Corp Finance: Lecture Preps
Which one of the following is a current liability? Multiple Choice Note payable to a supplier in 13 months Amount due from a customer in two weeks Account payable to a supplier that is due next week Loan payable to the bank in 18 months Amount due from a customer that is past due
Accounts Payable to a supplier that is due next week
hich one of the following is an example of a sunk cost? Multiple Choice $1,500 of lost sales because an item was out of stock $1,200 paid to repair a machine last year $20,000 project that must be forfeited if another project is accepted $4,500 reduction in current shoe sales if a store commences selling sandals $1,800 increase in comic book sales if a store ceases selling puzzles
$1,200 paid to repair a machine last year
You want to have $30,000 saved 5 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 3.5 percent rather than 2.5 percent on your savings? Today's deposit is the only deposit you will make to this savings account. Multiple Choice $1,256.43 $891.18 $1,124.60 $945.11 $1,219.02
$1,256.43
Suppose you observe the following situation: Security Beta Expected Return A 1.16 .1137 B .92 .0984 Assume these securities are correctly priced. Based on the CAPM, what is the return on the market? Multiple Choice 9.99 percent 11.42 percent 10.35 percent 9.78 percent
10.35% - no idea how to do this
The expected return on JK stock is 16.28 percent while the expected return on the market is 11.97 percent. The stock's beta is 1.63. What is the risk-free rate of return? Multiple Choice 2.22 percent 4.31 percent 2.42 percent 4.50 percent 5.13 percent
5.13 percent
Which one of the following terms is defined as the management of a firm's long-term investments? Multiple Choice Working capital management Financial allocation Agency cost analysis Capital budgeting Capital structure
Capital Budgeting
Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk? Multiple Choice Capital asset pricing model Time value of money equation Unsystematic risk equation Market performance equation Expected risk formula
Capital asset pricing model
Which one of following is the rate at which a stock's price is expected to appreciate? Multiple Choice Current yield Total return Dividend yield Capital gains yield Coupon rate
Capital gains yield
Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project? Multiple Choice Reduction in the cash outflow at Time 0 Cash inflow in the final year of the project Cash outflow in the final year of the project Cash inflow prorated over the life of the project Excluded from the net present value calculation
Cash inflow in the final year of the project
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? Multiple Choice Income statement Creditor's statement Balance sheet Statement of cash flows Dividend statement
Balance Sheet
Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset? Multiple Choice Beta Reward-to-risk ratio Risk ratio Standard deviation Price-earnings ratio
Beta
Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? Multiple Choice Default risk Taxability Liquidity Inflation Interest rate risk
Default risk
A decrease in which of the following will increase the current value of a stock according to the dividend growth model? Multiple Choice Dividend amount Number of future dividends, provided the total number of dividends is less than infinite Dividend growth rate Discount rate Both the discount rate and the dividend growth rate
Discount rate
Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows? Multiple Choice Constant dividend growth model Discounted cash flow valuation Average accounting return Expected earnings model Internal rate of return
Discounted cash flow valuation
Which bond would you generally expect to have the highest yield? Multiple Choice Risk-free Treasury bond Nontaxable, highly liquid bond Long-term, high-quality, tax-free bond Short-term, inflation-adjusted bond Long-term, taxable junk bond
Long-term, taxable junk bond
Which one of the following is represented by the slope of the security market line? Multiple Choice Reward-to-risk ratio Market standard deviation Beta coefficient Risk-free interest rate Market risk premium
Market risk premium
Decisions made by financial managers should primarily focus on increasing the: Multiple Choice size of the firm. growth rate of the firm. gross profit per unit produced. market value per share of outstanding stock. total sales.
