Finance 3770 Final Conceptual Questions

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Buxton Corp. has outstanding borrowings. One of these borrowings is nonconvertible preferred stock​ (cumulative) with a par value of​ $85 and an annual dividend rate of​ 6.20%. This preferred stock is currently selling for​ $56.50 per share. What is the yield or return​ (r) on this preferred​ stock? - ​9.89% ​- 9.22% ​- 9.56% ​- 9.32%

9.32%

Andy would like to buy a new car but must complete a two−year commitment to the Peace Corp before he will drive the new car. The current price of the car Andy wants to buy is​ $32,000, and the dealer expects the price of a similar new car to be​ $35,000 in two years. If Andy can earn an annual interest rate of​ 4% on his​ money, should he buy the car now or wait for two​ years? Why?​ Note: Storage costs if Andy purchases the car are​ $0. Please limit your considerations to the factors offered in the answer choices. - Buy in two years because​ $35,000 is a​ "real deal" for the car Andy wants. - Buy in two years because at​ $35,000 the car will cost less than the​ $36,385 Andy will have after investing the money for two years. - Buy now because if Andy invests the​ $32,000 today it will only increase in value to​ $34,611, and this is less than the cost of his desired new car in two years. - Andy is indifferent because his​ $32,000 investment will be worth exactly​ $35,000 after two years.

Buy now because if Andy invests the​ $32,000 today it will only increase in value to​ $34,611, and this is less than the cost of his desired new car in two years.

​________ refers to how quickly information is reflected in the available prices for trading. - Informational efficiency - Market efficiency - Operational efficiency - Mechanical efficiency

Informational efficiency

Which of the following are tax-deductible expenses for corporations

Interest expenses

A beta of 1.0 is the beta of the​ ________, while a beta of 0.0 is the measure for a​ ________. - risk−free ​security; market. - ​market; single security held on its own. ​- market; risk−free security. - Risk −free ​security; single security held on its own.

market; risk−free security.

The truly wonderful thing about diversification is that​ 100% of risk can be diversified​ away, given a large enough portfolio. True/False

False

A bond is a​ ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future. - short −term debt - long−term equity - long−term debt - short −term equity

long−term debt

​"Junk" bonds are a street name for​ ________ grade bonds. - investment - extremely speculative - speculative - speculative and investment

speculative

Net income is _______

the accounting profit from the operations of the company during the period

Net Working Capital for 2016 is​ $1,890 and Net Working Capital for 2017 is​ $3,597. What is the change in Net Working​ Capital? - ​$2,527 - −​$1,727 ​- $1,707 - −​$1,707

$1,707

A corporation is scheduled to produce a line of products for the next ten years and then go out of business. The firm will pay an annual dividend of​ $1.75 for only those ten years. What is the present value of a share for this company if we want an​ 8% annual return on the​ stock? - ​$12.97 ​- $15.97 ​- $11.74 ​- $14.97

$11.74

A wealthy man just died and left his pet dogs the following​ estate: $20,000 per year for the next 11 years with the first cash flow today. At a discount rate of​ 4.2%, what is the doggy estate worth in​ today's dollars? - $98,352.84 - $180,614.80 ​- $607,180.14 ​- $220,000.00

$180,614.80

Your firm intends to finance the purchase of a new construction crane. The cost is​ $2,500,000. What is the size of the first payment if the crane is financed with an interest−only loan at an annual rate of​ 7.50%? - ​$187,500.00 ​- $3,391,475.16 ​- $127,500.00

$187,500.00

You want to invest in a stock that pays​ $4.00 annual cash dividends for the next three years. At the end of the three​ years, you will sell the stock for​ $35.00. If you want to earn​ 9% on this​ investment, what is a fair price for this stock if you buy it​ today? - ​$18.91 ​- $41.37 ​- $37.15 ​- $24.75

$37.15

Rogue Motors Inc. has a​ 11% required rate of return. The firm does not expect to initiate dividends for 10​ years, at which time it will pay​ $2.00 per share in dividends. At that​ time, the firm expects its dividends to grow at​ 6% forever. What is an estimate of the​ firms' price in 10 years ​(P10​) if its dividend at the end of year 10 is​ $2.00? - ​$33.40 ​- $42.40 ​- $31.20 ​- $42.80

$42.40

Cash and Equivalents are​ $1,561; Short−Term Investments are​ $1,000; Accounts Receivables are​ $3,616; Accounts Payable are​ $5,121; Short−Term Debt is​ $288; Inventories are​ $1,816; Other Current Liabilities are​ $1,401; and Other Current Assets are​ $707. What is the amount of Total Current​ Liabilities? - $8,752 ​- $6,974 ​- $6,862 ​- $6,810

$6,810

Cash and Equivalents are​ $1,561, Short−Term Investments are​ $1,000, Accounts Receivables are​ $3,616, Accounts Payable is​ $5,121, Short−Term Debt is​ $288, Inventories are​ $1,816, Other Current Liabilities are​ $1,401, and Other Current Assets are​ $707. What are the Total Current​ Assets? - $5,136 ​- $8,752 ​- $8,700 ​- $6,862

$8,700

In January of​ 1997, the U.S. Consumer Price Index​ (CPI) stood at 159.1. By January of​ 2017, the level had risen to 242.84. What was the average annual rate of inflation over this time period as measured by the​ CPI? - 2.14% ​- 2.60% ​- 3.35% ​- 2.35%

2.14%

You have saved​ $44,000 for college and wish to use​ $12,000 per year. If you use the money as an ordinary annuity and earn​ 5.15% on your​ investment, how many years will your annuity​ last? Use a calculator to determine your answer. - 3.36 years - 4.17 years - 3.59 years - 4.27 years

4.17 years

year−end payments of​ $8,500 each. What annual rate of return must you make on this account to meet your​ objective? - 7.32% ​- 4.16% ​- 6.42% - ​4.58%

