Final FIN 305 w/ test questions

Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on stock market for the first time. We usually refer to these first-time issues as which of the following?....

A; Initial public offerings (IPO'S)....

Which ratio measures the number of dollars of sales produced per dollar of inventory?....

A; Inventory turnover....

In the United States, which of these financial institutions arrange most primary market transactions for businesses?....

A; Investment banks.....

Which of these refer to the ease with which an asset can be converted into cash?....

A; Liquidity....

Which of these is the portion of total risk that is attributable to overall economic factors?....

A; Market risk....

For publicly traded firms, which of these ratios measure what investors think of the company's future performance and risk?...

A; Market value ratios

When calculating the weighted average cost of capital, weights are based on:...

A; Market values...

Which of these feature debt securities or instruments with maturities of one year or less?....

A; Money markets.....

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?....

A; NPV....

Which of these is the interest rate that is actually observed in financial markets?....

A; Nominal interest rates....

Another term for MARKET RISK?....

A; Nondiversifiable risk....

The total risk of the S&P 500 Index is equal to:....

A; Nondiversifiable risk....

A dollar paid or received in the future is?....

A; Not worth as much as dollar paid or received today....

Which of the following is an example of aligning managers' personal interests with those of the owners?...

A; Offer the managers an equity stake in the firm...

As individual legal entities, corporations assume liability for their own debts, so the shareholders hold:...

A; Only limited liability...

Which of these provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds?....

A; Primary markets.....

Which of these refers to something that has not been released to the public, but is known by few individuals, likely company insiders?...

A; Privately held information...

Which of these ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm?.....

A; Profitability

This type of business organization is entirely legally independent from its owners:...

A; Public corporations...

TEST QUESTION: What part of the CAPM formula represents TVM?...

A; RISK FREE RATE (Rf)...

Which of these does NOT perform vital functions to securities markets of all sorts by channeling funds from those with surplus funds to those with shortages of funds?...

A; Secondary markets....

Once firms issue financial instruments in primary markets, these same stocks and bonds are then traded in which of these?....

A; Secondary markets.....

From the perspective of control, the best form of business organization is the:....

A; Sole proprietorship...

The most common type of business in the United States is the:....

A; Sole proprietorship....

Which financial statement reports the amounts of cash that the firm generated and distributed during a particular time period?....

A; Statement of Cash Flows....

T or F: The cost of capital rep. a "hurdle rate"..

A; TRUE

A strong liquidity position means that:....

A; The firm is able to meet its short-term obligations....

When calculating the # of years needed to grow an investment to a specific amount:....

A; The higher the interest rate, the shorter the time period needed to achieve the growth.....

If the yield curve is downward sloping, what is the yield to maturity on a 30-year Treasury bond relative to a 10-year Treasury bond?....

A; The yield on the 10-year bond must be greater than the yield on the 30-year bond....

People borrow money because they expect:.....

A; Their purchases to give them satisfaction that compensates them for the interest payment: charged for the loan.....

Which of the following is an important advantage to the issuer of a bond with a call provision?....

A; They allow for refinancing opportunities....

Which statement is incorrect regarding hybrid organizations?...

A; They offer the same type of control as a sole proprietorship....

Which ratio measures the number of dollars of operating earnings available to meet each dollar of interest obligations on the firm's debt?.....

A; Time interest earned....

What is the difference in perspective between finance and accounting?...

A; Timing....

Which of the following is NOT a capital market instrument?...

A; U.S. Treasury bills....

The biggest disadvantage of the sole proprietorship is:....

A; Unlimited liability...

When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as:...

A; Weighted average of the capital components costs....

Which of the following will impact the cost of equity component in the weighted average cost of capital?...

(The risk-free rate, Beta, Expected return on the market), A; All of these....

All of the following are reasons that one should be cautious in interpreting financial statements EXCEPT:....

A; All of these are reasons to be cautious in interpreting financial statements....