Market value per share of outstanding stock
Which one of the following best states the primary goal of financial management? Multiple Choice Maximize current dividends per share Maximize the current value per share Increase cash flow and avoid financial distress Minimize operational costs while maximizing firm efficiency Maintain steady growth while increasing current profits
Maximize the current value per share
Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? Multiple Choice Net present value Discounted payback Internal rate of return Profitability index Payback
Net present value
Which term relates to the cash flow that results from a company's ongoing, normal business activities? Multiple Choice Operating cash flow Capital spending Net working capital Cash flow from assets Cash flow to creditors
Operating Cash Flow
Forecasting risk is defined as the possibility that: Multiple Choice some proposed projects will be rejected. some proposed projects will be temporarily delayed. incorrect decisions will be made due to erroneous cash flow projections. some projects will be mutually exclusive. tax rates could change over the life of a project.
incorrect decisions will be made due to erroneous cash flow projections.
Depreciation for a tax-paying firm: Multiple Choice increases expenses and lowers taxes. increases the net fixed assets as shown on the balance sheet. reduces both the net fixed assets and the costs of a firm. is a noncash expense that increases the net income. decreases net fixed assets, net income, and operating cash flows.
increases expenses and lowers taxes
The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: Multiple Choice incremental cash flows. internal cash flows. external cash flows. erosion effects. financing cash flows.
incremental cash flows
Evidence seems to support the view that studying public information to identify mispriced stocks is: Multiple Choice effective as long as the market is only semistrong form efficient. effective provided the market is only weak form efficient. ineffective. effective only in strong form efficient markets. ineffective only in strong form efficient markets.
ineffective
Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as: Multiple Choice free interest. bonus income. simple interest. interest on interest. present value interest.
interest on interest
The internal rate of return: Multiple Choice may produce multiple rates of return when cash flows are conventional. is best used when comparing mutually exclusive projects. is rarely used in the business world today. is principally used to evaluate small dollar projects. is easy to understand.
is easy to understand.
When constructing a pro forma statement, net working capital generally: Multiple Choice remains fixed. varies only if the firm is currently producing at full capacity. varies only if the firm maintains a fixed debt-equity ratio. varies only if the firm is producing at less than full capacity. varies proportionally with sales.
varies proportionally with sales
The secondary market is best defined as the market: Multiple Choice in which subordinated shares are issued and resold. conducted solely by brokers. dominated by dealers. where outstanding shares of stock are resold. where warrants are offered and sold.
where outstanding shares of stock are resold.
The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the: Multiple Choice coupon rate. face rate. call rate. yield to maturity. current yield.
yield to maturity.
You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient. Multiple Choice weak semiweak semistrong strong perfect
semistrong
The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: Multiple Choice equilibrium. premium. discount. call price. spread.
spread.
A stock had returns of 12.4 percent, 16.6 percent, 10.2 percent, 19.0 percent, −15.7 percent, and 6.3 percent over the last six years. What is the geometric average return on the stock for this period? Multiple Choice 7.90 percent 7.46 percent 8.56 percent 7.76 percent 8.01 percent
7.46 percent - Need to use geomean equation on RELATIVE RETURNS (return+1), then subtract 1 OR ((PRODUCT(returns))^(1/count(returns))-)1
Which one of the following statements related to annuities and perpetuities is correct? Multiple Choice An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. Most loans are a form of a perpetuity. The present value of a perpetuity cannot be computed but the future value can. Perpetuities are finite but annuities are not.
A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.
Which one of the following statements best defines the efficient market hypothesis? Multiple Choice Efficient markets limit competition. Security prices in efficient markets remain steady as new information becomes available. Mispriced securities are common in efficient markets. All securities in an efficient market are zero net present value investments. All securities provide the same positive rate of return when the market is efficient.
All securities in an efficient market are zero net present value investments.
Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management? Multiple Choice An increase in the amount of the quarterly dividend A decrease in the per unit production costs An increase in the number of shares outstanding A decrease in the net working capital An increase in the market value per share
An increase in the market value per share
u are comparing two annuities that offer regular payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities? Multiple Choice These annuities have equal present values but unequal future values. These two annuities have both equal present and equal future values. Annuity B is an annuity due. Annuity A has a smaller future value than annuity B. Annuity B has a smaller present value than annuity A.
Annuity B has a smaller present value than annuity A.