4.58%

Which of the following is NOT a definition of​ beta? - A measure of systematic risk - A statistical measure of an individual​ asset's or​ portfolio's co−movement with the returns of the market - A measure of nondiversifiable risk - A measure of risk that can be avoided

A measure of risk that can be avoided

Select the statements below which correctly describe the relationship between a company and the community within which it operates. - If the firm pollutes local streams or destroys the quality of life through noise pollution or other types of​ pollution, the local community may sue the company for its damages and the best local workforce members may choose not to work for the company. Maintaining a good working relationship with the surrounding community is a good business practice. - A good community relationship is embedded in the goal of maximizing current share price or the equity value of the company. - If a company fails to maintain a good relationship with the​ community, employees may not be loyal to the company causing high turnover and increased personnel costs for recruiting and training. - If a company abuses local facilities such as​ roads, and in general does not participate in the economic advancement of the local​ community, facilities such as roads and utilities may not be repaired or modernized by the local community impacting the​ company's ability to produce a profit.

ALL OF THEM

The cost of retained earnings​ ________. - is the appropriate cost of capital for the shareholders - is the cost of issuing new common stock without the flotation costs - is the loss of the dividend option for the owners - All of the above

All of the above

​________ refers to the way a company finances itself through some combination of​ loans, bond​ sales, preferred stock​ sales, common stock​ sales, and retention of earnings. - Capital structure - NPV - Cost of capital - Working capital management

Capital structure

Which of the following identities is​ FALSE? - Net New Borrowing​ = Ending Long−term Liabilities− Beginning Long−Term Liabilities - Cash Flow to Owners​ = Dividends​ + Net New Borrowing from Owners - Net New Borrowing from Owners​ = Change in Equity - Cash Flow to Creditors​ = Interest Expense− Net New Borrowing from Creditors

Cash Flow to Owners​ = Dividends​ + Net New Borrowing from Owners

Shaky Company has just issued a​ five-year bond with a yield of​ 9%; Stable Company has issued an identical​ five-year bond, but with a yield of​ 7%. Why did the market demand a higher return from​ Shaky? - Companies with poor financials tend to compensate investors for the default risk by issuing bonds with high yields. - Companies with poor financials tend to compensate investors for the systematic risk by issuing bonds with high yields. - Companies with poor financials tend to compensate investors for the liquidity risk by issuing bonds with high yields. - Companies with poor financials tend to compensate investors for the inflation risk by issuing bonds with high yields.

Companies with poor financials tend to compensate investors for the default risk by issuing bonds with high yields.

________ is simply the interest earned in subsequent periods on the interest earned in prior periods. - Quoted interest - Anticipated interest - Simple interest - Compound interest

Compound interest

What are the four areas of​ finance? Give an example of a financial activity that would fall into each area.

Corporate Finance—the financial activities that support the operations of a business. A typical financial activity in this area is borrowing funds to support a plant expansion or supplementing short term cash needs.

All else equal, which of the following actions will increase the present value of an investment?

Decrease the interest rate

Which of the following actions will INCREASE the present value of an​ investment? - Decrease the future value. - Decrease the interest rate. - Increase the amount of time. - All of the above will increase the present value.

Decrease the interest rate.

Ben has just purchased a​ long-term government bond and expects to make a​ 7% return. Donna has just purchased a stock in a new startup​ company, but expects to make a​ 20% return. Why is Donna expecting a higher​ return? - Donna is expecting a higher return on the stock due to change in the​ risk-free interest rate. - Donna is expecting a higher return on the stock due to the default premium only. - Donna is expecting a higher return on the stock due to the maturity premium only. - Donna is expecting a higher return on the stock due to both the maturity premium and default premium.

Donna is expecting a higher return on the stock due to both the maturity premium and default premium.

Which of the following is NOT a generally accepted way to remove ineffective management of a publicly traded​ firm? - The shareholders can vote out directors who​ won't discipline managers. - Outside management teams can​ "take over" the company - The Board of Directors can vote to remove management. - Each of the above are recognized methods for the removal of ineffective management.

Each of the above are recognized methods for the removal of ineffective management.

A bull market is a prolonged declining market. True/False

False

Adding treasury bills which has a correlation coefficient of 0.0 wit hyour investment portfolio could NOT have any benefits for diversification with your investment portfolio T/F

False

Consider the TVM​ equation: A decrease in the time period will increase the future​ value, other things remaining equal. True/False

False

Consider the TVM​ equation: An increase in the present value will decrease the future​ value, other things remaining equal. True/False

False

Consider the TVM​ equation: The greater the interest​ rate, other things remaining​ equal, the greater the present value. True/False

False

Fortunately for investors, assigning a beta to individual projects is more of a science than an art T/F

False

If a bond is selling at a premium above the par value that means that the yield to maturity is greater than the coupon rate. True/False

False

If stock A has a greater standard deviation than stock B then it must also have a greater return. True/False

False

If two investments have the same expected​ return, a rational investor will choose the investment with the greater risk in an effort to get a much larger return. True/False

False

Over the 50−year period from 1950 to​ 1999, 3−month Treasury bills earned a higher average annual rate of return than long−term government bonds. True/False

False

What are the four areas of​ finance? Give an example of a financial activity that would fall into each area.

Financial Institutions—the organizations that promote and facilitate the cycle of money. A typical financial activity is offering checking and savings accounts as well as selling securities such as certificates of​ deposit, stocks and bonds.

Which of the statements below is​ FALSE? - Firms rarely use the payback period for small−dollar decisions. - Many companies use the payback period for small−dollar decisions because the future cash flows on these smaller projects may be quite difficult to accurately estimate far into the future. - Many companies use the payback period for small−dollar decisions because the time spent gathering the accurate cash flow may be lowered substantially if it is necessary to estimate only through the first few years. - Many companies use the payback period for small−dollar decisions because it does prevent a serious error when the future cash flow is insufficient to recover the initial cash outlay.

Firms rarely use the payback period for small−dollar decisions.

