Chapter questions Principles of Finanace WGU
Which answer is the correct definition of the accounting equation? Liabilities = Assets + Owners Equity Assets = Liabilities + Expenses Assets = Liabilities + Owner's Equity Owner's Equity = Assets + Liabilities
Assets = Liabilities + Owner's Equity
What type of risk can an investor reduce through the process of diversification? Unsystematic risk Systematic risk only All risk can be reduced Uncertainty
Unsystematic risk
Which answer is generally not a right granted to owners of preferred shares? Preference with regards to receiving dividends Callability Variable dividend amounts Convertibility to common shares
Variable dividend amounts
Which feature is generally not associated with preferred stock? Preference in dividends Callability at the option of the corporation Convertibility to common stock Voting rights
Voting rights
You plan to invest $100,000 in a 3 year Certificate of Deposit that has a simple interest rate of 5%. What is its future value? $105,000 $115,000 $115,763 $115,927
$115,000
What is the future value in 30 years of $100,000 invested today in a savings account earning a 1% compound interest rate every year (rounded up to the nearest dollar)? $30,000 More than $134785 $115,763 $130,000
$115,763
You plan to invest $100,000 in a 3 year Certificate of Deposit that has a 5% compound interest rate. What is its future value? $115,927 $105,000 $115,763 $115,000
$115,763
What is the future value in 30 years of $100,000 invested today in a savings account earning a 1% simple interest rate every year (rounded up to the nearest dollar)? $30,000 More than $134,785 $134,785 $130,000
$130,000
You have $300,000 that you want to invest in a one year Certificate of Deposit (CD) with a 4% annual interest rate. What will be the value of that CD in a year? $420,000 $315,000 $301,200 $312,000
$312,000
You own a perpetuity that pays $1000 in the first year. It has a 5% annual interest rate and a 2% annual growth rate. What is the present value of the perpetuity? $20,000 $14,286 $33,333 $50,000
$33,333 . PVGP = A1/(i - g) = $1000/(0.05 - 0.02) = $33,333.
An annuity has an interest rate of 7% and makes a quarterly payment of $2,000. The annuity is to last for 5 years. What is the present value of the annuity? $33,505 $2,118.80 $32,801.58 $8,200.4
$33,505 The present value of an annuity is the value of a stream of payments, discounted by the interest rate to account for the payments are being made at various moments in the future. The formula is: PV = [1-(1+i)^-n] / i, where n is the number of payments and i is the per period interest rate. Using the TI-BA II Plus calculator: N=5x4=20, I/Y=7/4=1.75, PMT=2000, FV=0 and [CPT] [PV] = 33,505.76.
An investment portfolio has a 30% chance of earning $125,000 in a year, a 40% chance of earning $50,000, a 15% chance of earning nothing and 15% chance of losing $20,000. What is its expected return? $38,750 $54,500 $50,000 $62,000
$54,500
A firm has projected current assets to be $205 million, fixed assets to be $605 million, current liabilities to be $188 million, long-term debt to be $461 million, and owner's equity to be $106 million. Given this information, what is the discretionary financing need? $38 million $94 million $9 million $55 million
$55 million
What is the present value of $100,000 that will be received 5 years from today if you face a 10% compound interest rate every year (rounded up to the nearest dollar)? $62,092 $72,092 $82,092 $52,092
$62,092
You expect to receive a payment of $1 million in a year. The annual interest rate is 5%. What is the present value of the future payment? $995,025 $952,381 $105,000 $666,667
$952,381
During a fiscal year, a company has $20,000,000 in revenue. Its operating expenses are $17,000,000. What is the company's operating margin? 0.15 0.73 0.85 0.13
0.15
Last year T&J Inc. reported total assets of $250 million, equity of $120 million, net income of $50 million, dividends of $15 million, and retained earnings of $35 million. What is T&J Inc.'s sustainable growth rate? 20.00% 29.17% 41.67% 12.50%
29.17% Correct! SGR = ROE (1-b) = (50/120) x [1- (15/50)] = 29.17%
company has assets of $2,000,000, net sales of $3,000,000, and $1,500,000 in equity. Its net income is $10,000,000. What is its return on equity? 0.15 3.333 6.667 5
6.667
