FINANCE FINAL LET'S GO BOIIIIIIII
You are considering buying some stock in Continental Grain. Which of the following is an example of nondiversifiable risk? A. Risk resulting from an explosion in a grain elevator owned by Continental B. Risk resulting from an impending lawsuit against Continental C. Risk resulting from a general decline in the stock market D. Risk resulting from a news release that several of Continental's grain silos were tainted
C. Risk resulting from a general decline in the stock market
All of the following are classified as non−bank financial intermediaries except A. hedge funds. B. insurance companies. C. stock brokerages. D. investment banks.
C. stock brokerages.
All of the following affect the value of a bond EXCEPT A. investors' required rate of return. B. the maturity date of the bond. C. the recorded value of the firm's assets. D. the coupon rate of interest.
C. the recorded value of the firm's assets.
You are considering investing in a portfolio consisting of 40% Electric General and 60% Buckstar. If the expected rate of return on Electric General is 16% and the expected return on Buckstar is 9%, what is the expected return on the portfolio?
(% of a portfolio x expected return) + (% of a portfolio x expected return) + ... (0.4 x 0.16) + (0.6 + 0.09) = (0.0640) + (0.0540) = 0.1180 =11.8%
Which of the following statements is true? A. The legal document that describes all of the terms and conditions of a bond issue is called a debenture agreement. B. A bond that has a rating of AA is considered to be a junk bond. C. A zero coupon is a bond that is secured by a lien on real property. D. A bond will sell at a premium if the prevailing required rate of return is less than the bond's coupon rate.
D. A bond will sell at a premium if the prevailing required rate of return is less than the bond's coupon rate.
Which of the following best represents operating income? A. Income after financing activities B. Income from capital gains C. Income from discontinued operations D. Earnings before interest and taxes
D. Earnings before interest and taxes
Which of the following statements about bonds is true? A. Long−term bonds have less interest rate risk than do short−term bonds. B. Bond prices move in the same direction as market interest rates. C. As the maturity date of a bond approaches, the market value of a bond will become more volatile. D. If market interest rates are above a bond's coupon interest rate, then the bond will sell below its par value.
D. If market interest rates are above a bond's coupon interest rate, then the bond will sell below its par value
Which of the following sequences is arranged in the correct order, from highest long−term returns to lowest? A. Corporate bonds, treasury bills, international equities B. International equities, U.S. government bonds, U.S. equities C. Government bonds, emerging market equities, treasury bills D. International equities, U.S. government bonds, treasury bills
D. International equities, U.S. government bonds, treasury bills
The security market line (SML) relates risk to return, for a given set of market conditions. If expected inflation increases, which of the following would most likely occur? A. The market risk premium would increase. B. The slope of the SML would increase. C. Beta would increase. D. The SML line would shift up.
D. The SML line would shift up.
The security market line (SML) relates risk to return, for a given set of market conditions. If risk aversion increases, which of the following would most likely occur? A. The SML line would shift up. B. Beta would increase. C. The slope of the SML would increase. D. The market risk premium would increase.
D. The market risk premium would increase.
Jayden spends a lot of time studying charts of stocks past performance, but his investment return are only average. This outcome supports A. the weak−form efficient market hypothesis. B. the semi−strong form efficient market hypothesis. C. the strong form efficient market hypothesis. D. all of the above.
D. all of the above.
The issuance of bonds to raise capital for a corporation A. increases risk to the stockholders. B. is a cheaper form of capital than the issuance of common stock. C. magnifies the returns to the stockholders. D. all of the above.
D. all of the above.
All else constant, the present value of an investment will increase if A. the investment is discounted at a higher interest rate. B. the investment is discounted at a lower interest rate. C. the investment is discounted for fewer years. D. both B & C.
D. both B & C.
The expected yield of a bond will be less than its yield to maturity when A. when the bond is purchased at a discount. B. the expected yield of a bond cannot be lower than its yield to maturity. C. market interest rates are expected to rise. D. market interest rates are expected to fall.
D. market interest rates are expected to fall.
The capital asset pricing model A. measures risk as the correlation coefficient between a security and market rates of return. B. provides a risk−return trade−off in which risk is measured in terms of the market returns. C. depicts the total risk of a security. D. provides a risk−return trade−off in which risk is measured in terms of beta.