Which of the following measures the number of days accounts receivable are held before the firm collects cash from the sale?....

A; Average collection period...

This group is elected by stockholders to oversee management in a corporation:....

A; Board of directors...

Which is true? Ratio analysis:......

A; Can provide useful information on a firm's current position and hint at future performance....

Which ratio measures a firm's ability to pay short-term obligations with its available cash and market securities?...

A; Cash.....

Which of these is a measure of risk to reward earned by an investment over a specific period of time?....

A; Coefficient of variation....

Which of the following is NOT a money market instrument?...

A; Corporate bonds....

Which of the following will directly impact the cost of debt?...

A; Coupon rate...

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?...

A; Credit quality risk....

The interest rate "i" which we use to calculate PV, is often referred to as?...

A; Discount rate.....

We can estimate a stock's value by:...

A; Discounting the future dividends and future stock price appreciation....

The process of calculating how much an amount that expect to revive in the future is worth today is called?....

A; Discounting....

All of the following are advantages to organizing as a corporation EXCEPT:....

A; Double taxation...

LIQUIDITY QUESTION: Which statement is true?...

A; Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets.....

Which of these money market instruments are short-term funds transferred between financial institutions, usually for no more than one day?...

A; Federal funds....

Which company has the most risk from an investor's standpoint? Firm A has a PE of 92 times and Firm B has a PE of 16 times. Assume both firms operate in the same industry. Firm A has fewer shares outstanding than Firm B......

A; Firm A because it has the higher PE ratio.....

Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification?....

A; Firm specific risk....

For which of the following would one expect the book value of the asset to differ widely from its market value?...

A; Fixed assets...

An investor wanting large returns will be interested in companies that have:....

A; High ROEs

Maximizing owners' equity value means carefully considering all of the following EXCEPT:....

A; How best to increase the firm's risk...

RANDOM QUESTIONS: 1. (The Dow Jones Industrial Average (DJIA) includes:), 2. (The Standard & Poor's 500 Index includes:), 3. (The NASDAQ Composite includes:),.....

A; 1. 30 of the largest (market capitalization) and most active companies in the U.S. economy, 2. 500 firms that are the largest in their respective economic sectors, 3. All the stocks listed on NASDAQ stock exchange......

Which of the following is an example of a capital structure?....

A; 20% debt 80% equity...

We often use the P/E ratio model with the firm's growth rate to estimate:...

A; A stock's future price...

BALANCE SHEET PROBLEM: You are evaluating the balance sheet for Cypress Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $570,000, Accounts receivable = $770,000, Inventory = $470,000, Accrued wages and taxes = $47,000, Accounts payable = $170,000, and Notes payable = $970,000. What is Cypress's net working capital? ---> equation: net working capital = current A - current L......

Cypress's current assets = (Cash and marketable securities: +$570,000), (Accounts receivable: +$770,000), (Inventory: + $470,000), =(Total current assets = $1,810,000). Cypress's current liabilities = (Accrued wages and taxes: + $ 47,000), (Accounts payable: + $170,000), (Notes payable: +$970,000), =(Total current liabilities =$1,187,000). SOLUTION: (1,810,000 - 1,187,000) = A; 623,000.......

MORE RANDOM QUESTIONS: 1. (Which of these is the reward for taking systematic stock market risk?), 2. (The U.S. Treasury Bill/Bond is universally regarded as the world's only risk-free investment.), 3. (Which of these is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return?), 4. (Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring?), 5. (Which of these makes this a true statement? The WACC formula:), 6. (Which of these is a measure of the sensitivity of a stock or portfolio to market risk?),

MORE RANDOM QUESTION ANSWERS; 1. Market risk premium, 2. TRUE, 3. Internal rate of return, 4. Expected return, 5. uses the after-tax costs of capital to compute the firm's weighted average cost of debt financing, 6. BETA.......

If a company reports a large amount of net income on its income statement during a year, the firm will have:...