A portfolio has $70,000 of bonds and $30,000 of stock. The bonds are 80% likely to have a 10% return and 20% likely to have a 0% return. The stock is 50% likely to have a 20% return and 50% likely to have a 10% loss. What is the expected return? 2.9% 5.9% 13% 7.1%
7.1
A portfolio is composed of 30% stock, 20% bonds, and 50% mutual funds. The stock is expected to have a 10% return, the bonds a 5% return and the mutual funds a 7% return. What is the expected return of the portfolio? 7% 7.3% 8.1% 7.5%
7.5
A US Treasury security matures in 4 years. What type of treasury is it? A money market instrument A bond A note A bill
A bill
Which statement regarding bonds and par values is true? The par value of a bond changes. Corporate bonds usually have a par value of less than $100,000. Corporate bonds usually have par values equal to $10,000. A bond selling at par has a coupon rate so the bond is worth its redemption value at maturity.
A bond selling at par has a coupon rate so the bond is worth its redemption value at maturity Correct. Yield-to-maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. If a bond's coupon rate is equal to its YTM, then the bond is selling at par
Which answer best defines financial statements in general? A listing of a company's assets and liabilities An analysis of the flow of cash into and out of a business A collection of reports that describes a company's financial activities to a third party A detailed report of a company's income and expenses
A collection of reports that describes a company's financial activities to a third party Correct! A complete set of financial statements is used to give readers an overview of the financial results and condition of a business.
A bond pays a coupon rate equal to the LIBOR rate plus 0.30%. The coupon rate is recalculated every three months. What type of bond is this? An inflation-linked bond A stepped-coupon bond A floating rate note A zero-coupon bond
A floating rate note
Of the following car financing options, which one would you prefer while assuming that you prefer paying the least amount of dollars and that you face a 10% annual compound interest rate on all your financial decisions? A lump-sum payment of $19,000 today only. A lump-sum payment of $20,000 in two years from today. A payment $10,000 today and another of $10,000 in one year from today. A lump-sum payment of $20,000 today only.
A lump-sum payment of $20,000 in two years from today.
Which prediction based on a description of the yield curve is not correct? An inverted yield curve suggests that interest rates will be dramatically cut. A normal yield curve suggests that interest rates will be raised in the future. A normal yield curve suggests that interest rates will remain the same in the future. A flat yield curve suggest that interest rates will be cut.
A normal yield curve suggests that interest rates will remain the same in the future.
A US Treasury security matures in 7 years. What type of security is it? A money market instrument A bond A note A bill
A note Treasury bills are short term instruments with maturities between 1-5 years. U.S. Treasury notes are medium-term instruments with maturities between 6-12 years.
Which description accurately describes a primary market? Securities start trading in primary market venues including the New York Stock Exchange and Nasdaq. A primary market is often referred to as a "stock market". A primary market refers to the market where securities are created. A primary market is where investors purchase assets from other investors.
A primary market refers to the market where securities are created.
Which example is not a correct definition of a basic type of financial ratios? Debt Ratios Liquidity Ratios Activity Profitability Ratios
Activity
Which answer does not give a correct definition of the basic type of financial ratio described? Debt ratios measure the firm's ability to pay long-term debt. Profitability ratios measure the firm's use of its assets to generate an acceptable rate of return. Activity ratios are concerned with shareholder audiences. Liquidity ratios measure the availability of cash to pay debt.
Activity ratios are concerned with shareholder audiences. Correct! Activity ratios are used to gauge the ability of a business to convert various asset, liability and capital accounts into cash or sales.
