BMAL 590 Business Finance
A cash budget is
A statement of a firm's planned inflows and outflows of cash used to ensure that a firm has available cash to meet short-term financial obligations
Your uncle would like to restrict his interest rate risk and his default risk, but he still would like to invest in corporate bonds. Which of the possible bonds listed below satisfies your uncle's criteria?
AAA bond with 5 years to maturity
Pure options are instruments that are
All of the above
Return on total assets (ROA) is equal to _________
All of the above
The firm's managers use ratios to _________
All of the above
Which of the following are common cash disbursements?
All of the above
Which of the following are generally considered advantages of term loans over publicly issued bonds?
All of the above
Which of the following statements is correct?
All of the above are correct
A company's balance sheet shows the value of assets, liabilities, and stockholders' equity
At a specific point in time
Your Aunt Agatha purchased a call option a few months ago. Today is the expiration date, so she must decide whether to exercise the option. Which of the following statements is correct? Do not consider brokers' commissions in your answer
Aunt Agatha should exercise the option if the price of the sock is greater than the exercise, or strike, price
Bond ratings of ________ and higher are considered investment grade
BBB
When generating pro forma statements, most firms rely on a ________ approach to sales forecasts
Blended
Which of the following assets is the most liquid?
Cash
________ are often used as the plug figure in pro forma projections
Cash balances
An American Depository Receipt (ADR) represents
Certificates representing ownership in stocks of foreign companies that are held in trust by a bank located in the country the stock is traded
When evaluating financial ratios, analysts typically examine a firm's ratio values
Compared to the firm's previous years' ratio
The firm's ________ are primarily interested in ratios that measure the short-term liquidity of the company and its ability to make principal and interest payments
Creditors
A protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid is called what?
Cumulative dividends
Eurodebt is the term used to designate
Debt that is denominated in a currency that is different than the currency of the country in which it is sold
During recessions the demand for funds typically
Decreases
The ________ premium is compensation for possibility that the borrower will not be able to pay the debt's interest and principal on time
Default risk
Which of the following is an inflow of corporate cash?
Depreciation charges
Earnings per share (EPS) is calculated by
Dividing earnings available for common stockholders by the number of shares of common stock outstanding
When a firm has no "other income," its operating profit and _________ are equal
EBIT
Uncertainty regarding the domestic flows that result from converting foreign cash flows is what type of risk?
Exchange rate
Which of the following is not one of the fundamental factors that affect the cost of money?
Exchange rates
An inverted yield curve
Exists when short-term rates exceed long-term rates
________ are decisions about whether to purchase capital projects and add them to existing assets so as to increase existing operations
Expansion decisions
The ________ flows result from debt and equity financing transactions
Financing
The sustainable growth model gives managers a kind of shorthand projection that ties together ________ and ________
Growth objectives and financial needs
Which of the following statements is most correct?
If the maturity risk premium were zero and the rate of inflation were expected to increase in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope
Which of the following statements is correct?
In estimating incremental operating cash flows for the purpose of capital budgeting, interest payments should not be included since the effects of these payments are already included in the rate of return the firm is required to earn from its investments
Which of the following statements is correct?
Income bonds pay interest only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a company and this makes them riskier to investors than regular bonds
A firm is considering the purchase of an asset whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should
Increase the required rate of return used to evaluate the project to reflect the higher risk of the project
The terms and conditions to which a bond is subject are set forth in its
Indenture
Which of the following is NOT an example of a financial asset?
Inventory
If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement?
Investors expect short-term rates to decrease in the future
Net working capital
Is a measure of a firm's overall liquidity
Why is the quick ratio a more appropriate measure of liquidity than the current ratio for a large-airplane manufacturer?
It excludes inventory from the numerator of the ratio because it is difficult to convert inventory to cash and most sales are made on a credit basis
The one fixed asset that is not depreciated is _________
Land
Which of the following statements is correct?