What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? Multiple Choice Maximal-growth model Constant-growth model Capital pricing model Realized-earnings model Realized-growth model
Constant-Growth Model
Agency problems are most associated with: Multiple Choice sole proprietorships. general partnerships. limited partnerships. corporations. limited liability companies.
Corporations
Net working capital is defined as: Multiple Choice total liabilities minus shareholders' equity. current liabilities minus shareholders' equity. fixed assets minus long-term liabilities. total assets minus total liabilities. current assets minus current liabilities.
Current Assets minus current liabilities
Which of the following questions are appropriate to address during the financial planning process? I. Should the firm merge with a competitor? II. Should additional shares of stock be sold? III. Should a particular division be sold? IV. Should a new product be introduced?
I, II, III, and IV
Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? Multiple Choice Riskless market Evenly distributed market Zero volatility market Blume's market Efficient capital market
Efficient capital market
Which one of the following applies to the dividend growth model? Multiple Choice An individual stock has the same value to every investor. Even if the dividend amount and growth rate remain constant, the value of a stock can vary. Zero-growth stocks have no market value. Stocks that pay the same annual dividend will have equal market values. The dividend growth rate is inversely related to a stock's market price.
Even if the dividend amount and growth rate remain constant, the value of a stock can vary.
Which one of the following is most directly affected by the level of systematic risk in a security? Multiple Choice Variance of the returns Standard deviation of the returns Expected rate of return Risk-free rate Market risk premium
Expected rate of return
You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? Multiple Choice Arithmetic return Historical return Expected return Geometric return Required return
Expected return
Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? Multiple Choice Storing supplies in the same space currently used for materials storage Utilizing the basket manager to oversee wreath production Hiring additional employees to handle the increased workload should the firm accept the wreath project Researching the market to determine if wreath sales might be profitable before deciding to proceed Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt
Hiring additional employees to handle the increased workload should the firm accept the wreath project
Capital structure decisions include determining: Multiple Choice which one of two projects to accept. how to allocate investment funds to multiple projects. the amount of funds needed to finance customer purchases of a new product. how much debt should be assumed to fund a project. how much inventory will be needed to support a project.
How much debt should be assumed to fund a project
Which one of the following questions is a working capital management decision? Multiple Choice Should the company issue new shares of stock or borrow money? Should the company update or replace its older equipment? How much inventory should be on hand for immediate sale? Should the company close one of its current stores? How much should the company borrow to buy a new building?
How much inventory should be on hand for immediate sale?
Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid. Multiple Choice I and III only II and IV only I and II only III and IV only I, II, and III only
I and III only
Which of the following are examples of diversifiable risk? I. An earthquake damages an entire town II. The federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards Multiple Choice I and III only II and IV only II and III only I and IV only I, III, and IV only
I and IV only
Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? Multiple Choice Income statement Balance sheet Statement of cash flows Tax reconciliation statement Market value report
Income Statement
Which one of the following actions by a financial manager is most apt to create an agency problem? Multiple Choice Refusing to borrow money when doing so will create losses for the firm Refusing to lower selling prices if doing so will reduce the net profits Refusing to expand the company if doing so will lower the value of the equity Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales Increasing current profits when doing so lowers the value of the company's equity
Increasing current profits when doing so lowers the value of the company's equity
Which one of the following will decrease the net present value of a project? Multiple Choice Increasing the value of each of the project's discounted cash inflows Moving each cash inflow forward one time period, such as from Year 3 to Year 2 Decreasing the required discount rate Increasing the project's initial cost at time zero Increasing the amount of the final cash inflow
Increasing the project's initial cost at time zero
Real rates are defined as nominal rates that have been adjusted for which of the following? Multiple Choice Inflation Default risk Accrued interest Interest rate risk Both inflation and interest rate risk
Inflation
Which one of the following is an expense for accounting purposes but is not an operating cash flow for financial purposes? Multiple Choice Interest expense Taxes Cost of goods sold Labor costs Administrative expenses
Interest Expense
Which one of the following is an example of systematic risk? Investors panic causing security prices around the globe to fall precipitously A flood washes away a firm's warehouse A city imposes an additional one percent sales tax on all products A toymaker has to recall its top-selling toy Corn prices increase due to increased demand for alternative fuels