Which answer does not describe a step in constructing a multi-step income statement? Subtract non-operating expenses from income from operations. Add all revenues, then subtract all expenses. Subtract operating expenses from gross profit to determine income from operations. Subtract income tax expense from income before taxes.
Add all revenues, then subtract all expenses. Correct! This is the procedure for single-step.
Which answer is an example of a stakeholder in a company? All of these The company's shareholders The company's employees The company's suppliers
All of these
Company X has decided to merge with another business. It is planning on preparing a pro forma income statement. Which condition should be included in the pro forma statement? How much the merged company's income tax expense will increase If the merged company will have increased Research & Development (R&D) expenses All of these answers How much the company's revenues will increase due to the merger
All of these answers
Which answer is a reason why a person would study finance? To better understand the economic environment All of these answers To apply financial concepts to business situations To improve management of personal finances
All of these answers
Which answer is the best example of a noncash item that would be included on the income statement? All of these answers Unrealized losses from investments Write down of inventory Depreciation and Amortization
All of these answers
Which answer gives the best example of a factor that can be determined through an analysis of a company's financial statements? The accuracy of the company's tax returns The company's profitability All of these answers The company's creditworthiness
All of these answers Correct! A complete set of financial statements is used to give readers an overview of the financial results and condition of a business.
Suppose a company is planning to increase its dividend payout ratio next year. Given this information, which of the following cases do you expect to occur in the upcoming year? A reduction in net income A decrease in the firm's stock price An increase in discretionary financing needed A reduction in the dividend received by investors
An increase in discretionary financing needed
Which answer is not a cost to the investor that is included in the calculation of an investment's interest rate? Risk of a bad investment Opportunity Cost Brokerage commissions and fees Inflation
Brokerage commissions and fees
Which answer is not a type of ratio used in financial statement analysis? Business ratio Liquidity ratio Profitability ratio Activity ratio
Business ratio Correct! This is not a specific type of financial ratio.
The percentage of sales forecasting method is used by management to forecast which of the following? Capital financing needed to promote marketing efforts. Profit expected for a given percentage increase in sales. Cash needed to finance future sales growth. Debt financing needed by the firm.
Capital financing needed to promote marketing efforts.
Which of the following is not a component of the Cash Flow Statement? Cash Flow from Financing Cash Flow from Investing Cash Flow from Sales Cash Flow from Operations
Cash Flow from Sales
Which of the following is the correct order of how assets should be presented on a balance sheet? Accounts receivable; cash; inventory property, plant, and equipment (PPE). Cash; inventory; accounts receivable; property, plant, and equipment (PPE). Cash; accounts receivable; inventory; property, plant, and equipment (PPE). Cash; inventory; property, plant, and equipment (PPE); accounts receivable.
Cash; accounts receivable; inventory; property, plant, and equipment (PPE).
External sources of financing include _______________. Commercial Paper Retained Earning Debt Collection Sale of fixed assets
Commercial Paper
Which answer is not a true statement regarding voting rights? Preferred stock generally does not carry voting rights. Corporate shareholders are prohibited from casting their vote online. Generally each share of common stock equals one vote. Shareholders generally get to vote on who is part of the corporate Board of Directors.
Corporate shareholders are prohibited from casting their vote online.
In using the percentage of sales forecasting method, the assumption is that
Correct! Inventories is a spontaneous account and will increase proportionately with sales.
Suppose a firm has a net profit margin of 15%, sales of $155 million, assets of $312 million, and owner's equity of $223. If the dividend payout ratio is 10%, what is the firm's sustainable growth rate? 10.43% 9.38% 7.45% 13.5%
Correct! SGR = ROE (1-b) = [0.15 x (155/312) x (312/223)] x (1-0.1) = 9.38%
The balance sheet is the only financial statement which .
Correct! The balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.
Which statement is false regarding debt vs. equity? Debt can be secured or unsecured, whereas equity is always unsecured. Debt holders are the creditors whereas equity holders are the owners of the company. Debt can be kept for a limited period and should be repaid back after the expiry of that term. On the other hand, Equity can be kept for a long period. Debt carries high risk to investors as compared to Equity.
