FIN 5352 TEST 2

A firm has a total debt ratio of 0.30 times. This means the firm has ______ in total debt for every $1 in total assets.

$0.30

Weston's financial planning model shows assets are projected to increase by $2.7 million while liabilities and equity increase by $1.5 million. What is the external financing need (EFN)?

$1.2 million

A pro forma balance sheet indicates that total assets will increase by $300,000. If a debt-equity ratio of 0.5 is maintained, then debt must increase by ______.

$100,000

If the current market price is $21, a limit order to buy shares at $17 will be filled at what price?

$17 or less

If the dividend paid over the past year was $2.25 and the beginning stock price was $42 per share, what is the dividend yield?

$2.25/$42 = 5.4 percent

If a firm needs $300 million in new assets and has projected retained earnings of $72.4 million, what is the external financing needed?

$227.60

If a firm needs $500 million in new assets and has projected retained earnings of $200 million, what is the external financing needed?

$300 million

If the current market price is $42, a limit order to buy shares at $35 will be filled at what price?

$35 or less

Dot's financial planning model shows assets are projected to increase by $800,000 but liabilities and equity increase by $395,000. What is the external financing need (EFN)?

$405,000

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?

$5,000 per bond

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

$50/$1,000

ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?

$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years.

What is the price of a U.S. Treasury bond that is listed at 90 if the par value is $1,000?

$900

Which one of these correctly specifies the relationship between the nominal rate and the real rate?

(1 + R) = (1 + r) × (1 + h)

A firm has a total debt ratio of ______ times. This means the firm has $0.20 in total debt for every $1 in total assets.

0.20

Long-term debt securities have maturities of more than ______.

1 year

A firm with $0.25 in debt for every $1 in assets has an equity multiplier of ______.

1.33

You buy a stock for $50. After 1 year, its price rises to $55, and it pays a $2 dividend. You do not sell the stock. Your capital gains yield is ______.

10%

What is the current yield on a $1,000 par value bond that sells for $900 if the coupon rate is 10 percent?

11.11%

BC Corporation has 1,800 shares outstanding and earned $2,700 last year on assets of $2 million and equity of $1.5 million. What is the PE ratio if the stock is currently selling at $18 per share?

12 times

You buy a stock for $100. In 1 year its price rises to $114, and it pays a $1 dividend. Your capital gains yield is ______.

14%

One year ago, Ernie purchased shares of RTF common stock for $100 a share. Today, the stock paid a dividend of $1 per share. If the stock currently sells for $114 per share, what is Ernie's total return?

15%

Suppose you buy a share of stock for $100. At the end of 1 year, the stock price is $114 and a $1 dividend is paid. If you do not sell the stock, your total annual return is ______.

15%

At what tax rate will you be indifferent between a muni that yields 5 percent and a comparable corporate bond yielding 6 percent?

16.67%

A firm that generates 18 cents in net income for every dollar in sales has a profit margin of ___ percent.

18

A firm that generates 19 cents in profit for every dollar of equity has a return on equity of ___ percent.

19

A share of common stock currently sells for $100 and will pay a dividend of $2 at the end of the year. If the price is expected to increase to $113 at the end of 1 year, what is the stock's current dividend yield?

2%

Alpha Omega's percentage of sales model forecasts sales growth of 20 percent next year. If cost of good sold is proportionate at 80 percent of sales, then cost of good sold will increase by ______.

20%

At what tax rate will you be indifferent between a muni that yields 7 percent and a comparable corporate bond yielding 9 percent?

22.22%

If a firm collects its credit sales in 25 days, on average, it has a days' sales in receivables of ___.

25

BC Toys has total equity of $584,000. There are 35,000 shares outstanding at a market price of $54 per share. What is the market-to-book ratio?

3.24 times

In the 24-year prior to 1999, how many companies doubled, or more than doubled, in value on the first day of trading?

39

If you are in the 15 percent tax bracket, what will be your aftertax yield on a U.S. Treasury bond that is currently priced at par and yielding 5 percent?

4.25%

What is the arithmetic average return for a mutual fund that reported a return of 5 percent every year for the last 3 years?

5%

What is the price of a U.S. Treasury bond listed at 122 if the par value is $5,000?

5,000 x 1.22 = 6,100

What is the aftertax yield on a U.S. Treasury bond yielding 7 percent if you are in the 20 percent tax bracket?

5.6%

Swenson's return on assets is 14 percent and its plowback ratio is 40 percent. What is the internal rate of growth?

5.93%

A firm with a profit margin of 6.8 percent generates ______ cents in net income for every one dollar in sales.

6.8

If an investment appreciates by 7 percent while the rate of inflation is 2 percent, what is the nominal rate of return?

7%

What is the arithmetic average return for a stock that had annual returns of 8 percent, 2 percent, and 11 percent for the past 3 years?

7%

A firm's return on equity is 18 percent and its retention ratio is 40 percent. What is its sustainable growth rate?

7.76%

How is a floating rate bond different from a conventional bond?

A floating rate bond's coupon payment varies while a conventional bond's coupon payment is fixed.

In a financial plan using the percentage of sales approach, why is it assumed that some assets increase with sales?

Additional working capital and fixed assets are needed to support growth.

Which of the following is true about the IPO market during 1999 and 2000?

Almost 200 IPOs doubled in value on their first day.

Which of the following is more typical with regard to the repayment of corporate bonds?

Bonds are partially repaid before maturity.

Cal's Market has a return on equity (ROE) of 15 percent. What does this mean?

Cal generated $0.15 in profit for every $1 of book value of equity.

Which type of bonds allows a corporation to repurchase part or all of the bond issue at stated prices over a specific period?

Callable bonds

What is the difference between CoCo bonds and NoNo bonds?

CoCo bonds make coupon payments, while NoNo bonds do not make coupon payments.

What are some differences in the income received by common stockholders and the income received by bondholders? Common stock pays dividends, while bonds pay interest. Both dividends and interest income are guaranteed as long as the corporation is generating sufficient income. Dividends are not based on the par value of stock, but interest is generally based on a bond's par value. Dividends are not fixed, but interest is generally a fixed dollar amount.

Common stock pays dividends, while bonds pay interest. Dividends are not based on the par value of stock, but interest is generally based on a bond's par value. Dividends are not fixed, but interest is generally a fixed dollar amount.

