Finance 311 Final Review (chapters 1-8)
__________ can be achieved by investing in a set of securities that have different risk-return characteristics.
Diversification
The financial analysis tool that takes into account the entire capital structure of the firm is the:
EBITDA multiple
A firm with a debt ratio of 0.75, will have an equity multiplier of
4.00
A firm with debt ratio of 0.75, will have an equity multiplier of
4.00
What is a eurobond?
A bond issued by a US corporation and sold to investors in Europe
The _________ has a goal of serving as a bridge between academic study of finance and the application of financial principles by financial managers
Financial Management Association
Most analysts prefer using price to free cash flow rather than price-to-earnings (P/E) ratio because price to free cash flow is:
A stricter measure that reduces the cash flow by the amount of capital expenditures.
Which of the following are reasons why large multinational corporations may sell equity in international markets rather than selling stock only in the country in which they are domiciled?
Global equity offerings result in higher price per share
____________ indicate the ability of the firm to meet its short-term financial obligations
Liquidity ratios
There are 3 forms of market efficiency. All of the following statements are correct EXCEPT:
Market efficiency is a hard and fast rule that has been verified in real-world situations
An example of a listed security exchange within the secondary market is:
NYSE
Total risk of a security can be viewed as consisting of two parts. Which of the following apply? I. verifiable risk II. non-verifiable risk
Neither statement is correct
Which of the following statements is/are correct about financial intermediaries? I. Financial intermediaries primarily operate within the secondary market. II. Examples of financial intermediaries are: commercial banks, thrift companies and the internal revenue
Only statement I is correct
Which of the following statements is/are correct? I. Unsystematic risk can be eliminated through diversification. II. Unsystematic risk is the relevant portion of an asset's risk attributable to market factors that affect all firms, like inflation, political events, etc.
Only statement I is correct
Which of the following statements is/are correct about long-term loans? I. Debentures are generally sold with a lower interest rate than mortgage bonds or secured bonds. II. The quality of a debenture depends on the general creditworthiness of the issuing company.
Only statement II is correct
The financial plan that is a "blueprint" detailing where the firm wants to be at some future point in time is the:
Operational plan
The type of ratio that indicates the firm's ability to provide adequate returns in the form of dividends and share price appreciation is:
Profitability ratios
There are 3 major factors that determine the market value of a company's share of stock. All of the following are factors EXCEPT:
Sales Generated
_______________ arise from the divergent objectives between owners and managers.
Agency problems
Junk bonds (i.e. bonds issued by companies with weak financial positions) are rated __________ or lower by Moody's.
Ba
Which of the following is/are correct regarding the maturity date on securities? I. Long-term debt has a shorter maturity date than preferred stock. II. Preferred stock can have no specific maturity date, so can be perpetual.
Both I and II
Generally, which of the following non-cash charges is/are added to earnings after tax to calculate the after-tax cash flow? I. Depreciation II. Deferred taxes
Both statements I and II are correct
Using a cash budget is more useful than the percentage of sales method because: I. It can more precisely estimate the amount of financing needed. II. It can better estimate the time of financing needs.
Both statements I and II are correct
An example of an investing activity is:
Buying new computer
An example of an investing activity is:
Buying new computers
____________ markets deal in long-term securities having maturities greater than one year.
Capital
In the ____, the expected return on a security is equal to the risk-free rate plus a single risk premium that is equal to the product of the expected rate of return on the market portfolio less the risk-free rate times the sensitivity of the security's returns to the market return.
Capital Asset Pricing Model
In the valuation of common stock, the simple annuity and perpetuity formulas used in the valuation of bonds and preferred stock are not generally applicable because:
Common stock dividends are normally expected to grow over time, rather than being constant as are payments on most bonds and most preferred stock.
If the exchange rate from U.S. dollars to Canadian dollars is $0.80/Canadian dollar, then the exchange rate from Canadian dollars to U.S. dollars is
$1.25 Canadial $/US dollar
A firm's price to earnings ratio is 8 an its market to book ratio is 2. If its earnings per share are $4, what is the BV per share?