Debt carries high risk to investors as compared to Equity. False statement
The cost of money is not related to the concept of Time Preference Opportunity Cost Depreciation The Time Value of Money
Depreciation
Which answer option is not a job function associated with a corporate finance department? Valuing the profitability of multiple projects and choosing one in which to invest. Determining whether to pay a dividend to the corporation's shareholders. Preparing the corporation's budget for the next fiscal quarter. Ensuring that the financial statements accurately reflect the firm's performance
Ensuring that the financial statements accurately reflect the firm's performance
A firm is evaluating the merits of investing in one of two non-repeatable projects with different lifespans. Start-up costs for each project are equal. If project A has an expected lifetime of five years, and project B has an expected lifetime of eight years, which capital budgeting method provides the best way to compare future cash flows from these projects? Accounting rate of return Equivalent annuity Payback Period Internal rate of return
Equivalent annuity Correct. The equivalent annuity method expresses the NPV as an annualized cash flow by dividing it by the present value of the annuity factor. It is often used when comparing investment projects of unequal lifespans.
Financial Ratios help to identify some of the financial strengths and weaknesses of a company. What are two ways that the ratios provide for making meaningful comparisons of a firm's financial data? Determining how long it takes to collect the firm's receivables and how long it takes to pay it accounts payables. Smoothing out differences when comparing firms that use different accounting practices and restating accounting data in relative terms. Identifying year over year changes in balance sheet and income statement items. Examining ratios across time to identify trends and comparing the firm's ratios with those of other firms.
Examining ratios across time to identify trends and comparing the firm's ratios with those of other firms.
Which answer is not a benefit associated with common stock? Preemptive rights Guaranteed dividends The right to vote on corporate objectives and policy The right to vote on who gets to sit on the company's Board of Directors
Guaranteed dividends
Which statement correctly explains the difference between price risk and reinvestment risk? When market interest rates rise, both price risk and reinvestment risk rise also. Price risk is positively correlated to interest rates, reinvestment risk is inversely correlated. For corporate planning, a bond's price risk is a bigger concern than its reinvestment risk. Price risk is positively correlated to maturity, reinvestment risk is inversely correlated.
Incorrect. Reinvestment risk is positively correlated with maturity. The longer a bond's maturity, the greater the likelihood that future interest rates will be lower, contributing to greater reinvestment risk. Price risk is inversely correlated, given that bond prices move opposite market interest rates.
Which option is an adequate method to reduce an investor's risk through diversification? Invest in a small pool of stocks from companies in the same industry. Invest in the common stocks of the two companies that have performed the best in the last 5 years. Invest in a broad pool of US and international stocks and bonds. Invest in a start-up business that has a broad ownership among a large number of investors.
Invest in a broad pool of US and international stocks and bonds.
Which description is not a drawback of using return on assets in a financial analysis? ROA does not identify how assets were financed. There is no definitive metric that identifies an ROA as good or bad. ROA is calculated using the assets' carrying value, not its market value. It does not measure how effective the company is at using its assets to generate profit.
It does not measure how effective the company is at using its assets to generate profit.
Which of the following is not a statistical forecasting method? Cross-sectional Time Series Longitudinal data Judgmental
Judgmental
Which answer is not a requirement for a financial manager to carry out his or her responsibilities? An understanding of the business's long-term strategy Knowing with certainty what the business cash flows will be in the future The ability to calculate the cost of investing in a product or business opportunity A firm grasp of the business's accounting system
Knowing with certainty what the business cash flows will be in the future
In the percent-of-sales forecasting method, which balance sheet items are not assumed to increase proportionately with sales? Accounts Payable Long-term debt Accounts Receivable Inventories
Long-term debt
Which answer is not a responsibility of a financial manager? Figuring out financial projections and whether a project is worth financing Maintaining the company's financial system Managing the budget Ensuring the business has enough cash to pay its financial obligations
Maintaining the company's financial system
Which investment proposal ranking method is widely used due to its simplicity, despite having several limitations? Payback period Internal Rate of Return (IRR) Profitability Index Net Present Value (NPV)
Payback period
What is a disadvantage of a partnership? Personal assets of owners are not protected. Filing taxes is overly complicated. Making business decisions involves a board. Owners must publish financial statements. X
Personal assets of owners are not protected.