Which of the following are true of convertible bonds?

Conversion of bonds to stocks can be done at the bondholder's discretion. If the bond is converted, conversion must take place before the bond matures. Convertible bonds can be converted to a fixed number of shares.

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

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?

Coupon Rate = coupon interest payment/par value of bond = $100/$1000 = 10%

______ act as two-sided dealers in particular stocks.

DMMs

Alpha Star's net income is $300 on $2,000 of sales. The company has $5,000 in assets and equity of $3,000. The firm paid out $125 in cash dividends. What is the dividend payout ratio?

DPR = dividends paid​​/net income = $125/$300 = 41.67%

Debentures commonly pledge which type of property as security?

Debentures do not pledge specific properties.

What is the debt-equity ratio for a company with $3.5 million in total assets and $1.4 million in equity?

Debt equity ratio = total debt/total equity = ($3.5 million-$1.4 million)/$1.4 million = 1.50

What is a discount bond?

Discount bonds are bonds that sell for less than the face value.

What are some important lessons from the 2008 financial crisis?

Diversification is important. The stock market is risky.

Last year, Benton, Inc., had a net income of $3.5 million and paid out $700,000 in cash dividends. If income this year is $4.1 million and the dividend payout ratio is held constant, how much will be paid in dividends?

Dividend payout rate = cash dividends/ net income = $4.1 million($700,000/$3.5 million) = $820,000

The ______ identity can help to explain why two firms with the same return on equity may not be operating in the same way.

DuPont

All else equal, a higher profit or ___ margin is preferable.

EBITDA

What is the EBITDA margin if a firm's EBITDA is $125, sales are $350, and net income is $80?

EBITDA margin = EBITDA/sales 35.71 percent

What conditions must be met for a firm to increase value?

Earnings must be retained to fund projects. Projects must have positive net present values.

For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed.

False

Nasdaq officials have recently created an advertisement campaign to promote the Nasdaq market as a purely OTC exchange.

False

True or false: A bond's value is not affected by changes in the market rate of interest.

False

True or false: A market order allows the investor to choose the price they will transact at.

False

True or false: An asset's value is determined by the most recent cash flows.

False

True or false: Arbitrage opportunities will not exist in efficient markets.

False

True or false: Given external financing needs in a financial plan, the firm must borrow both long- and short-term funds.

False

True or false: If you invest in junk bonds, there is a high likelihood that you will earn a very high return.

False

True or false: If you take more risk and earn a higher return, then the market is not efficient.

False

True or false: In an upward-sloping term structure, the long-term rates will be lower than the short-term rates.

False

True or false: Independent deviations from rationality mean markets are inefficient.

False

True or false: Plain vanilla bonds are exotic bonds with unique features.

False

True or false: The average return on the stock market can be used to find ways to beat the market.

False

True or false: The inflation premium will be higher if the rate of inflation is low.

False

True or false: There has been no change in the popularity of convertible bonds.

False

True or false: Throwing darts at the financial pages to construct a portfolio is not be a good strategy because professional security analysts always outperform dart portfolios.

False

True or false: Trades on Nasdaq occur on a trading floor.

False

What are some reasons why the bond market is so big?

Federal government borrowing activity in the bond market is enormous. Various state and local governments also participate in the bond market. Many corporations have multiple bond issues outstanding.

BC Corporation's ROA is 22 percent and its plowback ratio is 0.5. What is its internal growth rate?

IGR = (ROA x b) / 1 - (ROA x b) = 12.36%

BC Corporation had sales of $1,000,000 and costs of goods sold of $450,000 for the year. Inventory at year-end was $180,000. What is the inventory turnover?

Inventory turnover = COGS/inventory = $450,000/$180,000 = 2.5

Why do stocks that pay no dividends sell at positive prices?

Investors count on future dividends. Investors speculate on capital returns if the firm is sold.

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

It is a fixed annuity payment.

What is a sinking fund?

It is a fund set up for the repayment of bonds.

Which of the following are true about a bond's face value? It is also known as the par value. It is the market value of the bond at the time of maturity. It is the principal amount repaid at maturity. A bond's face value is the same for all corporations.

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

What is the nominal rate of return on an investment?

It is the actual percentage change in the dollar value of an investment.

What is the maturity of a debt instrument?

It is the length of time the debt remains outstanding with some unpaid balance.

Which of the following is true about the sustainable growth rate?

It is the maximum rate of growth a firm can maintain without increasing its financial leverage.

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

It is the number of years until the face value is paid.

What is a protective covenant?

It is the part of the bond indenture that protects bondholders by limiting the actions of the corporation.

What is the real rate of return? It is the average rate of return on similar investments. It is the rate of return that has not been adjusted for inflation. It is the percentage change in buying power. It is the rate of return that has been adjusted for inflation.

It is the percentage change in buying power. It is the rate of return that has been adjusted for inflation.

Which is the promised yield on a bond?

It is the yield based on the current price and expected cash flows, assuming no default.

What is the likely impact on the real rate if the economy is declining?

It will decline.

What will happen to a bond's time to maturity as the years go by?

It will decline.

What is the likely impact on the real rate if the economy is growing?

It will increase.

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

It will increase.

What will happen to the default risk premium during periods of economic uncertainty?

It will increase.

What is an interest-only loan?

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

Which of the following is true about the IPO market?

Large initial gains in stock prices often occur.

What are some reasons why the bond market is so big? Many corporations have multiple bond issues outstanding. Corporations are required to raise more money from bonds than from stocks. Federal government borrowing activity in the bond market is enormous. Various state and local governments also participate in the bond market.

Many corporations have multiple bond issues outstanding. Federal government borrowing activity in the bond market is enormous. Various state and local governments also participate in the bond market.

How is the price-earnings (PE) ratio computed?

Market price per share/Earnings per share

How is market-to-book ratio measured?

Market value per share/Book value per share

Which of the following has a physical trading floor?

NYSE

The two most important stock markets in the United States are the New York Stock Exchange and ______.

Nasdaq

Which of the following occurs in the primary market?

Newly issued stocks are initially sold.

What are the federal income tax implications of receiving $50 in interest income from a municipal bond versus a corporate bond?

Only the interest on the corporate bond will be taxed.

A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10 percent. What will the stock's price be?

P = D/R P = $2/10% P = 20

Vera has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 a share. What is the PE ratio?

