior debt.
|
|
e.
|
Protect shareholders against creditors.
|
10. Which
of the following statements is most CORRECT?
|
a.
|
Federal bankruptcy law deals only with corporate
bankruptcies. Municipal and personal bankruptcy are governed solely by state
laws.
|
|
b.
|
All bankruptcy petitions are filed by creditors
seeking to protect their claims against firms in financial distress. Thus,
all bankruptcy petitions are involuntary as viewed from the perspective of
the firm's management.
|
|
c.
|
Chapters 11 and 7 are the most important
bankruptcy chapters for financial management purposes. If a reorganization
plan cannot be worked out under Chapter 11, then the company will be
liquidated as prescribed in Chapter 7 of the Act.
|
|
d.
|
"Restructuring" a firm's debt can
involve forgiving a certain portion of the debt, but it cannot call for
changing the debt's maturity or its contractual interest rate.
|
|
e.
|
Our bankruptcy laws were enacted in the 1800s,
revised in the 1930s, and have remained unaltered since that time.
|
11. Which
of the following statements is most CORRECT?
|
a.
|
The primary test of feasibility in a
reorganization is whether every claimant agrees with the reorganization plan.
|
|
b.
|
The basic doctrine of fairness states that all
debtholders must be treated equally.
|
|
c.
|
Since the primary issue in bankruptcy is to
determine the sharing of losses between owners and creditors, the
"public interest" is not a relevant concern.
|
|
d.
|
While a firm is in bankruptcy, the existing
management is always allowed to retain control, though the court will monitor
its actions closely.
|
|
e.
|
To a large extent, the decision to dissolve a firm
through liquidation versus keeping it alive through reorganization depends on
a determination of the value of the firm if it is rehabilitated versus the
value of its assets if they are sold off individually.
|
12. What
would be the priority of the claims as to the distribution of assets in a
liquidation under Chapter 7 of the Bankruptcy Act? 1 is the highest claim, 5 is
the lowest.
|
(1)
|
Trustees' costs to administer and operate the
firm.
|
|
(2)
|
Common stockholders.
|
|
(3)
|
General, or unsecured, creditors.
|
|
(4)
|
Secured creditors, who have a claim to the
proceeds from the sale of specific property pledged to secure a loan.
|
|
(5)
|
Taxes due to federal and state governments.
|
|
a.
|
5, 4, 1, 3, 2
|
|
b.
|
4, 1, 5, 3, 2
|
|
c.
|
5, 1, 4, 2, 3
|
|
d.
|
1, 5, 4, 3, 2
|
|
e.
|
1, 4, 3, 5, 2
|
CHAPTER
25—PORTFOLIO THEORY AND ASSET PRICING MODELS
TRUE/FALSE
1. The
slope of the SML is determined by the value of beta.
2. If
you plotted the returns of Selleck & Company against those of the market and
found that the slope of your line was negative, the CAPM would indicate that
the required rate of return on Selleck's stock should be less than the
risk-free rate for a well-diversified investor, assuming that the observed
relationship is expected to continue in the future.
3. If
the returns of two firms are negatively correlated, then one of them must have
a negative beta.
4. A
stock with a beta equal to −1.0 has zero systematic (or market) risk.
5. It
is possible for a firm to have a positive beta, even if the correlation between
its returns and those of another firm are negative.
6. In
portfolio analysis, we often use ex post (historical) returns and standard
deviations, despite the fact that we are interested in ex ante (future) data.
7. If
investors are risk averse and hold only one stock, we can conclude that the
required rate of return on a stock whose standard deviation is 0.21 will be
greater than the required return on a stock whose standard deviation is 0.10.
However, if stocks are held in portfolios, it is possible that the required
return could be higher on the low standard deviation stock.
8. The
CAPM is a multi-period model which takes account of differences in securities'
maturities, and it can be used to determine the required rate of return for any
given level of systematic risk.
9. The
SML relates required returns to firms' systematic (or market) risk. The slope
and intercept of this line can be influenced by managerial actions.
10. The
Y-axis intercept of the SML indicates the return on an individual asset when
the realized return on an average (b = 1) stock is zero.
11. We
will almost always find that the beta of a diversified portfolio is less stable
over time than the beta of a single security.
12. Arbitrage
pricing theory is based on the premise that more than one factor affects stock
returns, and the factors are specified to be (1) market returns, (2) dividend
yields, and (3) changes in inflation.