Large costs occur at the end of nuclear power plants' lives because these plants have to be closed down, and shutdown costs are high due to the difficulty of handling radioactive materials. For this reason, it is possible that a nuclear plant project could have two IRRs
A strategic plan is a
Long-term guide driven by competitive forces
Most pro forma statements begin with a sales forecast. One approach to deriving a sales forecast is the top-down approach. Top-down sales forecasts rely heavily on
Macroeconomic and industry forecasts
Most firms when planning for growth focus on
Meeting sales target growth rates
________ projects are a set of projects where the acceptance of one project means that other projects cannot be accepted
Mutually exclusive
For both managers and external financial analysts, ________ is the single most important accounting number found on the income statement
Net income (net profit after tax)
Following ________ financing strategy takes advantage of short-term interest rates but also increases refinancing risk. Following ________ financing strategy minimizes the risk of a liquidity crisis, but generally increases borrowing costs. Following ________ financing strategy results in the use of long-term funding for permanent assets and short-term financing for temporary or seasonal requirements
None of the above
Companies can issue different classes of common stock. Which of the following statements concerning stock classes is correct?
None of the above statements is necessarily true
Which of the following rules are essential to successful cash flow estimates, and ultimately, to successful capital budgeting?
Only incremental cash flows are relevant to the accept/reject decision
Which of the following capital budgeting techniques does not adjust for the riskiness of the cash flows?
Payback
A speedup in ________ should ________ a firm's financing needs; whereas, a slow down in ________ should ________ financing needs for a firm
Payments; increase; collections; increase
_________ ratios would provide the best information regarding total return to common stockholders
Profitability
Which of the following is NOT a source of equity on a firm's balance sheet?
Property, plant, and equipment
The preemptive right is important to shareholders because it
Protects the current shareholders against dilution of ownership interests
Which of the following methods involves calculating an average beta for firms in a similar business and then applying that beta to determine the beta of its own project?
Pure play method
A ________ is a financial instrument which gives the owner the right but not the obligation to sell shares of stock at a specified price during a particular time period
Put option
The underlying cause of ranking conflicts between the NPV and IRR methods is differing
Reinvestment rate assumption
Which of the following statements is correct?
Reinvestment rate risk is lower, other things held constant, on long-term than short-term bonds
The bottom-up method for forecasting sales
Relies on the ability of sales personnel to assess future demand, usually without the aid of statistical models
A ________ is an agreement between two firms where one firm agrees to sell some of its financial assets to another and then buy the financial assets back from that firm at a later time
Repurchase agreement
As the demand for fund increase, the demand curve will shift to the ________ resulting in ________ market clearing interest rate
Right; higher
"Required total financing" figures in a cash budget
Show the additional amount a firm must borrow at the end of each month
Which of the following statements concerning common stock and the investment banking process is false?
Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a margin call
A long-term financial plan begins with ________
Strategy
A(n) ________ is a cash outlay that already has been incurred and that cannot be recovered regardless of whether the project is accepted or rejected
Sunk cost
Which of the following statements is most correct?
Sunk costs should be ignored in capital budgeting
A(n) ________ is generally obtained from a bank or insurance company and the borrower agrees to make a series of payments consisting of interest and principal
Term loan
Which of the following statements is most correct? Other things held constant,
The "liquidity preference theory" would generally lead to an upward sloping yield curve
Which of the following statements is correct?
The NPV and IRR methods use the same basic equation, but in the NPV method the discount rate is specified and the equation is solved for NPV, while in the IRR method the NPV is set equal to zero and the discount rate is found
Which of the following statements is correct?
The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the IRR
The key input required to build a cash budget is
The firm's sales forecast
Which of the following statements is correct?
The incremental operating cash flow for capital budgeting includes return on invested capital, which is net income, and return of part of invested capital, which is depreciation
When a project's NPV exceeds zero,
The project should be accepted without any further consideration, assuming we are confident that the cash flows and the required rate of return have been properly estimated
Which of the following statements is false?
The term Eurobond specifically applies to any foreign bonds denominated in U.S. currency
If the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a 1-year T-bond?
The yield on the 10-year bond is less than a yield on a 1-year bond
On a balance sheet, retained earnings are not "unspent cash" because
They have been used to finance the firm's assets
Most experts think that in the United States the real risk-free rate fluctuates between
Two to four percent
A firm that employs an aggressive strategy to finance assets
Will finance a portion of long-term (permanent) growth in assets with short-term financing
A(n) ________ is a bond that pays no annual interest but is sold at a discount below bar, thus providing compensation to investors in the form of capital appreciation
Zero coupon bond