PE ratio = price per share/earnings per share = 10 times

Profit Margin = Total Asset Turnover = Equity Multiplier =

Profit Margin =Net Income/Sales Total Asset Turnover = Sales/Assets Equity Multiplier = Assets/Total Equity

The profit margin is equal to net income divided by ______.

Profit margin = net income/sales sales

How are TIPS different from traditional bonds?

Promised payments are specified in real terms.

BT Tools has current assets totaling $9.2 million, including $4.3 million in inventory. The company's current liabilities total $8.1 million. What is the quick ratio?

Quick ratio = (current assets-inventory)/current liabilities = ($9.2 million-$4.3 million)/$8.1 million = 0.60

What does ROE equal?

ROA × Equity multiplier

How is sustainable growth calculated when equity used in the calculation of ROE is the beginning value?

ROE × b

A firm with an 8 percent dividend growth rate and a return on equity of 20 percent must have a retention ratio of ______ percent.

RR = growth rate/ROE RR = 8/20 RR = 40%

If a firm has a receivables turnover of 13.65 times and accounts receivables of $200. What is the sales?

Receivables turnover = sales/accounts receivable Receivables turnover x accounts receivable = sales 13.65x200 = $2,730

Omega Co. has annual sales of $250,000, costs of goods sold of $168,000, and assets of $322,000. Accounts receivable are $86,200. What is the receivables turnover?

Receivables turnover = sales/accounts receivable = $250,000/$86,200 = 2.90

______ bonds are the most common type of bond in the United States today.

Registered

BC Corporation has net income of $176,000, sales of $1,982,000, and total assets of $2.24 million. What is the return on assets?

Return on assets = net income/total assets = $176,000/$2.24 million = 7.86%

Alder Inc. has net income of $403,000, operating earnings of $640,000, sales of $1.23 million, and total assets of $1.48 million. What is the return on assets?

Return on assets = net income/total assets = 27.23%

AC Motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $491,300. What is the return on equity?

Return on equity = net income/total equity = $51,750/($523,400-$267,000) = 20.18%

Nestor has a net income of $315,000, total sales of $3.52 million, total assets of $4.4 million, and total equity of $1.98 million. What is the return on equity?

Return on equity = net income/total equity = 15.91%

Which of the following are not assumptions of market efficiency?

SEC oversight

Which of the following are implications of the efficient markets hypothesis (EMH)?

Securities sellers will receive a fair price that reflects the present value of the security. Investors should expect only a normal rate of return.

______ indicates preference in position over other lenders.

Seniority

Which of the following occurs in the secondary market?

Shareholders gift shares to charities. Issuers repurchase shares. Outstanding shares are resold.

What is the difference between the maturities of short-term and long-term debt?

Short-term debt matures in less than 1 year, while long-term debt matures in more than 1 year.

What does historical data suggest about the nature of short-term and long-term interest rates?

Sometimes short-term rates are higher and sometimes long-term rates are higher.

______ financial statements provide for comparison of firms that differ in size.

Standardized

Which of the following are true?

Strong form efficiency implies semistrong form efficiency. Semistrong form efficiency implies weak form efficiency.

The Ibbotson SBBI data shows that ______.

T-bills had the lowest risk or variability long-term government bonds had less risk or variability than stocks

Which of the following are true?

T-bills sometimes outperform common stocks. Common stocks frequently experience negative returns.

The Ibbotson SBBI data shows that over the long-term, ______.

T-bills, which had the lowest risk, generated the lowest return. small-company stocks had the highest risk level small-company stocks generated the highest average return

The difference between the yield on a 10-year ______ and the yield on a 10-year ______ reflects the market's expected annual rate of inflation over the next 10 years.

TIPS; Treasury bond

_purposes are the main reason for the distinction between debt and equity.

Tax

If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?

The 10-year bond is sensitive.

What are some features of the OTC market for bonds?

The OTC has no designated physical location. OTC dealers are connected electronically.

What is the bid price?

The bid is the price at which a dealer is willing to buy securities.

Assume you own a bond that was issued by a blue-chip company. If the market rate of interest rises, what will happen to the value of your bond?

The bond value will fall.

You own two bonds—one with a 5 percent coupon and one with a 6 percent coupon. Which one is more sensitive to interest rate risk, all other things being equal?

The bond with the 5 percent coupon rate is more sensitive.

What does it mean when a company reports ROA of 12 percent?

The company generates $12 in net income for every $100 invested in assets.

What are the drawbacks of bearer bonds?

The corporation cannot get in touch with the bondholders directly. They are difficult to recover if lost or stolen.

When a corporation raises capital by issuing bonds, how are the corporation and the bondholders classified?

The corporation is a debtor and the bondholders are creditors.

Why does a bond's value fluctuate over time?

The coupon rate and par value are fixed while market interest rates change.

Why is the YTM of a discount bond greater than the bond's current yield?

The current yield does not include the capital gain from the price discount.

What does an inventory turnover ratio of 5 mean?

The entire inventory was sold and replaced 5 times during the year.

What does it mean when a firm has a days' sales in receivables of 45?

The firm collects its credit sales in 45 days on average.

Which one of the following statements is most likely correct for a firm with days' sales in receivables of 30 days?

The firm finances approximately 8 percent of its annual sales at any given time.

What does a total asset turnover ratio of 0.75 mean?

The firm generated $0.75 in sales for every $1 in assets.

What does a current ratio of 1.2 mean?

The firm has $1.20 in current assets for every $1 in current liabilities.

What does a current ratio of 1.4 mean?

The firm has $1.40 in current assets for every $1 in current liabilities.

What does the AAA rating assigned by S&P mean?

The firm is in a strong position to meet its debt obligations.

What key assumption makes the promised yield different from the expected return?

The promised yield assumes no default risk.

Calculating the promised yield on a corporate bond is the same as calculating the yield to maturity on a government bond because ______.

The promised yield assumes no default.

What is the main role of the company registrar?

The registrar records the ownership of each bond and any changes in ownership.

Which of the following are true about stock price fluctuations?

Their absence would reflect a market inefficiency. They reflect new information.

How popular are convertible bonds?

They are fairly common but their popularity has been decreasing.

Which of the following characterizes newer companies?

They are fast-growing companies.

Which of the following are features of municipal bonds?

They are issued by state and local governments. The interest on municipal bonds is exempt from federal taxes.

