501. Which of the following is not a fundamental assumption made by Modigliani and Miller?
A. No taxes.
B. There is imperfect information.
C. Firms can be classified into distinct risk classes.
D. Possible to borrow and lend at the risk-free rate.

502. In a simple perfect capital market, what happens if dividends are brought forward?
A. Share price goes up.
B. It is impossible to know.
C. Share price goes down.
D. Share price remains the same.

503. In a simple perfect capital market, what happens if dividends are delayed?
A. Share price goes up.
B. It is impossible to know.
C. Share price goes down.
D. Share price remains the same.

504. What are home-made dividends and why would investors ‘make’ them?
A. Home-made dividends represent sales of stock by relatively impatient investors.
B. Home-made dividends represent purchases of stock by relatively impatient investors.
C. Home-made dividends represent sales of stock by relatively patient investors.
D. Home-made dividends represent purchases of stock by relatively patient investors.

505. What is Gordon’s ‘bird in the hand’ fallacy?
A. Investors prefer early resolution of uncertainty and apply a lower discount rate to later dividends.
B. Investors prefer early resolution of uncertainty and apply a higher discount rate to later dividends.
C. Investors prefer later resolution of uncertainty and apply a higher discount rate to later dividends.
D. Investors prefer later resolution of uncertainty and apply a lower discount rate to later dividends.

506. What does pecking order theory say? (The < or = sign represents company preference here.)
A. Internal capital < debt < external equity.
B. Internal capital = debt = external equity.
C. Internal capital > debt > external equity.
D. External equity > debt < internal capital.

507. Which of the following refers to a moral hazard problem?
A. The kind of firm which is desperate to raise equity is not the kind of firm in which you would care to invest.
B. There are insufficient safeguards to ensure basic honesty in business.
C. Directors may be engaging in insider trading.
D. Once the firm raises equity to solve a financing problem, it may relax and not work hard enough on the shareholders’ behalf.

508. Which of the following would not be financed from working capital?
A. Cash float.
B. Accounts receivable.
C. Credit sales.
D. A new personal computer for the office.

509. What is the difference between the current ratio and the quick ratio?
A. The current ratio includes inventories and the quick ratio does not.
B. The current ratio does not include inventories and the quick ratio does.
C. The current ratio includes physical capital and the quick ratio does not.
D. The current ratio does not include physical capital and the quick ratio does.

510. Which of the following statements is not true with respect to the matching strategy?
A. All assets should be financed with permanent long term capital.
B. Temporary current assets should be financed with temporary working capital.
C. Permanent current assets should be financed with permanent working capitals.
D. Long term assets should be financed from long term capital.

NOTE
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