Finance Final

c

A "round lot" consists of how many shares? A. 1 B. 10 C. 100 D. 1000

b

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT? A. The bond's current yield is less than 8%. B. If the yield to maturity remains at 8%, then the bond's price will decline over the next year. C. The bond's coupon rate is less than 8%. D. If the yield to maturity increases, then the bond's price will increase. E. If the yield to maturity remains at 8%, the bond's price will remain constant over the next year.

a

A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is NOT CORRECT? A. The bond's expected capital gains yield is positive. B. The bond's yield to maturity is 9%. C. The bond's current yield is 9%. D. If the bond's yield to maturity remains constant, the bond will continue to sell at par. E. The bond's current yield exceeds its capital gains yield.

Revenue received for the delivery of items that have not been delivered

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?

c

A 12-year bond has an annual coupon rate of 9%. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT? A. If market interest rates decline, the price of the bond will also decline. B. The bond is currently selling at a price below its par value. C. If market interest rates remain unchanged, the bond's price exactly one year from now will be lower than it is today. D. The bond should currently be selling at its par value. E. If market interest rates remain unchanged, the bond's price exactly one year from now will be higher than it is today.

c

A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT? A. The bond's coupon rate exceeds its current yield. B. The bond's current yield exceeds its yield to maturity. C. The bond's yield to maturity is greater than its coupon rate. D. The bond's current yield is equal to its coupon rate. E. If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850.

the amounts and dates of all payments to be made

A bond certificate indicates:

coupon rate is greater than YTM

A bond trades at a premium if:

8%

A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, which of the following coupon rates will cause the bond to be issued at a premium?

a 10-year bond with a face value of $2000 and a coupon rate of 5.8% with monthly payments

A corporate bond makes payments of $9.67 every month for ten years with a final payment (interest and principal combined) of $2009.67. Which of the following best describes this bond? A. a 10-year bond with a face value of $2000 and a coupon rate of 4.8% with monthly payments B. a 10-year bond with a face value of $2000 and a coupon rate of 5.8% with monthly payments C. a 10-year bond with a face value of $2009.67 and a coupon rate of 4.8% with monthly payments D. a 10-year bond with a face value of $2009.67 and a coupon rate of 5.8% with monthly payments

b

A corporate bond which receives a BBB rating from Standard and Poor's is considered A. a junk bond. B. an investment grade bond. C. a defaulted bond. D. a high-yield bond.

The sale will be added to Net Income on the income statement but deducted from net income on the statement of cash flows

A printing company prints a brochure for a client, and then bills them for this service. At the time the printing company's financial disclosed statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?

investors believe the company's assets are not likely to be profitable its market value is worth less than its book value

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price per share of $4. Which of the following statements is true regarding this company?

as an outflow under investment activities

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?

semiannually

A university issues a bond with a face value of $10,000 and a coupon rate of 5.65% that matures on 07/15/2015. The holder of such a bond receives coupon payments of $282.50. How frequently are coupon payments made in this case?

e

An increase in a firm's expected growth rate would normally cause its required rate of return to A. Increase B. Decrease C. Fluctuate less than before. D. Remain constant. E. Possibly increase, possibly decrease, or possibly have no effect.

$5100

An investor holds a Ford bond with a face value of $5000, a coupon rate of 4%, and semiannual payments that matures on 1/15/2009. How much will the investor recieve on 1/15/2009 (interest and principal combined)

unlevered

Apple computers has raised all its capital via equity rather than debt. Such a firm is also referred to as an ________ firm.

a mortgage bond

Athelstone Realty issues debt with a maturity of 20 years. In the case of bankruptcy, holders of this debt may claim the property help by Athelstone Realty. Which of the following best describes this type of corporate debt?

there is no chance of default & they have a zero coupon payment

Bonds are considered riskless (and therefore have no risk premium) if:

true

Classified stock differentiates different classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control. A. True B. False

e

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT? A. All common stocks fall into one of three classes: A, B, and C. B. All common stocks, regardless of class, must have the same voting rights. C. All firms have several classes of common stock. D. All common stock, regardless of class, must, by law, pay the same dividend. E. Some class or classes of common stock may be entitled to more votes per share than other classes.

basis points (multiply % by 100)

Credit spread for bonds can be expressed in percent or?