Which of the following characterizes newer companies?

They don't pay dividends. They have negative earnings.

A firm has an operating profit (EBIT) of $600 on sales of $1,000. Interest expense is $250 and taxes are $120. What is the times interest earned ratio?

Times interest earned ratio = EBIT/interest = $600/$250 = 2.40

A firm that generated $0.24 in sales for every dollar in assets has a total asset turnover of ___ times.

Total asset turnover = sales/total assets 0.24

A firm with $900,000 in sales, cash on hand of $1,150,000, liabilities of $400,000 and total assets of $2 million has a total asset turnover of ______ times.

Total asset turnover = sales/total assets = $900,000/$2 million = 0.45

A firm with $600,000 in sales, cash on hand of $750,000, liabilities of $200,000, and total assets of $1 million has a total asset turnover of ______ times.

Total asset turnover = sales/total assets 0.60

Assume current assets = $48; fixed assets = $125, current liabilities = $42, and equity= $100. What is the total debt ratio?

Total debt ratio = (total assets-total equity)/total assets = (($48+$125)-$100)/($48+$125) = 0.42

A Treasury yield curve depicts the yields for different maturities of ___ securities.

Treasury

What does TIPS stand for?

Treasury Inflation-Protected Securities

The U.S. government borrows money by issuing ______.

Treasury bonds Treasury notes

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

Treasury bonds Treasury notes

Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds?

Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer. Treasury bonds are issued by the U.S. government, while corporate bonds are issued by corporations. Treasury bonds are considered free of default risk, while corporate bonds are exposed to default risk.

True or false: A benefit of trailing earnings is that they reflect what actually happened.

True

True or false: A capital gain on a stock is counted as part of the total return whether or not the gain is realized from selling the stock.

True

True or false: A good working knowledge of financial statements is desirable because such statements are the primary means of communicating financial information both within and outside the firm.

True

True or false: If the growth rate is larger than the discount rate, the dividend growth model with constant growth does not work.

True

True or false: If you invest in a bond that is rated AAA by S&P, you can be reasonably assured that your investment has very little default risk.

True

What is a bond's yield to maturity (YTM)?

YTM is the expected return on a bond that is held until it matures.

What is a corporate bond's yield to maturity (YTM)?

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.

How is a zero coupon bond different from a conventional bond? Zeroes are sold at a premium. Zeroes have shorter maturity periods. Zeroes are always issued at a discount. Zeroes make no interest payments.

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

What is a premium bond?

a bond that sells for more than face value

A bond's YTM will exceed its current yield when the bond is selling at ______.

a discount

Bonds that are less liquid will have ______ required return than a more liquid bond, all else equal.

a higher

If markets are efficient, then portfolios with more risk will earn ______ return.

a higher

Taxable bonds have ______ rate of return than non-taxable bonds, all else equal.

a higher

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

a larger

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes ______ to sell.

a long time

A firm that collects credit sales quickly will have ______ days' sales in receivables than a comparable firm.

a lower

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

a lower

What is the legal document that describes a mortgage?

a mortgage trust indenture

Profitability measures such as return on assets (ROA) and return on equity (ROE) are ______ rates of return.

accounting

ROE is a(n) ______ rate of return, while stock return is a(n) ______ rate of return.

accounting; market

A market is said to be strong form efficient if prices incorporate which type of information?

all information, both public and private

EBITDA measures earnings before ______.

amortization interest depreciation

A website that allows investors to trade directly with one another is called ______.

an ECN

Which one of these will decrease a firm's sustainable rate of growth?

an increase in the dividend payout ratio

Floating-rate bond coupon payment adjustments are typically tied to _____.

an interest rate index

If you can beat the market by ______, then you are violating weak form efficiency.

analyzing historical price patterns

What information do we need to determine the value of stock using the zero-growth model?

annual dividend amount discount rate

One objection to the present value analysis of stocks is that investors ______.

are shortsighted

The ___ average rate of return measures the return in an average year over a given period.

arithmetic

The ______ mean is the best estimate of next year's return.

arithmetic

The sustainable growth rate can be used to ______.

assess planned growth

Which of the following are traditional financial ratio categories? asset management ratios real options ratios market value ratios profitability ratios

asset management ratios market value ratios profitability ratios

Collateral refers to any:

asset pledged on a debt.

Utilization ratios measure how efficiently a firm uses ______.

assets

In general, why is the yield on a corporate bond higher than the yield on a government bond?

because corporate bonds have default risk

The sustainable growth rate is computed as ROE × b when equity used is at the ______ of the period.

beginning

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

beginning stock price

A no-dividend firm can still pay off for an investor by ______.

being acquired in the future paying high dividends in the future

When an investor sells a bond, the price received is always the ______.

bid price

The ___-___ spread represents the dealer's profit.

bid; ask

Protective covenants are designed to protect the interests of the ______.

bondholders

What are some commonly used names for debt securities? bonds preferred stock notes debentures

bonds notes debentures

What are municipal bonds?

bonds that have been issued by state or local governments

Typically, enterprise value uses ______ value of debt because it is widely available.

book

Financial statements report ______.

book values

A short sale occurs if the seller initially ___ the asset and then sells it.

borrows

Which of the following help facilitate trades without necessarily maintaining an inventory?

broker

The bid price is the price the dealer is willing to ______.

buy at

In a financial plan, how is the amount of borrowing determined?

by management's D/E decision

A callable bond ______.

can be called and redeemed by the corporation before the maturity date

A corporate bond's yield to maturity ______.