Which of the following is NOT an example of an equity market​ transaction? -Grant contacts his broker and requests a purchase of IBM bonds. -Mark sells his shares of Apple stock. -Pavlina buys shares of a small company stock traded on the NASDAQ. -All of the above are equity market transactions.

Grant contacts his broker and requests a purchase of IBM bonds.

What are the four areas of​ finance? Give an example of a financial activity that would fall into each area.

International Finance—the financial activities performed in foreign countries for a domestic company. A typical financial activity is the changing of the currency of one country into the currency of another country.

What are the four areas of​ finance? Give an example of a financial activity that would fall into each area.

Investments—the activities around the buying and selling of financial assets. A typical activity is the selling of a bond issue such as a school bond for building a new school.

Which of the statements below is​ TRUE? - Investors want to maximize return and minimize risk. - Investors want to maximize return and maximize risk. - Investors want to minimize return and maximize risk. - Investors want to minimize return and minimize risk.

Investors want to maximize return and minimize risk.

​________ has to do with the speed and accuracy of processing a buy or sell order at the best available price. - Mechanical efficiency - Operational efficiency - Informational efficiency - Market efficiency

Operational efficiency

When considering expected​ returns, what is true about the states of the​ world? - They must have probabilities that sum to​ 100%. - They represent all possible outcomes. - They are sometimes simplified into outcomes such as​ boom, bust, and normal. - Statements A through C are all true.

Statements A through C are all true.

Which of the following would be classified as debt lenders for a firm?

Suppliers, nonbank lenders, and commercial banks

List a capital budgeting​ decision, a capital structure​ decision, and a working capital management decision a business might make. That a company chooses a new product to introduce into the market is a _________ __________ ​decision, that a company chooses to sell a bond to finance the new product is a ____________ _________ ​decision, and that a company sets production and inventory levels on the new product is a ___________ ___________ ______________ _______________.

That a company chooses a new product to introduce into the market is a CAPITAL BUDGETING ​decision, that a company chooses to sell a bond to finance the new product is a CAPITAL STRUCTURE ​decision, and that a company sets production and inventory levels on the new product is a WORKING CAPITAL MANAGEMENT DECISION .

List the advantages and disadvantages of the three different types of business organizations. PSRTNERSHIP

The Partnership is a business owned jointly by two or more individuals. The advantages of this form of business are that it involves more than one person in the business and all the profits are distributed to only this set of individuals. The larger number of owners usually increases the amount of capital and talent available over that available to the sole proprietorship. The disadvantage of this form of ownership is that the personal assets of the owners are commingled with the business assets and could potentially be required to settle business debts. Other disadvantages of this form of ownership is that taxes are paid at personal income tax​ rates, which may be higher than corporate tax rates and transference of ownership may be potentially difficult if one of the owners dies or wants to leave the business.

What is the difference between the primary market and the secondary​ market? The ____________ market is the sale of​ "used" stock in that the current owner sells it to a new owner and the proceeds go to the current​ owner, not the​ company, while the ____________ market is the market where the initial sale of common stock is made by a company and the proceeds of the sale go to the company for the newly issued stock. ​

The SECONDARY market is the sale of​ "used" stock in that the current owner sells it to a new owner and the proceeds go to the current​ owner, not the​ company, while the PRIMARY market is the market where the initial sale of common stock is made by a company and the proceeds of the sale go to the company for the newly issued stock. ​

Which of the statements below is​ FALSE? - The standard of one vote for each share cannot be altered. - Some firms issue several classes of common​ stock, and these classes may have unequal voting rights. - Common stock usually carries the right to participate in the management of the firm through the right to vote for the members of the Board of Directors and for changes to the charter and bylaws of the company. - Shareholders with super voting right shares have multiple votes per share− a fact that increases their influence and control over the company

The standard of one vote for each share cannot be altered.

Which of the following statements is incorrect?

There is no cost for using retained earnings because companies do not have to issue new bonds or shares to raise capital

Which of the following is NOT a function of a financial intermediary in the​ lending/borrowing process? - To bear the risk that the lender will not repay - To match the borrower and the lender - To bear the risk that the borrower will not repay - To help establish terms of the​ lending/borrowing agreement

To bear the risk that the lender will not repay

Which of the following are issued with the shortest time to​ maturity? - Treasury bonds - Treasury stocks - Treasury bills - Treasury notes

Treasury bills

Which of the following investments is considered to be default risk −​free? - Treasury bills - AAA rated corporate bonds - Common stock - Currency options

Treasury bills

Because money is often​ limited, companies must be careful to choose projects that are feasible and profitable. True/False

True

When interest rates are stated or given for loan​ repayments, it is assumed that they are​ ________ unless specifically stated otherwise. - effective annual rates - daily rates - annual percentage rates - APYs

annual percentage rate

________________ is a major disadvantage of the corporate form of business

double taxation

Family Construction had sales three years ago of​ $2,150,000. This year their sales hit​ $2,900,000. What has been the​ firm's average annual rate of growth of​ sales? - $350,000 per year ​- 30.56% ​- 10.49%

​10.49%

Wallboard​ Inc, plans to pay a dividend in one year ​(Div1​) of​ $0.80, the dividend growth rate​ (g) is expected to be​ 6%, and the required rate of return​ (r) for the​ firm's stock is​ 10%. What is the stock​ price, according to the constant growth dividend​ model? - $15.00 ​- $30.80 ​- $20.00 ​- $20.80

$20.00

Creative Solutions Inc. has issued 10−year ​$1,000 face​ value, 8% annual coupon​ bonds, with a yield to maturity of​ 9.0%. The annual interest payment for the bond is​ ________. - ​$40 ​- $80 ​- $90 ​- $45

$80

Five years​ ago, Simpson Warehouses Inc. issued twenty−five−year ​10% annual coupon bonds with a​ $1,000 face value each. Since​ then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now​ 12%. Given this​ information, what is the price today for a Thompson Tarps​ bond? - ​$1,181.54 ​- $1,170.27 ​- $843.14 ​- $850.61

