Corporate Finance Exam 1

Systemic risk principle

the expected return on a risky asset depends only on that asset's systemic risk

Working Capital Management

the managing of short-term assets and liabilities (day-to-day finances)

Which one of the following statements is accurate? A) An investor should expect to be rewarded for assuming unsystematic risk. B) Eliminating unsystematic risk is the responsibility of the individual investor. C) Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. D) Beta measures the level of unsystematic risk inherent in an individual security. E) Standard deviation is a measure of unsystematic risk.

B

Of the options listed below, which is the best example of a diversifiable risk? A) Interest rates increase B) Energy costs increase C) Core inflation increases D) A firm's sales decrease E) Federal income taxes increase

D

The ________ is a positively sloped linear function that plots securities' expected returns against their betas. A) reward-to-risk matrix B) portfolio weight graph C) normal distribution D) security market line E) market real returns

D

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the: A) coupon rate B) face rate C) call rate D) yield to maturity E) current yield

D

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? A) Electing the board of directors B) Receiving a distribution of company profits C) Voting either for or against a proposed merger or acquisition D) Determining the amount of the dividend to be paid per share E) Having first chance to purchase any new equity shares that may be offered

D

Which of the following items are included when calculating the expected return on a portfolio? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy A) I and III only B) II and IV only C) I, III, and IV only D) II, III, and IV only E) I, II, III, and IV

E

preferred stock

Has dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights

The security market line represents?

the relationship between beta and expected return

What do variance and standard deviation measure?

the volatility of returns

Total risk = ?

systematic risk + unsystematic risk

Capital Structure

the mixture of debt and equity maintained by a firm

What are 4 ways to Manage Managers?

1. Board of directors 2. Managerial compensation 3. Corporate control 4. Other stakeholders

What are the 3 major forms of business organization?

1. Sole Proprietorship 2. Partnership 3. Corporation

Capital Budgeting

the process a firm uses to evaluate long-term investment proposals

A ________ is the market's measure of systematic risk. A) beta of 1 B) beta of 0 C) standard deviation of 1 D) standard deviation of 0 E) variance of 1

A

What is a portfolio?

A collection of financial assets

What is a growing perpetuity?

A growing stream of cash flows that lasts forever

What is a growing annuity?

A growing stream of cash flows with a fixed maturity

What is an annuity?

A level stream of cash flows for a fixed period of time

What is a perpetuity?

An annuity in which the cash flows continue forever

Beta = 1 represents?

Average risk

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant. A) systematic risk B) unsystematic risk C) market risk D) nondiversifiable risk E) the systematic portion of a surprise

B

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return. A) expected market rate of return B) risk-free rate C) inflation rate D) standard deviation E) variance

B

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the: A) arithmetic return. B) historical return. C) expected return. D) geometric return. E) required return.

C

What happens to present value when interest rates increase?

It decreases

Ask price

The price at which the dealer will sell

Bid price

The price the buyer is willing to pay

Corporate Governance

The set of laws, rules, and procedures that influence a company's operations and the decisions made by its managers

What is considered a risk free asset?

Treasury bills

What type of risk is diversifiable?

Unsystematic risk

When do dividends become a liability of the firm?

When the dividend has been declared by the board

What is a broker?

an agent who arranges security transactions among investors

Annuity Due

cash flows occur at the beginning of each periods

What is the real rate of interest?

change in purchasing power

What is the relationship between coupon rate and yield to maturity in a discount bond?

coupon rate < yield to maturity

What is the relationship between coupon rate and yield to maturity in a par value bond?

coupon rate = yield to maturity

What is the relationship between coupon rate and yield to maturity in a premium bond?

coupon rate > Yield to maturity

Most securities transactions involve?

dealers and brokers

Does the expected return have to be a possible return?

no

What is the nominal rate of interest?

quoted rate of interest, change in actual number of dollars

What is an agency relationship?

relationship between stockholders and management