Corpate finance final

Matthews Company has two classes of common stock, and each share represents the same proportion of ownership in the company. Class A has 2 votes for each share. Class B has one vote per share. Which class is more valuable?

class A

A business that is a legal entity separate from the owners, yet treated as a legal person, is called a(n):

corporation

If preferred dividends are _____ and are not paid in a given year, they will be carried forward as an arrearage.

cumulative

A stock with dividend priority over common stock is called a _____ stock.

preferred

relationship determined from a company's financial information and used for comparison purposes known as:

financial ratios

MNO preferred stock pays a dividend of $2 per year and has a price of $20. If MNO's tax rate is 21 percent, the required rate of return on its preferred stock is found by which formula? Multiple choice question. $20/.21 $2/$20 $20 - $2 $2/.21

$2/$20

Dusty Corporation has an issue of preferred stock that pays a dividend of 7 percent of its state value, which is $100. Which of the following would be a commonly used name for that preferred stock? Multiple choice question.

$7 preferred

Including preferred stock in the WACC adds the term: Multiple choice question. [P/(E + D)] × RP (P/V) × RP (V/P) × RP

(P/V) × RP

Which of the following are features of common stock? Multiple select question. -It has no special preference in bankruptcy. -It receives dividends every quarter. -It receives interest semi-annually. -It generally has voting rights. -It has no special preference in receiving dividends.

-It generally has voting rights; - It has no special preference in bankruptcy; -It has no special preference in receiving dividends

Which of the following are tax-deductible to the firm? Multiple choice question. Dividends paid on common stock Coupon interest paid on bonds Principal amounts paid on debt Dividends paid on preferred stock

Coupon interest paid on bonds

In which way(s) is preferred stock like a bond? Multiple select question. -Preferred stock dividends are tax deductible for the issuer, like interest on bonds. -Preferred shareholders receive a stated value if the firm liquidates, like bondholders. -Some preferred stock has credit ratings, like bonds. -Preferred dividends, like interest, must be paid lest the firm be in default. -Preferred shareholders receive a stated dividend, similar to interest on a bond. -Preferred stock sometimes has a sinking fund, giving it a set maturity like bonds.

-Preferred shareholders receive a stated value if the firm liquidates, like bondholders. -Some preferred stock has credit ratings, like bonds. -Preferred shareholders receive a stated dividend, similar to interest on a bond. -Preferred stock sometimes has a sinking fund, giving it a set maturity like bonds.

Preferred stock has preference over common stock in the _____. Multiple select question. -number of votes given -payment of dividends -portfolios of individual investors -distribution of corporate assets

-payment of dividends -distribution of corporate assets

Which of the following is usually a right of common shareholders?

-voting rights -the right to a porpotional share of dividends paid

which one of the following is a correct formula for computing the return on equity?

ROA x Equity multiplier

Preferred shares have a stated liquidating value, typically $_____ per share.

100

Which of the following are components used in the construction of the WACC? Multiple select question. Cost of debt Cost of common stock Cost of preferred stock Cost of accounts payable

>cost of common stock>cost of debt>cost of preferred stock

The most acceptable method of a value in the financial statements is to compare the companies current financial:

Ratios to the companies historical ratios

Which of the following is a current liability: A loan payable to the bank in four years, an invoice payable to the supplier in 45 days, and amount due from a customer in 90 days, a note payable to a lender in 18 months

An invoice payable to a supplier in 45 days

____ are personally responsible for 100 percent of the firm's debts.

Both general partners and sole Proprietors

Are personally responsible for 100% of the firms debts

Both general partners and sole proprietors

Colin invested $5000.05 years ago and earns 6% interest annually by leaving his interest earnings in the account he increases the amount of interest he earns each year. His investment is best described as benefiting from

Compounding

A business that is a legal entity separate from the owners yet treated as a legal person is called a

Corporation

agency problems are most likely to be associated with:

Corporations

What can we say about the dividends paid to common and preferred stockholders? Multiple select question. Dividends to preferred stockholders are fixed. Dividends are guaranteed for both preferred and common stockholders. Preferred stock dividends change every year based on the earnings of the firm. Dividends to common stockholders are not fixed.

Dividends to common stockholders are not fixed..Dividends to preferred stockholders are fixed.

The relationship between the return on assets in the return on equity is identified by the

Dupont identity

The most well-known approach to company performance evaluation is the _____ method

EVA economic value added

which one of the following accurately lists the three components of Dupont Identity ?

