FINC 341 EXAM 1 THEORY GUYTON QUESTIONS AND
ANSWERS
When two of different size (of investment) are compared using ROE, the one with the
lower ROE will add less value to the firm than the other one - Answers - False
ROE does not consider risk or the amount of invested capital - Answers - True
Trying to maximize a companies ROE leads managers to sometimes reject a project
with a very acceptable ROE - Answers - True
ROE looks at return on the shareholders' investment, but maximization of ROE in not
desirable - Answers - True
A firm's ROA will equal the firm's ROE if no debt is used as capital - Answers - True
Upper corporate managers are highly motivated to give their stockholders an
appropriate return on the stock because in the stockholders start selling the stock, the
company's stock price will decrease and the company can become a takeover target -
Answers - True
Stock prices have increased significantly since President Trump was elected due to
expectations that the U.S. economy will gain strength in the future from lower corporate
tax rates, repatriation of corporate cash from abroad, and some deregulation of
business - Answers - True
From World War I to 2000, the economy grew at a an average growth rate of 3.5 % per
year. From 2000 until today, it has grown at about 1.5% on average per year - Answers
- False
When interest rates are high, an investor should consider buying bonds and then selling
them once interest rates go back down if they want to make capital gains on bonds -
Answers - True
As U.S. rates go up, the dollar should strengthen and help U.S. companies that import
goods - Answers - True
The repeal of the Glass Steagall Act of 1933 under President Clinton's administration
has been partially blamed for the 2008-09 crisis - Answers - True
In 2015, the U.S. had a trade deficit of about $800 million - Answers - True
, The Volcker Rule has never actually taken affect, even though it's in the Dodd Frank
Bill. It was supposed to keep big banks from taking on investments that could put the bill
in bankruptcy - Answers - True
When a company buys it's own stock, its P/E ratio is decreased, thus making its stock
price decrease - Answers - False
The NASDAQ has acquired the Philadelphia Stock Exchange and 25% of the London
Stock Exchange - Answers - True
If a stock's market price is more than the perceived intrinsic value of the stock, investor
demand for purchasing the stock will decrease and the stock's market price will rise to
seek equilibrium - Answers - False
The DJIA began with just 10 stocks, was expanded in 1916 to 20 stocks, and then was
increased to 30 stocks in 1928. It is adjusted for stock splits - Answers - True
Since the NASDAQ is value-weighted, stock price movement of Apple, Microsoft,
Google, Facebook, and/or Intel can move the entire index - Answers - True
The S&P 500 Index is made up of the leading companies in the leading industries, and
the largest companies (value-wise) have the greatest influence on the index - Answers -
True
When the Fed fights inflation by raising the interest rates, that is known as "shooting the
gun" - Answers - False
If expected inflation decreases more than some foreign country than the United States,
the value of that country's currency is likely to decrease compared to U.S. dollar -
Answers - False
If the yield curve for treasury bonds is downward sloping, then inflation could be
expected to decrease or increase in the future, depending on MRP - Answers - False
In trying to stimulate the economy after the 2008 Crisis, the Fed conducted three
quantitative easing programs, with the last one ending in October of 2014 - Answers -
True
The spread between yield curves of corporate bonds and treasury bonds in smaller the
longer the maturity because the MRP increases for both corporate and treasury bonds -
Answers - False
If EVA is positive, then after-tax operating income exceeds the cost of the capital
needed to produce that income, and management's actions are adding value for
stockholdres - Answers - True
ANSWERS
When two of different size (of investment) are compared using ROE, the one with the
lower ROE will add less value to the firm than the other one - Answers - False
ROE does not consider risk or the amount of invested capital - Answers - True
Trying to maximize a companies ROE leads managers to sometimes reject a project
with a very acceptable ROE - Answers - True
ROE looks at return on the shareholders' investment, but maximization of ROE in not
desirable - Answers - True
A firm's ROA will equal the firm's ROE if no debt is used as capital - Answers - True
Upper corporate managers are highly motivated to give their stockholders an
appropriate return on the stock because in the stockholders start selling the stock, the
company's stock price will decrease and the company can become a takeover target -
Answers - True
Stock prices have increased significantly since President Trump was elected due to
expectations that the U.S. economy will gain strength in the future from lower corporate
tax rates, repatriation of corporate cash from abroad, and some deregulation of
business - Answers - True
From World War I to 2000, the economy grew at a an average growth rate of 3.5 % per
year. From 2000 until today, it has grown at about 1.5% on average per year - Answers
- False
When interest rates are high, an investor should consider buying bonds and then selling
them once interest rates go back down if they want to make capital gains on bonds -
Answers - True
As U.S. rates go up, the dollar should strengthen and help U.S. companies that import
goods - Answers - True
The repeal of the Glass Steagall Act of 1933 under President Clinton's administration
has been partially blamed for the 2008-09 crisis - Answers - True
In 2015, the U.S. had a trade deficit of about $800 million - Answers - True
, The Volcker Rule has never actually taken affect, even though it's in the Dodd Frank
Bill. It was supposed to keep big banks from taking on investments that could put the bill
in bankruptcy - Answers - True
When a company buys it's own stock, its P/E ratio is decreased, thus making its stock
price decrease - Answers - False
The NASDAQ has acquired the Philadelphia Stock Exchange and 25% of the London
Stock Exchange - Answers - True
If a stock's market price is more than the perceived intrinsic value of the stock, investor
demand for purchasing the stock will decrease and the stock's market price will rise to
seek equilibrium - Answers - False
The DJIA began with just 10 stocks, was expanded in 1916 to 20 stocks, and then was
increased to 30 stocks in 1928. It is adjusted for stock splits - Answers - True
Since the NASDAQ is value-weighted, stock price movement of Apple, Microsoft,
Google, Facebook, and/or Intel can move the entire index - Answers - True
The S&P 500 Index is made up of the leading companies in the leading industries, and
the largest companies (value-wise) have the greatest influence on the index - Answers -
True
When the Fed fights inflation by raising the interest rates, that is known as "shooting the
gun" - Answers - False
If expected inflation decreases more than some foreign country than the United States,
the value of that country's currency is likely to decrease compared to U.S. dollar -
Answers - False
If the yield curve for treasury bonds is downward sloping, then inflation could be
expected to decrease or increase in the future, depending on MRP - Answers - False
In trying to stimulate the economy after the 2008 Crisis, the Fed conducted three
quantitative easing programs, with the last one ending in October of 2014 - Answers -
True
The spread between yield curves of corporate bonds and treasury bonds in smaller the
longer the maturity because the MRP increases for both corporate and treasury bonds -
Answers - False
If EVA is positive, then after-tax operating income exceeds the cost of the capital
needed to produce that income, and management's actions are adding value for
stockholdres - Answers - True