D. provides a risk−return trade−off in which risk is measured in terms of beta.
Advantages of privately placing debt include all of the following except A. speed. B. flexibility. C. reduced placement costs. D. restrictive covenants.
D. restrictive covenants.
The beta of ABC Co. stock is the slope of A. the arbitrage pricing line. B. the characteristic line for a plot of returns on the S&P 500 versus returns on short−term Treasury bills. C. the security market line. D. the line of best fit for a plot of ABC Co. returns against the returns of the market portfolio for the same period.
D. the line of best fit for a plot of ABC Co. returns against the returns of the market portfolio for the same period.
You have been offered a credit card with an interest rate of 1.5% per month. This is equivalent to and effective annual rate (EAR) of
EAR = (1 + (i/n))^n -1 = (1 + (1.5/12) ) ^12 - 1 = 19.56% THIS COULD BE THE WRONG WAY TO DO IT BUT 19.56% IS RIGHT
Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm's EBIT?
EBIT = Sales Revenue - cost of goods sold - operating expenses EBIT = $50,250,000 -$10,115,000 -$35,025,000 =$5,110,000
Charlie Stone wants to retire in 30 years, and he wants to have an annuity of $1,000 a year for 20 years after retirement. Charlie wants to receive the first annuity payment at the end of the 30th year. Using an interest rate of 10%, how much must Charlie invest today in order to have his retirement annuity (round to the nearest $10)?
N = I = PV = PMT = FV = =$540 i have no clue how to do this buuuuuuuut the answer is $540
If you put $6,000 in a savings account that yields an 1% rate of interest compounded daily, what will the investment be worth at the end of one year?
N = 1 x 365 = 365 I = 1 / 365 = 0.0027 PV = -6,000 PMT = 0 FV = ? = $6,060.30
You bought a painting 10 years ago as an investment. You originally paid $85,000 for it. If you sold it for $484,050, what was your annual return on investment?
N = 10 I = ? PV = -85,000 PMT = 0 FV = 484,050 = 19%
What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).
N = 10 x 12 = 120 I = 8.5 / 12 = 0.7083 PV = ? PMT = 0 FV = 1,000 = $429
Terminator Bug Company bonds have a 14% coupon rate. Interest is paid semiannually. The bonds have a par value of $1,000 and will mature 10 years from now. Compute the value of Terminator bonds if investors' required rate of return is 12%.
N = 10 x 2 = 20 I = 12/2 = 6 PV = ? PMT = 70 FV = 1,000 1000 x 0.14 = 140/2 = 70 PV = $1,114.70
MI has a $1,000 par value, 30minus−year bond outstanding that was issued 20 years ago at an annual coupon rate of 10%, paid semiannually. Market interest rates on similar bonds are 7%. Calculate the bond's price.
N = 10 x 2 = 20 I = 7/2 = 3.5 PV = ? PMT = 50 FV = - 1,000 = $ 1,213.19
You are considering the purchase of Hytec bonds that were issued 14 years ago. When the bonds were originally sold, they had a 30minus−year maturity and a 14.375% coupon interest rate that is payable semiannually. The bond is currently selling for $1,508.72. What is the yield to maturity on the bonds?
N = 16 x 2 = 32 I = ? PV = 1,508.72 PMT = 71.875 FV = 1,000 = 4.25 x 2 = 8.5%
A retirement plan guarantees to pay you or your estate a fixed amount for 20 years. At the time of retirement, you will have $31,360 to your credit in the plan. The plan anticipates earning 8% interest annually over the period you receive benefits. How much will your annual benefits be, assuming the first payment occurs one year from your retirement date?
N = 19 I = 8 PV = PMT = ? FV = =$3,194 i have no clue how to do this buuuuuuuut the answer is $3,194
A commercial bank will loan you $17,500 for two years to buy a car. The loan must be repaid in 24 equal monthly payments. The annual interest rate on the loan is 6% of the unpaid balance. What is the amount of the monthly payments?
N = 2 x 12 = 24 I = 6 / 12 = 0.5 PV = -17,500 PMT = ? FV = 0 PMT = $775.61
What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)?
N = 4.5 x 4 = 18 I = 7.5 / 4 = 1.8750 PV = -750 PMT = 0 FV = ? = $1,048
What is the expected rate of return on a bond that pays a coupon rate of 9% paid semi−annually, has a par value of $1,000, matures in five years, and is currently selling for $1071?
