Corporate Finance Cumulative Final
rue or False: In some cases, individuals who start a business have special voting rights that help them exercise more control over the firm. They own a special class of stock called founders' shares.
True
stock splits are interpreted as positive signals as they typically occur when management is confident
True
A bond issuer is said to be in__ if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue's restrictive covenants.
default
A stock that is more volatile than the market will have a beta of less than 1.0.
false
Capital budgeting is the process of planning and controlling investments in assets that are expected to produce cash flows for one year or less. This statement is: False True
false
High current and quick ratio always indicate that a firm is managing its liquidity position well
false
Management tries to maintain consistent, regular dividend distributions to encourage any dividend cuts in the future and prevent a negative signaling effect. True False
false
Managers always attempt to maximize the long-run value of their firm stocks or the stocks intrinsic values. This is exactly that stockholders desire. thus, conflicts between stockholders and managers are not possible.
false
True or False: Repurchases are more dependable than dividends because the investor wealth does not decrease after a repurchase, whereas the stock price decreases when dividends are distributed.
false
True or False: Sophisticated firms use only the NPV method in capital budgeting decisions. True False
false
a call provision gives bondholders the right or demand to call for repayments of a bond. typically companies call bonds I interest rates rise and do not call them if interest rates decline
false
a portfolios risk is normally measured bu the wighted average of the standard deviation of the securities in the portfolio
false
debt is typically a more risky security that is equity because a debt holds claim has priority ti an equity holders claim
false
even if a correlation between the return on two securities its 1.0 of the securities are combined in the correct proportions the resulting 2-assest portfolio will have less rick than either security held alone.
false
if investors become less averse to rick the slope of the security market line (SML) will increase
false
increasing the number of non-perfectly correlated asses in a portfolio will decrease the portfolios diversified rick which is measured by its beta
false
the FCF corporate valuation model cannot be used when a company pays dividends
false
when na portfolio is properly diversified a rational invest essentially eliminated all of the portfolios market risk, but it is impossible eliminate all risk
false
Number of shares change in dividend distribution.
false , they do not change
preferred stock is a hybrid a sort of cross between a stock an a bond in the sense that it pays dividends that normally increase like a stock but its payments are contractually guaranteed like interest on a bond
false, preferred dividends don't normally grow and they are not guaranteed
A project with normal cash flows, so its NPV decreases as the cost of capital___.
increases
When raising funds by issuing new preferred stock, the company will incur an underwriting, or flotation, cost that___ the cost of preferred stock. Because the flotation cost is usually expressed as a percentage of price of each share, the difference between the cost of preferred stock with and without flotation cost is___enough to not ignore.
increases, significant
W2 Corp. needs capital to finance a new product line. It borrows money in the form of long-term bonds underwritten by an investment bank.
indirect transfer through investment bank
A key to resolving this conflict is the assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the____ , and the NPV calculation implicitly assumes that the rate at which cash flows can be reinvested is the_____ .
internal rate of return (IRR), required rate of return
The entity that promises to make the interest and maturity payments for a bond issue is called the
issuer
These are financial intermediaries that share the financial risk of the untimely demise of their policyholders, who make regular payments to financial intermediaries for taking this risk.
life insurance companies
Ratios that help determine whether a company can access its cash and pay its debts that mature in less than a year are called
liquidity
what type of long term capital do firms use?
long-term debt, preferred stock, common equity
Benefits of being a owner'manager
luxurious office, executive assistants, expense accounts, limousines/allowances, country clubs, generous retirement plan
The problem with using____when trying to adjust for projects that are more risky or less risky than a firm's average project is that these adjustments are extremely subjective and difficult to justify.
a risk-adjusted cost of capital
you recently sold 200 shares of apple stock to your brother. the transfer was made through a broker, and the trade occurred on NYSE. this is an example of _____
a secondary market transaction
it is an ____problem when managers can use corporate funds for non-value maximizing purposes.
agency problem
Nazim also recently bought bonds with a clause stating that interest will be paid based on the inflation rate. When the inflation rate increases, the interest on the bonds will also increase. Nazim has invested in
purchasing power bonds .
Underinvestment agency problem is when debt increases risk of financial distress.
teu
Optimal range of stock price
$20-$80
effective board of director
1. election easier for minorities to gain seats 2. CEO is not chairman 3. board has b=majority outside directors 4. not an interlocking board 5. not unduly busy 6. compensation is appropriate
Six problems with Managerial Behavior
1. expend too little time and effort 2. consume too many nonpecniary benefits 3. avoid difficult decision out of loyalty to friends in company 4. reject risky positive project 5. avoid returning capital to investors 6. massage info releases or manage earning
What are the three dividend theories ?