Expected (coupon/face value & default)

Expected return for bond calculation considers what payments?

capm

For an unlevered firm, the cost of capital of the firm can be determined by using the

such bonds are purchased at a discount to their face value

How are investors in zero-coupon bonds compensated for making such an investment?

total sales-cost of sales

How is gross profit calculated?

false

If expectations for long-term inflation rose, all else equal, this would have a greater impact on the required rate of return on equity, re, than on the pre-tax interest rate on long-term debt, rd, for most firms. Therefore, the percentage point increase in the cost of equity would be greater than the increase in the pre-tax interest rate on long-term debt.

c

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that A. The investor thinks the stock is experiencing supernormal growth. B. The investor thinks the stock should be sold. C. The investor thinks the stock is a good buy. D. The investor thinks management is probably not trying to maximize the price per share. E. The investor thinks dividends are not likely to be declared.

b

If markets are efficient, which of the following will occur? A. Each stock's expected return should always equal its realized return. B. Each stock's expected return should equal its required return. C. All stocks should have the same expected return. D. The expected and required returns on stocks and bonds should be equal. E. All stocks should have the same realized return during the coming year.

b

If security markets were truly strong-form efficient, one could never earn a realized return on a stock greater than the marginal investor's expected (and required) rate of return on the stock. A. True B. False

b

If two constant growth stocks have the same price and the same required rate of return, which of the following statements is CORRECT? A. The two stocks must have the same dividend per share. B. If one stock has a higher dividend yield, it will also have a lower dividend growth rate. C. The two stocks have the same dividend growth rate. D. The two stocks have the same dividend yield. E. The stock with the higher dividend yield will have the higher dividend growth rate.

discounted free cash flow model

If you want to value a firm but do not want to explicitly forecast its dividends, what is the simplest model for you to use?

dividend discount

If you want to value a firm that consistently pays out its earnings as dividends, the simplest model for you to use is the

c

Most studies of stock market efficiency suggest that the stock market is highly efficient in the weak form and reasonably efficient in the semistrong form. (This is true.) Based on these findings, which of the following statements is CORRECT? A. Information disclosed in companies' most recent annual reports can be used to consistently beat the market. B. The stock price for a company has been increasing for the past 6 months. Based on this information, it must be true that the stock price will also increase during the current month. C. Information you read in The Wall Street Journal today cannot be used to select stocks that will consistently beat the market. D. Market efficiency implies that all stocks should have the same expected return. E. The Efficient Markets Hypothesis suggests that the market does not price stocks fairly; hence, managers should make decisions based on the premise that firms' stocks are undervalued or overvalued.

d

Northeast Corporation's stock expected return is 14%. Its dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT? A. The stock's dividend yield is 7%. B. The stock's dividend yield is 8%. C. The current dividend per share is $4.00. D. The stock price is expected to be $54 a share one year from now. E. The stock price is expected to be $57 a share one year from now.

false

Prior to its maturity date, the price of a zero-coupon bond is its face value

b

Stock A has a required return of 10% and a price of $25, and its dividend is expected to grow at a constant rate of 7% per year. Stock B has a required return of 12% and a price of $40, and its dividend is expected to grow at a constant rate of 9% per year. Which of the following statements is CORRECT? A. If the stock market were efficient, these two stocks would have the same price. B. The two stocks have the same dividend yield. C. If the stock market were efficient, these two stocks would have the same expected return. D. The two stocks have the same expected capital gains yield. E. The two stocks have the same expected year-end dividend.