Investors panic causing security prices around the globe to fall precipitously
Which one of the following is an example of systematic risk? Multiple Choice Investors panic causing security prices around the globe to fall precipitously A flood washes away a firm's warehouse A city imposes an additional one percent sales tax on all products A toymaker has to recall its top-selling toy Corn prices increase due to increased demand for alternative fuels
Investors panic causing security prices around the globe to fall precipitously
The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? Multiple Choice Salvage value Wasted value Sunk cost Opportunity cost Erosion
Opportunity Cost
Which one of the following is classified as a tangible fixed asset? Multiple Choice Accounts receivable Production equipment Cash Patent Inventory
Production Equipment
Which one of the following are you most apt to estimate first as you begin the process of preparing pro forma statements? Multiple Choice Need for additional fixed assets Current fixed costs Projected sales Desired net income Desired dividend payments
Projected sales
Which one of the following has the least effect on a firm's sustainable rate of growth? Multiple Choice Capital intensity ratio Profit margin Dividend policy Debt-equity ratio Quick ratio
Quick Ratio (current assets-inventory)/current liabilities
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas? Multiple Choice Reward-to-risk matrix Portfolio weight graph Normal distribution Security market line Market real returns
Security market line
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? Multiple Choice Providing both ketchup and mustard for customers' use Repairing the roof of the hot dog stand because of water damage Selling fewer hot dogs because hamburgers were added to the menu Offering french fries but not onion rings Losing sales due to bad weather
Selling fewer hot dogs because hamburgers were added to the menu
Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? Multiple Choice Scenario Simulation Break-even Sensitivity Cash flow
Sensitivity
Which one of the following statements is correct? Multiple Choice Stocks can only be assigned one dividend growth rate. Preferred stocks generally have variable growth rates. Dividend growth rates must be either zero or positive. All stocks can be valued using the dividend discount models. Stocks can have negative growth rates.
Stocks can have negative growth rates.
GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? Multiple Choice Opportunity Fixed Incremental Erosion Sunk
Sunk
The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following? Multiple Choice Depreciation tax shield Tax due on the current salvage value of that asset Current year's operating cash flow Change in net working capital MACRS depreciation for the current year
Tax due on the current salvage value of that asset
Which one of the following is correct in relation to pro forma statements? Multiple Choice Fixed assets must increase if sales are projected to increase. Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity. The addition to retained earnings is equal to net income less cash dividends. Long-term debt varies directly with sales when a firm is currently operating at maximum capacity. Inventory changes are not proportional to sales changes.
The addition to Retained Earnings is equal to net income less cash dividends
hich one of the following best describes the concept of erosion? Multiple Choice Expenses that have already been incurred and cannot be recovered Change in net working capital related to implementing a new project The cash flows of a new project that come at the expense of a firm's existing cash flows The alternative that is forfeited when a fixed asset is utilized by a project The differences in a firm's cash flows with and without a particular project
The cash flows of a new project that come at the expense of a firm's existing cash flows
Which one of the following statements concerning interest rates is correct? Multiple Choice Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. The effective annual rate decreases as the number of compounding periods per year increases. The effective annual rate equals the annual percentage rate when interest is compounded annually. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.
The effective annual rate equals the annual percentage rate when interest is compounded annually.
Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient. Multiple Choice Company insiders were aware of the information prior to the announcement. Investors do not pay attention to daily news. Investors tend to overreact. The news was positive. The information was expected.
The information was expected.
Which one of these statements related to growing annuities and perpetuities is correct? Multiple Choice You can compute the present value of a growing annuity but not a growing perpetuity. In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. The future value of an annuity will decrease if the growth rate is increased. An increase in the rate of growth will decrease the present value of an annuity. The present value of a growing perpetuity will decrease if the discount rate is increased.
The present value of a growing perpetuity will decrease if the discount rate is increased.
A project has a net present value of zero. Which one of the following best describes this project? Multiple Choice The project has a zero percent rate of return. The project requires no initial cash investment. The project has no cash flows. The summation of all of the project's cash flows is zero. The project's cash inflows equal its cash outflows in current dollar terms.
