Finance Final- Conceptual

What is the primary goal of financial management for a sole proprietorship?

Maximize the market value of the equity

Which one of these is correct?

Net income is distributed either to dividends or retained earnings.

Which one of the following indicators offers the best assurance that a project will produce value for its owners?

Positive NPV

Newly issued securities are sold to investors in which one of the following markets?

Primary

Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?

Statement by a firm that it has just discovered a manufacturing defect and is recalling its product

On which one of the following dates is the principal amount of a semiannual coupon bond repaid?

The entire bond is repaid on the maturity date.

Which one of the following statements is correct?

The higher the expected rate of return, the wider the distribution of returns.

Kelly's uses the firm's WACC as the required return for some of its projects. For other projects, the firms uses a rate equal to WACC plus one percent, while another set of projects is assigned rates equal to WACC minus some amount. Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning a discount rate to a specific project?

The perceived risk level of project

New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient?

The price of New Labs stock increases rapidly to a higher price and then remains at that price.

In a general partnership, each partner is personally liable for

The total debts of the partnership, even if he or she was unaware of those debts.

Which one of these is a perpetuity?

Trust income of $1,200 a year forever

Which one of the following is used as the pretax cost of debt?

Weighted average yield to maturity on the firm's outstanding debt

The daily financial operations of a firm are primarily controlled by managing the

Working Capital

Semistrong form market efficiency states that the value of a security is based on:

all publicly available information.

Highly liquid assets

can be sold quickly at close to full value.

Dividends are best defined as:

cash or stock payments to shareholders.

Which one of the following is the quoted price of a bond?

clean price

The security market line is a linear function that is graphed by plotting data points based on the relationship between the:

expected return and beta.

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the

future value

The future value of a lump sum investment will increase if you

increase the time period.

The cost of preferred stock:

is equal to the stock's dividend yield.

Unsystematic risk can be defined by all of the following except:

market risk.

Systematic risk is:

measured by beta.

A bond's indenture agreement generally includes all of the following except the:

names of registered shareholders.

Dividends are:

paid out of net income.

A registered-form bond is defined as a bond that:

pays coupon payments directly to the owner of record.

Farmer's Supply is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion. Which one of the following terms describes this evaluation approach?

pure play approach

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

recoup its initial cost.

Net income increases when

revenue increases

If a firm has an inventory turnover of 15, the firm

sells its entire inventory an average of 15 times each year.

Kate is the CFO of a major firm and has the job of assigning discount rates to each project under consideration. Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases and a lower rate as the risk level declines. Kate is applying the ___ approach.

subjective

Security dealers

buy and sell from their own inventory.

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?

A decrease in the probability of an economic boom

Derek's is a brick-and-mortar toy store. The firm is considering expanding its operations to include Internet sales. Which one of the following would be the best firm to use in a pure play approach to analyzing this proposed expansion?

A toy store that sells online only

Which one of the following is the best example of unsystematic risk?

A warehouse fire

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

All available information

Net working capital is defined as:

Assets-Liablities

Which one of the following methods of analysis ignores cash flows?

Average accounting return

Mixture of Debt & Equity

Capital Structure

Which one of the following is a measure of long-term solvency?

Cash coverage ratio

Which one of the following types of securities has the lowest priority in a bankruptcy proceeding?

Common Stock

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Common-size income statement

The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s?

Corporate accounting and financial fraud

Which type of stock pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?

Cumulative preferred

Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

Diversification

Donovan's would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?

Dividend payout ratio

The constant growth model can be used to value the stock of firms that have which type(s) of dividends?

Dividends that are either constant or change annually at a constant rate

Which one of the following is defined as the average compound return earned per year over a multiyear period?

Geometric Average Return

The primary goal of financial management is most associated with increasing the

Market value of the firm

Which one of these represents systematic risk?

Increase in consumption created by a reduction in personal tax rates

Which one of the following will increase the cost of equity, all else held constant?

Increase in the dividend growth rate

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing

Internal growth rate

Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional.

Internal rate of return that exceeds the required return

Which one of the following is an advantage of being a limited partner?

Losses limited to capital invested

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:

Marginal Tax Rate

The systematic risk principle states that the expected return on a risky asset depends only on the asset's ___ risk.

Market

A debenture is:

an unsecured bond.

When using the pure play approach for a proposed investment, a firm is primarily seeking a rate of return that:

best matches the risk level of the proposed investment.

A broker is an agent who:

brings buyers and sellers together.

Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?

cost of equity

The weighted average cost of capital is defined as the weighted average of a firm's:

cost of equity, cost of preferred, and its aftertax cost of debt.

An agent who buys and sells securities from inventory is called a:

dealer

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:

debenture

An increase in a levered firm's tax rate will:

decrease the firm's cost of capital.

Russell's has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance. This provision is referred to as the _____ provision.

deferred call

Which one of the following is the price that an investor pays to purchase an outstanding bond?

dirty price

The internal rate of return is the:

discount rate that results in a zero net present value for the project.

Standard deviation measures _____ risk while beta measures _____ risk.

total; systematic

The modified internal rate of return is specifically designed to address the problems associated with:

unconventional cash flows.

The standard deviation measures the _____ of a security's returns over time.

volatility

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:

will be greater than 12.9 percent.

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?

zero coupon