FIN 311 - Exam #1

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

$11,739.09

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

$133.10

Present Value Factor formula

1/(1 + r)t

A partnership must have at least _______ owners.

2

Semiannual compounding means that interest is paid ______ per year.

2 times

In terms of maturity, U.S. Treasury notes and bonds have initial maturities ranging from ____ years.

2 to 30

During the financial crisis of 2008, the S&P 500 Index fell by ____ percent

37

Future value spreadsheet function

=FV(rate,nper,pmt,pv)

Present value spreadsheet function

=PV(rate,nper,pmt,fv)

Discount rate spreadsheet function

=RATE(nper,pmt,pv,fv)

If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?

An efficient market reaction

The ____ is the interest rate charged per period

Annual Percentage Rate (APR)

If you are forecasting a few decades in the future (as you might do for retirement planning) you should calculate the expected return using:

Blume's formula

Finance is only important to study if you are planning a career in finance.

FALSE

It is sometimes argued that, left to themselves, managers tend to minimize the amount of resources over which they have control.

FALSE

Future Value of an Annuity formula

FV = C((1+r)t−1r)

The Future Value of an Annuity

Is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.

In a shareholder-manager relationship, who is the agent?

Managers

Organized auction markets include:

New York Stock Exchange

The EBITDA ratio is similar in spirit to:

PE ratio

basic present value equation

PV = FV/(1+r)^t

The aim of the act known as Blank______ is to protect investors from corporate abuse.

SOX

Mona Corporation has a variance of returns of 343, while Scott Corporation has a variance of returns of 898. Which company's actual returns vary more from their mean return?

Scott Corporation

True or false: The existence of traders attempting to beat the market is a necessary precondition for markets to become efficient.

TRUE

Which of the following is commonly used to measure inflation? Multiple choice question.

The Consumer Price Index (CPI)

What is the main goal of financial management?

To maximize current value per share of existing stock

There are various ways to quote interest rates

True

The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____.

[1 − (1/1.0820)]/.08

perpetuity

a constant stream of cash flows forever (infinite)

The relationship between stockholders and management can best be described as a(n) ______ relationship.

agency

annuity due

an annuity for which the cash flows occur at the beginning of each period

Joint stock company is another name for what is referred to as a ____ in the United States.

corporation

EBITDA multiple is equal to the enterprise value (divided/multiplied) by EBITDA.

divided

In financial markets, debt and ____ securities are bought and sold.

equity

The (greater/lower) the risk, the greater the required return.

greater

Long-term bonds have ____ interest rate sensitivity because a ____ portion of a bond's value comes from the face amount

greater greater

An efficient market is one that fully reflects all available ______. Multiple choice question.

information

Stock prices fluctuate from day to day because of _____.

information flow

semi-strong form efficiency

it is the most controversial, and all public information is reflected in the stock price

weak form efficiency

it suggests that, at a minimum, the current price of a stock reflects the stock's own past prices.

More volatility in returns produces ______ difference between the arithmetic and geometric averages.

larger

A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons.

legal

Capital budgeting is concerned with planning and managing a firm's _____.

long-term investments

The reason that interest rate risk is greater for ____ term bonds than for ____ term bonds is that the change in rates has a greater effect on the present value of the ____ than on the present value of the ____.

long; short; face value; coupon payments

Because ownership in a corporate is spread over a huge number of shareholders, it can be argued that ____ effectively controls the firm.

managers

The goal of a for-profit business is to Blank______ existing owners' equity.

maximize

The basic present value equation underlies many of the _____.

most important ideas in corporate finance

most investments involve ____ cash flows

multiple

Common stocks may experience ____ returns.

negative

The year 2008 was ____.

one of the worst years for stock market investors in US history

One method of calculating future values for multiple cash flows is to compound the accumulated balance forward ____ at a time

one year

Most equity shares of large firms in the U.S. trade on:

organized auction markets

if you want to know how much you need to invest today at 12% compounded annually in order to have $4000 in 5 years, you will need to find a(n) _____ value ~ the current value of future cash flows discounted at the appropriate discount rate.

present

The discount rate is also called the rate of _____

return

The arithmetic average rate of return measures the ____.

return in an average year over a given period

EAR of 12.36% = 12% compounded ____

semiannually

Geometric Averages are ____ arithmetic averages.

smaller than

A ______ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm.

stakeholder

The geometric average rate of return is approximately equal to ___.

the arithmetic mean minus half of the variance

When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year

the same

The financial manager acts in the shareholders' best interests by making decisions that increase the value of _____.

the stock

Average Returns can be calculated ____.

two different ways

A distribution tends to have a smooth shape when the number of observations is ___.

very large

The efficient markets hypothesis contends that _____ capital markets such as the NASDAQ are efficient.

well-organized

formula for Present Value interest factor

{1-[1/(1+r)t]}r1-[1/(1+r)t]r.