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

The excess rate of return ______.

can occasionally be negative is generally positive over the long-term

The enterprise value multiple allows for comparing the value of firms with different ______ structures.

capital

The total dollar return is the sum of dividends and ______.

capital gains or losses

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

cash

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

cash flow size, risk, and timing

Junior debt cannot be subordinated to ______.

common stock

Which of the following are examples of collateral? equipment a bank loan building common stock

common stock equipment building

The standardized statements used for the purpose of comparing the financial statements of different companies are called ______.

common-size statements

The average return on the stock market can be used to ______.

compare stock returns with the returns on other securities

What are the three components of the nominal rate of return? compensation for the inflation effect on the original investment the inflation-adjusted risk-free rate of return real rate of return compensation for the inflation effect on the investment earnings

compensation for the inflation effect on the original investment real rate of return compensation for the inflation effect on the investment earnings

The history of U.S. capital market returns is ______ in raw form.

complicated

Geometric averages are usually smaller than arithmetic averages because of the effect of ______.

compounding

The arithmetic average return ignores ___.

compounding

The geometric rate of return takes ______ into account.

compounding

Daily stock price movement is ______ with efficiency.

consistent

Plain vanilla bonds are ______.

conventional bonds with typical bond features

Which of the following bonds have default risk? U.S. Treasury bonds corporate bonds municipal bonds

corporate bonds municipal bonds

Most bond trading takes place over the ___ (OTC).

counter

What "floats" in a floating rate bond?

coupon payments

A firm with a market-to-book value that is greater than 1 is said to have ______ value for shareholders.

created

The dividend yield is determined by dividing next year's expected cash dividend by the ______.

current stock price

Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ______.

dealer

The bid-ask spread represents the ______.

dealer's profit

What is the commonly used term for an unsecured bond?

debenture

On a balance sheet, notes, debentures, and bonds are classified as ______.

debt

The difference between ROA and ROE reflects the use of ___ financing.

debt

A corporation that borrows money is known as a(n) ______.

debtor

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

decision making

If the liquidity of a bond increases, then the bond's yield will ______.

decrease

All else constant, the dividend yield will increase if the stock price ______.

decreases

What are three important features of Treasury notes and bonds? default-free taxable tax-free highly liquid

default-free taxable highly liquid

A provision whereby the corporation is prohibited from calling the bonds for a stipulated time is known as a(n) ______ call provision.

deferred

When a corporation is prohibited from calling bonds for 7 years, it is subject to a(n) ______.

deferred call provision

Even with efficient markets, investors must worry about their ______.

degree of diversification level of risk exposure

The liquidity premium compensates investors based on a bond's ______.

degree of marketability

Which of the following are cash flows to investors in stocks?

dividends capital gains

Which of the following are ways to make money by investing in stocks?

dividends capital gains

The total dollar return on a stock is the sum of the ______ and the ______.

dividends; capital gains

Generally, debtholders ______ voting power.

do not have

Market efficiency ______ require rational individuals.

does not

A times interest earned (TIE) ratio of 3.5 times means a firm has ______ that is(are) 3.5 times greater than the firm's interest expense.

earnings before interest and taxes

The price-earnings ratio is found by dividing the current price per share by last year's ______.

earnings per share

If new information reaches the market and stock prices instantly and fully reflect the new information, the market has reacted ______.

efficiently

Most trades on the NYSE occur ______.

electronically without human intervention

The promised yield and the expected return for risk-free security will be ______.

equal

A convertible bond can be swapped for ______.

equity

The ______ risk premium on common stocks represents the additional return from bearing risk.

equity

The average excess return on common stocks is called the ______ risk premium.

equity

The two main types of securities issued by a corporation are debt securities and ______ securities.

equity

What are the two main types of securities issued by a corporation? redeemable securities mortgage securities equity securities debt securities

equity securities debt securities

Who generally enjoys voting rights in a corporation?

equityholders

A 10-year AAA corporate bond is most apt to have a yield that ______ the yield on a 10-year AAA state government bond.

exceeds

The ______ rate of return is the difference between risky returns and risk-free returns.

excess

CoCo and NoNo bonds are examples of:

exotic bonds.

The price of a share of common stock is equal to the present value of all ______ future dividends.

expected

Which of the following are premiums in the determination of the yield on a bond? lack of liquidity interest rate risk the real rate of return default risk taxability expected future inflation

expected future inflation interest rate risk default risk taxability lack of liquidity

Given an internal growth rate of 5 percent, for a firm to grow by 10 percent, it will need ______.

external financing

All else equal, when the rate of growth in sales or assets in a financial plan is higher, ___ financing needs will be greater.

external or debt

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

fair

If market interest rates ______, the bond price will ______.

fall; rise rise; fall

Companies with differential growth have dividends that grow ______ in the near term than in the long term.

faster

The maximum reward for owning debt security is ______.

fixed by the amount of the loan

A provision that the annual coupon payment will equal the yield on 30-year Treasury bond plus 2 percent is an example of a(n) ______ ______ bond.

floating rate

A limitation of bond ratings is that they ______.

focus exclusively on default risk

To ___ future U.S. equity premiums, assumptions related to the future risk environment and risk aversion of future investors are needed.

forecast

When computing the PE ratio, using ___ earnings is merely using forecasts.

forward

A ___ distribution of stock returns plots the frequency of occurrence for various ranges of return.

frequency

An asset's value is determined by the present value of its ______ cash flows.

future

All else equal, when the rate of growth in sales or assets in a financial plan is higher, external financing needs will be ______.

greater

When the growth rate is ___ than or equal to the discount rate, one should be particularly skeptical.

greater

A times interest earned (TIE) ratio greater than 1 means EBIT is ______ the firm's interest expense.

greater than

Given an internal growth rate of 3 percent, a firm can ______.

grow by 3 percent or less without any additional external financing

Which of these factors are used in predicting stock values using the dividend discount model?

growth discount rate

The ______ can be interpreted as the capital gains yield.

growth rate

The value of a firm is the function of its ______ rate and its ______ rate.

growth; discount

If the dispersion of returns on particular security is not very spread out from the security's mean return, the security ______.

has a low level of risk

A firm may choose to forgo dividends today if growth opportunities are ______.

high

All junk bonds typically have which of these features? time to maturity of 10 years or more high probability of default zero coupon rate less than investment-grade rating

high probability of default less than investment-grade rating

A ______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.

higher

A high-growth firm will have a relatively ______ need for external financing than a low-growth firm.

higher

As long as all sales requests are being met, a ______ inventory turnover ratio is better.

higher

Higher growth opportunities create ______ value today.

higher

When analyzing financial performance over time, all else equal, a(n) ______ profit or EBITDA margin is preferred.

higher

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

higher

A bond's call price is generally ______ ______ the bond's par or stated value.

higher than

In a stock price quote, the ask price is ______ the bid price.

higher than

Markets are more likely to be weak form efficient than semistrong form efficient because ______.

historical stock price information is easy to get easy profits would lead everyone to trade on historical information

The ___ period rate of return is the rate of return over some arbitrary investment period.

holding

An efficient market is one in which any change in available information will be reflected in the company's stock price ______.