1. dividend s are irrelevant 2. dividend preference 3. tax effect
The reduced riskiness of the market portfolio is reinforced by noting that the standard deviation of the average single-stock portfolio is 35%, whereas the standard deviation of the market portfolio, which is assumed to contain approximately___stocks, is 20%.
2,000+
Bridge Bonds Series A Dated 7-15-2005 4.375% Due 7-15-2055 @100.00 What is the coupon interest rate of this bond?
4.375%
Which of the following is considered a financially leveraged firm?
A company that uses debt to finance some of its assets
What kind of company is most likely to follow a strict residual distribution policy? A firm with highly variable earnings and investment A firm whose earnings are cyclical and follow the economy A firm with stable, predictable earnings and investment A firm whose investment needs change often
A firm with stable, predictable earnings and investment
Modern Corporation
A large, hierarchical business enterprise, staffed by salaried and waged employees and owned by stockholders, that came to play a dominant and sometimes controversial role in the American economy after 1865
A rental car company bought a new fleet of midsize cars and sold off its old midsize cars because they had too many miles on them. Which type of project would this be considered?
A replacement project
Capital budgeting analysis often involves decisions related to expansion projects and/or replacement projects. Based on your understanding of expansion and replacement projects, answer the following: A rental car company bought a new fleet of midsize cars and sold off its old midsize cars because they had too many miles on them. Which type of project would this be considered? An expansion project A replacement project
A replacement project
According to the concept of risk aversion, Check all that apply. Investors prefer certainty to uncertainty, and therefore will accept a lower return to avoid a potentially larger and more uncertain return. Risk-averse investors require a greater return for owning securities that exhibit greater risk.
ALL
Which is not a way to repurchase stocks? •Have broker/trustee purchase on open market over period of time. •Make a tender offer to shareholders. Make a block (targeted) repurchase Through the guy Jack got the magic beans from
All except Jack
If WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply. The firm will become less valuable. The firm will accept too many relatively risky projects. The firm will accept too many relatively safe projects.
All true
The capital budgeting process in a company involves evaluation of cash flows, risk analysis, correlation with the portfolio of projects in the company etc. To make this process more streamlined, firms identify whether the projects qualify as a capital budgeting project or not and generally analyze them in different vertical categories. Which of the following are examples of a capital budgeting project? Check all that apply. International Imports Inc.'s purchase of a new piece of equipment. Anderson Animations Inc.'s purchase of its normal stock of raw materials inventory. Yorkshire Pudding Inc.'s purchase of a competitor's subsidiary.
B and C
you have the following data on 3 stocks if you are a strict minimizer you would choose stock_____ if it to be held in isolation and stock ____if it to be held as a part of a we;;-diversified portfolio.
B:A (B 10%SD 0.6 Beta, A 20% SD 0.59 Beta)
Different forms of businesses have different characteristics. Which of the following characteristics would apply to a corporation? Chartered by a state and is its own entity separate from its owners Has unlimited life Exempt from double taxation Owned by single individual Owners have limited liability Easier to transfer ownership in the form of stock
Chartered by a state and is its own entity separate from its owners Exempt from double taxation Owned by single individual Owners have limited liability Easier to transfer ownership in the form of stock
The CEO of EchoStar Communications, Charlie Ergen, owned around 50% of the company's stock, but his multiple votes per share gave him around 90% of the vote.
Classified shares have super voting rights, which give more control to a certain class of investors.
Evaluating risk is an important part of the capital budgeting process. Which of the following represents the project's risk to the corporation as opposed to investors' risks? Market, or beta, risk Corporate, or within-firm, risk Stand-alone risk
Corporate, or within-firm, risk
Based on the information below for Benson Corporation, what is the optimal capita structure?
Debt 60% Equity %40 EPS $3.18 Stock Price $31.20
Taxes on capital gains are deferred until the capital gain is realized, whereas taxes on dividends are due in the year in which they are received. Based on the factor described, identify whether investors, in general, will tend to favor high or low payout ratios. Favor a high payout Favor a low payout
Favor a low payout
Based on your understanding of the factors that affect the cost of money, identify which of the following statements is true: Interest is the price paid to borrow funds. Higher inflation leads to lower interest rates. Higher risk leads to lower interest rates.
Interest is the price paid to borrow funds.
Another firm, called Cheatum Power & Water, an established public utility company, has been paying dividends for the past 20 years. This year Cheatum also announced that it will increase its dividends by 10%. Which class of investors is more likely to be pleased by Cheatum's dividend announcement? Investors with low tax rates who depend on current dividend income for living expenses Investors with high tax rates who don't depend on current dividend income for living expenses
Investors with low tax rates who depend on current dividend income for living expenses
Paradigm Media is a company run by a group of new media professionals. The owners of the company do not have any personal liability and file taxes based on individual income
LLC/LLP
Suppose your boss has asked you to analyze two mutually exclusive projects—project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement? No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPV. No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows. Yes, project A will always have the largest NPV, because its cash inflows are greater than project B's cash inflows.