$850.61

A U.S. Treasury bill is currently selling at a discount basis of​ 2.25%. The par value of the bill is​ $100,000, and will mature in ninety days. What is the price of this Treasury​ bill? - $99,952.05 ​- $99,437.5 ​- $97,952.78 ​- $97,750.00

$99,437.5

Douglas Dynamics Inc. has outstanding​ $1,000 face value​ 4% coupon bonds that make semiannual​ payments, and have 10 years remaining to maturity. If the current price for these bonds is​ $938.57, what is the annualized yield to​ maturity? - ​5.02% ​- 5.13% ​- 4.96% ​- 4.78%

4.78%

The weighted average cost of capital is​ ________. - the average of the cost of each financing​ component, weighted by the proportion of each component - made up of three financing​ components: the cost of​ debt, the cost of preferred​ stock, and the cost of equity - the cost of capital for the firm as a whole - All of the above

All of the above

In regards to the fact that the pricing of stocks is more difficult than the pricing of​ bonds, which of the below statements is​ FALSE? - A​ stock's final sale is fixed in time on its maturity date. - Because a stock has no maturity​ date, the number of its payments are unknown. - The ending price of the stock at any point in time is not fixed like the par value of the principal. - Cash​ dividends, unlike coupons for​ bonds, typically change from year to year.

A​ stock's final sale is fixed in time on its maturity date.

Present values and interest rates are inversely related. This means that if you deposit​ $1,000 into an interest−earning account​ today, it will take longer to reach a future value of​ $5,000 at an interest rate of​ 6% than at a rate of​ 4%. True/False

False

The coupon payment for an annual-coupon corporate bond is equal to the YTM multiplied by the par value of the bond T/F

False

The future value of a combination of positive and negative cash flows cannot be determined. True/False

False

The principal−agent problem is most severe for the sole proprietorship because there are fewer owners who can monitor the relationship. True/False

False

Which of the following is not a definition of beta

Has a value from -1.0 to 1.0

To estimate the market value of a publicly traded bond that has a broad market with frequent trading, it is usually best to multiply the number of bonds outstanding by the market value of the bond T/F

True

Double taxation refers to which of the following​ scenarios? - Both bondholders AND shareholders of a corporation must pay taxes on proceeds received. - The corporation pays taxes on its​ earnings, and shareholders pay taxes on dividends received. - The corporation pays taxes on its​ earnings, and creditors pay taxes on interest received. - All of the above

The corporation pays taxes on its​ earnings, and shareholders pay taxes on dividends received.

When estimating the cost of debt financing from​ bonds, a firm can use the yield−to−maturity as the before−tax cost of debt. True/False

True

The​ ________ model answers one basic​ question: How soon will I recover my initial​ investment? - IRR - NPV - payback period - profitability index

payback period

Your university is running a special offer on tuition. This​ year's tuition cost is​ $16,000. Next​ year's tuition cost is scheduled to be​ $16,640. The university offers to discount next​ year's tuition at a rate of​ 4% if you agree to pay both​ years' tuition in full today. How much is the total tuition bill today if you take the​ offer? ​- $32,080 ​- $33118 ​- $32,981 ​- $32,000

​$32,000

You intend to buy a vacation home in eight years and plan to have saved​ $75,000 for a down payment. How much money would you have to place today into an investment that earns​ 9% per year to have enough for your desired down​ payment? ​- $37,218 - ​$37,640 - $34,989 ​- $35,335

​$37,640

Dividend growth rate is important to many investors. You are considering investing in a firm after looking at the​ firm's dividends over a six−year period. At the end of the year​ 2010, the firm paid a dividend of​ $0.98. At year−end ​2016, it paid a dividend of​ $1.64. What was the average annual growth rate of dividends for this​ firm? - ​8.25% ​- 8.96% ​- 9.86%

​8.96%

Susan and her spouse have saved​ $5,500 for a 12−day cruise vacation in Europe. The couple needs​ $6,500 for a​ "nice" cabin or​ $7,000 for a​ "luxury" cabin. If cabin prices are expected to remain constant for the next three years and Susan expects to earn​ 5% per year on her​ investments, will the​ couple's savings be enough to afford the​ "nice" cabin in three​ years? Can they afford the luxury​ cabin? Why or why​ not? - Yes, they can afford the​ "nice" cabin or the luxury cabin because their​ $5,500 investment will increase to​ $7,082 by the end of year three. ​- Yes, they can afford the​ "nice" cabin but NOT the luxury cabin because their​ $5,500 investment will only increase to​ $6,482 by the end of year three. ​- No, they cannot afford the​ "nice" cabin or the luxury cabin because their​ $5,500 investment will only increase to​ $6,367 by the end of year three ​- Yes, they can afford the​ "nice" cabin or the luxury cabin because their​ $5,500 investment will increase to​ $6,367 by the end of year three.

​No, they cannot afford the​ "nice" cabin or the luxury cabin because their​ $5,500 investment will only increase to​ $6,367 by the end of year three

Stock​ A, has returns of​ 10%, 20%,​ 30%, and​ 40%, over the last four years. What is the​ stock's standard​ deviation? - 12.91% ​- 166.67% ​- 4.08% ​- 2.15%

12.91%

Assume the following information about the market and Lithium Motors Stock.​ Lithium's beta​ = 1.80, the risk−free rate is​ 2.50%, the market risk premium is​ 8.0%. Using the​ SML, what is the expected return for the​ firm's stock? - 18.50% - ​16.90% ​- 27.00% ​- 13.50%

16.90%

Which of the following is NOT a DISADVANTAGE of a​ partnership? - The potential difficulty in transferring ownership - Unlimited liability to at least some of the owners - The limited life of the business - All are disadvantages of a partnership.

All are disadvantages of a partnership.

Which of the following statements is​ FALSE? - The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year. - The APR can be referred to as a promised annual percentage rate. - Although an APR is quoted on an annual​ basis, interest can be paid monthly but never daily. - Although an APR is quoted on an annual​ basis, interest can be paid quarterly.