The project's cash inflows equal its cash outflows in current dollar terms.
Which one of the following statements correctly defines a time value of money relationship? Multiple Choice Time and future values are inversely related, all else held constant. Interest rates and time are positively related, all else held constant. An increase in a positive discount rate increases the present value. An increase in time increases the future value given a zero rate of interest. Time and present value are inversely related, all else held constant
Time and present value are inversely related, all else held constant
Standard deviation measures which type of risk? Multiple Choice Total Non-diversifiable Unsystematic Systematic Economic
Total
Which one of these is a requirement if the sustainable growth rate is to exceed the internal growth rate? Multiple Choice Net working capital > $0 Total debt > $0 Dividend ratio = 0 Retention ratio = 0 Sales > Total assets
Total Debt>$0
Standard deviation is a measure of which one of the following? Multiple Choice Average rate of return Volatility Probability Risk premium Real returns
Volatility
You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? Multiple Choice Alternative voting Cumulative voting Straight voting Indenture voting Voting by proxy
Voting by proxy
Which one of the following statements related to loan interest rates is correct? Multiple Choice The annual percentage rate considers the compounding of interest. When comparing loans you should compare the effective annual rates. Lenders are most apt to quote the effective annual rate. Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.
When comparing loans you should compare the effective annual rates.
An example of a capital budgeting decision is deciding: Multiple Choice how many shares of stock to issue. whether or not to purchase a new machine for the production line. how to refinance a debt issue that is maturing. how much inventory to keep on hand. how much money should be kept in the checking account.
Whether or not to purchase a new machine for the production line
A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? Multiple Choice Debenture Callable Floating-rate Junk Zero coupon
Zero coupon
Which one of the following is most indicative of a totally efficient stock market? Multiple Choice Extraordinary returns earned on a routine basis Positive net present values on stock investments over the long-term Zero net present values for all stock investments Arbitrage opportunities which develop on a routine basis Realizing negative returns on a routine basis
Zero net present values for all stock investments
Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: Multiple Choice an increase in all stock values. all stock values to remain constant. a decrease in all stock values. dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value.
a decrease in all stock values.
The depreciation tax shield is best defined as the: Multiple Choice amount of tax that is saved when an asset is purchased. tax that is avoided when an asset is sold as salvage. amount of tax that is due when an asset is sold. amount of tax that is saved because of the depreciation expense. amount by which the aftertax depreciation expense lowers net income.
amount of tax that is saved because of the depreciation expense.
Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate. Multiple Choice effective annual annual percentage periodic interest compound interest periodic interest
annual percentage
The interest rate that is most commonly quoted by a lender is referred to as the: Multiple Choice annual percentage rate. compound rate. effective annual rate. simple rate. common rate.
annual percentage rate.
The _____ tax rate is equal to total taxes divided by total taxable income. Multiple Choice deductible residual total average marginal
average
A bond that is payable to whomever has physical possession of the bond is said to be in: Multiple Choice new-issue condition. registered form. bearer form. debenture status. collateral status.
bearer form.
Changes in the net working capital requirements: Multiple Choice can affect the cash flows of a project every year of the project's life. only affect the initial cash flows of a project. only affect the initial and final cash flows of a project. are generally excluded from project analysis due to their irrelevance to the total project. are excluded from project analysis as long as they are recovered when the project ends.
can affect the cash flows of a project every year of the project's life.
Unsystematic risk: Multiple Choice can be effectively eliminated by portfolio diversification. is compensated for by the risk premium. is measured by beta. is measured by standard deviation. is related to the overall economy.
can be effectively eliminated by portfolio diversification.
Unsystematic risk: Multiple Choice can be effectively eliminated by portfolio diversification. is compensated for by the risk premium. is measured by beta. is measured by standard deviation. is related to the overall economy.
can be effectively eliminated by portfolio diversification.
The standard deviation of a portfolio: is a weighted average of the standard deviations of the individual securities held in the portfolio. can never be less than the standard deviation of the most risky security in the portfolio. must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. can be less than the standard deviation of the least risky security in the portfolio.
can be less than the standard deviation of the least risky security in the portfolio.