Positive cash flow, Negative cash flow, Zero cash flow, A; Any of these scenarios are possible.....

RANDOM PV/ FV QUESTIONS: 1. Which of the following will NOT increase a PV?, 2. When computing the FV of an annuity, the higher the compounding frequency:, 3. Which of the following will increase the PV of an annuity?, 4. Everything else equal, you would rather be?, 5. The PV of annuity payments made far into the future is:, 6. How are FV's affected by interest rates?,.....

RANDOM PV/FV ANSWERS: 1. Increase the interest rate, 2. the higher the FV will be, 3. Decreasing the discount rate, 4. The receiver of an annuity due, 5. Worth very little today, 6. The higher the interest rate, the larger the FV will be,......

RANDOM QUESTION: 1. (Which of these includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment?), 2. (Which of the following is a measurement of the co-movement between two variables that ranges between -1 and +1?), 3. (We commonly measure the risk-return relationship using which of the following?)....

RANDOM QUESTIONS ANSWERS; 1. Dollar return, 2. Correlation, 3. Coefficient of variation,.....

INCOME STATEMENT PROBLEM: Income Statement Barnyard, Inc.'s 2008 income statement lists the following income and expenses: EBIT = $508,000, Interest expense = $52,000, and Taxes = $160,000. Barnyard's has no preferred stock outstanding and 280,000 shares of common stock outstanding. What are its the 2008 earnings per share?.....

SOLUTION: (EBIT: $508,000), (Interest expense: - 52,000), (EBT: 456,000), (Taxes: -160,000), (Net income $296,000). .....(Earnings per share (EPS) = $296,000/ $280,000) A; $1.06 per share...

STATEMENT OF CASH FLOWS PROBLEM: Statement of Cash Flows In 2008, Upper Crust had cash flows from investing activities of −$300,000 and cash flows from financing activities of −$169,000. The balance in the firm's cash account was $80,000 at the beginning of 2008 and $124,000 at the end of the year. What was Upper Crust's cash flow from operations for 2008?......

SOLUTION: (Cash Flows from Operating Activities $513,000) (Cash Flows from Investing Activities −300,000) (Cash Flows from Financing Activities −169,000) (Net Change in Cash and Marketable Securities $44,000) - $124,000 − $80,000 =A; $44,000.

An investor owns $2,000 of Adobe Systems stock, $4,000 of Dow Chemical, and $6,000 of Office Depot. What are the portfolio weights of each stock?....

SOLUTION: (Total portfolio is $2,000 + $4,000 + $6,000 = $12,000), 1. (Adobe System weight = $2,000/$12,000 = 0.1667), 2. (Dow Chemical weight = $4,000/12,000 = 0.3333), 3. (Office Depot weight = $6,000/$12,000 = 0.5), A; .1667, .3333, .5....

BALANCE SHEET PROBLEM: ABC Inc. has $100 in cash on its balance sheet at the end of 2009. During 2010, the firm issued $450 in common stock, reduced its notes payable by $40, purchased fixed assets in the amount of $750, and had cash flows from operating activities of $315. How much cash did ABC Inc. have on its balance sheet at the end of 2010?....

SOLUTION: ($100 + 315 - 40 - 750 + 450 = $75), A; $75.....

BALANCE SHEET PROBLEM: Lemmon Inc. lists fixed assets of $100 on its balance sheet. The firm's fixed assets have recently been appraised at $140. The firm's balance sheet also lists current assets at $15. Current assets were appraised at $16.50. Current liabilities book and market values stand at $12 and the firm's long-term debt is $40. Calculate the market value of the firm's stockholders' equity:....

SOLUTION: ($140 + $16.50] - $12 - $40 = $104.50), A; 104.5.....

Pfizer, Inc. (PFE) has earnings per share of $2.09 and a P/E ratio of 11.02. What is the stock price?...

SOLUTION: ($2.09 × 11.02 = $23.03) A; $23.03....