$16
A corporation that operates ethically will notice certain benefits as it applies to shareholder wealth maximization. With shareholder wealth maximization in mind, all of the following could be experienced by an ethical corporation EXCEPT:
The cooperation can expect to have greater agency costs
What is the difference between the direct method and the indirect method of presenting the cash flow from operations?
The indirect method adjusts net income to reconcile in to net cash flow from operating activities.
A unique characteristic of bearer bonds is:
The name and country of the bond owner is not on the bond
The value of debt and equity securities is based upon:
The present value of the cash flows that the securities are expected to provide
The value of debt and equity securities is based upon:
The present value of the cash flows that the securities are expected to provide.
Which of the following is not a responsibility of an investment banker?
They directly influence the objectives and direction of the company
In an efficient capital market, all security investments will have:
a NPV of zero
In marketing a new security issue, the investment banker assumes the risk of not being able to sell the security at a favorable price in each of the following cases except:
a best efforts offering
Beta is defined as:
a measure of volatility of a security's returns relative to the returns of a broad-based market portfolio of securities.
A procedure that allows a firm to file a master registration statement with the SEC and then sell an offering of common stock in small increments is known as ___________.
a shelf registration
Stock splits are:
a sign that the company wants to get its stock price to a more desirable trading level.
The two most important disciplines on which financial management relies are
accounting and economics
The financial manager uses _________ when determining the firm's most appropriate capital structure.
accounting data
The financial manager uses __________ when determining the firm's most appropriate capital structure.
accounting data
The quick ratio is the same as current ratio except it does not consider
accounts receivable
In the percent-of-sales forecasting method, which of the following is (are) assumed to increase proportionately with sales?
all of the above (accts receivable, accts payable, cash)
Financial management draws heavily on the following related disciplines:
all of these (accounting, macroeconomics, microeconomics)
The success of a firm is linked to its stakeholders. This group includes:
all of these (employees, community neighbors, suppliers)
Users of the CAPM should be aware of some of the problems in its practical application. These problems include which of the following?
all of these (estimating expected future market returns, determining an asset's future beta, determining the most appropriate measure of the risk-free rate)
Although ratios can provide valuable information, they can also be misleading for the following reason(s):
all of these are correct
The call feature of a long-term bond
all of these are correct (is an optional retirement provision, allows the insurer to replace a high coupon bond with a lower coupon bond, states the call price)
The main advantage of deterministic models is that they
allow the user to perform sensitivity analyses quickly
A component of earnings that recognizes the return that the firm is expected to earn on assets that have not been placed in services is called ___________.
allowance for funds used during construction
Capital markets in financially sophisticated economies are not perfectly efficient because of
anomalous events and irrational investor behavior
Preferred stock has a priority over common stock with regard to the company's
assets and dividends
The security market line can be thought of as expressing relationships between required rates of return and
beta
Rank in ascending order (lowest to highest) the relative risk associated with holding the preferred stock, common stock and bonds of a firm:
bonds, preferred stock, common stock
On the capital market line (CML), any risk-return combination beyond the Market Portfolio (m) is obtained by __________.
borrowing money
Which of the following is an example of a deterministic model?
budget simulator
The returns investors receive from holding common stocks may be in 2 forms. They are
cash dividend payments and capital gains
When considering the quality of a firm's earnings, high quality earnings tend to be _______
cash earnings and earnings derived from regularly recurring transactions
All of the following are primary sources of systematic risk except
changes in the amount of foreign competition facing an industry
Financial ratio analysis is most often performed as a
comparative analysis and a trend analysis
____________ is interest that is paid not only by the principal, but also on any interest earned but not withdrawn during earlier periods.
compound interest
All of the following are users of financial information EXCEPT:
customers
To decrease the additional financing needed to support an increase in sales, management can
cut dividends
All of the following types of bonds are secured except
debentures
One method of decreasing the cash outflows of a firm is to
decrease dividends
Deferred taxes may occur due to the use of
different depreciation methods for taxes and financial reporting
An exchange rate quoted as $1.47 per British pound is known as a _______ quote.
direct
The process of finding PV is frequently called
discounting
_____ can be achieved by investing in a set of securities that have different risk-return characteristics.
diversification
An investor, by investing in combinations of stocks, develops a ____________ portfolio
diversified
The rights of stockholders to share equally on a per share basis in any distributions of corporate earnings is known as _____________________.