The interest earned on both the initial principal and the interest reinvested from prior periods is called: Multiple Choice free interest. dual interest. simple interest. interest on interest. compound interest.
compound interest
When utilizing the percentage of sales approach, managers: Multiple Choice estimate company sales based on a desired level of net income and the current profit margin. consider only those assets that vary directly with sales. consider the current production capacity level. can project net income but not net cash flows. assume all liability accounts will remain constant.
consider the current production capacity level
Sam just opened a savings account paying 3.5 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this, Sam: Multiple Choice will earn the same amount of interest each year for four years. will earn simple interest on his savings every year for four years. could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest. has an account currently valued at $5,000. could earn more interest on this account if the interest earnings were withdrawn annually.
could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.
Sensitivity analysis determines the: Multiple Choice range of possible outcomes given that most variables are reliable only within a stated range. degree to which the net present value reacts to changes in a single variable. net present value range that can be realized from a proposed project. degree to which a project relies on its initial costs. ideal ratio of variable costs to fixed costs for profit maximization.
degree to which the net present value reacts to changes in a single variable.
Scenario analysis is defined as the: Multiple Choice determination of the initial cash outlay required to implement a project. determination of changes in NPV estimates when what-if questions are posed. isolation of the effect that a single variable has on the NPV of a project. separation of a project's sunk costs from its opportunity costs. analysis of the effects that a project's terminal cash flows has on the project's NPV.
determination of changes in NPV estimates when what-if questions are posed.
Steve just computed the present value of a $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the: Multiple Choice current yield. effective rate. compound rate. simple rate. discount rate.
discount rate
The process of determining the present value of future cash flows in order to know their value today is referred to as: Multiple Choice compound interest valuation. interest on interest valuation. discounted cash flow valuation. future value interest factoring. complex factoring.
discounted cash flow valuation
The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate. Multiple Choice stated discounted annual effective annual periodic monthly consolidated monthly
effective annual
An ordinary annuity is best defined as: Multiple Choice increasing payments paid for a definitive period of time. increasing payments paid forever. equal payments paid at the end of regular intervals over a stated time period. equal payments paid at the beginning of regular intervals for a limited time period. equal payments that occur at set intervals for an unlimited period of time.
equal payments paid at the end of regular intervals over a stated time period.
A firm is operating at 90 percent of capacity. This information is primarily needed to project which one of the following account values when compiling pro forma statements? Multiple Choice Sales Cost of goods sold Accounts receivable Fixed assets Long-term debt
fixed assets
You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now? Multiple Choice Future value Present value Principal amount Discounted value Invested principal
future value
Which one of the following represents the capital gains yield as used in the dividend growth model? Multiple Choice D1 D1/P0 P0 g g/P0
g
As the degree of sensitivity of a project to a single variable rises, the: Multiple Choice less important the variable is to the final outcome of the project. less volatile the project's net present value is to that variable. greater is the importance of accurately predicting the value of that variable. greater is the sensitivity of the project to the other variable inputs. less volatile is the project's outcome.
greater is the importance of accurately predicting the value of that variable.
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to: Multiple Choice have two net present value profiles. have operational ambiguity. create a mutually exclusive investment decision. produce multiple economies of scale. have multiple rates of return.
have multiple rates of return.
Individual investors who continually monitor the financial markets seeking mispriced securities: Multiple Choice earn excess profits on all of their investments. make the markets increasingly more efficient. are never able to find a security that is temporarily mispriced. are overwhelmingly successful in earning abnormal profits. are always quite successful using only historical price information as their basis of evaluation.
make the markets increasingly more efficient.
The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate. Multiple Choice mean residual total average marginal
marginal
DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: Multiple Choice coupon rate will also increase. current yield will decrease. yield to maturity will be less than the coupon rate. market price of the bond will decrease. coupon payment will increase.
market price of the bond will decrease.
