Finance final exam (exams 1-2)

an investor can virtually eliminate all asset specific risks in their portfolio by

investing in varied and numerous assets

Average taxe rate

it is the total tax expenses divided by the total taxable income and it is always less than or equal to or considerably less than the marginal tax rate

A stocks price is

present value of the (future cash flows) expected dividends and capital gains

Newly issued securities are sold to investors in _____ markets

primary

a firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions and by doing so

the firm automatically gives preferential treatment to the allocation of funds to its riskiest division

the higher the expected rate of return the wider the distribution of returns

the higher the expected rate of return the wider the distribution of returns

The market prices of bonds with longer maturities are more sensitive to changes in market interest rates.

the market prices of bonds with longer maturities are more sensitive to changes in market interest rates

It is not true that a firms cost fo capital primarily depends on

the source of the funds. it actually depends on use

standard deviation measures _________ while beta measures__________

total risk , market wide risk

all of the following have the potential to increase the NPV of an investment

1. ability to immediatley shut down 2. ability to wait until economy improves 3. option to increase production

Managers should act in shareholders interest because shareholders have _______ priority in receiving their claims

Bottom

the average return is __________ less than the geometric return

NOT ALWAYS

it is __________ that the primary advantage of payback analysis is that it biases companies to invest in long term projects that require large expenditures

NOT TRUE - its for short term projects

the price earnings ratio __________ the book value per share per dollar of an accounting firms earnings

DOES NOT REFLECT

Profits being taxed at the corporate level is a ___________ to the corporate form of an organization

Disadvantage

Practice problems exam 1-2

Ok

given an interest rate of zero percent the future value of a lump sum invested today will

always remain constant regardless of investment time period

Firms that compile financial statements according to GAAP:

can still manipulate their earnings to some degree

the future value of annuity ___________ with a higher interest rate

does not fall

the effect of compunding is great for short periods but begins to decline as horizon grows

false

whats an example of something that should not be used in the analysis of a proposed investment

the amount paid 4 years ago for an existing building to be used in the project

Operating cash flow

the cash that a firm generates from its normal business activities using its existing assets

When should you never use the average tax rate

when making decisions regarding new investments and financial choices