Finance Test 1 & 2 + Chapter 11

the credit rating increases, the default risk decreases, and the required rate of return decreases

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________.

senior debtholders

When a company is in financial difficulty and cannot fully pay all of its creditors, the first lenders to be paid are the ________.

mortgaged security

When real property is used as collateral for a bond, it is termed a/an ________.

coupon rate; discount to

When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.

Limited liability

Which of the following is NOT an ADVANTAGE of a sole proprietorship?

Grant contacts his broker and requests a purchase of IBM bonds.

Which of the following is NOT an example of an equity market transaction?

Sole proprietors have limited liability.

Which of the following is NOT true of a sole proprietorship?

The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal less the total payment.

Which of the following is NOT true with regard to an amortization table?

Preferred stock

Which of the items below is sometimes termed hybrid equity financing?

money

Financial assets that will mature within a year are bought and sold in the ________ market.

Discount loan

If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the total amount of principal and interest due of $215,892.50 at the end of 10 years, what type of loan did you have?

principals, agents

In agency theory, the owners of the business are referred to as ________, and the managers are referred to as ________.

WACC

In capital budgeting, the ________ is the appropriate discount rate to use when calculating the NPV of an average risk project.

the beginning balance times the monthly interest rate

Monthly interest on a loan is equal to ________.

a perpetuity

Pricing preferred stock is most similar to pricing ________.

equity

Stocks are bought and sold in ________ markets.

The bank is technically renting money from you with a promise to repay that money with interest.

Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE?

yield to maturity

The ________ is a market derived interest rate used to discount the future cash flows of the bond.

par value

The ________ is the face value of the bond.

coupon

The ________ is the regular interest payment of the bond.

cost of debt

The ________ is the return that the bank or bondholder demands on new borrowing.

principal-agent problem

The problem of motivating one party to act in the best interest of another party is known as the ________.

primary

The sale of "new" securities, where the financial asset is being traded for the very first time, is said to take place in the ________ market.

secondary

The sale of "used" securities, where the financial asset is being traded from one individual to another and the proceeds do not go to the original issuer of the security, is said to take place in the ________ market.

Noncash accounting

Three fundamental issues separate net income and cash flow. Which of the answers below is NOT one of these three fundamental issues?

Treasury bills

______ belong to money market securities.

sold additional shares of stock

A negative cash flow to owners indicates that a firm has ________.

ordinary annuity

A/An ________ is a series of equal end-of-the-period cash flows.

make all parties better off

The common objective of borrowing and lending is to ________.

present value, future value, time, interest rate, and payment

The main variables of the time value of money (TVM) equation are ________.

the cycle of money

The movement of money from lender to borrower and back again is known as ________.

interest rates

The phrase "price to rent money" is sometimes used to refer to ________.

debt financing

When a company borrows money from a bank or sells bonds, it is called ________.

The ease of start up

Which of the following is an ADVANTAGE of a sole proprietorship?

The capital market is the term for the market for longer-term financial assets such as stocks and bonds.

Which of the following statements is TRUE?

Three fundamental issues separate net income and cash flow: accrual-based accounting, noncash expense items, and interest expense.

Which of the following statements is TRUE?

speculative

"Junk" bonds are a street name for ________ grade bonds.

debt

Bonds are bought and sold in ________ markets.

Increases expenses and lowers taxes.

Depreciation for a tax-paying firm:

The corporation pays taxes on its earnings, and shareholders pay taxes on dividends received.

Double taxation refers to which of the following scenarios?

Preferred shareholders, common shareholders, and retained earnings

Which of the following would be classified as equity financing for a firm?

Cash flow to owners shows cash paid to owners plus any new borrowing from owners.

Which of the statements below is FALSE?

In accrual-based accounting, revenue is recorded at the time of sale if the revenue has been received in cash.

Which of the statements below is FALSE?

Long-term assets are accounts that will normally be turned into cash over the course of the operating or business cycle of the firm, and current liabilities are the accounts that will come due for payment over the operating or business cycle.

Which of the statements below is FALSE?

interest payments; principal

With a bearer bond, whoever held it was entitled to the ________ and the ________.

Financial markets

________ are the forums where buyers and sellers of financial assets and commodities meet.

IRR

In capital budgeting, the appropriate decision rule for an average-risk project is to accept if the ________ is greater than the WACC.

interest expense

In finance, we separate operating decisions from financing decisions and thus exclude ________ as a part of operating income from the income statement.

You benefit from earning interest on your deposit, safety for your funds, and having a recognizable means for paying for your financial obligations without having to hold cash.

Professor Gaston, your History teacher, borrows money at a rate of 6% per year from the Valley State Bank for a tuition loan for her son. You have $1,200 deposited into your checking account at the same bank earning a rate of 0.5% per year. Which of the following statements is TRUE?

NPV

The best rule for choosing projects when a firm has a limited amount of funds is to accept the group of projects with the greatest combined ________.

the accumulated interest over the life of the bond

The difference between the price and the par value of a zero-coupon bond represents ________.

Double taxation

________ is a major disadvantage of the corporate form of business.

Compound interest

________ is simply the interest earned in subsequent periods on the interest earned in prior periods.

Agency theory

________ is the name given to the processes surrounding recognition of the principal-agent problem and ways to align agents with the interests of the principals.

Pure play

________ refers to a method of matching a single project of a company to another company with a single business focus in an effort to assign an appropriate level of risk to the project.

Capital structure

________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.