b

Stock X has a required return of 12% and a dividend yield of 5%, and its dividend is expected to grow at a constant rate forever. Stock Y has a required return of 10%, a dividend yield of 3%, and its dividend is expected to grow at a constant rate forever. Both stocks currently sell for $25 per share. Which of the following statements is CORRECT? A. Stock Y pays a higher dividend per share than Stock X. B. Stock X pays a higher dividend per share than Stock Y. C. One year from now, Stock X should have the higher price. D. Stock Y has a lower expected growth rate than Stock X. E. Stock Y has the higher expected capital gains yield.

a

Stocks A and B have the same price, but Stock A has the higher required rate of return. Which of the following statements is CORRECT? A. If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's. B. Stock B must have a higher dividend yield than Stock A. C. Stock A must have a higher dividend yield than Stock B. D. If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's. E. Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.

a

Stocks A and B have the same required return and the same price, $25. Stock A's dividend is expected to grow at a constant rate of 10% per year, while Stock B's dividend is expected to grow at a constant rate of 5% per year. Which of the following statements is CORRECT? A. Stock A's expected dividend at t = 1 is only half that of Stock B. B. Stock A has a higher dividend yield than Stock B. C. Currently the two stocks have the same price, but over time Stock B's price passes that of A. D. Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. E. The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium exists.

b

Stocks that do not currently pay a dividend must have a value of $0. A. True B. False

False

The balance sheet shows the assets, liabilities, and stockholder's equity of a firm over a given length of time

d

Which of the following best describes a bond rated by Standard and Poor's and Moody as B? A. judged to be high quality by all standards B. possessing many favorable characteristics C. neither highly protected nor poorly secured D. generally lacks the characteristics of a desirable investment

true

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stocks only have residual claims against the company. A. True B. False

price of the bond minus accrued interest

The clean price of the bond =

false

The credit spread of a bond shrinks if the probability of the issuer defaulting increases

true

The firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash

common stock, paid-in surplus, retained earnings

The major components of common stockholder's equity are:

capital structure

The relative proportion of debt, equity, and other securities that a firm has outstanding constitute its

d

Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT? A. Bond A's current yield will increase each year. B. Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. C. Bond C sells at a premium (its price is greater than par), and its price is expected to increase as the bond approaches maturity. D. Bond A sells at a discount (its price is less than par), and its price is expected to increase as the bond approaches maturity. E. As the bond approaches maturity, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price is expected to increase.

the bondholder's priority in claiming assets in the event of a default

What is a bond's seniority?

The difference between sales revenues and the costs associated with those sales

What is a firm's gross profit?

The difference between the sales and other income generating by the firm, and all costs, taxes, and expenses incurred by the firm in a given period, the last or bottom line of the income statement, a measure of the firm's profitability

What is a firm's net income?

total debt/total equity

What is the formula for leverage/debt to equity?

notes

What kind of unsecured corporate debt has a maturity of less than ten years?

debt-equity ratio

What measures a company's leverage? aka how reliant they are on debt financing

a

Which of the following bonds is trading at a premium? A. a five-year bond with a $2000 face value whose yield to maturity is 7.0% APR and coupon rate is 7.2% APR paid semiannually B. a ten-year bond with a $4000 face value whose yield to maturity is 6.0% APR and coupon rate is 5.9% APR paid semiannually C. a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% APR and coupon rate is 7.8% APR paid semiannually D. a two-year bond with a $50,000 face value whose yield to maturity is 5.2% APR and coupon rate is 5.2% APR paid monthly

a

Which of the following bonds will have the least percentage change in value if interest rates (YTM not coupon rates since coupon rates are fixed) on all bonds increased by 1%? A. a ten-year bond with a $2000 face value whose coupon rate is 6.8% B. a 15-year bond with a $5000 face value whose coupon rate is 6.2% C. a 20-year bond with a $3000 face value whose coupon rate is 5.4% D. a 30-year bond with a $1000 face value whose coupon rate is 6.4%

e

Which of the following bonds would have the greatest percentage increase in value if all interest rates (YTM not coupon rates since coupon rates are fixed) fall by 1%? A. 10-year, zero coupon bond. B. 20-year, 10% coupon bond. C. 20-year, 5% coupon bond. D. 1-year, 10% coupon bond. E. 20-year, zero coupon bond.