Although an APR is quoted on an annual​ basis, interest can be paid monthly but never daily.

The Internal Rate of Return​ (IRR) Model suffers from three problems. Which of the below is NOT one of these​ problems? - Comparing mutually exclusive projects - Incorporates the IRR as the reinvestment rate for the future cash flows - Multiple IRRs - Cumbersome computations not resolvable by the latest technology

Cumbersome computations not resolvable by the latest technology

Which od the following statements below is TRUE of the payback period method?

It ignores the cash flow after the initial outflow has been recovered

Which of the statements below is TRUE of the payback period​ method? - It ignores the cash flow after the initial outflow has been recovered. - It is biased against projects with earl−term payouts. - It focuses on cash flows after the initial outflow has been recovered. - It incorporates tim−value−of−money principles.

It ignores the cash flow after the initial outflow has been recovered.

You are presented with two cash flow​ options: Option​ Near, a​ $5,000 annuity for three​ years, with the first cash flow one year from​ today, or Option​ Far, a​ $5,000 annuity for six years with the first cash flow ten years from today. Assuming an interest rate of​ 7.0%, which set of cash flows has a greater present​ value? - Option Near has a greater PV of​ $13,121.58 vs. Option Far PV of​ $12,963.41. - Option Near and Option Far have the same PV of​ $12,963.41. - Option Far has a greater PV of​ $30,000 vs. Option Near PV of​ $15,000. - Option Far has a greater PV of​ $13,121.58 vs. Option Near PV of​ $12,963.41.

Option Near has a greater PV of​ $13,121.58 vs. Option Far PV of​ $12,963.41.

Which of the following statements is​ TRUE? - Some preferred stocks are cumulative with respect to​ dividends, meaning that if a company skips a cash​ dividend, it must pay it at some point in the future. - The par value for preferred​ stock, unlike​ bonds, is never paid back. - Preferred stock usually has a stated or par value​ and, like​ bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date. - A preferred​ stock's cash dividend due each year is based on the stated dividend rate times the market value of the stock.

Some preferred stocks are cumulative with respect to​ dividends, meaning that if a company skips a cash​ dividend, it must pay it at some point in the future.

Which of the statements below is​ FALSE? - A typical practice of many companies is to distribute part of the earnings to shareholders through cash dividends. - Unlike coupon payments on​ bonds, which are treated as an interest expense of the​ firm, common stock dividends are considered a return of capital to shareholders and not an expense of the firm. - For the​ shareholder, receipt of dividends is a taxable event. - The payment of cash dividends to shareholders is a deductible expense for the company.

The payment of cash dividends to shareholders is a deductible expense for the company.

Consider a two−year ​investment: Given a constant and positive interest​ rate, the interest earned in the second year will be greater than the interest earned in the first year​ (assuming annual​ compounding). True/False

True

Consider the TVM​ equation: A decrease in the interest rate will decrease the future​ value, other things remaining equal. True/False

True

Given positive equal annual cash flows and a positive interest​ rate, the future value of an annuity will be greater than the sum of the cash flows. True/False

True

The most common shape for a yield curve is upward sloping. True/False

True

There are two major markets for the sale of​ stock: the primary market and the secondary market. True/False

True

Unlike coupon payments on bonds which are treated as an interest expense of the firm, common stock dividends are considered a return of capital to shareholders and not an expense of the firm T/F

True

Which of the following statements about the relationship between yield to maturity and bond prices is​ FALSE? - A bond selling at a discount means that the coupon rate is less than the yield to maturity. - A bond selling at a premium means that the coupon rate is greater than the yield to maturity. - When interest rates go​ up, bond prices go up. - When the yield to maturity and coupon rate are the​ same, the bond is called a par value bond.

When interest rates go​ up, bond prices go up.

When you pay off the principal and all of the interest at one time at the maturity date of the​ loan, we call this type of loan​ a/an ________. - amortized loan - interest−only loan - discount loan - compound loan

discount loan

APRs must be converted to the appropriate periodic rates when compounding is​ ________. - more frequent than once a year - less frequent than once every six months - more frequent than once a month - less frequent than once a year

more frequent than once a year

Which of the following is NOT a form of​ perpetuity? - Preferred stock that pays the same dividend forever - A British consol bond - A philanthropic endowment fund that pays the same charitable amount every year forever - All are examples of perpetuities.

All are examples of perpetuities.

Free cash flow is the​ ________. - cash flow from assets - cash that a company generates to operate the company - remaining cash free to distribute to creditors and owners of the firm - All of the above

All of the above

Stocks differ from bonds​ because: - the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase. - bond cash flows are known while stock cash flows are uncertain. - firms pay bond cash flows prior to paying taxes while stock cash flows are after tax. - All of the above

All of the above

Which of the following may be TRUE regarding mutually exclusive capital budgeting​ projects? - There is a scarce resource that both projects would need. - There is need for only one​ project, and both projects can fulfill that current need. - By using funds for one​ project, there are not enough funds available for the other project. - All of the above

All of the above

Which of the following is NOT an example of a financial​ transaction? - You use the ATM at Heathrow airport in London to withdraw British pounds. - Your roommate lends you​ $20 and you repay it in one week. - Your parents use their credit card to pay for your current​ term's college tuition. All of the above are financial transactions

All of the above are financial transactions

Financial markets can be classified by which of the​ following? - Owner of the financial asset - Type of asset traded - Maturity of the financial asset - All of the above can be classifications of financial markets.

All of the above can be classifications of financial markets.

Which of the following statements is true about​ variance? - Variance describes how spread out a set of numbers or a value is around its mean or average. - Variance is essentially the variability from the average. - The larger the​ variance, the greater the dispersion. - All of the above statements are true.

All of the above statements are true.

The cost of debt could be which of the​ following? - The required return on money borrowed from a venture capitalist - The required return on money borrowed as a long−term loan from a bank - The yield−to−maturity on money raised by selling bonds - All of the choices above could be considered the cost of debt.