dividend rights
In valuing a company that sells products and services, _________ is the most important factor in the valuation of closely held firms.
earnings capacity
In any economy as a whole, the actual savings for a given period of time must ___________ the actual investments.
equal
Ex post returns differ from _________ returns in that they represent __________ values rather than ________________ values.
ex ante; actual; estimated
________ indicate the firm's capacity to meet its debt obligations, both short-term and long-term.
financial leverage ratios
In the constant growth dividend valuation model, it is assumed that the _____________.
firm's future dividend payments are expected to grow at a constant rate forever
Financial leverage ratios measure the
firm's use of fixed-charge financing
Which of the following features (if any) of debt securities provides the investor with a measure of protection against inflation?
floating coupon rates
A portfolio is efficient if___________.
for a given standard deviation, there is no other portfolio with a higher expected return and if, for a given expected return, there is no other portfolio with a lower standard deviation
The zero growth dividend valuation model is used when a firm's future dividends are expected to remain constant,
forever
Which of the following is not a correct statement about foreign currency futures?
futures contracts are not liquid
The quality of a debenture depends on the
general credit-worthiness of the issuing company
The difference between merchandise exports and imports is known as the ____________.
goods and services trade balance
When the required rate of return is ________ the coupon rate, the bond will sell at a discount.
greater than
A multinational firm ____________.
has direct investments in manufacturing facilities in more than one country
If the general level of interest rates in the economy moves up, then investors will require a ___________ rate of return on securities, and, in general, stock prices should ______________, ceteris paribus.
higher, decline
As a group, net savers are:
households
Which of the following is not an approach for managing risk
ignoring systematic risk
There are highly publicized hedge fund problems, for example Julian Robertson's Tiger fund or Long Term Capital Management. The impact that this has had on hedge funds is:
inconsequential and irrelevant. Investors may rely on the due diligence of the fund managers for safe investing.
If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must
increase its equity multiplier
Economic value added (EVA) is a measure of operating performance that indicates how successful a firm has been at:
increasing the MVA of the enterprise in any given year
In preparing a statement of cash flows, the ____ method involves adjusting net income to reconcile it to net cash flows from operating activities.
indirect
An investor decides to sell his stock based on information he received about some internal audit revealing that the company has severe financial problems. Trading on this information is called:
insider trading
____________ is the return earned by someone who has forgone current consumption.
interest
in using the percentage of sales forecasting method the assumption is that
inventories will increase proportionately with sales
Since small business owners have much of their own money tied up in their business, small business owners are most concerned with:
inventory control
All of the following economic environment factors affect stock prices except:
investment strategies
When considering the risk of receiving cash flows, financial managers must be aware that:
investors want higher returns for perceived greater risk
A change in the market price of an asset will occur as a result of changes in:
investors' required rates of return and their expected returns from the asset
Techniques identified by John Casey that managers could keep in mind when addressing the ethical dimensions of a business problem include all of the following except:
involve all parties with a financial interest in the outcome
Which of the following is not an advantage of common stock financing
involves relatively high flotation costs
Financial intermediaries
issue secondary claims to the lender
Annuity due calculations are especially important when dealing with
lease contracts
The category "Cash and Cash Equivalents" includes short term investments. The time frame for short-term is:
less than three months
The ___________ theory of the yield curve holds that required returns on long-term securities tend to be greater the longer the time to maturity.
liquidity premium
A fresh fruit wholesaler would normally be expected to have
low profit margin and high asset turnover
The barriers to the free flow of capital among the major world capital markets include all of the following except:
low transaction costs
Shareholder wealth is measured by the ___________ of the shareholder's common stock holdings
market value
Shareholder wealth is measure by the ____________.
market value of the shareholders' common stock holdings
The value of a 15-year bond will change __________ or a given change in the required rate of return than the value of a 5 year bond.
more
Which of the following statements is/are correct? I. Shareholders elect the Chairman of the Board II. The board of directors has no control over whether or not dividends will be paid.
neither statement I nor II is correct
Return on stockholders' equity is equal to __________ times __________ times_____________.
net profit margin; total asset turnover; equity multiplier ratio
Stockholder's equity is also known by another name. It is:
net worth
The FASB requires companies to prepare their statement of cash flows using the:
none of the answers are correct
If a firm's common size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money:
on cost of goods sold as a percentage of sales.