a

Which of the following does NOT always increase a company's stock price? A. Increasing the expected growth rate of sales. B. Increasing the expected operating profitability. C. Decreasing the investment in fixed assets with affecting sales D. Decreasing the weighted average cost of capital. E. Increasing the expected rate of return on invested capital.

a

Which of the following is NOT a way that a firm can increase its dividend? A. by increasing its retention rate B. by decreasing its shares outstanding C. by increasing its earnings (net income) D. by increasing its dividend payout rate

it is illiquid

Which of the following is a disadvantage of private debt over public debt?

it adds all non-cash entries related to the firm's operating activities

Which of the following is a way that the operating activity section of the statement of cash flows adjust net income from the balance sheet?

it is freely tradeable on the bond market

Which of the following is an advantage of a public bond issue over private placement?

Interest expense

Which of the following is not an operating expense?

The firm is growing

Which of the following is the least likely explanation for a firm's high ROE?

d

Which of the following is true about the face value of a bond? A. It is the notional amount we use to compute coupon payments. B. It is the amount that is generally repaid at maturity. C. It is usually denominated in standard increments, such as $1,000. D. All of the above are true.

a bond issue

Which of the following is usually a form of public debt?

b

Which of the following statements is CORRECT? A. A major disadvantage of financing with preferred stock is that preferred stockholders typically have super-normal voting rights. B. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and as a result, the expected after-tax return on the preferred is lower than the expected after-tax return on the common. C. One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income would be tax free. D. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.

c

Which of the following statements is CORRECT? A. A zero coupon bond's current yield is equal to its yield to maturity. B. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par. C. All else equal, if a bond's yield to maturity increases, its price will fall. D. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par. E. All else equal, if a bond's yield to maturity increases, its current yield will fall.

b

Which of the following statements is CORRECT? A. Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond. B. A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate. C. If a bond sells at par, then its current yield will be less than its yield to maturity. D. If a bond sells for less than par, then its yield to maturity is less than its coupon rate. E. A discount bond's price declines each year until it matures, when its value equals its par value.

a

Which of the following statements is CORRECT? A. If a coupon bond is selling at par, its current yield equals its yield to maturity. B. If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity. C. If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond. D. If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium. E. If a coupon bond is selling at a premium, its current yield equals its yield to maturity.

d

Which of the following statements is CORRECT? A. If a stock's beta increased but its growth rate remained the same, then the new equilibrium price of the stock will be higher (assuming dividends continue to grow at the constant growth rate). B. Market efficiency says that the actual realized returns on all stocks will be equal to the expected rates of return. C. If your uncle earned a return higher than the overall stock market last year, this is evidence that the stock market is inefficient. D. An implication of the semistrong form of the efficient markets hypothesis is that you cannot consistently benefit from trading on information reported in The Wall Street Journal. E. None of the statements above is correct.

d

Which of the following statements is FALSE? A. Estimating dividends, especially for the distant future, is difficult. B. A firm can only pay out its earnings to investors or reinvest their earnings. C. Successful young firms often have high initial earnings growth rates. D. According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate.

d

Which of the following statements is CORRECT? A. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rates. B. All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds. C. All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds. D. If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its face value. E. If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.

d

Which of the following statements is CORRECT? A. Junior debt has less default risk than senior debt. B. Junk bonds typically provide a lower yield to maturity than investment-grade bonds. C. A debenture is a secured bond that is backed by some or all of the firm's fixed assets. D. None of the above is correct

b

Which of the following statements is CORRECT? A. Preferred stockholders have a priority to income but not to liquidation proceeds over bondholders in the event of bankruptcy. B. The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. C. Corporations cannot buy the preferred stocks of other corporations. D. Preferred stocks do not generally have cumulative provisions. E. A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.