immediately

If you were classified as a high income/high tax bracket investor, you might find municipal bonds an attractive investment because ______.

income from municipal bonds is exempt from federal taxes

The information needed to compute the profit margin can be found on the ______.

income statement

An increase in the profit margin will ______ a firm's sustainable growth rate.

increase

As projected sales growth increases, the external financing needs ______.

increase

Assume you own a bond currently valued at $989. If the market rate of interest drops, the bond's current market value will ______.

increase

If a firm increases its debt-equity ratio, it will ______ its sustainable rate of growth.

increase

In a financial plan using the percentage of sales approach, as total assets increase, total liabilities and equity will ______.

increase

Which of the following can a firm do to increase sales above its sustainable growth rate? increase retained earnings decrease profit margin buy back shares increase profit margin increase financial leverage

increase retained earnings increase profit margin increase financial leverage

When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ______.

increases

If new, negative information reaches the market and stock prices slowly decrease, the market has reacted ______.

inefficiently

Over time, the purchasing power of the cash flows from a bond decreases due to ___.

inflation

The difference between the yield on a 10-year TIPS and the yield on a 10-year Treasury bond reflects the market's expected annual rate of ______ over the next 10 years.

inflation

The inflation premium is the additional return demanded by investors to compensate for ______.

inflation

Which of these is the least important component of the nominal rate of return?

inflation loss on investment earnings

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

information

What are the sources of information for generating bond ratings?

information from the corporation being rated information collected by bond rating agency

The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the ______.

initial stock price

It is not uncommon for IPOs to ______ experience large gains.

initially

For corporations, ______.

interest expense is tax-deductible, while dividends are not tax-deductible

Which of the following are premiums in the determination of the yield on a bond? the real rate of return interest rate risk default risk lack of liquidity taxability expected future inflation

interest rate risk default risk lack of liquidity taxability expected future inflation

The least liquid current asset is often ______.

inventory

The reason the quick ratio of Walmart is different from its current ratio is due to ______.

inventory

The relationship between bond prices and the market rate of interest is ______.

inverse; if the market rate of interest rises, bond prices will fall

What differences might cause firms in the same industry to have different multiples?

investment opportunities risk levels accounting treatments

Financial planning is a(n) ______ process.

iterative

If the growth rate exceeds the discount rate, then the present value of dividends ___.

keeps getting bigger

Which of the following could be mortgaged? common stock land building equipment

land building equipment

The U.S. Treasuries market is the ______ security market in the world (based on trading volume).

largest

If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______ $1,000.

less than

If a company has inventory, the quick ratio will always be ______ the current ratio.

less than

If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be ______.

less than 1

Long-term debt on the common-size balance sheet of Solid Rock Construction over the past 3 years is 30 percent, 34 percent, and 40 percent, respectively. This indicates that the firm has increased its ______.

leverage

Current assets on the common-size balance sheet over the past 3 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

Short-term creditors are interested in ___ ratios.

liquidity

Electronic communication networks increase ___ and ___ in a market.

liquidity; competition

If the term structure of interest rates is upward sloping, then ______.

long-term rates are higher than short-term rates

Companies may issue bonds with maturities greater than 30 years to lock in historically- ___ interest rates.

low

A low-growth firm will have a relatively ______ need for external financing than a high-growth firm.

lower

A lower PE ratio may indicate that investors believe a company has ______ prospects for future growth in earnings.

lower

When the typical stock in the S&P 500 Index has a PE ratio of 12, a company with a PE ratio of 7 may have ______ than average growth prospects, given similar earnings per share.

lower

Diversification is commonly used to ______.

lower risk

All else held constant, the yield on a highly liquid bond will be ______ the yield on an illiquid bond.

lower than

Generally, the ______ the inventory turnover ratio, the ______ efficiently the firm is managing inventory.

lower; less higher; more

When enterprise value is calculated, cash is subtracted from the market value of debt and equity because ______.

many firms hold more cash than necessary an EV ratio should reflect the ability of productive assets to create cash flow

The stock will be sold at (or near) the current market price in a ___ order.

market

In a stock price quote, the number of shares outstanding multiplied by the current price per share is known as the ______.

market cap

Which one of the following is the most important source of risk from owning bonds?

market interest rate fluctuations

The price-earnings (PE) ratio is a ______ ratio.

market value

Which ratios use information that is not contained in financial statements?

market value ratios

Which of the following variables are required to calculate the value of a bond? market yield original issue price of bond remaining life of bond coupon rate

market yield remaining life of bond coupon rate

Debt ___ is the length of time the debt remains outstanding with some unpaid balance.

maturity

What information is needed to compute the promised yield on a bond?

maturity coupon rate par value

Firms in the same industry ______ have the same multiples

may not

Registered bonds are ______ common than bearer bonds in the United States today.

more

A firm with growth opportunities should sell for ______ a firm without growth opportunities.

more than

Percentage returns are ______ dollar returns.

more useful than

Nasdaq has which of these features?

multiple market maker system computer network of securities dealers

Firms can raise financing via ______.

new equity long-term borrowing short-term borrowing

Retained earnings this year, return on retained earnings, and earnings this year determine earnings ___ year.

next

When calculating the promised yield, one assumes ______.

no default

Nasdaq differs from the NYSE primarily because Nasdaq has ______.

no physical location multiple market makers rather than DMMS

The rates on financial securities are generally quoted as ___ rates.

nominal

Typically, a corporation has ______ common stock outstanding and/but has ______ bond issues outstanding.

one; many

A network of dealers who buy and sell the stocks of corporations that are not listed on a security exchange is called ______.

over-the-counter market

Which of these affect a bond's yield to maturity? par value coupon rate number of bonds issued current price

par value coupon rate current price

Weak form efficiency considers trading strategies that use information based solely on ______ stock prices.

past

What types of information affect the rates at which stock prices adjust to new information?

past information all information publicly available information

The ask price is the price the investor will ______ if they transact with the dealer.

pay

Normally, the excess rate of return is ______.

positive

The difference between the bond's call price and par value is known as the call ______

premium

The equity risk ___ is the additional return from bearing risk.

premium

An objection to the ___ value analysis of stocks is that investors are too shortsighted to care about long-term dividends.

present

The current price per share divided by last year's earnings per share gives you ______.

price-earnings ratio

Arbitrage results in stock prices that are ______.