No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows.
Which of the following are most likely to have higher yields? Convertible bonds Nonconvertible bonds
Nonconvertible bonds
Option AThe firm's ability to generate positive cash flows now and in the future Option BThe firm's past ability to generate positive cash flows Which of the options is most accurate? Option B Option A
Option A
Bonds that are offered at a discounted price at the time of issue
Original issue discount bonds
An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandalays Inc.'s stock should be $28.95 per share, but Mandalays Inc.'s stock is trading at $33.58 per share on the New York Stock Exchange (NYSE). Considering the analyst's expectations, the stock is currently: In equilibrium Overvalued Undervalued
Overvalued
. The financial performance of an investment is best expressed as a: Percentage, since it scales, or standardizes, the return earned from the investment by the investment's size. Dollar amount, since it reflects the timing of the investment's return. Dollar amount, since it clearly identifies the sum of money that can be spent by the owner of the investment. Percentage, as it ignores the timing of the return, such as one year or ten years.
Percentage, since it scales, or standardizes, the return earned from the investment by the investment's size.
Warm Duck Brewing Company has two divisions: one is very risky, and the other exhibits significantly less risk. The company uses its investors' overall required rate of return to evaluate its investment projects. It is most likely that the firm will become:
Riskier over time, and its value will decrease
As an investor and based on your understanding of risk, which of the following statements is true? S&P 500 companies that are considered to be riskier than the others will have a higher expected rate of return than the others. S&P 500 companies that are considered to be riskier than the others will have a lower expected rate of return than the others.
S&P 500 companies that are considered to be riskier than the others will have a higher expected rate of return than the others.
How to reduce agency cost of debt
Securing the loan with company's assists. Placing restrictive covenants in debt agreements
____measures the percentage change in the net present value (NPV) that results from a given percentage change in one of the input variables while all other variables are held constant at their expected values.
Sensitivity analysis
You invest $100,000 in only one stock. What kind of risk will you primarily be exposed to? Stand-alone risk Portfolio risk
Stand-alone risk
Bonds that must increase the bond's coupon rate if the company's rating is downgraded
Step-up provision in bonds
A repurchase has no effect on stock price.
TRue
Which of the following statements is true? Taxes on dividend income s are paid when the stock is sold. Taxes on dividend income are paid in the year that they are received.
Taxes on dividend income are paid in the year that they are received.
Which of the following statements best describes the difference between the IRR method and the MIRR method? The IRR method uses the present value of the initial investment to calculate the IRR. The MIRR method uses the terminal value of the initial investment to calculate the MIRR. The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method assumes that cash flows are reinvested at a rate of return equal to the cost of capital. The IRR method uses only cash inflows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to calculate the MIRR.
The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method assumes that cash flows are reinvested at a rate of return equal to the cost of capital.
New York City issued a general obligation bond for a canal in 1812. It was the first formal debt instrument with a fixed repayment schedule issued by a city.What type of bonds are these?Who is the issuer of the bonds?
The New York City government.Municipal bonds
United Recycling Inc. is one of the largest recyclers of glass and paper products in the United States. The company is looking into expanding into the cardboard recycling business. The company's CFO has performed a detailed analysis of the proposed expansion. The company's CFO used sophisticated software to analyze a large number of scenarios and generate estimated rates of return and risk indexes. Based on the information given, determine which of the statements is correct. The company's CFO used a Monte Carlo simulation to evaluate the project's financial model. The company's CFO conducted a sensitivity analysis to evaluate the project's financial model.
The company's CFO used a Monte Carlo simulation to evaluate the project's financial model.
The preemptive rights allows Larry to purchase any additional shares sold by the company. The right will protect Larry in the dilution in the stock he holds.
True
Green Mountain Producers Inc. is an oil drilling company. The company paid a dividend of $2.20 last year, and, in the past, its dividend has increased steadily by about 4% a year. Green Mountain just announced that its dividend will increase to $2.90 this year, and its share price rose from $33 per share to $35 per share immediately after the announcement. Which of the following best explains why Green Mountain's stock price increased as it did? The signaling hypothesis MM dividend irrelevance The clientele effect
The signaling hypothesis
Your financial planner advises you to allocate 10% of your portfolio in foreign stocks for diversification purposes. Your portfolio has a total international exposure of $1,000,000, but you also face certain risks. Keeping other factors constant, which of the following statements describes the risk involved with investing in the international market?
The value of your investment will increase if the foreign stocks increase in their local markets.
Which of the following best describes incremental cash flows?
They are the difference between the cash flows the firm will have if it accepts the project versus the cash flows it will have if it rejects the project.
A firm needs to take flotation costs into account when it is raising capital fromissuing new common stock .
