Final Exam Review Questions
What best explains a fixed coupon bond?
Fixed coupon paid until maturity, and lump sum returned at maturity
If a company is in violation of a financial covenant and is precluded from accessing funding to undertake a positive net present value project, what kind of capital rationing would this be considered?
Hard rationing
What are pro forma financial statements?
Financial statement projecting future years operations
Kodai Senga just signed a two-year pitching contract with the New York Mets at $1,000,000 per year. His tax rate is 40%, and he receives his money at the end of the year. He lives with his Shohei Ohtani in Queens and doesn't have any expenses. He deposits his wages at the end of every year at a rate of 5.0%. What is the value of Senga-san's deposit after year two?
$1,230,000
You purchase a run-down home in Albany for $25,000 and spend another $25,000 to repair it. Your total in-cost is $50,000. When the work is done, you place the home back on the market and find that it's worth $60,000. What is your NPV?
$10,000
Twitter had a 2022 profit before tax of $10,000,000, a tax rate of 20%, and debt due in 2028 of $19,000,000. Its depreciation and amortization for 2022 aggregates $3,000,000. What is Twitter's approximate cash flow in 2022?
$11,000,000
XYZ Corporation's balance sheet of 2019 showed net fixed assets of $1.56 million, and the 2020 balance sheet showed net fixed assets of $1.78 million. The company's 2020 income statement showed a depreciation expense of $140,000. What was the company's net capital spending for 2020?
$360,000
Jay-Z earned $500,000 for a one-night singing gig, a zero tax jurisdiction. He immediately wired those funds to a 3 year bank deposit, where he earns 7% on the money each year. What is the value of the deposit?
$612,522
Former President Barack Obama goes on the university speaking circuit for three months per year. He receives $250,000 net of taxes per speaking engagement. His speaking engagements are monthly and begin January 31, 2023. To date, he has spoken at Stanford and Johns Hopkins. His last stop will be at UAlbany on March 31, 2023. President Obama deposits his funds in his account as soon as he receives them. He earns 12% on his deposit per annum paid monthly. What is the cumulative value of his money for the quarter on March 31, 2023?
$757,525
How is return volatility on a security measured?
Variance and standard deviation, normal distribution, bell curve
Find the current ratio: Company A's balance sheet shows current assets of $6,300, fixed assets of $32,000, total long-term liabilities of $16,200, and total equity of $18,100.
1.58x
Jamie Foxx attended your high school in the 1980s and today gave all recent alumnus a $100 U.S. savings bond, including you. He paid $90.90. What is your bonds discount rate?
10%
Wells Fargo is charging you 1.5% per month on your credit card. What is your annual percentage rate?
18%
What is included in current liabilities?
An account payable to a supplier that is due next week; loan payable to the bank in ten months
Brandon Nimmo has a $10,000,000 portfolio, of which $500,000 is in bond, $3,000,000 is in alternative investments, and the remainder is in equities. What was his equity portfolio weight?
65%
The Flushing Queens Brewery is 70% funded with debt at an after-tax cost of 9% while the cost of equity is 12%. What is the weighted average cost of capital?
9.9%
What is considered a relevant cash flow for a project?
A cash flow for project evaluation consists of any and all changes in the firms future
What is the best definition of an annuity?
A cash flow stream where a fixed amount is received every year
What is a financial security?
A claim against assets of cash flows of a company
Who is a business partner whose potential financial loss in a partnership will not exceed their investment?
A limited partner
Steve Cohen is speaking to David Stearns about "efficient capital markets theory." He would be correct if he stated ____________________
A market in which security trades is priced efficiently; based on available information, there is no reason that the current share price is too high or too low; although market inefficiencies may exist, they are relatively small and uncommon; the theory is nonsense and is just taught so professors can sell textbooks
How is the dividend discount model calculated?
A model which determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate
What is the best definition of a derivative in the context of securities markets?
A security where the value is based on the value of another security
What accounts are always included in working capital management?
Accounts payable and accounts receivable
What account is the most liquid?
Accounts receivable
How is the return on investment of an equity security calculated?
Adding the capital gain percentage to the dividend yield
What is a source of cash for a firm?
An increase in common stock
Protective covenants ___________
Are primarily designed to protect bondholders
What does inversely proportional mean?
As interest rates decline, bond values increase
What is the financial statement that shows the accounting value of a firm's equity as of a particular date?
Balance sheet
What is the best example of an interest-only security?
Corporate bond
What is a security traded in the U.S. money market?
Corporate bonds
What style of business organization is subject to double taxation?
Corporation
Market dealers _________________
Buy and sell for his/her own account
What is the process of planning and managing a firm's long-term investments?