N = 5 x 2 = 10 I = ? PV = -1,071 PMT = 45 FV = 1,000 = 3.6402 x 2 = 7.28%
What is the yield to maturity of a nine−year bond that pays a coupon rate of 20% per year, has a $1,000 par value, and is currently priced at $1,407? Assume annual coupon payments.
N = 9 I = ? PV = 1,407 PMT = 200 FV = - 1,000 = 12.28%
At 8% compounded annually, how long will it take $750 to double?
N = ? I = 8 PV = -750 PMT = 0 FV = 1,500 = 9 years
Which of the following statements is true? A. A stock with a beta less than 1.0 has higher nondiversifiable risk than a stock with a beta of 1.0. B. A stock with a beta less than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0. C. A stock with a beta less than zero has no exposure to systematic risk. D. A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.
B. A stock with a beta less than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.
All of the following are true about insurance companies EXCEPT A. They participate in equipment leasing. B. They may only invest their reserves in interest paying bank accounts under Federal law. C. They may guarantee to reimburse lenders should lenders' loans go into default. D. They invest their reserves.
B. They may only invest their reserves in interest paying bank accounts under Federal law.
Managers of corporations need to act in an ethical manner A. because ethics violations will be punished by the law. B. because a business must be trusted by investors, customer and the public if it is to succeed. C. because business managers must answer to a higher authority. D. because ethical behavior is its own justification.
B. because a business must be trusted by investors, customer and the public if it is to succeed.
The market risk premium is measured by
B. market return less risk−free rate.
Which of the following features allows a borrower to redeem or repurchase a bond issue before its maturity date? A. floating rate B. the call provision C. convertibility D. the priority of claims
B. the call provision
If the total asset turnover decreases, then the return on equity will A. not change. B. decrease. C. increase. D. change, but in an indeterminate way.
decrease
Currently, the expected return on the market is 12.5% and the required rate of return for Alpha, Inc. is 12.5%. Therefore, Alpha's beta must be
equal to 1.0.
A bond's "spread" refers to the difference between it's Moody's rating and its Standard & Poors rating. (T/F)
false
If a market is weak form efficient, an investor can make higher than expected profits by studying the past price patterns of a stock. (T/F)
false
If investors became more risk averse The SML would shift downward and the slope of the SML would fall. (T/F)
false
Portfolio returns can be calculated as the geometric mean of the returns on the individual assets in the portfolio. (T/F)
false
The goal of profit maximization is equivalent to the goal of maximization of share value. (T/F)
false
The par value of a corporate bond indicates the level of interest payments that will be paid to investors. (T/F)
false
Miller Motorworks has a $1,000 par value, 8% annual coupon bond with interest payable semiannually with a remaining term of 15 years. The annual market yield on similar bonds is 6%. This bond will at a discount from par. (T/F)
false the bond's price will be below par (discount) if the investor's required rate of return is > the bond's coupon interest rate in this one, it is false because 8% is NOT < 6%
You paid $865.50 for a corporate bond that has a 6.75% coupon rate. What is the bond's current yield?
idk man
If current market interest rates fall, what will happen to the value of outstanding bonds?
it will rise
Which of the following is NOT an example of systematic risk? A. Recession B. Inflation C. Interest rate risk D. Management risk
management risk
Bond ratings directly affect a bond's
spread over the Treasury yield.
All of the following operate as financial intermediaries EXCEPT A. mutual funds. B. the U. S. Treasury C. insurance companies. D. commercial banks.
the US treasury
A AAA rated bond's yield to maturity will be very close to it's expected yield. (T/F)
true
A basis point is equal to one hundredth of a percentage point. (T/F)
true
All else constant, an individual would be indifferent between receiving $2,000 today or receiving a $200 perpetuity when the discount rate is 10% annually. (T/F)
true
For any number of compounding periods per year greater than 1, EAR will always be greater than the APR. (T/F)
true
In a perfectly efficient market, all assets would plot on the Security Market Line. (T/F)
true
The longer the time to maturity, the more sensitive a bond's price to changes in market interest rates. (T/F)
true
The purpose of financial markets is to bring borrowers and savers together. (T/F)
true
The sensitivity of a bond's value to changing interest rates depends on both the bond's time to maturity and its pattern of cash flows. (T/F)
true
The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%. The coefficient of correlation between the stocks is .75. The standard deviation of any portfolio combining the two stocks will be less than 20%. (T/F)
true
When a bond's coupon rate is lower than the required rate of return, the bond
will sell at a discount from par.