Suppose Paccar's current stock price is $122.12 and it is likely to pay a $3.09 dividend next year. Since analysts estimate Paccar will have a 11.0 percent growth rate, what is its required return?.....

SOLUTION: ($3.09 / $122.12) + 0.110 = 13.53%, A; 13.53 +- 0.01......

INCOME STATEMENT PROBLEM: Income Statement Bullseye, Inc.'s 2008 income statement lists the following income and expenses: EBIT = $906,000, Interest expense = $94,000, and Net income = $579,000. What is the 2008 Taxes reported on the income statement?...

SOLUTION: (($906,000 - $94000) = EBT = 812,000 - 579,000 = 233,000 TAXES), A; $233,000.....

Financial analysts forecast Target Corp. (TGT) growth for the future to be 11 percent. Their recent dividend was $0.52. What is the value of their stock when the required rate of return is 11.89 percent?....

SOLUTION: (0.52 × 1.11)/(0.1189 - 0.11) = $64.85, A; $64.85....

A 5.125 percent TIPS has an original reference CPI of 191.8. If the current CPI is 188.3, what is the par value of the TIPS?....

SOLUTION: (1,000 × (188.3/191.8) = 981.75), A; 981.75....

Consider the following bond quote: a municipal bond quoted at 101.25. If the municipal bond has a par value of $5,000, what is the price of the bond in dollars?....

SOLUTION: (101.25% × 5,000 = 5,062.50), A; $5,062.5....

What's the current yield of a 5.75 percent coupon corporate bond quoted at a price of 103.05?....

SOLUTION: (5.75% ÷ 103.05% = 0.055798 = 5.58%), A; 5.75%....

AR PROBLEM: A firm ended the year with an average collection period of 50 days. The firm's credit sales were $11 million. What is the firm's year-end balance in accounts receivable?....

SOLUTION: (50 = (AR × 365)/11; AR × 365 = 50 × 11; AR = 1.51m), A; 1.51 MIL.....

BALANCE SHEET PROBLEM: Balance Sheet Jack and Jill Corporation's year-end 2009 balance sheet lists current assets of $250,000, fixed assets of $800,000, current liabilities of $195,000, and long-term debt of $300,000. What is Jack and Jill's total stockholders' equity? equation: Equity = Assets - Liabilities......

SOLUTION: (800,000+ 250,000 - 300,000 + 195,000), A; 555,000....

DEBT-2-EQUITY RATIO PROBLEM: You are considering a stock investment in one of two firms (A and B), both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the debt-to-equity ratio for the two firms:....

SOLUTION: (A: 18/2 = 9 ; B: 2/11 = .11), A; FIRM A 9 TIMES; FIRM B =0.11 TIMES.......

A stock has an expected return of 15 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 11 percent. Given this data, which of the following statements is correct?....

SOLUTION: (CoV for the stock investment: 20/15 = 1.33; CoV for the bond: 15/9 = 1.22), A; The bond investment has a better risk-return trade off....

A bond issued by a corporation on May 1, 1999, is scheduled to mature on May 1, 2019. If today is May 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.).....

SOLUTION: (May 1, 2019 minus May 2, 2009 = 10 years and 0 months), A; 10 Years....

Compute the price of a 4.75 percent coupon bond with 15 years left to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond?....

SOLUTION: (N = 30, I = 3.125, PMT = 23.75, FV = 1000, CPT PV = -855.34), Since this is less than $1,000, it's, A; Discount bond.....

Calculate the price of a zero coupon bond that matures in five years if the market interest rate is 7.50 percent. (Assume semi-annual compounding and $1,000 par value.)....

SOLUTION: (PV= FVn / (1+i)^n = 1000 / 1.4450 = 692.04), A; $692.02....

Year to date, Company Y had earned a 10.8 percent return. During the same time period, Company R earned 12.20 percent and Company C earned -1.56 percent. If you have a portfolio made up of 45 percent Y, 35 percent R, and 20 percent C, what is your portfolio return?....