c

Which of the following statements is CORRECT? A. The constant growth model is often appropriate to evaluate start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. B. If a stock has a required rate of return of12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is 5%. C. The dividend discount model for constant growth firms can be used for firms that have expected negative, but constant, growth rates. D. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. E. The dividend discount model for constant growth firms cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.

a

Which of the following statements is CORRECT? A. The constant growth model takes into consideration the capital gains investors expect to earn on a stock. B. Two firms with the same expected dividend and growth rate must also have the same stock price. C. A stock's dividend yield can never exceed its expected growth rate. D. If a stock has a required rate of return of 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. E. A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return.

c

Which of the following statements is CORRECT? A. The total return on a bond during a given year consists only of the coupon interest payments received. B. All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%. C. The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant. D. For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.

d

Which of the following statements is CORRECT? A. The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield. B. The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy. C. Rising inflation makes the expected return of a bond less than the yield to maturity D. The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield. E. The expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.

a

Which of the following statements is CORRECT? A. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation. B. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. C. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock. D. If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough retained earnings to take care of its equity financing and hence needs to issue new stock.

d

Which of the following statements is CORRECT? A. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are tax deductible. B. All else equal, an increase in a company's stock price will increase its cost of common equity, re. C. Since the money is readily available, the after-tax cost of retained earnings is usually much lower than the after-tax cost of debt. D. If a company's tax rate increases but the YTM of its bonds remains the same, the after-tax cost of its debt will fall.

a

Which of the following statements is CORRECT? A. You hold two bonds. One is a 10-year, zero coupon issue and the other is a 10-year bond that pays a 6% annual coupon. The same YTM rate, 6%, applies to both bonds. If the YTM rises from the current level, the zero coupon bond will experience the larger percentage decline. B. The time to maturity does not affect the percentage change in the value of a bond in response to a given change in interest rates. C. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same YTM rate, 6%, applies to both bonds. If the YTM rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. D. The shorter the time to maturity, the greater the percentage change in the value of a bond in response to a given change in interest rates. E. The longer the time to maturity, the smaller the percentage change in the value of a bond in response to a given change in interest rates.

d

Which of the following statements is FALSE? A. A common approximation is to assume that in the long run, dividends will grow at a constant rate. B. The dividend each year is the firm's earnings per share (EPS) multiplied by its dividend payout rate. C. There is a tremendous amount of uncertainty associated with any forecast of a firm's future dividends. D. During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

B

Which of the following statements is FALSE? A. One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond. B. The YTM of a bond with default risk is lower than the bond's expected/required rate of return. C. Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably. D. The expected return of an investment in a risk-free bond is given a special name, the yield to maturity (YTM).

b

Which of the following statements is FALSE? A. The amount of each coupon payment is determined by the coupon rate of the bond and the face value. B. Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value. C. The simplest type of bond is a zero-coupon bond in the sense that it makes one only type of payment. D. Treasury bills are U.S. government bonds with a maturity of up to one year.

c

Which of the following statements is FALSE? A. The bond certificate typically specifies how frequently coupons will be paid until the maturity date of the bond. B. The bond certificate indicates the amounts and dates of all payments to be made. C. The only cash payments the investor will receive from a zero-coupon bond are the interest payments that are paid up until the maturity date. D. Usually the face value of a bond is repaid at maturity.

d

Which of the following statements is FALSE? A. The firm's weighted average cost of capital (WACC) is the cost of capital that reflects the risk of the overall business, which is the combined risk of the firm's equity and debt. B. Intuitively, the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model the firm's cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model. C. We interpret WACC as the expected return the firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together. D. When using the discounted free cash flow model we should always use the firm's equity cost of capital.

c

Which of the following statements is FALSE? A. The long-run growth rate of FCF is typically based on the expected long-run growth rate of the firm's revenues. B. Because the firm's free cash flow is equal to the sum of the free cash flows from the firm's current and future investments, we can interpret the firm's enterprise value as the total net present value (NPV) that the firm will earn from continuing its existing projects and initiating new ones. C. If the firm has no debt, then WACC equals the risk-free rate of return. D. When using the discounted free cash flow model, we forecast the firm's free cash flow up to some horizon, together with some terminal (continuation) value of the enterprise.