What are the three central components of business ethics? Moral, mission, and strategy Personal, professional, and corporate Practical, tangible, and intangible Personal, managerial, and organizational
Personal, professional, and corporate
What does the principal agent problem refer to? The personal liability risks that some business owners must accept The struggle for power between managers and union representatives of a company Potential conflicts of interest between shareholders and managers of a company Possible conflicts between a company's financial and operational goals
Potential conflicts of interest between shareholders and managers of a company
Which is the correct reason as to why businesses issue preferred stock? Preferred stock provides a simpler means of raising substantial capital than the sale of common stock does. The par value at which companies offer preferred stock is often significantly lower than the common stock price. Preferred stock also offers companies some financial rigidity. Preferred stock carries a lower privilege by almost every measure in relation to common stock.
Preferred stock provides a simpler means of raising substantial capital than the sale of common stock does. Correct. Preferred stock provides a simpler means of raising substantial capital than the sale of common stock does.
Which statement is not true regarding preferred stock owners? Preferred stockholders must be paid their due dividends before the company can distribute dividends to common stockholders. Preferred stock owners are paid before common stock shareholders in the event of the company's liquidation. Preferred stockholders typically have voting rights. Preferred stockholders enjoy a fixed dividend.
Preferred stockholders typically have voting rights. Correct. Preferred stockholders typically do not have the voting rights that common stockholders do, but they may be granted special voting rights.
A company issues a bond with the provision that it may pay off the debt early. Which type of risk is this bond subject to? Prepayment risk. Asset-backed risk Foreign investment risk Model risk.
Prepayment risk.
Which answer best summarizes why there may be a difference between a company's pretax income and taxable income? GAAP requires that companies use historical costs, while the tax code does not. The tax code requires full disclosure, GAAP does not. All of these answers are correct. Pretax income is based on revenue recognition; taxable income is based on the company's cash flow.
Pretax income is based on revenue recognition; taxable income is based on the company's cash flow. Correct! Pretax operating income is a measure of a company's operating efficiency because it only takes into account expenses that are directly related to ongoing business operations.
Which answer is not one of the four basic GAAP principles? Revenue should be recorded when realized or realizable and when cash is received Assets and liabilities should be reported based on acquisition cost Expenses should be recognized when the product it is associated with generates recognized revenue Deciding which information to disclose should be based on a trade-off analysis
Revenue should be recorded when realized or realizable and when cash is received orrect! Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product has been sold or a service has been performed, regardless of when the cash is actually received.
You are considering investing in the common stock of a major US Corporation. Which answer is an example of systematic risk? Risk resulting from general unrest in the company's labor force Risk resulting from a general decline in the US stock markets Risk related to the possibility of foreign expropriation of the company's property Risk related to an impending lawsuit against the company
Risk resulting from a general decline in the US stock markets
Government bonds have lower interest rates than do actively traded corporate bonds of the same maturity because the default premium is lower for government bonds. This illustrates which of the major factors influencing market interest rates? Inflationary expectations Risks of investment Deferred consumption Liquidity preference
Risks of investment
Internal sources of financing include which of the following? Sale of stock Debenture Factoring Trade credit
Sale of stock
Which answer is not a factor that influences market interest rates? Stock market activity Alternative investments Inflationary expectations Deferred consumption
Stock market activity
Which statement accurately describes systematic risk? An example of a systematic risk is if you own stock in a company that has liquidity problems. Systematic risk is what provides a stock's "risk premium." By diversifying your stock portfolio, you can minimize systematic risk. Systematic risk is uncertainty associated with a company or industry in which you invest.