Which of the following positions generally report to the chief financial officer (CFO)?

~ Controller ~ Treasurer

Corporations in other countries are often called:

~ Joint stock companies ~Public limited companies

What can be determined using the future value approach to compound growth developed in this chapter

~ sales growth ~ dividend growth

What is needed to describe the distribution of stock returns?

~ standard Deviation of returns ~ the mean return

Second lesson from capital market history

~ there is a direct link between risk and reward. ~ handsomely rewarded

When the U.S government wants to borrow money for the long-term (more than 1 year ) it issues ____ and ____

treasury bond treasury notes

A sole proprietor has ____ personal liability for all business debts and obligations

unlimited

the square of the standard deviation

variance

Given the same APR, more frequent compounding results in _____.

higher EARs

In general, the arithmetic average return is probably too _____ (low/high) for longer periods and the geometric average is probably too _____ (low/high) for shorter periods.

high; low

characteristics of a normal distribution

~ bell shaped ~symmetrical

A benefit corporation is for profit, and has the legal attributes of accountability, _____, and purpose.

transparency

The Sharpe ratio measures ____ and is calculated ___

~reward to risk ~ as the risk premium of the asset divided by the SD

examples of annuities

~ car payment ~ house payments ~ annual $1,000 contribution to retirement account ~ monthly rent payments ~ installment loan payments

Growing Annuities cash flow grows at a ____ and for a ____

~ constant rate ~ finite period

Which of the following, according to the textbook, are possible financial goals for a company?

~ minimize costs ~ survival ~ maximize profits

Studying market history can reward us by demonstrating that ____

~ on average, investors will earn a reward for bearing risk ~the greater the potential reward is, the greater the risk

The Ibbotson-Sinquefield data shows that ____.

~long-term corporate bonds had less risk or variability than stocks ~U.S. T-bills had the lowest risk or variability ~ T-bills have the lowest risk and the lowest return ~ small-company stocks has the highest risk level ~ small-company stocks generated the highest average return

Which compounding interval will result in the lowest future value assuming everything else is held constant?

annual

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______.

beginning stock price

When calculating the future value of multiple cash flows using a spreadsheet, you must:

calculate the future value of each cash flow then add the compounded values together.

When calculating the present value of multiple cash flows using a spreadsheet, you must:

calculate the present value of each cash flow then add the discounted values together

Future Value is the ___ value of an investment at some time in the future

cash

When a company declares a dividend, shareholders generally receive ______.

cash

T-bills sometimes outperform _____.

common stocks

The geometric rate of return takes ______ into account.

compounding

The process of leaving your money and any accumulated interest in an investment for more than one period, thereby (reinvesting the interest) Interest is earned on interest

compounding

Some of the cash flow generated by a firm goes back to the financial markets in the form of ______.

dividends and debt payments

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

end

In an efficient market, firms should expect to receive ______ value for securities they sell.

fair

strong form efficiency

implies that all information of every kind is reflected in stock prices

Dividends are the ______ component of the total return from investing in a stock.

income

The excess return on a risky asset is the difference between the risky return and the ____ rate.

risk-free

Kate Corporation has discovered a very secret new product, but hasn't yet announced the discovery to the public. If the stock price reacts before the announcement (assuming no corporate "leaks"), the market is _____ form efficient.

strong

2 major forms of long-term debt

1. Public issue 2. Privately placed

Highest --> Lowest returns

1. Small-company common stock 2. Long-term corporate bonds 3. U.S. Treasury bills

Lowest Risk --> Highest Risk

1. U.S. Treasury Bills 2. Long-term corporate bonds 3. Large-company stocks 4. company stocks

5 main areas of finance

1. corporate finance 2. investments 3. financial institutions 4. international finance 5. fintech

A projected IRR on a risky investment in the ____ % range is not unusual.

10 to 20

What should be valued using a perpetuity formula?

~ Preferred stock ~ Cash flows from a product whose sales are expected to remain constant forever ~ A consol (bond that pays interest only and does not mature)

In an efficient market:

~ all investments are zero NPV investments ~ assets are priced at the present value of their future cash flows

Which of the following can be used to encourage managers to act in the best interests of shareholders?

~Better prospects of promotion ~Managerial compensation tied to performance

Which of the following are among the most important questions to be asked when a business is started?

~What long-term investments should be made? ~Where will long-term financing be obtained to pay for investments? ~How will everyday financial activities be handled?