Capital budgeting
What are current assets?
Cash and accounts receivable
Interest earned on both the initial principle and the interest reinvested from the prior periods is called ___________
Compound interest
How is net working capital defined?
Current assets-current liabilities
What is a financial leverage ratio?
Debt to equity
Alan Fishman just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as what?
Discount rate
The process of determining the present value of future cash flows in order to know their worth today is referred to as __________
Discounted cash flow valuation
An example of erosion when taking on a new project would be ___________________
Disney adding a new park in Shanghai which would erode or cannibalize Hong Kong
Tom Seaver is looking to eliminate unsystematic risk in his portfolio which comprises 2mm shares of Tesla. What is the best way he can go about doing that?
Diversify with shares in multiple industries
Which security has a "residual claim" on a company's cash flows?
Equity
To what do noncash items refer?
Expenses which do not directly affect net cash flows
A bond's coupon rate is equal to the annual interest divided by what?
Face value
What is the average life of common equity?
Forever
What sets forth the common set of standards and procedures by which audited financial statements are prepared?
Generally Accepted Accounting Principles
What should a financial manager consider when considering an opportunity?
How much cash they expect to receive, when they will receive funds, how likely they are to receive funds
A Johnson & Johnson bond pays an 8% coupon rate on a bond provided that its earnings exceed an ROE of 8%. What type of security is this?
Income bond
Bond yields are the combined effect of ____________
Inflation, rate risk, default risk, and taxability
Which two cash flows are received by a typical bond?
Interest and principal at maturity
What is the real rate of interest?
Interest rate minus inflation rate
Which investment technique yields the same result as net present value?
Internal rate of return
What is an example of a key turnover ratio?
Inventory turnover ratio, asset turnover ratio, receivables turnover ratio, fixed asset turnover ratio
What is true regarding the internal rate of return?
It is the most important alternative to net present value; it is a single rate of return that summarizes the merits of the project; it is the discount rate that makes the net present value of an investment equal to 0; an investment is acceptable if its IRR exceeds the required return
What is an example of an action market?
London Stock Exchange
The bond principal is repaid on which date?
Maturity date
What is a bond that is 100% exempt from being taxed by the U.S. government?
Municipal bond
What is the difference between an investment's market value and cost?
Net present value
What is a net working capital concern?
Net working capital may be a negative value
What are some common pitfalls when looking at incremental cash flows?
Not including sunk costs; including opportunity costs; including financial costs; not including side effects of doing the deal
What represents cash outflows from a corporation?
Payment of dividends, payment of government taxes
Which is the best example of a perpetuity?
Pension plan with TIAA
What are the market based ratios?
Price to equity ratio and price to book value ratio
What are the correct set of components of ROE?
Profit margin, asset turnover, equity multiplier
What is a measure of a company's liquidity?
Quick ratio
What does the securities and exchange commission not do?
Regulate all national banks in the U.S.
As a financial manager, what will you do with an investment if its net present value is negative?
Reject the investment
Who is the primary regulator of the U.S. securities markets?
Securities and exchange commission
Which security has the greatest preference in liquidation?
Senior debt
Which type of analysis only allows for one variable to change?
Sensitivity analysis
With whom does control of a firm ultimately rest?
Shareholders
Mike Piazza is asking you to tell him about the Capital Asset Pricing Model. what will you tell him?
Shows expected return for a particular asset; incorporates the pure time value of money; explains the reward of bearing systematic risk; alerts you to the amount of systematic risk of a particular security
Hunter Biden invested $2,000 six years ago at 7.5%. He spends his earnings as soon as he earns any interest. What type of interest is Mr. Biden earning this year?
Simple interest
Which type of company analysis considers the inter-relationships between cash flow components?
Simulation analysis
The sources and uses of cash over a period are reflected on the ______________
Statement of cash flow
What is true about operating leverage?
The greater the degree of operating leverage, the greater the potential for forecasting risk; suggests that a business is capital intensive; the degree to which a business relies on fixed costs; small errors in operating leverage can magnify problems in forecasting
What best describes the primary advantage of being a limited partner instead of a general partner?
The maximum loss is limited to the capital invested
What is the best definition of an opportunity cost?
The most valuable investment alternative given up if a particular investment is undertaken
ABC Corporation has current assets of $5,200, fixed assets of $26,000, current liabilities of $4,900, and long-term debt of $15,000. What is the ABC Corporation's total equity? What is the NWC of ABC Corporation?
Total equity: $11,300, NWC: $300
What is an example of an indirect agency cost?
Unnecessary corporate expenditure