priced correctly

Initial public offerings of stock occur in the ______ market.

primary

The percentage of sales approach will produce ___ ___ financial statements.

pro forma

Financial planning using the percentage of sales approach produces ______.

pro forma financial statements

Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth? profit margin current stock price dividend policy financial policy

profit margin dividend policy financial policy

Return on assets (ROA) is a measure of ______.

profitability

If the net income on a common-size income statement decreases over time, one can infer that ______.

profitability decreased

Efficient markets ______.

provide fair prices provide fair rates of return

Market value measures can be calculated for ______.

publicly traded companies

The liquidity of a company with significant amounts of obsolete inventory is best measured by the ______ ratio.

quick

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

raised its prices relative to costs

According to the ______ theory, the random component in any period is unrelated to random errors in any past period.

random walk

Which of the following conditions will cause market efficiency according to Andrei Shleifer?

rationality independent deviations from rationality arbitrage

Financial ___ allow users to compare companies of different sizes.

ratios

Inflation will ______ the value of a traditional bond's expected cash flows (interest and repayment of principal).

reduce

Which form of bond is safer for bondholders?

registered bonds

The term structure of interest rates examines the ______.

relationship between short-term and long-term interest rates

Which of the following variables are required to calculate the value of a bond? original issue price of bond remaining life of bond market yield coupon rate

remaining life of bond market yield coupon rate

According to the Fisher effect hypothesis, the real rate of return ______ as inflation increases.

remains the same

A conventional bond's cash flows consist of ______. quarterly dividend payments late fees and transactions costs repayment of the bond's par value at maturity coupon interest payments

repayment of the bond's par value at maturity coupon interest payments

Rationality implies that investors, when faced with new information about a stock, will _____.

reprice the stock rationally

A sinking fund is used to ______.

retire debt

The determinants of a firm's growth rate include which factors?

return on retained earnings the retention ratio

The Sharpe ratio is a measure of ______ to ______.

return; risk

The mean return and the standard deviation of returns can be used to describe the distribution of stock ___.

returns

The equity risk premium rewards investors for bearing ___.

risk

Assumptions related to the ______ are critical for forecasting future U.S. equity premiums.

risk aversion of future investors future risk environment

Income statement items that are affected by ___ will be included in the percentage of sales approach.

sales

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

The trading of existing shares occurs in the ______ market.

secondary

A market is said to be ______ form efficient if prices incorporate all publicly available information.

semistrong

A ___ sale occurs if the seller borrows the asset and then sells it.

short

Which two of the following groups are most interested in liquidity ratios? short-term creditors stock analysts bankers tax authorities such as the IRS

short-term creditors bankers

Large inventories are often a sign of ______.

short-term trouble

Common-size statements allow comparison of companies of different ______.

sizes

Geometric averages are usually ______ arithmetic averages.

smaller than

The assumption that independent deviations from rationality produce market efficiency implies that ______.

some investors may overreact to new stock price information some investors may underreact to new stock price information

Historically, short-term rates are ______ higher than long-term interest rates.

sometimes

The standard deviation is the ______ of the variance.

square root

The Sharpe ratio is the stock's excess return (risk premium) divided by its ______.

standard deviation

The goal of many successful organizations is a(n) ______ rate of growth in dividends.

steady

A market is said to be ______ form efficient if prices incorporate all information, both public and private.

strong

If you beat the market with inside information, you have violated the concept of ______ form efficiency.

strong

Using the Ibbotson SBBI yearbook, year-by-year real returns can be calculated by ______.

subtracting the annual inflation rate from the annual historical rate of return

Bond ratings are constructed by information ______ by the corporation and ______ by the rating agency.

supplied; collected

If a firm maintains a constant debt-equity ratio and dividend payout ratio and does not use any new external equity financing, the firm can grow at a rate no greater than its ___ growth rate.

sustainable

If a firm maintains a constant debt-equity ratio and dividend payout ratio and does not use any new external equity financing, the firm can grow at a rate no greater than its ______.

sustainable growth rate

The maximum rate of growth a firm can maintain without increasing its financial leverage is ______.

sustainable growth rate

A normal distribution has a ______ shape.

symmetrical

Some important characteristics of the normal distribution are that it is ______.

symmetrical bell-shaped

The taxability premium is the additional compensation demanded on ______.

taxable bonds

The enterprise value multiple allows for comparing the value of firms with different ______.

taxes capital structures capital spending amounts

The rates of return in the Ibbotson SBBI yearbook are not adjusted for which of the following?

taxes transactions costs

The ___ structure of interest rates plots the relationship between short-term and long-term interest rates.

term

Which is the largest security market in the world in terms of trading volume?

the U.S. Treasuries market

Which measure of return is best for making unbiased estimates of future returns?

the arithmetic average return

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

the arithmetic mean minus half of the variance

Bond ratings are based on the probability of default risk, which is the risk that ______.

the bond's issuer may not be able make all the required payments

In theory, which of the following models are mutually consistent and can be used to determine the value of a share of stock?

the comparables method the dividend discount model the free cash flow model

Who are the parties to the bond indenture agreement?

the corporation and the bondholders

Throwing darts at the financial pages to construct a portfolio may not be a good strategy because ______.

the darts cannot consider the overall risk of the portfolio

At maturity, bondholders are repaid ______.

the face value of the bond

What is included in the bond indenture? the bond's yield to maturity (YTM) the face value of the bond the coupon rate the call provisions

the face value of the bond the coupon rate the call provisions

In theory, which of the following models are best used to determine the value of a non-dividend-paying share of stock?

the firm cash flow model

A financial planning model can be used to test the feasibility of a planned growth rate because it incorporates which of the following? the choice of long-term or short-term debt the firm's use of financial leverage the firm's dividend policy the asset turnover rate

the firm's use of financial leverage the firm's dividend policy the asset turnover rate

A frequency distribution of stock returns displays ______.

the frequency of occurrence for each rate of return range various ranges of returns on the horizontal axis

Investors select a stock based on the cash they expect to receive from that stock. That cash comes in the form of ______.

the future sales price dividends

If you own corporate bonds, you will be concerned about interest rate risk as it affects ______.

the market price of the bonds

For risk-free security, the promised and expected returns are equal because ______.

