Applied Managerial Finance Midterm

Which one of the following constitutes an infrequent annuity?

$100 once every 2 years

When is a balloon or bullet payment made?

At the end of the loan period

What variables are required to calculate the value of a bond?

Coupon rate, market yield, remaining life of bond

T/F Lower PEs are often interpreted as favorable and indicate significant growth prospects for the firm.

False

Which of the following are true of a bond indenture?

It is sometimes referred to a the deed of trust. It is a legal document.

You received $100 in interest from a U.S. Treasury bond. If your state income tax rate is 5 percent, how much will you pay in state tax on this income?

Nothing

What represents the receivables turnover ratio?

Sales / Accounts Receivable

What are the categories of financial ratios?

Short-term solvency or liquidity Long-term solvency or financial leverage Asset management or turnover Profitability Market value

Suppose you own a 30-year bond issued by GE and a 2-year bond issued by PG with identical coupon rates and par values. Which bond will you lose more money on as interest rates rise?

The GE bond will lose more because it has a longer maturity.

What is true about a partial amortization loan?

The monthly payment is based on the amortization period Amortization period is longer than the loan period A large balloon payment is due at the end of the loan period

Types of long-term solvency/financial leverage ratios

Total debt, debt-equity, equity multiplier, times interest earned, cash coverage

T/F A bullet payment is required in a partial amortization loan

True

If you invest in a corporate bond, how many times can you expect, in general, to receive interest?

Twice a year

How is a zero coupon bond different from a conventional bond?

Zeroes are always issued at a discount. Zeroes make no interest payments.

An increase in the interest rate/discount rate will result in ______ in the NPV

a decrease

Profitability measures such as ROA and ROE are ______ rates of return.

accounting

Which of the following are often left out of most financial planning models?

cash flow size, risk, and timing

Types of short-term solvency/liquidity ratios

current, quick, cash

An important accounting goal is to report financial information to users in a way that is useful for ______.

decision making

A fixed payment loan has a fixed payments but the interest amount paid ______ over the life of the loan.

decreases

______ involves an iterative process that culminates in a result negotiated between various parties involved in the process

financial planning

Discounting is the process of converting ______ dollars into a ______ value

future, present

When the typical stock in the S&P 500 Index has a PE ratio 12, a company with a PE ratio of 15 may have ______ than average growth prospects, given similar earnings per share.

higher

types of asset utilization/turnover ratios

inventory turnover, days' sales in turnover, receivables turnover, days' sales in receivables, total asset turnover, capital intensity

A traditional (non-growing) annuity consists of a(n) ______ stream of cash flows for a fixed period of time

level

Long-term debt on the common-size balance sheet over the past three years was 30, 34, and 40 percent, respectively. This indicates the firm has increased its ______.

leverage

Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.

liquidity

If reinvestment of interest or dividends does not occur, then the future value of an investment will be ______ and the realized yield will be ______ than if reinvestment had occurred.

lower, lower

Market value measures are based, in part, upon information from what non-financial-statement source?

market price per share of stock

Compared to a comparable fixed principal loan, the total interest on a fixed payment loan is ______

more

Payments in a partial amortization loan are based on the amortization period, not the loan period. The remaining balance is then ______.

paid off in a lump sum bullet payment

The payments in a ______ amortization loan are NOT based on the life of the loan

partial

The length of time, on average, it takes a firm's customers to ______ is referred to as the days' sales in receivables ratio.

pay their bills

EBITDA is a measure of ______ operating cash flow.

pretax

Types of Market Value Ratios

price-earnings ratio, market-to-book ratio

Amortization is the process of paying off loans by regularly reducing the _________.

principal

Types of Profitability Ratios

profit margin, return on assets, return on equity

The interest rate (r) used in the general compounding formula is the ______ interest rate.

quoted

If a company's common-size income statement shows a lower percentage for cost of goods sold this period compared to last period, the company may be controlling its costs well or it has ______.

raised its prices relative to costs

The percentage of sales approach separates accounts on the pro forma income statement and balance sheet into those that change directly with ______ and those that do not.

sales

Common-size statements are used for comparing firms with differing ______

sizes

A borrower receives $7,500 today and repays a single lump sum in nine months. This simple form of loan is called ______.

the pure discount loan

The degree of interest rate risk depends on ______.

the sensitivity of the bond's price to interest rate changes

Which one of the following best explains why financial managers use a common-size balance sheet?

to trach changes in a firm's capital structure

Some financial ratios measure a firm's ______, which indicates how efficiently a firm is using its assets to generate sales, while others measure a firm's financial ______, which demonstrates the ability to pay its bills over the short run without undue stress.

turnover, liquidity

The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $100, and the third cash flow at the end of year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.

uneven