True
Externalities will be positive if new projects are complements to existing assets.
True
Which of the following is true about the leveraging effect? Using leverage reduces a firm's potential for gains and losses. Using leverage can generate shareholder wealth, but if a company fails to make the interest and principal payments on its debt, credit default can reduce shareholder wealth.
Using leverage can generate shareholder wealth, but if a company fails to make the interest and principal payments on its debt, credit default can reduce shareholder wealth.
the impact of capital structure depends on two factors
WACC/FCF
Which statements is correct? (cost of debt)
When calculating the cost of debt a company needs to adjust for taxes be interest payments are deductible by the paying corporation
When are issuers more likely to call an outstanding bond issue? When interest rates are lower than they were when the bonds were issued When interest rates are higher than they were when the bonds were issued
When interest rates are lower than they were when the bonds were issued
Repurchases can be seen as negative to stockholders
Yes, may think the firm has poor investment opportunities
What statements is true? (reinvesting earning)
a firm cost of reinvesting earning is the rate of return stockholders require on a firms common stock.
Generally, investors would prefer to invest in assets that have: a lower-than-average expected rate of return given its perceived risk. a higher-than-average expected rate of return given its perceived risk.
a higher-than-average expected rate of return given its perceived risk.
A large soft-drink company currently produces regular cola and diet cola. It is considering introducing a new soft drink that tastes like regular cola but has zero calories like the diet cola. The new zero-calorie drink that tastes like regular cola is most likely to produce___ externality.
a negative within-firm
Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? a. A project's IRR increases as the WACC declines. b. A project's NPV increases as the WACC declines. c. A project's MIRR is unaffected by changes in the WACC. d. A project's regular payback increases as the WACC declines. e. A project's discounted payback increases as the WACC declines.
a project NPV increases as the cost of capital declines
Due to the impact that sudden events could have in the value of bonds, event risk covenants, or provisions, are included in the issuance of some corporate bonds. This covenant allows the bondholder to turn in, or put, a bond back to the issuer of the bond at par if a takeover, merger, or a major change in the company's capital structure were to occur. Such a bond is called a
a super poison put .
What is not a capital component when calculating the WACC for capital budgeting?
account payable, accruals, deferred taxes
which of the following statements best describes what you should expect you randomly select stocks and add them to your portfolio?
adding more such stocks will reduce the unsystematic or diversifiable rick
what is it called when creditors anticipate possible harmful actions by stockholders.
agency cost
Companies often use several methods to evaluate the project's cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. The NPV shows how much value the company is creating for its shareholders.
all
Each of the following factors affects the weighted average cost of capital (WACC) equation. Which are factors that a firm can control? Check all that apply. The firm's capital budgeting decision rules The firm's dividend payout ratio The firm's capital structure Interest rates in the economy
all
For which of the following reasons are capital budgeting decisions important to a business organization? Check all that apply. Capital investments have relatively short life spans, so mistakes are worked through rather quickly. Capital investments tend to reflect the firm's future activities, markets, and productive technologies. Capital investments tend to require sizable cash outlays.
all
Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period does not take the project's entire life into account. The payback period is calculated using net income instead of cash flows. The payback period does not take the time value of money into account.
all
Companies in countries with strong protection for investors tend to have: Check all that apply. better access to financial markets a lower cost of wait increased market liquidity less noise in stock prices
all correct
If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will____agree.
always
Targeted share repurchases, shareholder rights provisions and restricted voting rights plans are all part of ______
anti-takeover positions
In the real world dividend,
are usually more stable than earning
These ratios, which help determine how efficiently a firm is using its assets to generate sales are called
asset management or activity
an outside investor that owns a large amount os the company's shares
block ownership
what does corporate governance include?
board of directors, charter, compensations plans, capital structure, internal accounting control systems
A bond's___gives the issuer the right to call, or redeem, a bond at specific times and under specific conditions.
call provision
As a result, the U.S. tax code encourages many individual investors to prefer to receive___ .
capital gains
What are the three factors a firm can control?
capital structure, investment, and dividend policy
Repurchases allow investors who need cash to convert their investment in the company into ____ .
cash
The present value of___ can be used to determine the basis of a firm's value.
cash flows
what is it called when •Different groups of investors, or clienteles, prefer different dividend policies.
clientele effect
companies A & C each reported the same EPS but A stock trades at a higher price. Why?
company A trades at a higher P/E ratio
what is the set of laws rules and procedures that influence a company's operations and the decisions made by its managers
corporate governance
What does agency cost include?
creditors may share higher interest rate. Companys cost of capital foes up. value of company goes down
Based in Grass Valley, California, L & M Seeds Co. is a small company that manufactures organic seeds. To raise capital, the company sells stocks directly to savers in Grass Valley without involving any bank or financial intermediary.