Systematic risk is what provides a stock's "risk premium."
Which answer describes a characteristic of a sole proprietorship? Liability is shared among stakeholders. Taxes are filed as personal income. It requires formal incorporation. It requires election of a board.
Taxes are filed as personal income.
Which description is not a benefit associated with using the DuPont Equation? xThe DuPont equation can show whether a high level of leverage is risky or necessary for a company. The DuPont equation is very useful in analyzing any business regardless of industry. analysts can use the DuPont equation to understand the fluctuations of a company's Return on Equity. Analysts can determine which factor is dominant in determining a company's return on equity.
The DuPont equation is very useful in analyzing any business regardless of industry.
Which answer correctly describes an advantage the internal rate of return has over net present value for capital budgeting purposes? Internal rate of return is an indicator of the efficiency, quality or yield of an investment. The IRR shows the actual annual profitability of an investment. The IRR method recognizes the time value of money. The IRR method is clear an easy to understand.
The IRR shows the actual annual profitability of an investment.
A company issues a bond with a coupon rate of 5%. Since the bond was issued, market interest rates have decreased. What effect will this decrease have on the bond's market price and its current yield? The bond will trade above par and its current yield will increase. The bond will trade above par and its current yield will decrease. The bond will trade below par and its current yield will increase. The bond will trade below par and its current yield will decrease.
The bond will trade above par and its current yield will decrease. Correct. Current yield is the annual interest payment divided by current market price. When market interest rates decrease, the market price of existing bonds rises above par. The bond's annual interest payment is now divided by a larger market price for the bond, which makes the current yield decrease.
Which of the following is an example of trend analysis? The company's current gross profit margin is compared with its gross profit margin from past years. All of these answers. The company's gross profit margin is compared with its industry's average profit margins. The company compares its current assets to its current liabilities.
The company's current gross profit margin is compared with its gross profit margin from past years.
A firm is trying to choose the most profitable project to invest in. Which feature should be used as the company's discount rate? The company's internal rate of return The company's reinvestment rate The company's profitability index The company's weighted average cost of capital
The company's reinvestment rate
A company had $1 million in sales last year, $1.5 million in sales this year, and projected net income of $250,000. It has $5 million of its assets tied to sales, $3 million in sales-affected liabilities, and a retention ratio of 0.3. What is its AFN? x$92,500 x$9,992,500 $23,425,000 $925,000
The correct formula to calculate AFN is: Projected increase in assets - spontaneous increase in liabilities - any increase in retained earnings.
Which statement regarding shareholder and market value is correct? The idea of maximizing market value is related to the idea of maximizing shareholder value. Market value is not the price at which a shareholder is willing to sell. All of these answers are correct. Short-term focus on shareholder value is never detrimental to long-term shareholder value.
The idea of maximizing market value is related to the idea of maximizing shareholder value.
Under the internal rate of return rule in capital budgeting, which statement does not apply? The internal rate of return can vary throughout the life of a project. The internal rate of return can be equal to the cost of capital. The initial investment for all projects under consideration can require the same amount of capital. The cash inflows can be estimates.
The internal rate of return can vary throughout the life of a project. Correct. IRR assumes reinvestment of interim cash flows in projects with equal rates of return (the reinvestment can be the same project or a different project).
Which definition is a correct description of a capital budgeting method? The internal rate of return is the discount rate that gives a net present value of zero. Real option analysis is the ratio of payoff to investment of a proposed project. Equivalent annuity method essentially value projects as if they were risk bonds. The profitability index is the time required for an investment to "repay" the original investment.
The internal rate of return is the discount rate that gives a net present value of zero.