MULTIPLE
CHOICE
13. You
have the following data on three stocks:
|
Stock
|
Standard Deviation
|
Beta
|
|
A
|
0.15
|
0.79
|
|
B
|
0.25
|
0.61
|
|
C
|
0.20
|
1.29
|
As
a risk minimizer, you would choose Stock ____ if it is to be held in isolation
and Stock ____ if it is to be held as part of a well-diversified portfolio.
|
a.
|
A; B.
|
|
b.
|
B; C.
|
|
c.
|
C; A.
|
|
d.
|
C; B.
|
|
e.
|
A; A.
|
14. Which
is the best measure of risk for an asset held in isolation, and which is the
best measure for an asset held in a diversified portfolio?
|
a.
|
Standard deviation; correlation coefficient.
|
|
b.
|
Beta; variance.
|
|
c.
|
Coefficient of variation; beta.
|
|
d.
|
Beta; beta.
|
|
e.
|
Variance; correlation coefficient.
|
15. Which
of the following is NOT a potential problem with beta and its
estimation?
|
a.
|
Sometimes, during a period when the company is
undergoing a change such as toward more leverage or riskier assets, the
calculated beta will be drastically different than the "true" or
"expected future" beta.
|
|
b.
|
The beta of "the market," can change
over time, sometimes drastically.
|
|
c.
|
Sometimes the past data used to calculate beta do
not reflect the likely risk of the firm for the future because conditions
have changed.
|
|
d.
|
There is a wide confidence interval around a
typical stock's estimated beta.
|
|
e.
|
Sometimes a security or project does not have a
past history which can be used as a basis for calculating beta.
|
16. Stock
A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements
must be true about these securities? (Assume market equilibrium.)
|
a.
|
Stock B must be a more desirable addition to a
portfolio than Stock A.
|
|
b.
|
Stock A must be a more desirable addition to a
portfolio than Stock B.
|
|
c.
|
The expected return on Stock A should be greater
than that on Stock B.
|
|
d.
|
The expected return on Stock B should be greater
than that on Stock A.
|
|
e.
|
When held in isolation, Stock A has greater risk
than Stock B.
|
17. For
markets to be in equilibrium (that is, for there to be no strong pressure for
prices to depart from their current levels),
|
a.
|
The past realized rate of return must be equal to
the expected rate of return; that is, .
|
|
b.
|
The required rate of return must equal the
realized rate of return; that is, r = .
|
|
c.
|
All companies must pay dividends.
|
|
d.
|
No companies can be in danger of declaring
bankruptcy.
|
|
e.
|
The expected rate of return must be equal to the
required rate of return; that is, = r.
|
18. Which
of the following statements is CORRECT?
|
a.
|
The slope of the CML is (M − rRF)/bM.
|
|
b.
|
All portfolios that lie on the CML to the right of
M are inefficient.
|
|
c.
|
All portfolios that lie on the CML to the left of
M are inefficient.
|
|
d.
|
The slope of the CML is (M − rRF)/M.
|
|
e.
|
The Capital Market Line (CML) is a curved line
that connects the risk-free rate and the market portfolio.
|
19. In
a portfolio of three different stocks, which of the following could NOT
be true?
|
a.
|
The riskiness of the portfolio is greater than the
riskiness of one or two of the stocks.
|
|
b.
|
The beta of the portfolio is less than the betas
of each of the individual stocks.
|
|
c.
|
The beta of the portfolio is greater than the beta
of one or two of the individual stocks' betas.
|
|
d.
|
The beta of the portfolio cannot be equal to 1.
|
|
e.
|
The riskiness of the portfolio is less than the
riskiness of each of the stocks if they were held in isolation.
|
20. You
have the following data on (1) the average annual returns of the market for the
past 5 years and (2) similar information on Stocks A and B. Which of the
possible answers best describes the historical betas for A and B?
|
Years
|
Market
|
Stock A
|
Stock B
|
|
1
|
0.03
|
0.16
|
0.05
|
|
2
|
−0.05
|
0.20
|
0.05
|
|
3
|
0.01
|
0.18
|
0.05
|
|
4
|
−0.10
|
0.25
|
0.05
|
|
5
|
0.06
|
0.14
|
0.05
|
|
a.
|
bA> +1; bB = 0.
|
|
b.
|
bA = 0; bB = −1.
|
|
c.
|
bA< 0; bB = 0.
|
|
d.
|
bA< −1; bB = 1.
|
|
e.
|
bA> 0; bB = 1.
|
21. Which
of the following statements is CORRECT?
|
a.
|
The typical R2 for a stock is about
0.94 and the typical R2 for a portfolio is about 0.6.
|
|
b.
|
The typical R2 for a stock is about 0.3
and the typical R2 for a large portfolio is about 0.94.
|
|
c.
|
The typical R2 for a stock is about
0.94 and the typical R2 for a portfolio is also about 0.94.
|
|
d.
|
The typical R2 for a stock is about 0.6
and the typical R2 for a portfolio is also about 0.6.
|
|
e.
|
The typical R2 for a stock is about 0.3
and the typical R2 for a portfolio is also about 0.3.
|
22. Which
of the following statements is CORRECT?
|
a.
|
The characteristic line is the regression line
that results from plotting the returns on a particular stock versus the
returns on a stock from a different industry.
|
|
b.
|
The slope of the characteristic line is the
stock's standard deviation.
|
|
c.
|
The distance of the plot points from the
characteristic line is a measure of the stock's market risk.
|
|
d.
|
The distance of the plot points from the
characteristic line is a measure of the stock's diversifiable risk.
|
|
e.
|
"Characteristic line" is another name
for the Security Market Line.