direct transfer
Erin borrows money from her uncle to buy a new laptop
direct transfer
the level of cash distributions to shareholders
distribution policy
He or she will not be compensated for the___ risk that could be eliminated by increasing the size of his or her portfolio.
diversifiable
Unsystematic, or company-specific, risk, on the other hand, is___ , because it results from events and phenomena that are unique to a particular individual firm.
diversifiable
Investors may thins dividends are less risky than potential future capital gains in which theory?
dividend preference (bird-in the hand) theory
The payment of ____helps to reduce agency costs between shareholders and management.
dividends
In a state of market equilibrium, the intrinsic value of the stock will be___ to the market price of the stock.
equal
A stock is in equilibrium if its required return___ its expected return.
equals
These financial instruments are U.S. dollar deposits outside the United States that earn interest over a certain time period. Risk associated with these deposits depends on the risk of the issuing bank.
eurodollar time deposits
Ideally, capital budgeting analysis should take cash flows into account___ .
exactly when they occur
when the owner of a share can no longer exercise their right to by a share at specified amount
expiration, or maturity date
The stock price of a firm increases after the firm repurchases some of its shares. This statement is ___ because if the stock price changes after a firm conducts its share repurchase, then there___arbitrage opportunities. Thus, the price of the stock remains the same after a repurchase.
false, will be
the one bear the cost of the perks although there are outside shareholders.
false. shareholders bare some. minority shareholders will ay less for shares of cost. a single owner bears all cost
With capital gains, shareholders in high tax brackets have the ability to defer taxes into the future.
fewer dividends
When a project has a PI greater than 1.00, it will exhibit an NPV___ ; when it has a PI of 1.00, it will have an NPV equal to $0. Projects with PI___ will exhibit negative NPVs.
greater than $0, less than 1.00
If a firm cannot invest retained earnings to earn a rate of return____ the required rate of return on retained earnings, it should return those funds to its stockholders.
greater than or equal to
Generally, a positive correlation exists between a project's returns and the returns on the firm's other assets. If this correlation is___ , stand-alone risk will be a good proxy for within-firm risk.
high
Which is not a reason for stock repurchases? (HINT They all are) •As an alternative to distributing cash as dividends. •To dispose of one-time cash from an asset sale. •To make a large capital structure change. •To use when employees exercise stock options.
im lazy so yeah just memorize
A project's IRR will ___ if the project's cash inflows increase, and everything else is unaffected.
increase
which of the following mechanisms would most likely help motivate managers to act in the best interest of shareholders?
increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid in cash
There are now fewer but larger public traded companies due to ___
mergers and acquit ions by private equity funds of small start-up firms
The firm's target capital structure should be consistent with which of the following statements?
minimize the WACC
Raising funding by issuing new stock requires companies to meet several regulatory requirements, which helps to____managerial performance.
monitor
Investors expect a reliable annual cash flow from their stock portfolios.
more dividends
The value of a dividend received today is known, but the value of a capital gain received in the future is uncertain.
more dividends
An analyst will need to use the EAA approach to evaluate projects with unequal lives when the projects are_____ .
mutually exclusive
his is the cost of___ debt, and it is different from the average cost of capital raised in the past.
new
Gaven Industries, which is in the same sector as Yellow Duck Distribution, exhibits very stable and predictable earnings, but its capital investments tend to be lumpy. This means that Gaven's required capital investment spending is usually relatively low, but every few years, some sizable expenditures will cause the firm's capital budget to be quite large. Should Gaven Industries be following a strict residual distribution policy? Yes No
no
if a firm adheres to the residual dividend policy the issuance os new common stock would suggest that
no dividends were paid during the year
Sunk costs are___ in the capital budgeting analysis.
not relevant
which of the following are correct (about IRR)?
one defect of the IRR method is that the cash flow to be received from a project can be reinvested at the IRR itself and that assumption is often not valid
The firm announces its intention to buy shares of its own stock, like an ordinary investor, and proceeds to do so. What method is described in the preceding situation?
open market transaction
When the demand for an initial public offering (IPO) of securities exceeds the number of securities issued, the offering is deemed to be:
oversubscribed
Wilson started a business, based in a different state, with his uncle. Due to the business's underperformance, they had to close the business. Wilson, however, ended up losing his house due to a litigation claim.
partnership
A firm's____dividend policy determines its current clientele of investors.
past
In countries with low dividend tax penalties more companies
pay dividends and larger
what is it called when firm use internally generated funds first because there are no flotation costs or negative signals.
pecking order theory
Issued by corporations, these financial instruments give their holders a class ownership in a company. They are riskier than bonds but less risky than the general class of ownership.
