Fin 305 final Exam

One year ago, you purchased 500 shares of stock for $22 a share. The stock pays $0.32 a share in dividends each year. Today, you sold your shares for $24.50 a share. What is your total dollar return on this investment?

$1,410

Which one of the following is the equity risk arising from the daily operations of a firm?

Business risk

The price of a stock at Year 3 can be expressed as:

D4/(R - g).

Which one of the following statements concerning financial leverage is correct?

Financial leverage magnifies both profits and losses.

Which one of the following is the equity risk arising from the capital structure selected by a firm?

Financial risk

Which one of the following is defined as the average compound return earned per year over a multiyear period?

Geometric average return

Which one of the following has the narrowest distribution of returns for the period 1926-2014?

Intermediate-term government bonds

Jamie is employed as a currency trader in the Japanese yen market. Her job falls into which one of the following areas of finance?

International finance

Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives?

Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0

If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas?

Investments

Which one of the following is a direct bankruptcy cost?

Legal and accounting fees related to a bankruptcy proceeding

Which one of the following terms refers to the termination of a firm as a going concern?

Liquidation

Which one of the following is an advantage of being a limited partner?

Losses limited to capital invested

Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC?

Pink sheets

Newly issued securities are sold to investors in which one of the following markets?

Primary

Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority?

Proxy

On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

Risk Premium

What is the market called that facilitates the sale of shares between individual investors?

Secondary

The rate of return on which one of the following has a risk premium of 0%?

U.S. Treasury bills

Which one of the following is minimized when the value of a firm is maximized?

WACC

is Copyright an intangible fixed asset?

Yes

A portfolio is:

a group of assets held by an investor.

The price at which an investor can purchase in the bond market is called the _____ price.

asked

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

balance sheet.

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the:

beta coefficient.

If a trade is made "in the crowd," the trade has occurred:

between two brokers.

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

bid-ask spread.

A broker is an agent who:

brings buyers and sellers together

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's:

capital structure.

Dividends are best defined as:

cash or stock payments to shareholders.

Net working capital is defined as:

current assets minus current liabilities.

The current yield on a bond is equal to the annual interest divided by the:

current market price.

An agent who buys and sells securities from inventory is called a:

dealer

Most trades on the NYSE are executed:

electronically.

The ratios that are based on financial statement values and used for comparison purposes are called:

financial ratios

The yield to maturity on a discount bond is:

greater than both the current yield and the coupon rate.

A sole proprietorship:

has its profits taxed as personal income.

A common-size balance sheet helps financial managers determine:

if changes are occurring in a firm's mix of assets.

The written agreement that contains the specific details related to a bond issue is called the bond:

indenture.

When a bond's yield to maturity is less than the bond's coupon rate, the bond:

is selling at a premium.

A protective covenant:

limits the actions of the borrower.

Given a profitable firm, depreciation:

lowers taxes.

Unsystematic risk can be defined by all of the following except:

market risk.

A call provision grants the bond issuer the:

option of repurchasing the bonds prior to maturity at a prespecified price.

To be a member of the NYSE, you must:

own a trading license

Dividends are:

paid out of after tax profits.

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.

semiannual

The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the:

stocks of the 500 companies included in the S&P 500 index

Portfolio diversification eliminates:

unsystematic risk.

The standard deviation measures the _____ of a security's returns over time.

volatility

The daily financial operations of a firm are primarily controlled by managing the:

working capital.

The market-required rate of return on a bond that is held for its entire life is called the:

yield to maturity.

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:

zero percent.

Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security's beta, and E(RM) is the expected rate of return on the market.

β[E(RM) - Rf]

Suppose a stock had an initial price of $47 per share, paid a dividend of $0.63 per share during the year, and had an ending share price of $ 38. What was the capital gains yield?

-19.15 percent

Sweet Treats pays a constant annual dividend of $2.38 a share and currently sells for $52.60 a share. What is the rate of return?

.0452

A stock is priced at $38.24 a share and has a market rate of return of 9.65 percent. What is the dividend growth rate if the company plans to pay an annual dividend of $.48 a share next year?

.0839

The Outlet Mall has a cost of equity of 16.3 percent, a pretax cost of debt of 7.9 percent, and a return on assets of 13.4 percent. Ignore taxes. What is the debt-equity ratio?

.5273

Infinity Completion, Inc. currently has 50,000 shares of stock outstanding and no debt. The price per share is $23.75. The firm is considering borrowing funds at 6 percent interest and using the proceeds to repurchase 5,000 shares of stock. Ignore taxes. How much is the firm borrowing?

118,750

Brick House Markets has a tax rate of 34 percent and taxable income of $308,211. What is the value of the interest tax shield if the interest expense is $39,700?

13,498

Gator Tires pays a constant annual dividend of $1.21 per share. How much are you willing to pay for one share if you require a rate of return of 9.3 percent?

13.01

Polar Mechanical Systems will pay an annual dividend of $1.88 per share next year. The company just announced that future dividends will be increasing by 1.2 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 9.68 percent?

22.1698

Braxton's Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.8 percent. What is the amount of the next annual dividend if the dividends are increasing by 2.4 percent annually?

3.72

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

A decrease in the capital intensity ratio

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?

A decrease in the probability of an economic boom

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

All available information

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

Corporation

Which one of these transactions will increase the liquidity of a firm?

Credit sale of inventory at cost

Donovan's would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?

Dividend payout ratio

Capital budgeting includes the evaluation of which of the following?

Size, timing, and risk of future cash flows

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?

Sole proprietorship

Which one of the following could cause the total return on an investment to be a negative rate?

Stock price that declines over the investment period