fin350 final exam prep

Which one of the following statements is true?

A discount bond has a coupon rate that is less than the bond's yield to maturity.

Which one of the following is included in net working capital?

Accounts payable

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant?

An increase in depreciation

Which one of the following applies to a general partnership?

Any one of the partners can be held solely liable for all of the partnership's debt.

In a large corporation, what are the two distinct groups that report to the chief financial officer? Which group is the focus of corporate finance?

The treasurer's office and the controller's office are the two primary organizational groups that report directly to the chief financial officer. The controller's office handles cost and financial accounting, tax management, and management information systems. The treasurer's office is responsible for cash and credit management, capital budgeting, and financial planning. Therefore, the study of corporate finance is concentrated within the functions of the treasurer's office.

What are the four primary disadvantages to the sole proprietorship and partnership forms of business organization?

Unlimited liability Limited life Difficulty in transferring ownership Hard to raise capital funds

common sized statement

a standardized financial statement presenting all items in percentage terms. balance sheet items are shown as a percentage of assets and income statement items as a percentage of sales.

dividend yeild

a stock's expected cash dividend divided by its current price.

consol

a type of perpetuity

marginal tax rate

amount of tax payable on the next dollar earned

sinking fund

an account managed by the bond trustee for early bond redemption.

annuity due

an annuity for which the cash flows occur at the beginning of the period.

perpetuity

an annuity in which the cash flows continue forever

note

an unsecured debt, usually with a maturity under 10 years.

When you refer to a bond's coupon, you are referring to which one of the following?

annual interest payment

free cash flow

another name for cash flow from assets

Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge of:

capital budgeting.

Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's:

capital structure

operating cash flow

cash generated from a firm's normal business activities.

The annual interest divided by the face value of a bond is referred to as the:

coupon rate

The goal of financial management is to increase the:

current market value per share.

maturity

date on which the principal amount of a bond is paid

Computing the present value of a future cash flow to determine what that cash flow is worth today is called:

discounted cash flow valuation.

common stock

equity without priority for dividends or in bankruptcy

noncash items

expenses charged against revenues that do not directly affect cash flow, such as depreciation.

income statement

financial statement summarizing a firm's performance over a period of time.

Corporate shareholders:

have the ability to change the corporation's bylaws.

compound interest

interest earned on both the intial principal and the interest reinvested from prior periods.

interest on interest

interest earned on the reinvestment of previous interest payments

simple interst

interest earned only on the original principal amount invested.

Cash flow to creditors is defined as:

interest paid minus net new borrowing.

The relationship between the present value and the time period is best described as:

inverse

A corporation:

is a legal entity separate from its owners.

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

is selling at a premium.

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities.

maturity

A call provision grants the bond issuer the:

option of repurchasing the bonds prior to maturity at a pre-specified price.

dividends

payments by a corporation to shareholders, made in either cash or stock.

du point identity

popular expression breaking ROE into three parts: operating efficiency, asset use efficiency, and financial leverage.

cumulative voting

a procedure in which a shareholder may cast all votes for one member of the board of directors

Which one of the following functions should be assigned to the treasurer rather than the controller?

CASH MANAGEMENT

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

Credit sale of inventory at cost

Below are examples of business transactions. Choose the type of financial management decision that is relevant to each.

Deciding whether to expand a manufacturing plant Capital budgeting Deciding whether to issue new equity and use the proceeds to retire outstanding debt Capital structure Modifying the firm's credit collection policy with its customers Working capital management

Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested.

Decrease in the interest rate

Which one of the following will increase the profit margin of a firm, all else constant?

Decrease in the tax rate

Which of the following combinations is assured to decrease the interest rate sensitivity of a bond?

Decrease in the time to maturity and an increase in the coupon rate

Donovan Brothers, Inc. 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

proxy

a grant of authority by a shareholder allowing another individual to vote that shareholder's shares.

Which one of the following is a capital structure decision?

Establishing the preferred debt-equity level

Which one of the following refers to the relationship between nominal returns, real returns, and inflation?