SOLUTION: (Portfolio Return is 0.45 × 10.8% + 0.35 × 12.20% + 0.20 × -1.56% = 8.818%), A; 8.82%....

If the risk-free rate is 4.60 percent and the risk premium is 2.6 percent, what is the required return?....

SOLUTION: (Required return = 4.60% + 2.6% = 7.2%) A; 7.2...

Apple's 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $890. The firm's tax rate is 36 percent. What is the firm's after-tax cost of debt?...

SOLUTION: (Step 1: PV = -890; PMT = 90; FV = 1000; N = 10; => I = 10.86%),( Step 2: 10.86%(1 - 0.36) = 6.95%), A; 6.95%....

A 3.75 percent TIPS has an original reference CPI of 175.8. If the current CPI is 207.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)....

SOLUTION: (par value = 207.7/175.8 × $1,000 = $1,181.4562),(interest payment = 0.5 × 3.75% × $1,181.46 = $22.15), A: 1,181.5, 22.15 respectively....

A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?....

SOLUTION: (principal + call premium = $1,000 + 4.5% × $1,000 = $1,045), A; $1,045....

Diddy Corp. stock has a beta of 1.0, the current risk-free rate is 5 percent, and the expected return on the market is 15.5 percent. What is Diddy's cost of equity?...

SOLUTION: 5 + 1(15.5 - 5) = 15.50, A; 15.5%....

RULE OF 72 PROBLEM: Approximately what interest rate is needed to double an investment in 6 years?...

SOLUTION: 6/72 = x = 12% A; 12%.....

The past five monthly returns for K and Company are 2.28 percent, 2.64 percent, -1.05 percent, 4.25 percent, and 9.25 percent. What is the average monthly return?....

SOLUTION: Average Return = (2.28% + 2.64% - 1.05% + 4.25% + 9.25%)/5 = A; 3.47.....

Hastings Entertainment has a beta of 0.56. If the market return is expected to be 13.80 percent and the risk-free rate is 4.80 percent, what is Hastings' required return?....

SOLUTION: Hastings' required return = 4.80% + 0.56 × (13.80% - 4.80%) = 9.84%, A; 9.84 +- 0.01%....

Suppose Netflix, Inc., has a beta of 4.05. If the market return is expected to be 15.50 percent and the risk-free rate is 7.50 percent, what is Netflix's risk premium?....

SOLUTION: Netflix's risk premium = 4.05 × (15.50% - 7.50%) = 32.40%, A; 32.40...

You have a portfolio with a beta of 1.67. What will be the new portfolio beta if you keep 93 percent of your money in the old portfolio and 7 percent in a stock with a beta of 0.76?...

SOLUTION: New portfolio beta = (0.93 × 1.67) + (0.07 × 0.76) = A; 1.61....

You remove the Queen-of-Hearts from an ordinary deck of 52 playing cards, and then blind-draw one card from the remaining pile. What is the probability of drawing a King?.... TEST QUESTION: PROBABILITY OR DRAWING THE ACE?..

SOLUTION: Removing the Queen-of-Hearts from the deck results in a population of 51 cards. There are 4 Kings in the population. The chance of drawing 1 Kink is 4/51. A; 7.84%, **TQA; 7.7 (4:52)**

WayCo stock was $75 per share at the end of last year. Since then, it paid a $3 per share dividend last year. The stock price is currently $70. If you owned 200 shares of WayCo, what was your percent return?....

SOLUTION: [Dollar Return = (Ending Value - Beginning Value) + Income = $70 × 200 - $75 × 200 + $3 × 200= -$400], [Percentage Return = -$400 ÷ ($75 × 200) = -0.0267 = -2.67 percent], A; -2.67%....

When a firm alters its capital structure to include more or less debt (and, in turn, less or more equity), it impacts which of the following?....

The residual cash flows available for stock holders, The number of shares of stock outstanding, The earnings per share (EPS), A; All of the choices.....