Equity multiplier, net profit margin, and total asset turnover

Assume you were investing $100 today in a savings account which one of the following terms refers to the total value of investment one year from now

Future volume

Jared invested $100.02 years ago at 8% interest. The first year, he earned eight dollar interest on his $100 investment he reinvested the eight dollars. The second year he carried $8.64 interest on is $108 investment. The extra $.64 he earned in interest the second year is referred to as:

Interest on interest

Which of the following is classified as a current asset

Inventory

One reason corporations use staggered boards is that _____.

It makes takeover attempts less likely to be successful.

which one of the following best states the primary goal of financial management ?

Maximize the current value per share

WinWin Corporation has five board members, and each shareholder gets one vote per share. The company uses a straight board voting procedure. How does this arrangement affect minority shareholders?

No minority shareholder would have enough votes to win any seat on the board.

Is a company required to pay preferred dividends?

No; the company may differ dividends on preferred stock; however, they cannot pay dividends to come in shareholders until preferred dividends are paid.

Haley won a lottery and will receive $1000 each year for the next 30 years the current value of these winnings are called

Present value

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ____ ratios.

Profitability

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as

Profitability ratios

The formula for the required return from the SML is: Multiple choice question. RE = Rf − B(RM − Rf) RE = Rf + B/(RM − Rf) RE = Rf + B(RM − Rf)

RE = Rf + B(RM − Rf)

A sole proprietorship

Requires the owner to be personally responsible for all the companies debts

In addition to CAPM, the cost of equity can be determined using the dividend growth model and the _____ approach. Multiple choice question. adjusting GAAP SML

SML

A common size income statement is an accounting statement that expresses all the firms expenses as a percentage of:

Sales

Which of the following entities declares a dividend?

The board of directors

WACC is used to discount ______.

cash flows

Which one of the following is true?Under U.S. tax law, all company interest payments are taxable to the company. Under U.S. tax law, a corporation's interest payments are deductible for tax purposes.

Under U.S. tax law, a corporation's interest payments are tax deductible

Activities of a firm that require the spending of cash are known as

Uses of cash

One vote per share held

When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:

B = the market value of a firm's debt S = the market value of that same firm's equity RB = the before-tax yield on the firm's debt TC = the corporate tax rate RS = the cost of equity Given the definitions above, the weighted average cost of capital formula can be written as:

[S/(S + B)] × RS + [B/(S + B)] × RB × (1 − Tc)

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds _____.

a target average accounting return

which one of the following is a source of cash ?

acquisition of debt

he WACC is the weighted average of the cost of equity and the _____.

aftertax cost of debt

The book value of a firm is

based on historical transactions

determining the number of shares of stock to issue is an example of a ____ decision

capital structure

Suppose Bob owns 20 shares and Vikki owns 30 shares in Good Company, and there are five members of the board of directors. Under which voting arrangement can Bob assure himself of a board member that represents his interests?

cumulative voting

a Firm's liquidity is measured with which one of the following ratios?

current ratio

A firm's overall cost of capital will include both its cost of and equity capital.

debt

The cost of ---- can be observed because it is the interest rate the firm must pay on new loans.

debt

which one of the following is a source of cash?

decrease in inventory

lFinding a firm's overall cost of equity is (straightforward/difficut).

difficult

The value of a share of common stock in a corporation is _____ to the general rights of shareholders.

directly related

which one of the following is a disadvantage of the corporate form of business?

distribution profits may expierence double taxation

A is a payment by a corporation to shareholders, made in either cash or stock.

dividend

One method for estimating the cost of equity is based on the ______ model. Multiple choice question. dividend growth prime growth prime and LIBOR average bond plus equity premium

dividend growth

Common stock as no special preference either in receiving _______ or in bankruptcy.

dividends

Shareholders typically have the right to share proportionally in ____- paid.

dividends

The relationship between the return on asset and return on equity is identified by the:

dupont identity

Which of the following is true? Multiple choice question. A company can deduct interest paid on debt when computing taxable income. A company cannot deduct interest paid on debt when computing taxable income. A company can deduct dividends paid to shareholders when computing taxable income.

economic value added

The return an investor in a security receives is ______ the cost of the security to the company that issued it. Multiple choice question. greater than equal to less than unrelated to

equal to

A firm's cost of debt can be ___. Multiple select question. obtained by checking yields on publicly traded bonds estimated easier than its cost of equity calculated using the dividend growth model obtained by talking to investment bankers

estimated easier than its cost of equityobtained by talking to investment bankersobtained by checking yields on publicly traded bonds.