Fisher effect

Which one of the following is a working capital decision?

How much cash should the firm keep in reserve?

annuity

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

treasury yield curve

a plot of the yields on treasury notes and bonds relative to maturity.

Which of the following will increase the future value of a lump sum investment? I. Decreasing the interest rate II. Increasing the interest rate III. Increasing the time period IV. Decreasing the amount of the lump sum investment

II and III only

Who owns a corporation? Describe the process whereby the owners control the firm's management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?

In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm's management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else's best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.

All else equal, an increase in which one of the following will decrease owners' equity?

Increase in accounts payable

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

Losses limited to capital invested

Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns?

Marginal tax rate

Which one of the following statements related to the income statement is correct?

Net income is distributed either to dividends or retained earnings.

Which one of the following statements correctly applies to a sole proprietorship?

Obtaining additional equity is dependent on the owner's personal finances.

Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued?

Positive cash flow to stockholders

Which one of the following situations is most apt to create an agency conflict?

Rejecting a profitable project to protect employee jobs

Ted currently owns 100 shares of a publicly traded stock which he would like to sell. Which one of the following provides the most efficient means for Ted to sell his shares?

Secondary market transaction

What benefits are there to these types of business organization as opposed to the corporate form?

Simpler Less regulation The owners are also the managers Sometimes Personal tax rates are better than corporate tax rates

Capital budgeting includes the evaluation of which of the following?

Size, timing, and risk of future cash flows

Which one of the following is a correct statement, all else held constant?

The future value is directly related to the interest rate.

straight voting

a procedure in which a shareholder may cast all votes for each member of the board of directors.

Which one of the following terms refers to a bond's rate of return that is required by the market place?

YTM

zero coupon bond

a bond that makes no coupon payments and thus is initially priced at a deep discount.

corporation

a business created as a distinct legal entity owned by one or more individuals or entities.

partnership

a business formed by two or more individuals or entities.

working capital

a firm's short-term assets and liabilities.

Financial statement analysis:

provides useful information that can serve as a basis for forecasting future performance.

financial ratios

relationships determined from a firm's financial information and used for comparison purposes.

stakeholder

someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.

coupon

stated interest payment made on a bond

preferred stock

stock w/ dividend priority over common stock, normally w/ a fixed dividend rate, sometimes without voting rights.

Operating cash flow is defined as:

the cash that a firm generates from its normal business activities.

interest rate risk premium

the compensation investors demand for bearing interest rate risk.

present value

the current value of future cash flows discounted at the appropriate discount rate.

capital gains yield

the dividend growth rate, or the rate, or the rate at which the value of an investment grows.

Effective annual rate (EAR)

the interest rate expressed as if it were compounded once per year.

stated interest rate

the interest rate expressed in terms of the interest payment made each period. Also, quoted interest rate.

sustainable growth rate

the maximum possible growth rate for a firm that maintains a constant debt ratio and doesn't sell new stock.

internal growth rate

the maximum possible growth rate for a firm that relies only on internal financing.

capital structure

the mixture of debt and equity maintained by a firm.

An upward-sloping term structure of interest rates indicates:

the nominal rate is increasing even though the real rate is constant as the time to maturity increases.

liquidity premium

the portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.

default risk premium

the portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.

taxability premium

the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.

inflation premium

the portion of a nominal interest rate that represents compensation for expected future inflation.

agency problem

the possibility of conflict of interest between the owners and management of the firm.

face value

the principal amt of a bond that is repaid at the end of the term. Also, par value.

capital budgeting

the process of planning and managing a firm's long term investments.

YTM

the rate required in the market on a bond.

term structure of interest rates

the relationship b/t nominal interest rates on default free, pure discount securities and time to maturity; that is the pure time value of money.

fisher effect

the relationship b/t nominal returns, real returns, and inflation.

cash flow from assets

the total of cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, capital spending, and change in net working capital.

Centre Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Country Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:

will be greater if you invest with Country Bank.

Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's:

working capital.

Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments?

zero coupon