All of the choices above could be considered the cost of debt.

Which of the following is NOT an example of annuity cash​ flows? - Regular equal monthly rent payments - The​ $50 of gasoline you put into your car every two weeks on pay day - Equal annual deposits into a retirement account - All of the examples above are annuity cash flows.

All of the examples above are annuity cash flows.

You wish to diversify your single−security portfolio in a way that will maximize your reduction in risk. Which of the following securities should you add to your​ portfolio? - Beta Company stock that has a correlation coefficient of 0.50 with your current security - Alpha Company stock that has a correlation coefficient of−0.25 with your current security - Delta Company bonds that have a correlation coefficient of 0.36 with your current security - Treasury bills that have a correlation coefficient of 0.0 with your current security

Alpha Company stock that has a correlation coefficient of−0.25 with your current security

To estimate the market value of a publicly traded bond that has a broad market with frequent​ trading, it is usually best to multiply the number of bonds outstanding by the bond par value. True/False

False

You sign a contract to pay back all of the interest and principal of a loan at the maturity date. This is an example of an interest−only loan. True/False

False

Which of the statements below is​ FALSE? - Most companies have the resident expertise to complete an initial public offering​ (IPO) or first public equity issue. - A company is said to go​ "public" when it opens up its ownership structure to the general public through the sale of common stock. - Selling of shares is the selling of ownership in the company. - Companies choose to sell stock to attract permanent financing through equity ownership of the company.

Most companies have the resident expertise to complete an initial public offering​ (IPO) or first public equity issue.

The crossover rate is the discount rate where both projects have the same​ ________. - IRR - NPV - PI - length to completion ​

NPV

Which of the following identities is​ TRUE? - Net Working Capital​ (NWC) = Current Assets− Current Liabilities - Operating Cash Flow​ = EBIT− Depreciation​ + Taxes - Net Capital Spending​ = Ending Net Fixed Assets− Depreciation - Cash Flow from Assets​ = Operating Cash Flow− Net Capital Spending

Net Working Capital​ (NWC) = Current Assets− Current Liabilities

Maximizing the market value of firm equity and which of the following are mutually​ exclusive? - Maximizing market value and customer satisfaction are mutually exclusive. - Maximizing market value and good relationships with the local community are mutually exclusive. - Maximizing market value and a safe and happy work place are mutually exclusive. - None of the above is mutually exclusive with maximizing the value of market equity.

None of the above is mutually exclusive with maximizing the value of market equity.

There are two ways to correct for projects with unequal lives when using the NPV approach. Which of the answers below is one of these​ ways? - One way is to compare the lengths of the projects and take the project with the shortest life. - One way is to find a common life by extending the projects to the least common multiple of their lives. - One way is to find a common​ life, without the need to extend the projects to the least common multiple of their lives. - One way is to find the present value factors and then compare them

One way is to find a common life by extending the projects to the least common multiple of their lives.

Which of the following identities is​ TRUE? - Cash Flow from Assets​ = Operating Cash Flow​ + Net Capital Spending - Change in Net Working Capital​ (NWC) = Current Assets− Current Liabilities - Operating Cash Flow​ = EBIT​ + Depreciation− Taxes - Net Capital Spending​ = Ending Net Fixed Assets− Depreciation

Operating Cash Flow​ = EBIT​ + Depreciation− Taxes

Which of the following is NOT an example of an agency​ cost? - The cost of designing contracts that satisfy creditors that their concerns will be met - Paying an accounting firm to audit your financial statements - Paying an insurance company to assure that building codes have been met for new construction - Paying a landscaping firm to maintain your​ firm's grounds

Paying a landscaping firm to maintain your​ firm's grounds

We can separate short−term and long−term decisions into three dimensions. Which of the below is NOT one of​ these? - Cost - Length of impact - Degree of information gathering prior to the decision - Personality of CEO making the decisions

Personality of CEO making the decisions

Which of the sections below is NOT contained in the annual​ report? - Company highlights - Prediction of​ competitors' returns - Description of the​ company's activities​ (usually with pictures and​ graphs) ​- President's letter to the shareholders

Prediction of​ competitors' returns

Which of the items below is sometimes termed hybrid equity​ financing? - Retained earnings - Callable bonds - Variable rate bonds - Preferred stock

Preferred stock

Which of the statements below is​ FALSE? - Preferred​ shareholders' dividend claims take precedence over common​ shareholders' dividend claims. - It is common for companies to issue preferred stock with the right to convert to common shares after a specific waiting period. - Preferred stock does not have a maturity date. - Preferred stock cannot be converted into common stock.

Preferred stock cannot be converted into common stock.

Which of the following statements about probabilities is​ INCORRECT? - The sum of all probabilities of a particular event must sum to​ 100%. - Probability is associated with an ex−post view. - Each possible outcome must have a non−negative probability. - Probability is a statistical tool for estimating future outcomes.

Probability is associated with an ex−post view.

​________ is a modification of NPV to produce the ratio of the present value of the benefits​ (future cash​ inflow) to the present value of the costs​ (initial investment). - Payback Period Method - Discounted Cash Flow Method - Profitability Index​ (PI) - Modified Internal Rate of Return Method

Profitability Index​ (PI)

​________ may be defined as a measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss. - Risk - Uncertainty - Diversification - Collaboration

Risk

List the advantages and disadvantages of the three different types of business organizations. CORPORATION

The corporation is a business form in which the company is a​ legal, separate entity from the owners and can enter into​ contracts, can sue or be​ sued, and pays taxes. The key advantage of this type of organization is that the shareholders or owners have limited liability. A second advantage is the size of the organization which allows it to borrow money from banks and capital markets. One disadvantage of this form of business organization is that company profits are taxed prior to distribution to the owners and then the owners may be taxed again on distributions received. This form of business organization generally incurs greater​ legal, administrative and accounting expenses to form and run the company.