The sustainable growth rate of a firm is best described as the _____ growth rate achievable _____. Multiple Choice minimum; assuming a 100 percent retention ratio minimum; if the firm maintains a constant equity multiplier maximum; excluding external financing of any kind maximum; excluding any external equity financing while maintaining a constant debt-equity ratio maximum; with unlimited debt financing
maximum; excluding any external equity financing while maintaining a constant debt-equity ratio
An amortized loan: Multiple Choice requires the principal amount to be repaid in even increments over the life of the loan. may have equal or increasing amounts applied to the principal from each loan payment. requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term. requires that all payments be equal in amount and include both principal and interest. repays both the principal and the interest in one lump sum at the end of the loan term.
may have equal or increasing amounts applied to the principal from each loan payment.
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: Multiple Choice independent. interdependent. mutually exclusive. economically scaled. operationally distinct.
mutually exclusive.
The length of time a firm must wait to recoup the money it has invested in a project is called the: Multiple Choice internal return period. payback period. profitability period. discounted cash period. valuation period.
payback period
Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the: Multiple Choice single amount. future value. present value. simple amount. compounded value.
present value
National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: Multiple Choice basically worthless as it offers no growth potential. equal in value to the present value of $1 paid one year from today. priced the same as a $1 perpetuity. valued at an assumed growth rate of 1 percent. worth $1 a share in the current market.
priced the same as a $1 perpetuity.
The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the: Multiple Choice trustee relationships. bylaws. legal bounds. trust deed. protective covenants.
protective covenants.
The principle of diversification tells us that: Multiple Choice concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. spreading an investment across five diverse companies will not lower the total risk. spreading an investment across many diverse assets will eliminate all of the systematic risk. spreading an investment across many diverse assets will eliminate some of the total risk.
spreading an investment across many diverse assets will eliminate some of the total risk.
Total risk is measured by _____ and systematic risk is measured by _____. Multiple Choice beta; alpha beta; standard deviation alpha; beta standard deviation; beta standard deviation; variance
standard deviation; beta
Total risk is measured by _____ and systematic risk is measured by _____. Multiple Choice beta; alpha beta; standard deviation alpha; beta standard deviation; beta standard deviation; variance
standard deviation; beta
The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient. Multiple Choice weak semiweak semistrong strong perfect
strong
Inside information has the least value when financial markets are: Multiple Choice weak form efficient. semiweak form efficient. semistrong form efficient. strong form efficient. inefficient.
strong form efficient.
The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk. Multiple Choice efficient markets hypothesis systematic risk principle open markets theorem law of one price principle of diversification
systematic risk principle
The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk. Multiple Choice efficient markets hypothesis systematic risk principle open markets theorem law of one price principle of diversification
systematic risk principle
The pure time value of money is known as the: Multiple Choice liquidity effect. Fisher effect. term structure of interest rates. inflation factor. interest rate factor.
term structure of interest rates.
Efficient financial markets fluctuate continuously because: Multiple Choice the markets are continually reacting to old information as that information is absorbed. the markets are continually reacting to new information. arbitrage trading is limited. current trading systems require human intervention. investments produce varying levels of net present values.
the markets are continually reacting to new information.
Working capital management decisions include determining: Multiple Choice the minimum level of cash to be kept in a checking account. the best method of producing a product. the number of employees needed to work during a particular shift. when to replace obsolete equipment. if a competitor should be acquired.
the minimum level of cash to be kept in a checking account
The plowback ratio is: Multiple Choice equal to net income divided by the change in total equity. the percentage of net income available to the firm to fund future growth. equal to one minus the retention ratio. the change in retained earnings divided by the dividends paid. the dollar increase in net income divided by the dollar increase in sales.
the percentage of net income available to the firm to fund future growth
If a project has a net present value equal to zero, then: Multiple Choice the total of the cash inflows must equal the initial cost of the project. the project earns a return exactly equal to the discount rate. a decrease in the project's initial cost will cause the project to have a negative NPV. any delay in receiving the projected cash inflows will cause the project to have a positive NPV. the project's PI must also be equal to zero.
the project earns a return exactly equal to the discount rate.