When assets are positively correlated, they tend to rise or fall together. (T/F)
True
Tanzlin Manufacturing's common stock has a beta of 1.5. If the expected risk−free return is 2% and the expected return on the market is 14%, what is the expected return on the stock?
20% idk how/why
Michael Masury has an opportunity to buy a commercial property. Rents from the property will be $24,000 and he expects them to increase at a rate of 3% per year annually. His required rate of return on this investment is 12%. At what price would Michael be indifferent to buying or not buying the investment? Round off to the nearest $1.
-growing perpetuity P / (r-g) = periodic payment / interest rate - growth rate = 24,000 / (0.12 - 0.03) = 24,000 / 0.09 = $266,667
Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millers's return on equity.
0.35 x 0.5 = 17.5
Skrit Corporation has a net profit margin of 15% and a total asset turnover of 1.7. What is Skrit's return on total assets?
1.7 x 0.15 = 0.255 =25.5%
Francis Peabody just won the $89,000,000 California State Lottery. The lottery offers the winner a choice of receiving the winnings in a lump sum or in 26 equal annual installments to be made at the beginning of each year. Assume that funds would be invested at 7.65%. Francis is trying to decide whether to take the lump sum or the annual installments. What is the amount of the lump sum that would be exactly equal to the present value of the annual installments? Round off to the nearest $1.
1st - NEED TO PUT CALCULATOR INTO BEGINNING MODE!!!!!!!!!! 2nd - 89,000,000 / 26 =3,423,076.92 N = 26 I = 7.65 PV = ? PMT = -3,423,076.92 = $41,083,128
Storm King Associates has a total asset turnover ratio of 1.90 and a return on total assets of 7.20%. What is Storm King's net profit margin?
7.2 / 1.9 = 3.79
What is the expected dollar return on a portfolio which consists of $9,000 invested in an S&P 500 Index fund, $32,500 in a technology fund, and $8,500 in Treasury Bills. The expected rate of return is 11% on the S&P Index fund, 14% on the technology fund and 2% on the Treasury Bills.
= (9,000 x 0.11) + (32,500 x 0.14) + (8,500 x 0.02) = $5,710
The Blackburn Group has recently issued 20−year, unsecured bonds rated BB by Moody's. These bonds yield 443 basis points above the U.S. Treasury yield of 2.76%. The yield to maturity on these bonds is
= 2.76% + (0.01% x 443) = 2.76% + 4.43 = 7.19%
Calculate Inventory Turnover ratio
= cost of goods sold / inventories
Your firm has the following income statement items: sales of $52,000,000; income tax of $1,880,000; operating expenses of $9,000,000; cost of goods sold of $36,000,000; and interest expense of $800,000. Compute the firm's gross profit margin.
= sales - cost of goods sold / sales = $52,000,000 - $36,000,000 / $52,000,000
What is the annual compounded interest rate of an investment with a stated interest rate of 6% compounded quarterly for seven years (round to the nearest .1%)?
A = (1 + (rate / # of time compounded per year)) ^ time in years = (1 + (6/4) ) ^7 = 610 or 6.1%
Which of the following is NOT included in computing EBT (earnings before taxes)? A. Dividends B. Depreciation expense C. Marketing expenses D. Cost of goods sold
A. Dividends
Which of the following is NOT a component of return on assets (ROA)? A. Leverage B. Cost of goods sold C. Total assets D. Sales
A. Leverage
Quirk Drugs sold an issue of 30−year, $1,000 par value bonds to the public that carry a 10.85% coupon rate, payable semiannually. It is now 10 years later, and the current market rate of interest is 9.00%. If interest rates remain at 9.00% until Quirk's bonds mature, what will happen to the value of the bonds over time?
A. The bonds will sell at a premium and decline in value until maturity.
If the market price of a bond increases, then A. the yield to maturity decreases. B. the yield to maturity increases. C. the coupon rate increases. D. none of the above.
A. the yield to maturity decreases.
If current market interest rates rise, what will happen to the value of outstanding bonds? A. It will remain unchanged. B. It will rise. C. It will fall. D. There is no connection between current market interest rates and the value of outstanding bonds.