Which of the statements below describes the IRR decision​ criterion? - The decision criterion is to reject a project if the IRR exceeds the desired or required return rate. - The decision criterion is to accept a project if the NPV is positive. - The decision criterion is to accept a project if the IRR falls below the desired or required return rate. - The decision criterion is to accept a project if the IRR exceeds the desired or required return rate

The decision criterion is to accept a project if the IRR exceeds the desired or required return rate

The U.S. government offers two​ bonds: one selling to yield​ 6.5% and the other to yield​ 8.5%. Why would one bond sell for a lower yield if the originator is the same on both​ bonds? - The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments. - The difference between the yields of the U.S. government bonds is due to the default premium of the investments. - The difference between the yields of the U.S. government bonds is due to the liquidity premium of the investments. - The difference between the yields of the U.S. government bonds is due to the forward premium of the investments

The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments.

Under which of the following circumstances is the pure play method of estimating a​ project's beta particularly​ useful? - The firm is looking to expand its current business operations into a brand new area unlike any of its internal projects. - The firm is looking to expand its current business operations. The work will be essentially the same as current operations but there is no obvious outside provider of the same service or product. - The firm is looking to expand its current business​ operations, doing essentially the same work. - The pure play method works equally effectively under each and all of these scenarios.

The firm is looking to expand its current business operations into a brand new area unlike any of its internal projects.

Which of the statements below is​ FALSE? - The difference in rates as the borrowing time or investment horizon increases is due to the maturity premium of the investments. - The longer the​ loan, the greater the risk of nonpayment and the lower the interest rate the lender demands. - If you invest money for a short period and buy a six−month ​CD, you will not receive as high an interest rate as if you bought a CD with a longer maturity period. - The maturity premium represents that portion of the yield that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive repayment in full.

The longer the​ loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.

Which of the statements below is​ FALSE? - The real interest rate is the reward for waiting. - The reward for postponing consumption implies that at the end of the year you will be able to buy more goods. - The prices of goods and services tend to decrease over time because of inflation. - Nominal interest rates are the sum of two major​ components: the real interest rate and expected

The prices of goods and services tend to decrease over time because of inflation.

Which of the statements below is​ FALSE? - Shareholders elect the board of​ directors, which ultimately selects the management team that runs the day−t−day operations of the company. - Stock is a major financing source for public companies. - The profits for common stock owners come before payment to​ employees, suppliers,​ government, and creditors. - Common​ stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim.

The profits for common stock owners come before payment to​ employees, suppliers,​ government, and creditors.

Which of the following is NOT true with regard to an amortization​ table? - The remaining principal balance at the end of a payment period is equal to the beginning−of−the−period principal less the total payment. - The total payment is calculated by using the present value of an annuity formula. - The interest payment for a period is equal to the periodic interest rate multiplied by the beginning−of−the−period principal balance. - All of the above are true.

The remaining principal balance at the end of a payment period is equal to the beginning−of−the−period principal less the total payment.

List the advantages and disadvantages of the three different types of business organizations. SOLE PROPIETORSHIP

The sole proprietorship is a business that is entirely owned by an individual. This is the simplest and least complicated business organization with the least amount of formal documentation required. It is also the least regulated form of business. The major advantages of this type of business organization are that the owner makes all the​ decisions, can act quickly to make business decisions and keeps all of the profits. The financial disadvantage of this form of business organization is that the owner pays all the company bills and may even be required to sell off personal property to cover them. Other disadvantages of the​ (sole proprietorship,​ partnership, corporation) include difficulty in passing the business to a new owner and a limited ability to raise capital which may impede the growth and development of the business.

Which of the statements is FALSE

The standard of one vote for each share cannot be altered

Which of the statements below is​ FALSE? - If a company has constrained​ capital, then it can only take on a limited number of projects. - Projects are mutually exclusive if picking one project eliminates the ability to pick the other project. - The NPV decision criterion is true when all projects are independent and the company has a sufficient source of funds to accept all positive NPV projects. - Two projects are mutually exclusive if the acceptance of one project has no bearing on the acceptance or rejection of the other project.

Two projects are mutually exclusive if the acceptance of one project has no bearing on the acceptance or rejection of the other project.

Which of the following statements is TRUE if you increase your monthly payment above the required loan​ payment? - The extra portion of the payment does not go to the principal. - You can significantly increase the number of payments needed to pay off the loan. - The extra portion of the payment increases the principal. - You can significantly reduce the number of payments needed to pay off the loan.

You can significantly reduce the number of payments needed to pay off the loan.

A series of equal periodic finite cash flows that occur at the beginning of the period are known as​ a/an ________. - amortization - perpetuity - ordinary annuity - annuity due

annuity due

The​ ________ of an asset or liability is its cost carried on the balance sheet. - hybrid value - book value - market value - theoretical value

book value

A company selling a bond is​ ________ money. - taking - lending - borrowing - reinvesting

borrowing

Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem​ arises, however, in that future cash flows may be difficult to predict as to​ ________ of these cash flows. - neither the timing nor the amount - the timing but not the amount - the amount but not the timing - both the timing and the amount

both the timing and the amount

A​ ________ has limited​ liability, is a legal​ entity, and has the greatest potential to raise capital. - limited partnership - sole proprietorship - corporation - general partnership

corporation

When the​ ________ is less than the yield to​ maturity, the bond sells at​ a/the ________ the par value. - time to​ maturity; discount to - coupon​ rate; discount to - time to​ maturity; same price as - coupon​ rate; premium over

coupon​ rate; discount to

Strong−form efficient markets theory proclaims that​ ________. - one can chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market - current prices reflect the price and volume history of the​ stock, all publicly available​ information, and all private information - one can exploit publicly available news or financial statement information to routinely outperform the market - current prices reflect the price and volume history of the​ stock, all publicly available​ information, but no private information

current prices reflect the price and volume history of the​ stock, all publicly available​ information, and all private information

