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| Section | Objectives |
|---|---|
| Risk and Return | - Portfolio risk and diversification - Expected return |
| Capital Budgeting | - Net present value (NPV) - Payback period analysis - Internal rate of return (IRR) |
| Financial Statement Analysis | - Balance sheet and income statement interpretation - Financial ratios - Cash flow analysis |
| Time Value of Money | - Present and future value calculations - Annuities and perpetuities |
| Cost of Capital and Valuation | - Weighted average cost of capital (WACC) - Bond and stock valuation basics |
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NEW QUESTION # 74
What distinguishes a subordinated debenture from a senior debenture?
Answer: C
Explanation:
A subordinated debenture differs from a senior debenture primarily in the priority of claims. Both are typically unsecured debt instruments, but subordinated debentures rank below senior debentures in the event of liquidation or bankruptcy. This means holders of senior debt are paid before holders of subordinated debt if the firm's assets are distributed. Because subordinated debenture holders face greater default risk, they usually require a higher yield as compensation. This ranking feature is a key concept in capital market theory because the risk level of a security affects investor required return and the issuer's cost of capital. Choice A is the opposite of the correct answer. Choice C is incorrect because a debenture is generally unsecured, and subordination does not mean collateral is provided. Choice D is unrelated to the distinction between the two instruments. Financial managers must understand debt priority because it influences financing choices, covenant design, investor demand, and interest cost. Therefore, B is correct because subordination means a lower claim on assets and cash flows relative to senior debtholders.
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NEW QUESTION # 75
What is the main responsibility of the Financial Industry Regulatory Authority (FINRA)?
Answer: D
Explanation:
The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization responsible for overseeing brokerage firms and registered securities representatives in the United States. Its primary mission is to protect investors and ensure market integrity by enforcing rules governing ethical conduct, disclosure, trading practices, and licensing. FINRA operates under the oversight of the Securities and Exchange Commission (SEC), creating a regulatory structure that combines federal authority with industry expertise. Unlike the FDIC, FINRA does not insure deposits, and unlike the Federal Reserve, it does not manage monetary policy or issue currency. Financial management texts emphasize FINRA's role in supervising broker-dealers, administering qualification exams, and resolving disputes through arbitration and mediation. Option A correctly identifies FINRA's core responsibility.
NEW QUESTION # 76
Which ratio indicates the ratio of a company's current assets relative to its current liabilities?
Answer: B
Explanation:
The current ratio measures a company's short-term liquidity by comparing current assets to current liabilities.
It is calculated as Current Assets ÷ Current Liabilities. This ratio indicates whether the firm has enough short- term resources, such as cash, accounts receivable, and inventory, to meet obligations due within one year. A current ratio above 1.0 generally suggests that current assets exceed current liabilities, although the ideal level depends on the industry and the nature of the business. Financial managers and analysts use the current ratio to evaluate liquidity risk, operating flexibility, and working capital strength. Choice B is correct because it directly matches the definition in the question. Choice A is incorrect because fixed asset turnover measures how efficiently fixed assets generate sales. Choice C is incorrect because working capital turnover focuses on sales relative to net working capital rather than simply comparing current assets and current liabilities. Choice D is incorrect because inventory turnover measures how efficiently inventory is sold and replaced. Therefore, B is the correct answer because the current ratio is the standard liquidity ratio used to compare current assets with current liabilities.
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NEW QUESTION # 77
In the capital asset pricing model (CAPM), what does a beta (#) greater than 1 signify for a portfolio?
Answer: D
Explanation:
Within the CAPM framework, beta quantifies the degree of systematic risk relative to the market portfolio, which by definition has a beta of 1. A portfolio with a beta greater than 1 carries more systematic risk than the market, meaning its returns are expected to be more sensitive to market movements. This higher sensitivity increases both upside potential and downside exposure. According to CAPM, investors require a higher expected return for bearing this additional risk. Importantly, a higher beta does not guarantee superior performance; it simply reflects greater volatility relative to the market. Option B accurately captures this risk-based interpretation.
NEW QUESTION # 78
What is a limitation of historical mean returns when estimating the cost of common equity?
Answer: D
Explanation:
A limitation of using historical mean returns to estimate the cost of common equity is that past performance may not accurately reflect future investor expectations or future market conditions. Historical averages are backward-looking measures. They summarize what returns were earned over a past period, but they do not directly account for changing economic conditions, shifts in interest rates, changes in business risk, new competition, or revised growth expectations. Because the cost of equity is a forward-looking required return, relying only on historical mean returns can produce misleading estimates if the future differs materially from the past. Choice C is correct because it identifies the main weakness: historical returns may ignore current market conditions and future prospects. Choice A is incorrect because historical returns are usually straightforward to calculate. Choice B describes a dividend-based model, not a historical-return approach.
Choice D is also incorrect because the limitation is not that the method only applies to large firms. Financial managers often compare historical-return estimates with other methods, such as CAPM or dividend-growth approaches, to form a more balanced estimate of the cost of equity. Therefore, C is the correct answer.
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NEW QUESTION # 79
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