|
23. Which
of the following statements is CORRECT?
|
a.
|
Richard Roll has argued that it is possible to
test the CAPM to see if it is correct.
|
|
b.
|
Tests have shown that the risk/return relationship
appears to be linear, but the slope of the relationship is greater than that
predicted by the CAPM.
|
|
c.
|
Tests have shown that the betas of individual
stocks are stable over time, but that the betas of large portfolios are much
less stable.
|
|
d.
|
The most widely cited study of the validity of the
CAPM is one performed by Modigliani and Miller.
|
|
e.
|
Tests have shown that the betas of individual
stocks are unstable over time, but that the betas of large portfolios are
reasonably stable over time.
|
24. Assume
an economy in which there are three securities: Stock A with rA =
10% and A = 10%; Stock B with rB = 15% and B
= 20%; and a riskless asset with rRF = 7%. Stocks A and B are
uncorrelated (rAB = 0). Which of the following statements is most
CORRECT?
|
a.
|
The expected return on the investor's portfolio
will probably have an expected return that is somewhat below 10% and a
standard deviation (SD) of approximately 10%.
|
|
b.
|
The expected return on the investor's portfolio
will probably have an expected return that is somewhat below 15% and a
standard deviation (SD) that is between 10% and 20%.
|
|
c.
|
The investor's risk/return indifference curve will
be tangent to the CML at a point where the expected return is in the range of
7% to 10%.
|
|
d.
|
Since the two stocks have a zero correlation
coefficient, the investor can form a riskless portfolio whose expected return
is in the range of 10% to 15%.
|
|
e.
|
The expected return on the investor's portfolio
will probably have an expected return that is somewhat above 15% and a
standard deviation (SD) of approximately 20%.
|
25. You
hold a portfolio consisting of a $5,000 investment in each of 20 different
stocks. The portfolio beta is equal to 1.12. You have decided to sell a coal
mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount
of a mineral rights company stock (b = 2.00). What is the new beta of the
portfolio?
|
a.
|
1.1139
|
|
b.
|
1.1700
|
|
c.
|
1.2311
|
|
d.
|
1.2927
|
|
e.
|
1.3573
|
26. Your
mother's well-diversified portfolio has an expected return of 12.0% and a beta
of 1.20. She is in the process of buying 100 shares of Safety Corp. at $10 a
share and adding it to her portfolio. Safety has an expected return of 15.0%
and a beta of 2.00. The total value of your current portfolio is $9,000. What
will the expected return and beta on the portfolio be after the purchase of the
Safety stock?
rpbp
|
a.
|
11.69%; 1.22
|
|
b.
|
12.30%; 1.28
|
|
c.
|
12.92%; 1.34
|
|
d.
|
13.56%; 1.41
|
|
e.
|
14.24%; 1.48
|
27. Suppose
that (1) investors expect a 4.0% rate of inflation in the future, (2) the real
risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Talcott Inc.'s
beta is 1.00, and (5) its realized rate of return has averaged 15.0% over the
last 5 years. Calculate the required rate of return for Talcot Inc.
|
a.
|
10.29%
|
|
b.
|
10.83%
|
|
c.
|
11.40%
|
|
d.
|
12.00%
|
|
e.
|
12.60%
|
28. A
stock you are holding has a beta of 2.0 and the stock is currently in
equilibrium. The required rate of return on the stock is 15% versus a required
return on an average stock of 10%. Now the required return on an average stock
increases by 30.0% (not percentage points). The risk-free rate is unchanged. By
what percentage (not percentage points) would the required return on your stock
increase as a result of this event?
|
a.
|
36.10%
|
|
b.
|
38.00%
|
|
c.
|
40.00%
|
|
d.
|
42.00%
|
|
e.
|
44.10%
|
29. Calculate
the required rate of return for the Wagner Assets Management Group, which holds
4 stocks. The market's required rate of return is 15.0%, the risk-free rate is
7.0%, and the Fund's assets are as follows:
|
Stock
|
Investment
|
Beta
|
|
A
|
$
200,000
|
1.50
|
|
B
|
300,000
|
−0.50
|
|
C
|
500,000
|
1.25
|
|
D
|
1,000,000
|
0.75
|
|
a.
|
10.67%
|
|
b.
|
11.23%
|
|
c.
|
11.82%
|
|
d.
|
12.45%
|
|
e.
|
13.10%
|
30. Consider
the information below for Postman Builders Inc. Suppose that the expected
inflation rate and thus the inflation premium increase by 2.0 percentage
points, and Postman acquires risky assets that increase its beta by the indicated
percentage. What is the firm's new required rate of return?
|
Beta:
|
1.50
|
|
Required return (rs)
|
10.20%
|
|
RPM:
|
6.00%
|
|
Percentage increase in beta:
|
20%
|
|
a.
|
14.00%
|
|
b.
|
14.70%
|
|
c.
|
15.44%
|
|
d.
|
16.21%
|
|
e.
|
17.02%
|
No comments:
Post a Comment