the probability of default is zero

Which of these are required to calculate the current value of a bond? time remaining to maturity price at the time of bond issue applicable market rate par value coupon

time remaining to maturity applicable market rate par value coupon

Which of the following terms apply to a bond? time to maturity dividend yield par value coupon rate

time to maturity par value coupon rate

Why did Disney issue 100-year bonds, dubbed "Sleeping Beauty" bonds, in the 1990s?

to lock in historically low-interest rates for a long time

A calculated stock price that discounts earnings instead of dividends will usually be ______.

too high

Growth opportunities may be lost if a firm pays out ______ in dividends

too much

In the DuPont identity, asset use efficiency is measured by ______.

total asset turnover

Net investment is equal to the ______ minus ______.

total investment; depreciation

If a $1,000 par value bond is trading at a premium, the bond is ______.

trading for more than $1,000 in the market

Which of the following are traditional financial ratio categories? employee ratios turnover ratios real options ratios liquidity ratios financial leverage ratios

turnover ratios liquidity ratios financial leverage ratios

A designated market maker, or DMM, continually posts and updates bid and ask prices as he or she maintains a ______ market.

two-sided

What is the maximum reward for owning equity security?

unlimited

Markets are more likely to be efficient if the investors______.

use relevant information to make a trade are rational

Since estimation error may be high, what do some financial economists recommend when using the constant-growth dividend discount model?

use the industry average rate of return for R

The square of the standard deviation is equal to the ______.

variance

If you can beat the market using publicly available data such as balance sheets, then the market can be, at best, ______ efficient.

weak form

Which one of the following are markets most likely to be?

weak form efficiency

In the percentage of sales approach to financial planning described in the text book, it is assumed that any surplus funds ______.

were used to pay off debt

Which cases should make one particularly skeptical when estimating the required rate of return?

when the growth rate is greater than or equal to the discount rate zero dividend case

The coupon rate, par value, and maturity are all needed to compute the promised ___ on a bond.

yield

The real rate of return, expected inflation, and interest rate risk premium determine the Treasury ___ curve.

yield

A Treasury yield curve depicts the ______.

yields for different maturities of Treasury securities

If a company's current ratio is equal to its quick ratio, then its inventory is ______.

zero

If the growth rate (g) is zero, the capital gains yield is ______.

zero

Assume current assets = $11,300; long-term liabilities = $45,000; and total debt = $54,800. What is the current ratio?

Current ratio = current assets/current liabilities = $11,300/($54,800 - $45,000) = 1.15

What is a bond's current yield?

Current yield = Annual coupon payment/Current price

What is the EBITDA margin if a firm's EBITDA is $175, sales are $540, and net income is $60?

EBITDA margin = EBITDA/sales 32.41 percent

Enterprise value is the sum of a firm's market capitalization and the ______ value of its interest-bearing debt ______ any cash on hand.

EV = market capitalization + market value of interest-bearing debt - cash market; less

True or false: Interest earned on Treasury notes and bonds is taxable.

True

Percentage returns are more convenient than dollar returns because they ______.

apply to any amount invested

Net investment is equal to the total investment minus ______.

depreciation

Financial analysis uses EBITDA over EBIT because the former adds back ______ and ______ and is thus a better measure of pretax operating cash flow. interest expense depreciation expense taxes amortization expense

depreciation expense amortization expense

Which of the following are noncash expenses on the income statement? income tax expense depreciation expense amortization expense interest expense

depreciation expense amortization expense

Which type of growth describes a company that grows quickly at first but then grows slower in later years?

differential growth

Different types of information will affect stock prices ______.

differently

Which three of the following are most apt to create problems when comparing financial statements for multiple firms?

differing accounting methods seasonality differing fiscal years

A one-time profit from an asset sale makes it ______ to compare financial statements.

difficult

It is ______ to assess the probability of default.

difficult

Historically, there is a(n) ______ relationship between risk and expected return in the financial markets.

direct

Shareholders' equity changes based on the firm's ______.

dividend policy

Common stockholders receive ______ income, while bondholders receive ______ income.

dividend; interest

A no-dividend firm can pay off an investor by paying ___ in the future.

dividends

For many companies, steady growth in ___ is an explicit goal.

dividends

The cash flows of common stock are ______.

dividends

The ______ period rate of return is simply the rate of return over some arbitrary investment period.

holding

Which one of the following does not affect ROE according to the DuPont identity?

investor sentiment

The idea behind countervailing irrationalities is that there are equal numbers of irrationally optimistic and ______ investors.

irrationally pessimistic

In general, a corporate bond's coupon rate ______.

is fixed until the bond matures

If the dispersion of returns on particular security is very spread out from the security's mean return, the security ______.

is highly risky

The Fisher effect hypothesizes that the real rate of return ______.

is invariant to the rate of inflation

When dealing with the history of capital market returns, an average stock market return is useful because it ______.

is the best estimate of any 1 year's stock market return during the specified period simplifies detailed market data

For corporations, interest expense ______ tax-deductible and/while dividends ______ tax-deductible.

is; are not

The expected return may not be accurate because ______.

it is difficult to accurately assess the probability of default

A zero coupon bond is a bond that ______.

makes no interest payments

The rates on financial securities are generally quoted as ______.

nominal rates

A major implication of the efficient markets hypothesis (EMH) is that investors will only receive a(n) ______ rate of return.

normal

he default risk premium refers to the extra compensation demanded by investors for the possibility that the issuer might ______.

not make all the promised payments

According to the random walk theory, if the prices have been going up for the last 10 days, on the 11th day, the prices will ______.

not necessarily go up

The distinction between a debt and an equity security is important primarily because ______.

of tax implications

The net income as shown on the common-size income statement of Omega Industries for the past 3 years increased from 3 percent to 6 percent. This indicates that the firm is increasing its ______.

profitability

Earnings next year are a function of which factors?

retained earnings this year return on retained earnings earnings this year

The ___ ratio is the ratio of this year's retained earnings to net income.

retention

The ratio of this year's retained earnings to net income is called the ______ ratio.

retention

The arithmetic average rate of return measures the ______.

return in an average year over a given period

Which six factors determine the yield on a bond?

the real rate of return expected future inflation liquidity taxability interest rate risk default risk

What are the three components of the Treasury yield curve? the real rate of return expected inflation interest rate risk premium liquidity risk premium

the real rate of return expected inflation interest rate risk premium

Which of the following are needed to describe the distribution of stock returns?

the standard deviation of returns the mean return