Business Finance Final

The fundamental starting point of all the accounting statements is the ________.

Accounting identity

________ is the name given to the processes surrounding recognition of the principal-agent problem and ways to align agents with the interests of the principals.

Agency theory

Which of the following can lead to increased expected cash flow over time to the firm?

All of the above

When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise.

Annual percentage rates

A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________.

Annuity due

Accounting Identity is

Assets = Liabilities + Owner's Equity

The ________ of an asset or liability is its cost carried on the balance sheet.

Book value

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.

Both the timing and the amount

Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?

Callable bond

The means by which a company is financed refers to the firm's ________.

Capital structure

_______ is the typical title of the corporate executive charged with determining the best repayment structure for borrowed funds to ensure timely repayment and sufficient cash for daily operations.

Chief Financial Officer (CFO)

________ is simply the interest earned in subsequent periods on the interest earned in prior periods.

Compound interest

________ means that the percentage increase in the dividend is the same each year.

Constant growth

The ________ is the return that the bank or bondholder demands on new borrowing.

Cost of debt

The ________ is the interest rate printed on the bond.

Coupon rate

When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.

Coupon rate; discount to

Which of the following actions will INCREASE the present value of an investment?

Decrease the interest rate

The ________ compensates the investor for the additional risk that the loan will not be repaid in full.

Default premium

To determine the present value of a future amount, one should ________ the future cash flows.

Discount

The ________ are quite dynamic in terms of processing trades and incorporating information in prices and thus are considered very efficient markets.

Equity markets

The holder of preferred stock is entitled to a constant dividend

Every period

Which of the following is the CORRECT formula for calculating the future value?

FV = PV × (1 + r)n

True or false? Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.

False

True or false? In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis.

False

True or false? The prices of goods and services tend to decrease over time because of inflation.

False

True or false? The profits for common stock owners come before payment to employees, suppliers, government, and creditors

False

True or false? The standard of one vote for each share cannot be altered.

False

True or false? When interest rates go up, bond prices go up.

False

Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.

Fixed income

Dividend models suggest that the value of a financial asset is determined by the ________ the owner is entitled to while holding the asset.

Future cash flows

Which of the following is NOT an example of an equity market transaction?

Grant contacts his broker and requests a purchase of IBM bonds

Which of the below is NOT a major component of interest rates?

Historical interest rates

________ is the area of finance concerned with the activities of buying and selling financial assets such as stocks and bonds.

Investments

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.

Long term debt

The crossover rate is the discount rate where both projects have the same ________.

NPV

Which of the following identities is TRUE?

Net Capital Spending = Ending Net Fixed Assets - Depreciation

The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes. Next, interest expense is subtracted to find the taxable income for the period. Then the appropriate taxes are calculated and subtracted. We finally arrive at the ________, the so-called bottom line of the income statement.

Net income

The Fisher Effect involves which of the items below?

Nominal rate, the real rate, and inflation

Maximizing the market value of firm equity and which of the following are mutually exclusive?

None of the above

Net income is ________.

Not cash flow

To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.

Number of compounding periods per year

The ________ is the face value of the bond.

Par value

The ________ model answers one basic question: How soon will I recover my initial investment?

Payback period

A never-ending stream of equal periodic, end-of-the-period cash flows is called a/an

Perpetuity

The problem of motivating one party to act in the best interest of another party is known as the ________.

Principle-agent problem

In agency theory, the owners of the business are referred to as ________, and the managers are referred to as ________.

Principles; agents

Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?

Rd × (1 - Tc)

Sale of new common stock in the primary market is regulated by the ________, and a sale of used common on the secondary market is regulated by the ________.

SEC; SEC

The sale of "used" securities, where the financial asset is being traded from one individual to another and the proceeds do not go to the original issuer of the security, is said to take place in the ________ market.

Secondary

Most academic research supports markets as ________ efficient.

Semi strong form

In ________, current prices already reflect the price history and volume of the stock as well as all available public information.

Semi strong form efficient markets

"Junk" bonds are a street name for ________ grade bonds.

Speculative

Diversification is

Spreading out investments to reduce risk

Which of the following compensation packages is likely to work best for executive managers?

Stock options

Suppose you deposit money in a certificate of deposit (CD) at a bank. What is technically happening?

The bank is technically renting money from you with a promise to repay that money with interest.

MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE?

The coupon rate is greater than the yield to maturity.

Which of the following are issued with the shortest time to maturity?

Treasury bills

Which of the following investments is considered to be default risk-free?

Treasury bills

True or false? The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.

True

True or false? The most common shape for a yield curve is upward sloping.

True

True or false? The payback period method ignores the cash flow after the initial outflow has been recovered.

True

Financial markets can be classified by which of the following?

Type of asset traded

________ is the absence of knowledge of the outcome of an event before it happens.

Uncertainty

One of the key components to making financial decisions is to ________.

Understanding the timing and amount of cash flow

In capital budgeting, the ________ is the appropriate discount rate to use when calculating the NPV of an average risk project.

WACC

In ________, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market.

Weak form efficient markets

Capital budgeting is best defined by which of the following questions?

What business are we in?

Managing the firm's short-term financing activities is known as ________.

Working capital management

The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life.

Yield to Maturity

The ________ is a market derived interest rate used to discount the future cash flows of the bond.

Yield to maturity

Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________.

You will be able to buy more goods or services

The Security Market Line has ________.

a positive slope

Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments.

bills; bonds; notes

Bonds are different from stocks because ________.

bonds promise fixed payments for the length of their maturity

________ 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

The ________ is the regular interest payment of the bond.

coupon

Strong-form efficient markets theory proclaims that ________.

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

Bonds are bought and sold in ________ markets.

debt

When a company borrows money from a bank or sells bonds, it is called

debt financing

Stocks are bought and sold in ________ markets.

equity

In the NPV model, all cash flows are stated ________.

in present value or current dollars, and the total inflow is "netted" against the initial outflow to see if the net amount is positive or negative

A beta of 1.0 is the beta of the ________, while a beta of 0.0 is the measure for a ________.

market; risk free security

The ________ is the expiration date of the bond.

maturity date

A basis point is ________.

one-hundredth of a percentage point

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

________ is risk that cannot be diversified away.

systematic risk

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 decreases

The movement of money from lender to borrower and back again is known as ________.

the cycle of money

Cash flow is ________.

the increase or decrease in cash for the period

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 constant growth dividend model requires that

the return rate r is greater than the growth rate g of the dividend stream

The type of risk that can be diversified away is called ________

unsystemic

A more risky stock has a higher ________.

variance and standard deviation