FIN 3013 Cumulative Exam

doesn't

An independent project _____________ (does/doesn't) rely on the acceptance or rejection of another project.

Compounding

Discounting is the opposite of___________.

erosion

can refer to the gradual redirection of funds from profitable segments or projects within a business to new projects and areas

It is likely to decrease, or be totally eliminated

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?

inventory is purchased, cash is kept for unexpected expenditures, and credit sales are made

Investment in net working capital arises when ___________.

interest only loan

It's a loan in which the borrower pays interest periodically and repays the principal when the bond matures

Multiple

Most investments involve _____ cash flows.

present

Net___________________ value is a measure of how much value is created or added today by undertaking an investment.

relevant

Opportunity costs are classified as _________________ costs in project analysis.

Be close to

To be considered good, projected cash flows should ____________ actual cash flows.

True

True or false: Equity represents an ownership interest.

A corporates bond yield to maturity

YTM is the prevailing market interest rate for bonds with similar features. YTM is the expected return for an investor who buys the bond today and holds it to maturity.

scenario analysis

_____________ determines the impact on NPV of a set of events relating to a specific situation.

Incremental

________________cash flows come about as a direct consequence of taking a project under consideration.

Pluse

n general, if you invest for one period at an interest rate of r, your investment will grow to 1 __________ (minus/plus) r.

$50/ $1000

A bond pays annual interest payments of $50, has a par value of $1,000, and a market price of $1,200. How is the coupon rate computed?

coupon

A bond's ______________rate is the stated interest payment made on a bond.

benefits lost due to taking on a particular project

Opportunity costs are:

accounts payable, bondholders, other debt holders

Residual value is the amount left over after paying ________________.

unanticipated

The true risk of any investment is the _________ portion.

First

The___________step is to determine whether cash flows are relevant.

True

True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.

A decrease in account receivable, and increase in note payable

Which of the following are sources of cash?

It is also known as the par value. It is the principal amount repaid at maturity.

Which of the following are true about a bond's face value?

Test-marketing expense

Which of the following is an example of a sunk cost?

have already occurred and are not affected by accepting or rejecting a project

Sunk costs are costs that ______________.

Expected

The _____________ return is the return that an investor will probably earn on a risky asset in the future.

Present

The ___________value is the current value of future cash flows discounted at the appropriate discount rate.

Stand

The ________alone principle is the assumption that evaluation of a project may be based on the project's incremental cash flows.

if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference, accept a project if the NPV is greater than zero., reject a project if its NPV is less than zero.

The basic NPV investment rule is:

systematic

The principle of diversification tells us that, to a diversified investor, the only type of risk that matters is

Income Statement

The purpose of a(n) ______ is to measure performance over a set period of time.

Surprises, Unanticipated events

The risk of owning an asset comes from____________.

They can be one of the largest cash outflows a firm experiences.

Which is true of taxes?

Increases in inventory, property, plant and equipment Decreases in accounts payable

Which of the following are uses of cash?

Equity is publicly traded while debt is not

Which of the following is not a difference between debt and equity?

It is a fixed annuity payment

Which of the following is true about a typical multiple-year bond's coupon?

Time to maturity, coupon rate, and par value

Which of the following terms apply to a bond?

What is the total amount of assets the firm owns; How much debt is used to finance the firm,

Which of these questions can be answered by reviewing a firm's balance sheet?

Cash flows can be derived from financial statements.

Which one of the following is true?

Its assets

Which one of the following represents what a firm owns at a given point in time?

Systematic, or market risk

Which type of risk does not change as we add more securities to a portfolio?

Systematic Risk

Which type of risk is unaffected by adding securities to a portfolio?

Shareholders

Who is entitled to the residual value of a firm's cash flows?

Diversification

is an investing strategy used to manage risk. Rather than concentrate money in a single company, industry, sector or asset class, investors diversify their investments across a range of different companies

changes over time; can be greater than, equal to, or less than the bond's coupon rate

A corporate bond's yield to maturity ____.

$5,000 per bond

A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for $5,500 each. What will the par value of the bonds be in year 5?

beyond the break-even sales point

A firm will start generating positive accounting profits at

Outflow, Inflow

A typical investment has a large cash _______________, (inflow/outflow) at the beginning and then a cash __________ (inflow/outflow) for many years.

makes no interest payments

A zero-coupon bond is a bond that ____.

Stand alone

According to the _________________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm."

Its hard to keep up with the market value

Assets are recorded at historical cost, not market value, because _____.

not what the assets are actually worth

Book value of assets is generally

$400,000

Broadband, Inc. has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $400,000. The company now plans to perform a scenario analysis on the cash flow and NPV estimates. It will use an NPV of ____________ as the base case.

Budgeting

Capital _______________ is the decision-making process for accepting and rejecting projects.

positive

If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be______________

$133.10

If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?

(1 + r)

If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.

Present

If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value.

End

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.

Financial Statements

James is an owner of J & Jo Company. If he wants to find out the cash flow of his bakery, he should look into the firm's

Cash

Future value is the ________ value of an investment at some time in the future.

the relationships between pieces of financial information

Financial ratios are ways of comparing and investigating

Fixed

For a______________ asset, it would be purely a coincidence if the actual market value were equal to its book value.

present value

In capital budgeting, the net ___________ determines the value of a project to the company.

Cash flows

In finance, the value of a firm depends on its ability to generate

fixed until the bond matures

In general, a corporate bond's coupon rate ________,

It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.

In the context of capital budgeting, what does sensitivity analysis do?

Direct

Incremental cash flows come about as a(n) _______________consequence of taking a project under consideration.

simple interest

Interest earned on the original principal amount invested is called ___________.

Simple

Interest earned only on the original principal amount invested is called__________.

Ignored

Interest expenses incurred on debt financing are _______________ when computing cash flows from a project.

Liquidity, Leverage

Some financial ratios measure a firm's ______, which shows the ability to meet short-term obligations without undue stress, while others measure a firm's financial ______, which demonstrates the proportion of assets financed by long-term obligations.

False

True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows

False

True or false: Systematic risk can be eliminated by diversification

False

True or false: Systematic risk will impact all securities in every portfolio equally.

Pay $800 today and receive $1000 at the end of 5 years

What are the cash flows involved in the purchase of a 5-year zero coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent.

Accounting value of a specific date

What does a balance sheet reflect about a firm?

It is additional compensation for taking risk, over and above the risk-free rate.

What is a risk premium?

It is a risk that pertains to a large number of assets

What is systematic risk?

10%

What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year?

It is the number of years until the face value is due to be repaid.

What is the definition of a bond's time to maturity?

It is the return that an investor expects to earn on a risky asset in the future.

What is the definition of expected return?

11,739.09

What is the future value of $100 compounded for 50 years at 10 percent annual interest?

To determine the level of sale where profits equal zero

What is the purpose of accounting profit break-even analysis?

GAAP, cash vs non-cash, and time and cost

What should you keep in mind when examining an income statement?

Working Capital

When a firm finances new investments, it may set up accounts payable with suppliers, but the balance that the firm must supply is called the investment in net_______________.

won't

When analyzing a proposed investment, we _______________ (will/won't) include interest paid or any other financing costs.

$600; $605

You invest $500 at 10 percent interest. At the end of 2 years with simple interest you will have ____ and with compound interest you will have ____.

Future, Future

___________value is the cash value of an investment at some time in the________________.