preferred stock
when evaluating a new project firms wholly include in the project cash flows all accept
previous expenditures associated with market test to determine the feasibility of the project provided they have already been expensed for tac purposes
The capital budgeting process is comprehensive and is based on certain assumptions, models, and benchmarks. This process often begins with a project analysis. Generally, the first step in a capital budgeting project analysis—which occurs before any evaluation method is applied—involves estimating the ___.
project's expected cash flows .
agency realtionship
relationship between principals and agents to perform a service and delegate decision-making authority
Excess cash or a desire to recapitalize usually leads management to ___
repurchase stock
In countries with relatively high dividend tax penalties more companies____
repurchase stock
This concept is based around the idea that investors will require higher rates of return as risk increases.
risk aversion
These government-chartered institutions accept deposits from savers and use the pool of deposits to provide loans, usually fixed-rate mortgages, to borrowers.
saving and loan associations
Martha Stewart sold 3,928 shares of ImClone stock on December 27, 2001
secondary markets
The process through which savings and loan associations (S&Ls), banks, and entities such as Fannie Mae and Freddie Mac create financial instruments by combining other financial assets, such as mortgages and credit card debt, is called___
securitization
Two ways to raise common equity
selling newly issued shares to the public OR reinvesting net income instead of paying it all out in dividends
money markets are markets ____
short -term debt securities
In general, the___ the payback, other things constant, the greater the project's liquidity.
shorter
what is it called when Investors view dividend changes as signals of management's view of the future
signaling hypothesis /content hypothesis
A bond contract feature that requires the issuer to retire a specified portion of the bond issue each year is called a__ .
sinking fund provision
There are 3 ways to view a projects
stand-alone, corporate, rick/within-firm risk, market risk/beta risk
A measure of the variability of a set of outcomes.
standard deviation
The risk of a single asset is best measured by the___ of the asset's possible outcomes, while the risk of an asset in a multiple-asset portfolio is best measured by its___.
standard deviation, beta coefficient
Which of the following statements is correct? (stock repurchases)
stock repurchases make the most sense when a company believed its stock is undervalued
when a firm increases the number of shares outstanding say 2:1 and send shareholder more shares
stock split
which of the following statements is NOT correct?(stockholders)
stockholders pay no income tax on dividends if the dividend are used to purchase stock through a dividend reinvestment plan
which of the following is NOT a relevant cash flow and should not be reflect3ed in capital budgeting project?
sunk costs that have been expensed for tax purposes
A stock's contribution to the market risk of a well-diversified portfolio is called____ risk. According to the Capital Asset Pricing Model (CAPM), this risk can be measured by a metric called the beta coefficient, which calculates the degree to which a stock moves with the movements in the market.
systematic
This type of risk relates to problems caused by political instability.
systematic risk
What are four factors a firm can not control?
tax rates, credit crisis, interest rates, market rick premium
In which theory does lower payouts mean higher capital gains?
tax theory
for portfolio of 40 randomly selected stocks which of the following is most likely to be true?
the beta of the portfolio is equal to the highest weighted average of the beta of the individual stocks
Other things held constant which of the following events most likely encourage a firm to increase the amount of debt in its capital structure?
the corporate tax rate increases
If mutually exclusive projects are proposed that both have an IRR greater than the necessary WACC, the IRR method states that the firm should accept: the project with the greatest IRR, assuming that both projects have the same risk as the firm's average project. the project with the greater future cash inflows, assuming that both projects have the same risk as the firm's average project. the project that requires the lowest initial investment, assuming that both projects have the same risk as the firm's average project.
the project with the greatest IRR, assuming that both projects have the same risk as the firm's average project.
what is correct? (
there is an opportunity associated with using reinvested earning, hence they are not "free"
A firm's weighted average cost of capitalshould decrease if its tax rate increases, but the yield to maturity of its noncallable bonds remains the same and all other factors are held constant.
true
Agency costs, such as perquisite consumption and wasteful acquisitions, are harder for investors to to prevent.
true
Beta measures the volatility in stock movements relative to the market.
true
Foreign investments fuel growth in a country. However, this investment is based on factors that affect the business environment and increase riskiness, such as macroeconomic policies, political changes, labor issues, tax rates, and regulations.
true
If a company's tax rate increases then all else equal its weighted average cost of optical will decline.
true
Market timing theory is when equity is issue when the market is high and debt when the stock market is low.
true
More good investments would lead to a lower dividend payout.
true
No agency problem will exist if you are the only employee and only your money invested in a business.
true
Over time, a stock with a beta of 1.0 produces a return that goes up and down with a 1:1 relationship with the return on the market.
true
Projected free cash flows should be discounted at the firms Wass as part of finding a firms total corporate value
true
ST investments fall because they are used to repurchase stock
true
The WACC that should be used in capital budgeting is the firms marginal after-tax cost of capital
true
When a firm declares a 4-for-1 stock split, it quadruples the number of shares outstanding. This causes the earnings and dividends per share to be cut to one-fourth of their value before the stock split, thereby reducing the stock price to one-fourth of its original value. Each shareholder will own four times as many shares, but each share will be worth only one-fourth of its value before the stock split.