b

Which of the following statements is FALSE? A. The more cash the firm uses to repurchase shares, the less it has available to pay dividends. B. Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered. C. We estimate a firm's current enterprise value by computing the present value (PV) of the firm's free cash flow. D. We can interpret the enterprise value as the net cost of acquiring the firm's equity, taking its cash, and paying off all debts.

a

Which of the following statements is FALSE? A. We cannot use the general dividend-discount model to value the stock of a firm with rapid or changing growth. B. As firms mature, their growth slows to rates more typical of established companies. C. The dividend-discount model values the stock based on a forecast of the future dividends paid to shareholders. D. If a firm retains more earnings, it will have to reduce its dividends.

d

Which of the following statements is FALSE? A. Zero-coupon bonds are also called pure discount bonds. B. The expected return of a bond is the discount rate at which the price of the bond is equal to the present value of the payments the bondholders expect. C. The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment. D. When prices are quoted in the bond market, they are conventionally quoted assuming the fave value is $1000.

e

Which of the following statements is NOT CORRECT? A. If a bond is selling at a discount to par, its current yield will be less than its yield to maturity. B. All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities. C. If a bond is selling at its par value, its current yield equals its yield to maturity. D. If a bond is selling at a premium, its current yield will be greater than its yield to maturity. E. All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons.

by including more covenants issuers always increase their costs of borrowing

Which of the following statements is false? A. By including more covenants, issuers always increase their costs of borrowing. B. Once bonds are issued, equity holders have an incentive to increase dividends at the expense of debt holders. C. Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital. D. The reduction in the firm's borrowing cost from covenants can more than outweigh the cost of the loss of flexibility associated with covenants.

The public debt market is larger than the private debt market for business

Which of the following statements regarding private debt is false? A. Private debt has the advantage that it avoids the cost of registration. B. Bank loans are an example of private debt - debt that is not publicly traded. C. Private debt has the disadvantage of being illiquid. D. The public debt market is larger than the private debt market for businesses.

The amount of deferred tax liability held by a company

Which of the following would NOT be included on the left side of the balance sheet? A. The value of government bonds held by the company B. The cash held by the company C. The amount of deferred tax liability held by the company D. The amount of money owed to the company by customers who have not yet paid for goods and services they have received

To provide interested parties, both inside and outside the company, with an overview of the short and long-term financial condition of the business

Why do firms produce financial statements?

by raising its reported earnings

WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldCom's financial statements more attractive to investors?

Promised (just coupon and face value)

YTM calculation only considers what payments?

c

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT? A. The price of Bond B will decrease over time, but the price of Bond A will increase over time. B. The prices of both bonds will remain unchanged. C. The price of Bond A will decrease over time, but the price of Bond B will increase over time. D. The prices of both bonds will increase by 7% per year. E. The prices of both bonds will increase over time, but the price of Bond A will increase by more.

b

You placed an order to purchase stock where you specified the maximum price you were willing to pay. This type of order is known as a: A. maximum order. B. limit order. C. floor order. D. market order.

long-term liability

a 30-year mortgage loan is a

current liability

accounts payable is a:

true

bonds with a high risk of default generally offer high yields

the pv of the bond if the coupon has yet to be paid in this period

dirty price of a bond basically =

growth in EPS

if payout ratio is constant, the growth in dividends=

growth in stock price

which growth of dividends is constant, growth in dividends=

the balance sheet reports liabilities on the left-hand side

which of the following statements regarding the balance sheet is INCORRECT? A. The balance sheet provides a snapshot of the firm's financial position at a given point in time. B. The balance sheet lists the firm's assets, liabilities, and equity. C. The balance sheet reports stockholders' equity on the right-hand side. D. The balance sheet reports liabilities on the left-hand side.