Which statement regarding financial forecasting is correct? Forecasting is straightforward and does not require making many assumptions. Only a cash budget is needed to prepare a financial forecast. Strategic planners do not rely on financial forecasts to understand the possible outcomes from different investments options. The most difficult aspect of preparing a financial forecast is predicting revenue.
The most difficult aspect of preparing a financial forecast is predicting revenue.
Which statement reflects the best reason to use the payback method to evaluate investments? The payback method covers all cash inflows and outflows for the duration of the investment. The payback method helps gauge a project's risk. If you use the payback method, you do not need to perform additional analyses. The payback method is easy to use and understandable for most people, regardless of training.
The payback method is easy to use and understandable for most people, regardless of training
Which statement accurately describes a shareholder's preemptive rights? The right to retain their proportional ownership in a company should it issue another stock offering The right to claim a company's remaining assets after a liquidation The right to vote on directors The right to purchase new shares issued by the company
The right to retain their proportional ownership in a company should it issue another stock offering
Which yield curve theory is based on the premises that financial instruments of different terms are not substitutable and therefore the supply and demand in the markets for short-term and long-term instruments is determined largely independently? The segmented market hypothesis The liquidity premium theory The expectation hypothesis Time Value of Money Theory
The segmented market hypothesis
When crowding out occurs, investment spending decreases. What causes this phenomenon? The total money supply is increased, increasing interest rates. The total money supply is decreased, decreasing interest rates. The total money supply is decreased, increasing interest rates. The total money supply is increased, decreasing interest rates.
The total money supply is increased, increasing interest rates.
In which situation would it be appropriate to use the IRR method to make an investment decision? To rate the desirability of mutually exclusive projects To compare two investments that have different lifespans To compare two projects that have an equal initial investment To assess a project in which cash flows fluctuate
To compare two projects that have an equal initial investment
Which answer correctly describes a way the internal rate of return (IRR) is used in capital budgeting? As the effective interest rate for savings and loans To determine the actual annual profitability of an investment As a means to compare the profitability of different investments To determine which discount rate results in a net present value (NPV) of zero
To determine which discount rate results in a net present value (NPV) of zero
Which of the following is a function of corporate capital budgeting? To rank projects by profitability To provide a history of past revenues and expenditures To assist managers with reacting to problems after they arise To encourage managers to operate independently of other business operations and departments
To rank projects by profitability
Which answer is not a correct description of a type of yield curve? When all maturities have similar yields, the resulting curve is flat. When long-term yields are higher than short-term yields, the curve is normal. When long-term yields fall below short-term yields, the curve is inverted. When long-term yields fall below short-term yields, the curve is flat.
When long-term yields fall below short-term yields, the curve is flat.
Which of the following describes the relationship between present value and future value? The higher the interest rate, the higher the present value and the lower the future value. The more time that passes, the higher the present value and the lower the future value. When present value increases, the future value decreases, assuming all variables are constant. When one increases, the other increases, assuming all variables are constant.
When one increases, the other increases, assuming all variables are constant.
Which type of bond will not be affected by reinvestment risk? Floating rate Zero-Coupon Stepped-coupon Inflation linked
Zero-Coupon Correct. There are no coupon payments made to the investor over the life of the bond.
A bond makes only one payment—the payment of the face value on the maturity date. The bond is sold at a discount. What type of bond is this? Zero-coupon bond Floating rate note Stepped-coupon bond Inflation-linked bond
Zero-coupon bond
The most common measure of risk in finance is the
standard devation
The risk that remains after an investor has extensively diversified his portfolio is primarily Standard deviation risk systematic risk unsystematic risk variance risk
systematic risk
Which of the following is not an example of benchmarking using ratio analysis? Contrast a company's current ratio with its nearest competitors. Calculate a company's debt ratio and compare it to its industry's average debt ratio. Compare the company's gross profit margin to the average gross profit margin of the top three firms in its industry. Calculate the company's current ratio by comparing its current assets with its current liabilities.
vCalculate the company's current ratio by comparing its current assets with its current liabilities.
