UNLV Finance 301 Terms

Which of the following causes common stock prices to increase

A lower required return rate of return

Which of the following events would make it more likely that a company would choose to call its outstanding bonds

A reduction in market interest rates

Investment grade bonds include those bonds with ratings:

From AAA to BBB

Stock valuation model dynamics make clear that lower discount rates lead to

Higher valuations

Which of the following is a true statement?

If interest rates fall, all bonds will enjoy rising values

Which of the following is a capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision rule?

Modified Internal rate of return

Which of these describe groups or pairs of projects where you can accept one but not all?

Mutually exclusive

Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?

Normal cash flows

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

Payback

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project?

Payback

Which of these are valued as a special zero-growth case of the constant growth rate model?

Preferred stock

Which of the following is the risk that an asset's sale price will be lower than its purchase price?

Price risk

Which of the following is NOT a function of the board of directors?

Provide reports to the auditors

When looking at which of these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life?

Replacement projects

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

Secondary markets

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?

Secondary markets

This type of business organization is relatively easy to start, and it is subject to much lighter regulatory and paperwork burden than other business forms.

Sole proprietorship

Sally wants to invest in only two stocks. Which pair of stocks should Sally select?

Stock C and D move in opposite directions at the same time

For corporations, maximizing the value of owner's equity can also be stated as maximizing the firm's

Stock Price

Interest rates, inflation and economic growth are economic factors that are examples of

Market risk

Which of the following statements is correct?

Accountants are focused on what happened in the past

Which of the following can create ethical dilemmas between corporate managers and stockholders?

Agency Relationship

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

Fixed assets

Which of these is a measure of the sensitivity of a stock or portfolio to market risk?

Beta

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

Board of directors

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?

Discounted payback

Which of the following is legal duty between two parties where one party must act in the interest of the other party?

Fiduciary

Concerning incremental project cash flow, which of these is a cost one would never count as an expense of the project?

Financing cost

Which financial statement shows the total revenues that a firm earns and the total expenses the firm incurs to generate those revenues over a specific period of time—generally one year?

Income Statement

Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

Interest rate risk

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?

Internal rate of return

Which of the following statements is most correct

Investors are able to eliminate virtually all firm-specific (unique or diversifiable) risk through diversification.

A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as

MIRR

This is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns

Marginal tax rate

If Zeus Energy bonds are upgraded from BBB- to BBB+, which of the following statements is true?

The current bond price will increase and interest rates on new bonds issues will decrease

Which of these statements is true?

The higher the default risk, the higher the interest that security buyers will demand

A manufacturing firm is planning on expanding its existing operations. The expansion project is significant and will require the firm to house the expansion in a different location. The firm is considering building on a lot they own across town. The lot is currently vacant and it was paid for nearly 20 years ago. Given this information, which of the following statements is correct?

The lot is an incremental cash flow because it represents an opportunity cost

How are present values affected by changes in interest rates?

The lower the interest rate, the larger the present value will be

How are present values (PVs) affected by the number of compounding periods per year

The lower the number of compounding periods, the larger the present value will be

Which of the following is the correct ranking from least risky to most risky?

Treasury bills, long-term Treasury bonds, stocks

The biggest disadvantage of the sole proprietorship is

Unlimited Liability

Financial management involves decisions about which of the following?

Which projects to fund How to minimize taxation What type of capital should be raised ANSWER: All of these

An employee stock option plan is:

a way to align the interests of employees with those of the owners

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

Many people who want to start investing for their future want to start today, which implies an annuity stream that is paid at the beginning of the period. Beginning-of-period cash flows are referred to as

annuities due

Board of Directors

are elected by shareholders

Which is true? Ratio analysis

can provide useful information on a firm's current position and hint at future performance

Neither payback period nor discounted payback period techniques for evaluating capital projects account for

cash flow that occur after payback

Neither payback period nor discounted payback period techniques for evaluating capital projects account for

cash flows that occur after payback

The research chemists at MegaClean created a new cleaner that keeps car and truck tires shiny and clean for one year. They believe that this product will be highly successful and will attract customers to purchase their existing line of household cleaning products. This is an example of

complementary effect

Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as

complementary effects

We call the process of earning interest on both the original deposit and on the earlier interest payments

compounding

The net present value decision technique uses a statistic denominated in

currency

A local bank is contemplating adding a new ATM to their lobby. They will need another phone line to provide communications that has a monthly cost of $50 per month. This is an example of:

incremental cash flow

The maximum growth rate that can be achieved by financing asset growth with internal financing or retained earnings is called the

internal growth rate

Studies of investor psychology have discovered that

investors tend to trade too much. investors tend to sell their winners too soon. investors tend to become overconfident. Ans: All of these

All of the following are strengths of payback EXCEPT

its benchmark is not determined by a relevant external constraint. it incorporates the time value of money. it uses a conservative reinvestment rate. Ans: none of these.

All of the following are strengths of NPV EXCEPT

managers have a preference for using a statistic that is in percent instead of dollars

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

nondiversifiable risk

An equity-financed firm will

pay more in income taxes than a debt-financed firm

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a

sunk cost

Dividend yield is defined as

the last four quarters of dividend income expressed as a percentage of the current stock price

The optimal portfolio for you will be

the one that reflects the amount of risk that you are willing to take

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose

the project that pays back the soonest if it is equal to or less than manager's maximum payback period

The net present value decision technique may not be the only pertinent unit of measure if the firm is facing

time or resource constraints