true
When the Fed increases the money supply, short-term interest rates tend to decline.
true
a bond has a 1000 par value makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not in default. The bond should sell at a premium if market interest rates re below 10% and at a discount if interest rates are greater than 10%.
true
a disadvantage of the corporate firm of organizations is that corporate ownership is often separate from management
true
an advantage of the corporate form of organization is that corporate ownership is often separate from management
true
block holders ofter monitors mangers an take active role, leading to better corporate governance
true
capital components are funds that come from investors
true
if a bank compounds saving accounts quietly the effective annual rate will exceed the nominal rate
true
in a portfolio analysis we often use historical returns and standard deviation despite the fact we are really interested in trying to predict a future return
true
in order to maximize its shareholders value, a firm management must attempt to maximize the stock price in the long run, or the stock;'s. intrinsic value
true
is a company assigns the same cost of capital to all of its projects regardless of each projects risk then the company is likely to reject some safe projects that it actually should accept and accept some risky projects it should reject
true
managers can underperform market or peer group yet still reap rewards from stock options as long as the stock price increases to above the exercise cost
true
never base the cost of debt on the coupon rate on firms existing debt
true
never use the current book value capital structure to obtain the weights when estimating WACC
true
residual distribution model finds reinvested earning needed for capital budgets
true
sometimes managers falsify financial statements or take excessive risks to reap the benefits from their stock options
true
stock options gives owners the option to buy a share of the company's stock at a specific price called the "strike price" even if the actual stock price is higher
true
the price sensitivity of a bond to a given change in interest rates is generally greater the longer the bonds remaining maturity
true
when estimating the market risk premium for the cape method never use the historical average on stock in conjunction with the current return on T-bonds
true
This type of risk is associated with how a firm is financed.
unsystematic risk
Which of the following are money market instruments? Check all that apply.
urodollar time deposits Common stocks Corporate bonds Bankers' acceptances Certificates of deposit
what is is called when an owner of a share has to wait several years before exercising their right to buy a share at a specified price maybe lower than the actual price
vesting period
Which of the following statements are correct? (cost of debt)
when calculating the cost of debt you need to adjust for taxes because interest payments are deductible by the paying corporation
under what circumstance can a agency problem exist
when firm owns less that 100% of a firm common stock or the firm borrows
When performing scenario analysis, the expected net present value (NPV) ____ the base-case NPV.
will rarely be equal to
would hiring additional people create agency problems?
yes if the principal hired employees to perform a service and delegated some authority to them
May be a positive signal to shareholders when stock are repurchases
yes they may think its undervalued
If the price of the bond is initially discounted and offers no coupon payments, the bond is called a___bond.
zero coupon
An investment's risk, or the probability that it generates a return that is___ its expected return, can be considered from two perspectives: that of___ asset, or a single-asset portfolio, and that of a multiple-asset portfolio.
greater than or less than, a stand-alone
ratios examine the market value of a company's share price, its profits and cash dividends, and the book value of the firm's assets and relate them to other data items to determine how the firm is perceived in the stock market
market-value or market based
Jacob is self-employed and reports all of his income and expenses in his personal income-tax return.
proprietorship
If a stock price is lower than its intrinsic value, then the investor would receive an expected return greater than the return required as compensation for risk.
True
Backed by the U.S. government, these financial instruments are fixed-rate debt securities with a maturity of more than one year. They are considered default free but are subject to interest rate risk.
U.S Treasury notes and bonds
Jorge bought APJ Inc.'s convertible bond at par ($1,000) with a yield of 3.25%. This bond had a conversion ratio of 25:1 at the price of $40 per share. If APJ Inc.'s shares are currently trading at $48 per share, should Jorge convert his bond into shares? Yes
Yes because $48 is $8 more than $40 or 40*25=1000 , 48*25=1200 ,,,,1200>1000
A bond's__ is generally $1,000 and represents the amount borrowed from the bond's first purchaser.
face or maturity value
Systematic risk, also called___or market risk, results from phenomena that affect the majority of firms and securities. Since the events or circumstances that give rise to market risk affect most firms, it____possible to diversify away this type of risk.
non-diversifiable, is not
Which of the following asset classes is generally considered to be the most liquid? Accounts receivable Inventories Cash
Cash
When determining the value of a firm, which of the following statements is true? The timing of cash flows a firm can generate is very important in determining the value of a firm. All else being equal, cash received later is better. The timing of cash flows a firm can generate is irrelevant in determining the value of a firm. The timing of cash flows a firm can generate is very important in determining the value of a firm. All else being equal, cash received sooner is better.