C. It will fall.
Which of the following streams of income is not affected by how a firm is financed (whether with debt or equity)? A. Income before tax B. Net working capital C. Operating income D. Net profit after tax but before dividends
C. Operating income
Stephen's grandmother deposited $100 in an investment account for him when he was born, 25 years ago. The account is now worth $1,500. What was the average rate of return on the account? Which of the following is a correct way to solve this problem using EXCEL? A. =rate(0,−100,1500,25) B. =PV(25,i,−100,1500) C. =rate(25,0,−100,1500) D. =rate(25,0,100,1500)
C. =rate(25,0,−100,1500)
Interest rates have increased by 50 basis points (0.5%). Which of the following bonds will decline most in price? All of the bonds have AA ratings. A. A bond that matures in 10 days B. All of the bonds will decline in price by approximately the same amount. C. A bond that matures in 10 years. D. A bond that matures in 5 years
C. A bond that matures in 10 years
Which of the following statements about bonds is true? A. If market interest rates are higher than a bond's coupon interest rate, then the bond will sell above its par value. B. Long−term bonds are less risky than short−term bonds. C. If market interest rates change, long−term bonds will fluctuate more in value than short−term bonds. D. Bond prices move in the same direction as market interest rates. E. None of the above.
C. If market interest rates change, long−term bonds will fluctuate more in value than short−term bonds.
If an investor earns 10% on her investment in the first year and loses 10% the next year, she will have neither a gain nor a loss. (T/F)
False
The arithmetic average rate of return takes compounding into effect. (T/F)
False
Adequate portfolio diversification can be achieved by investing in several companies in the same industry. (T/F)
False it's several companies in different industries
Which of the following statements about bonds is true?
If market interest rates are below a bond's coupon interest rate, then the bond will sell above its par value.
Why is the quick ratio a more refined measure of liquidity than the current ratio?
Inventories are omitted from the numerator of the ratio because they are generally the least liquid of the firm's current assets.
On the income statement, sales revenue, minus cost of goods sold and operating expenses, equals
Net operating income (EBIT)
Congratulations. You just won the California State Lottery. The amount awarded is paid in 20 equal annual installments, at the beginning of each year. You can invest your money at 6.6%, compounded annually. You have calculated that the lottery is worth $20,975,400 today. How much was the amount awarded?
PUT IN BEGINNING MODE N = 20 I = 6.6 PV = 20,975,400 PMT = 1,048,770 FV = ? =36,000,000 idk how to do this
What is the present value of $250 received at the beginning of each year for 21 years? Assume that the first payment is received today. Use a discount rate of 12%, and round your answer to the nearest $10.
PUT IN BEGINNING MODE N = 21 I = 12 PV = ? PMT = -250 FV = 0 = $2,117
You are considering investing in Ford Motor Company. Which of the following is an example of diversifiable risk?
Risk resulting from uncertainty regarding a possible strike against Ford
Which of the following has a beta of zero?
a risk-free asset
Smith Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Smith's quick or acid test ratio?
acid test ratio = ( (current assets - inventory) / current liabilities ) ) x current ratio = (11,400 - 4,000) / 11,400 =0.6491 x 2.6 = 1.69
Businesses that wish to issue public debt will usually seek help from
an investment banking firm
A negative coefficient of correlation implies that
asset returns tend to move in opposite directions.
Over the period 1995minus−2015, which pair of investments does not perfectly fit the "higher risk, higher return" pattern? Government bonds and treasury bills, why?
because they do not have a high standard deviation and thus are not receiving a high compound annual return
A bond investor seeking capital gains should purchase
bonds with distant maturity dates when interest rates are expected to decline.
Which of the following portfolios is clearly preferred to the others? all standard deviations and expected return rates are within 2% of each other
cannot be determined
A decrease in ________ will increase gross profit margin.
cost of goods sold
Caldwell, Inc. sold an issue of 30−year, $1,000 par value bonds to the public. The bonds carry a 10.85% coupon rate and pay interest semiannually. It is now 12 years later. The current market rate of interest on the Caldwell bonds is 8.45%. What is the current market price (intrinsic value) of the bonds? Round off to the nearest $1.
current yield = coupon interest / current market place = 10.85 / 2 = 5.425 x 1000 = 54.25 54.25 / 0.0845 = current market price = 642.01 x 2 (semiannual) = 1,220