The PV of a(n) ______________ is determined by dividing the annual cash flow by the interest rate.
perpetuity
Many small business owners are _________ diversified with respect to their personal wealth.
poorly
The Market Value Added (MVA) is the ______.
positively related to the present value of all expected future EVA.
If a firm's return on investment, i.e., earnings after taxes divided by total assets, is 7%, and the firm has no preferred stock financing, it is
possible that its return on stockholders' equity is 10%.
Creditors have a fixed financial claim on a company's resources through all of the following EXCEPT:
preferred stock
The zero growth method is used to value
preferred stock
If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717, then the Yen is trading at a(n) ____.
premium
The shareholder wealth maximization goal states that management should seek to maximize the _______ of the expected future returns to the owners of the firm.
present value
Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating the
present value of an annuity
In the constant-growth dividend valuation model, the required rate of return on a common stock can be shown to equal to the sum of the dividend yield plus:
price appreciation yield
Which of the following financial ratios are market-based ratios?
price-to-earnings
Common stock prices are dependent on the amount and stability of a firm's cash flows so common stockholders are especially interested in:
profitability measurements
The objective of maximizing shareholder wealth, as measured by the market value of the firm's stock
provides a way to consider the risk of the returns being offered
A _______ is a group of underwriters who agree to underwrite a new issue in order to spread the risk.
purchasing syndicate
The amount of simple interest is equal to the product of principal ____________ times ___________________.
rate per time period, the number of time periods
The coefficient of variation is a(n) __________ measure of risk.
relative
The coefficient of variation is a(n) ___________ measure of risk
relative
The NPV rule provides appropriate guidance for financial decision makers when costs are incurred immediately but
result in a stream of benefits over several future time periods
From an accounting standpoint, stock dividends involve a transfer from the
retained earnings account
Which of the following (if any) are not financial intermediaries?
securities broker
The kind of analysis that consists of rerunning the model to determine the effect on the output variables of changes in the input variables is
sensitivity analysis
The primary objective of the firm is:
shareholder wealth maximization
Commercial banks are an important source of
short-term loans and term loans
Although this type of business generates less than 6% of the total U.S. business revenue, _________ make up approximately 75% of all businesses.
sole-proprietorships
A firm's operational plan states objectives that define where the firm wants to be at the end of the planning period. These objectives must be:
specific
An example of a financial middleman is a:
stock broker
_____________ provide a direct measure of the success of decisions made by a firm's managers.
stock prices
Among the most important agency relationships in the context of finance is (are) the relationship(s) between ___________.
stockholders and creditors
Potential sellers of an asset can be represented as a ____________ schedule showing the ____________ prices at which they are willing to sell given quantities of the asset.
supply, minimum
In stock quotations, the last column, showing the net change, indicates the net change in
the closing price from the previous day's close
If the present value of a given sum is equal to its future value, then
the discount rate must be zero
The book value of an asset represents
the historic acquisition cost of the asset
The term structure of interest rates is the pattern of interest rate yields for securities that differ only in
the length of time to maturity
A major disadvantage of a sole proprietorship is the fact that
the owner has unlimited personal liability
A good operational plan incorporates a plan for:
the resources a firm will need to obtain its long term objectives.
The analysis of financial statements is affected by inflation because
the value of fixed assets may be understated
Foreign bonds have all of the following characteristics EXCEPT:
they are denominated in euros
Investors can obtain high returns in their investments if:
they assume high risks
The U.S. financial markets are said to be highly informationally efficient. This means
they quickly reflect information relevant to determining stock value
Which ratio is frequently used in conjunction with the analysis of a bond's quality?
times interest earned
A firm's return on equity is a function of its net profit margin, ____ and equity multiplier.
total asset turnover
The difference between the selling price to the public of a new issue and the net the issuing firm actually receives is known as the
underwriting spread
The NPV of an investment is made by a firm represents the contribution of that investment to the ____________ of the firm.
value
The definition of marginal analysis principle is that financial decisions are made and actions are taken:
when the added benefits exceed the added costs
