ENG106: Academic Oral Communication Skills for BU103 Managerial Ethics
Ch. Bauer-Ramazani

Financial Management: Risk vs. Return / Stocks and Bonds

DIRECTIONS: Answer the following questions are based on the lecture/book.

1.     T / F           Financial managers have to find sources of funds to finance the company’s growth.

2.     T / F           Financial managers have to analyze the company’s uses of funds.

3.     Which of the following is NOT an example of operating risk?

  1. not enough advertising

  2. damage to equipment

  3. taking out a loan you can’t pay back

  4. spoilage

  5. too much inventory

4.  Financial risk is defined as the risk that the company can’t ______________________.

5.  A company’s total risk consists of ________________ + _________________.

6.  T / F            A high tech company has higher operating risk than an electric utility.

7.  T / F            It is a good idea to finance a high tech company with debt.

8.     LIST the advantages of financing a company with debt.


9.     NAME the major disadvantage of financing a company with debt.  _____________________

10. T / F           A company with no debt and only equity financing pays higher taxes.

11. T / F           Interest expenses on the income statement lower a company’s taxes.

12. T / F           Stockholders expect a higher rate of return because they are in a riskier position than debtholders.

13. As a lender you are concerned with

  1. getting your investment back

  2. a company’s  credit rating

  3. a company’s Return-on-Assets

  4. a company’s Debt-to-Equity ratio

  5.  a company’s Debt-to-Total Assets ratio

  6. all of the above

  7. none of the above

14. T / F           Lenders charge interest in order to cover their risk, so the interest rate is really the rate of risk.

15. T / F           The US government is considered a risk-free borrower by its lenders.

16. If the US government is risk-free, why would lenders charge interest to the US government?

  1. They want a return for their investment.

  2. They could invest in another opportunity (=opportunity cost).

  3. The interest rate reflects the amount of inflation in the economy.

  4. all of the above

  5. none of the above

17. T / F           A bond with a longer maturity, higher inflation expectation, and greater default risk will carry a lower interest rate.

18. What does a designation of  Ba2/BB+  in a bond table mean? ______________

19. T / F           In a bond table, the yield rate states a bond’s interest rate.

20. Which of the following is NOT a major characteristic of bonds?

  1. Bonds have a fixed maturity date.

  2. The investor (borrower) has a legal obligation to pay back the money.

  3. Bondholders have the right to force a company to declare bankruptcy.

  4. In the event of bankruptcy, bondholders get paid before stockholders.

  5. The interest rate of the bond is tied to the profitability of the company.

21. T / F           A company’s stock price depends on the performance of the company.

22. T / F           A company’s valuation in the market is related to the company’s financial risk and expectation of growth.

23. T / F           If a company decided to finance all of its total assets with debt, its stock price would go up.

24. T / F           If street vendors were outlawed, the stock price of a hot dog stand would go up.

25. What is a company’s stock price based on ?

  1. Stock prices are based on a company’s past performance.

  2. Stock prices are based on the expectation of future earnings in a company.

  3. Stock prices are related to the rate of return that investors expect.

  4. all of the above

  5. none of the above

26. Which of the following is NOT TRUE about a company’s dividend decision?

  1. The decision whether to pay out dividends and how much to pay out is made by the Board of Directors.

  2. Companies are required to pay out dividends to their stockholders.

  3. The amount of a dividend payout is based on the earnings performance of the company.

  4. A company can be forced into default if it has declared a dividend but not paid it.

  5. a and b

  6. b and d

  7. c and d