True or false: Cumulative voting means board members are elected one at a time, with each shareholder casting his or her allotted votes for each seat on the board. True false question.

false

The underlying key assumption, and oftentimes a key disadvantage, of the dividend growth model is that it assumes the dividend _____. Multiple choice question. grows at a constant rate grows at a stair-step rate is constant

grows at a constant rate

The cash coverage ration directly measures the ability of a company to meet its obligation to pay :

interest to lender

One common reason for having two classes of common stock with different voting rights is _____.

it is easier for insiders such as founding families to maintain control of the company

Preferred shareholders receive a stated value if the firm liquidates, _______ (like/unlike) bondholders.

like

A partner in film knows thst the maximum financial loss he or she will experience is the amount he or she invested in the firm. The partner is called a _____ partner.

limited

mortgage lenders probably have the most interest in the ______ ratios.

long term debt and times interest earned

The Sarbanes Oxley Act 2002 holds a public a company's ____ responsible for the accuracy of the company's financial statements.

managers

The most appropriate weights to use in the WACC are the ______ weights. Multiple choice question. book value market value government mandated salvage value

market value

decisions made by financial managers should primarily focus on increasing the:

market value per share of outstanding stock

Most voting in large corporations is done by proxy because _____

most small shareholders do not attend the annual meeting

When voting for the board of directors, the number of votes a shareholder is entitled to is usually ____ vote per share held.

one

Preferred stock ___. Multiple select question. does not pay dividends has a fixed maturity pays dividends in perpetuity pays a constant dividend

pays dividends in perpetuitypays a constant dividend

The controller, rather than the treasurer is typically responsible for which one o the following functions?

processing cost reports

A ____ is the grant of authority by a shareholder to someone else to vote his or her shares.

proxy

The most acceptable method of evaluating the financial statements is to company's current financial:

ratios to the company's historical ratios

The rate used to discount project cash flows is known as the ___. Multiple select question. market rate required return discount rate cost of capital

required of return. cost of capital. and discount rate

A project should only be accepted if its return is above what is ___. Multiple choice question. required by investors mandated by law socially acceptable company policy

required. by investors

a common size income statement is a accountung statement that expresses as a percentage of:

sales

Financial managers should primarily focus on the interests of :

shareholders

ratios that measure a firm's liquidity are nkown as _____ ratios.

short term solvency

A firm owned by a singke person who has unlimited liability for the firm's debt is called a

sole proprietorship

In a _____ board, only a fraction of the directorships are up for election at any one time.

staggered

Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:

staggered board

The coding system established by the U.S government to classify companies by the nature of their business operations is known as the:

standard industrial classification codes

With voting, the directors are elected one at a time and the only way to guarantee a seat is to own 50 percent plus one share.

straight voting

Capital weights can be interpreted just like portfolio weights.

structure

The SML approach requires estimates of the _____.

the beta coefficientthe market risk premium

Which of the following methods for calculating the cost of equity ignores risk? Multiple choice question. The CAPM Yield to maturity The dividend growth model

the dividend growth model

Using the SML approach, what is the expected return on a stock if its beta is equal to zero? Multiple choice question. Zero The return on the market minus the risk-free rate The risk-free rate The market-risk premium

the risk free rate

Finding a firm's overall cost of equity is difficult because _____. Multiple choice question. it extensively requires the use of differential equations the federal government refuses to disclose equity costs unless the firm is in the real estate sector there is no way of directly observing the return that the firm's equity investors require on their investment there is no way to estimate it

there is no way of directly observing the return that the firm's equity investors require on their investment

Economic value added (EVA) is a means of evaluating corporate performance. True false question.

true

True or false: It can be advantageous to have a staggered board because it provides "institutional memory."

true

True or false: The return an investor in a security receives is equal to the cost of the security to the company that issued it.

true

True or false: With more than one class of common stock, it is easier for insiders such as founding families to maintain control of the company.

true

The cost of capital depends primarily on the (use/source) of funds.

use

To estimate the growth rate of a particular stock, we can ___. Multiple select question. use the average bank's annual CD rate use security analysts' forecasts use the historical dividend growth rate. use the average market dividend yield

use security analysts' forecasts use the historical dividend growth rate.

The cost of capital depends on the _____ of funds, not the _____ of funds. Multiple choice question. source; use use; source use; inflation

use, source

Activities of a firm that require the spending of cash are known as

uses of cash

Usually, the treasurer of a Corporation reports directly to the:

vice president of finance

What does WACC stand for?

weighted average cost of capital

One of the disadvantages of using historical returns to estimate the market risk premium is that the past may not be a good guide to the future _____. Multiple choice question. when economic conditions are relatively stable ever when economic conditions change quickly

when economic conditions change quickly

The growth rate of dividends can be found using _____. Multiple select question. the perpetuity model historical dividend growth rates security analysts' forecasts the capital asset pricing model

• Security analysts' forecasts• Historical dividend growth rates