The timing of cash flows a firm can generate is very important in determining the value of a firm. All else being equal, cash received sooner is better.
Charles Underwood Agency Inc. recently raised capital through an initial public offering (IPO). Its stock can now be purchased on the NYSE. This company is referred to as:
a publicly owned corporation
ratios help measure a company's ability to generate income and profits based on its invested capital.
profitability
The owners of a corporation are the___ of the company . The primary objective of the corporate management team is to___ the shareholders' wealth by___the_____ over the long run
shareholders, maximize, maximizing, fundamental price of the company's common stock
In short, it means that a rational investor can only expect to be compensated for his or her exposure to___or market risk
systematic
Which of the following statements is true about bonds? Agency debt and government-sponsored entities (GSEs) debt usually carry slightly higher interest rates than Treasury bonds. Agency debt and government-sponsored entities (GSEs) debt usually carry slightly lower interest rates than Treasury bonds.
Agency debt and government-sponsored entities (GSEs) debt usually carry slightly higher interest rates than Treasury bonds.
Which of the following is a reason cash flows may differ from accounting income?
Depreciation is a tax-deductible expense but is not a cash outlay.
Which of the following statements represent a weakness or limitation of ratio analysis?
Different firms may use different accounting practices. A firm's financial statements show only one period of financial data. A firm may operate in multiple industries.
An oil trader buys contracts at the New York Mercantile Exchange, and he locks in the current futures price of heating oil for delivery in the winter season.
future markets
Nazim wants to include putable bonds in his investment portfolio. Nazim is likely to put the bonds when: He is in need of cash He expects to use the cash when the bond matures
he is in need of cash
Helen buys 1,000 shares of Microsoft stock through her online brokerage account.
financial asset market
Which of the following components would be best for you to include in your financial statement analysis? A comparison of the firm's performance with other firms in the same industry based on their financial ratios Financial statements based solely on information given to analysts and brokerage firms
A comparison of the firm's performance with other firms in the same industry based on their financial ratios
Which of the following statements is correct? Check all that apply. Systematic risk reflects the risk that remains after an investor has diversified his or her portfolio. A investor's exposure to company-specific risk can be diversified away by holding approximately 40 randomly-selected securities in an investor's portfolio. Possible sources of diversifiable risk include inflation and commodity price changes, changes in currency exchange rates, and fluctuations in interest rates.
ALL
our accountant has convinced you that you should invest your bonus from this year into your retirement account—instead of buying a new sports car—because of the high expected return on the investment. Determine which of these fundamental factors is affecting the cost of money in the scenario described: Inflation Time preferences for consumption Risk
Time preferences for consumption
Which of the following types of bonds has the least default risk? Municipal bonds Corporate bonds Treasury bonds
Treasury bonds
A large soft-drink company currently produces regular cola and diet cola. It is considering introducing a new soft drink that tastes like regular cola but has zero calories like the diet cola. The new zero-calorie drink that tastes like regular cola is most likely to produce____________ externality.
a negative within-firm
Suppose you work for a mutual fund firm. Your team is thinking of investing in EchoStar's stock. Your task is to create a report on the stock's performance and investment potential. In this scenario, you are working as a___analyst
buy-side
Issued by a nonfinancial firm, these financial instruments are guaranteed by a bank. There is less risk involved because of bank backing.
bankers acceptances
Long-term mortgage-backed securities are traded between investors and issuers.
capital market
The filing document, which requires the company to state: (1) the name of the proposed corporation, (2) types of activities the company will be involved in, (3) amount of capital stock, (4) number of directors, and (5) names and addresses of the directors, is called the corporate
charter
Rock Inc. is a mineral mining company. The CEO of Rock Inc. recently died. The news led to a short-term decline in the company's stock price, but it bounced back after the company announced its quarterly earnings.
corporation
Ratios that help assess a company's ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called
debt or financial management
They are a pool of assets that trade like stocks on an exchange. They track a group of stocks, such as all stocks in an index or stocks of companies in emerging markets.
exchange traded funds
If the Fed injects a huge amount of money into the markets, inflation is expected to decline, and long-term interest rates are expected to rise.
false
California Public Employees' Retirement System (CalPERS) manages pension and health benefits of California public employees and retirees. CalPERS collects money from its participants and creates a pool of assets. It manages these assets by making investments across domestic and international markets.
indirect transfer through financial intermediaries
In a taxless world with no brokerage costs, repurchases and dividends have the same effect on shareholder wealth. In the real world, however, repurchases provide more preferable tax treatment than dividends to ordinary investors. Does this mean that firms should always use share repurchases so that investors can gain from this tax benefit?
no
In general, are stock repurchases a feasible substitute for the payment of cash dividends? In other words, will a firm either pay a cash dividend or repurchase its shares, but never do both?
no