The​ ________ compensates the investor for the additional risk that the loan will not be repaid in full. - inflation premium - default premium - interest rate - real rate

default premium

An investment​ banker's fees are part of the​ ________ realized for issuing new debt or equity. - opportunity costs - benefits - revenues - flotation costs

flotation costs

The hurdle rate should be set so that it reflects the proper risk level for the project. If we have to choose between two projects with similar risk and therefore similar hurdle​ rates, we would select the project that​ ________. - has a higher internal rate of return - has a lower internal rate of return - has a hurdle rate that is consistent with the discounted payback period model - has a hurdle rate that is consistent with the payback period method

has a higher internal rate of return

James is a rational investor wishing to maximize his return over a 20−year period. The current yield curve is inverted with one−year rates at​ 5.00% and 20−year rates at​ 3.50%. James will invest in the lower−rate 20−year bonds​ if: - he thinks rates will rise in the future and locking in long−term rates today may provide the lowest long−run average return. - he thinks rates will fall in the future and locking in long−term rates today may provide the highest long−run average return. - he thinks rates will remain flat at​ 5% in the future and locking in long−term rates today will prevent him from appearing greedy to those without this investment opportunity. - he thinks rates will rise in the future and locking in long−term rates today may provide the highest long−run average return.

he thinks rates will fall in the future and locking in long−term rates today may provide the highest long−run average return.

When there are conflicts among managerial goals in U.S.​ markets, the most important priority is to​ ________. - keep all of the​ company's customers happy - increase the current market value of equity - maintain a safe and happy work place - foster good relationships with the community

increase the current market value of equity

The primary goal of the financial manager is​ to: - ensure that the firm maintains its level of employment within the community so that people are not laid off. - maximize the current share price or equity value of the firm. - improve relations with the community even at the expense of corporate profits. - provide for the economic growth of the community in which the firm resides.

maximize the current share price or equity value of the firm.

The capital budgeting decision model that utilizes all the discounted cash flow of a project is the​ ________ model, which is one of the single most important models in finance. - internal rate of return​ (IRR) - profitability index​ (PI) - net present value​ (NPV) - discounted payback period

net present value​ (NPV)

Notes to the financial statements help explain many of the details necessary to gain a more complete picture of the​ firm's ________. - dividend policy - capital budget - performance - choice of management

performance

Investors​ ________ for estimating the WACC. - prefer market value to book value - prefer a mix of book and market value - are indifferent between using market and book value - prefer book value to market value

prefer market value to book value

The sale of "new" securities, where the financial asset is being traded for the very first time, is said to take place in the ________ market

primary

Most U.S. corporate and government bonds choose to make​ ________ coupon payments. - quarterly - monthly - semiannual - annual

semiannual

When a company is in financial difficulty and cannot fully pay all of its​ creditors, the first lenders to be paid are the​ ________. - senior debtholders - sinking fund holders - stockholders - junior debtholders

senior debtholders

As the rating of a bond increases​ (for example, from​ A, to​ AA, to​ AAA), it generally means that - the credit rating​ increases, the default risk​ decreases, and the required rate of return increases. - the credit rating​ increases, the default risk​ decreases, and the required rate of return decreases. - the credit rating​ decreases, the default risk​ decreases, and the required rate of return decreases. - the credit rating​ increases, the default risk​ increases, and the required rate of return decreases. ​

the credit rating​ increases, the default risk​ decreases, and the required rate of return decreases.

The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are​ ________. - the inflation premium and the maturity premium - the liquidity premium and the maturity premium - the default premium and the maturity premium - the default premium and the bankruptcy premium

the default premium and the maturity premium

The participants in the cycle of money​ are: - the Federal Reserve which controls the money supply and provides money for business loans. - a borrower such as a company that is using the funds for operating the business or expanding the business. - the original​ lender, usually an individual​ (or household) through direct investment or through a financial institution. - the financial institution that matches the lender with a borrower or bundles up a set of lenders for a single borrower.

the financial institution that matches the lender with a borrower or bundles up a set of lenders for a single borrower.

The cycle of money​ is - the movement of funds from your savings account to your checking account and back to your savings account. - the movement of money from a borrower to a lender and back to the borrower. - the movement of money from your checking account to the Internal Revenue Service and back to you in the form of a Social Security check. - the movement of funds from a lender to a borrower and back to the lender.

the movement of funds from a lender to a borrower and back to the lender.

The IRR is the discount rate that produces a zero NPV or the specific discount rate at which the present value of the cost equals​ ________. - the present value of the future benefits or cash inflows - the future value of the present cash outflows - the investment - the present value of the cash outflow

the present value of the future benefits or cash inflows

The form of business organization in the United States that has the greatest amount of capital is​ ________. - the sole proprietorship - the partnership - the sub−chapter corporation - the publicly traded corporation

the publicly traded corporation

A yield curve constructed using Treasury securities has each of the following components embedded in the nominal interest​ rates: - the real​ rate, expected​ inflation, and a maturity premium. - expected​ inflation, a default risk premium and a maturity premium. - the real​ rate, a default risk premium and expected inflation. - the real​ rate, expected inflation and a default risk premium.

the real​ rate, expected​ inflation, and a maturity premium

What is the general definition of the financial management​ function? - the movement of money from lender to borrower and back again. - those activities which create or preserve the economic value of the assets of an​ individual, small business or corporation. - those activities which reduce cash outflows for the​ individual, small business or corporation. - those activities which reduce revenue for an​ individual, small business or corporation.

those activities which create or preserve the economic value of the assets of an​ individual, small business or corporation.

A sinking fund may be used for each of the following EXCEPT​ ________. - to call in bonds early - to be held on to and used to pay off the principal at maturity - to buy back some of the bonds over time - to be used to pay off other outstanding debt issues

to be used to pay off other outstanding debt issues

The objective of every financial transaction​ is: ​ - to ensure that borrowers are able to make purchases. - to make all parties in the transaction better off. - to ensure that financial institutions remain strong. - to enrich the lenders.

to make all parties in the transaction better off.


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