Corporate finance
FedEx Corp. stock ended the previous year at $165.30 per share. It paid a $1.20 per share dividend last year. It ended last year at $173.90. If you owned 600 shares of FedEx, what was your dollar return?
$5,880
GEN has 10 million shares outstanding and a stock price of $89.25. What is GEN's market capitalization?
$892,500,000
Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asest?
0
Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?
0
Assume the interest rate demanded on a bond issued by ford is 7%. If the risk premium on this bond is equal to 5%, we would conclude that the risk-free rate is equal to
2%
Company A issued all of its outstanding bonds 4 years ago, all maturing in 21 years, with the same terms. The yield to maturity on the bonds was recorded equal to 5.5% 3 years ago, 4% 2 years ago, 4.5% 1 year ago, and 6% earlier today. What pre-tax cost of debt should be used in the WACC equation?
6%
Which of the bonds below would be the most liquid?
A bond issued by the United States government
Which of the following statements is correct?
A high average payment period and a low accounts payable turnover are a sign of good management
Which of these is a measure summarizing the overall past performance of an investment?
Average Return
For publicly traded firms, these ratios measure what investors think of the company's future performance and risk.
Market value ratios
Which of the below is the goal that according to most financial professionals corporate managers ought to pursue?
Maximize shareholder wealth
The over all goal of the financial manager is to ____
Maximize the company's stock market price
All of the following are stock market indices except _____________?
Mercantile 1000
Which of the following is an electronic stock market without a physical trading floor?
NASDAQ stock market
Which of the following is an example of aligning managers' personal interests with those of the owners?
Offer the managers shares of common stock of the firm
What is the correct order of the following component costs of capital, from the highest to the lowest?
The cost of common equity (highest), the cost of preferred equity, the cost of debt (lowest)
A firm has an average collection period of 13 days. The industry average ACP is 27 days. Which of the following statements is true given this information?
The firm could probably increase its sales by relaxing its strict accounts receivable policy
A manufacturing firm is planning on expanding its existing operations. The expansion project is significant and will require the firm to house the expansion in a different location. The firm is considering building on a lot they own across town. The lot is currently vacant and it was paid for nearly 20 years ago. Given this information, which of the following statements is correct?
The lot is an incremental cash flow because it represents an opportunity cost
In 2000, the S&P500 index earned 11% while the T-bill yield was 4.4%. Given this information, which of the following statements is likely correct with respect to the market risk premium?
The market risk premium must have been positive
What is the main reason for calculating standard deviation of past returns on a stock?
We think it will be useful in estimating the future risk of the stock's returns
Which of the below is correct?
When market interest rates rise we will expect an increase in the yield to maturity on an already outstanding bond.
which financial statement reports a firm's assets, liabilities, and equity at a particular point in time?
balance sheet
Which statement is true?
extremely high levels of liquidity guard against crises, but at the cost of lower returns on assets
which of these refer to the ease with which an asset can be converted into cash
liquidity
Stock valuation model dynamics make clear that higher discount rates lead to
lower valuations
Stock valuation model dynamics make clear that lower dividend growth rates lead to
lower valuations
The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm's:
market capitalization
This is another term for market risk
non-diversifiable risk
Balance Sheet you are evaluating the balance sheet for campus corporation. From the balance sheet you find the following balances: cash and marketable securities = $400,000, accounts receivable = $200,000, inventory = $100,000, accrued wages and taxes = $10,000, accounts payable = $300,000, and notes payable = $600,000. What is Campus's net working capital?
$-210,000
Statement of cash flows Crispy Corporation has net cash flow from financing activities for the last year of $20 million. The company paid $5 million in dividends last year. During the year, the change in notes payable on the balance sheet was an increase of $2 million, and change in common and preferred shtock was an increase of $3 million. The end of year balance for long-term debt was $45 million. What was their beginning of year balance for long-term debt?
$25 million
An average home in Chicago costs $295,000 if houses are expected to grow at an average rate of 3% per year, what will a house cost in 5 years?
$341985.85
Financial analysts forecast Best Buy Company (BBY) growth for the future to be 13 percent. Their recent dividend was $0.69. What is the value of their stock when the required rate of return is 15.13 percent?
$36.61
Compute the future value in year 10 of a $1,000 deposit in year 1 and another $1,500 deposit at the end of year 4 using an 8 percent interest rate
$4,379.31
Given a 5 percent interest rate, compute the present value of deposits made in years 1,2,3, and 4 of $1,000, $1,400, $1,400, and $1,500
$4,665.65
You wish to buy a $20,000 car. The dealer offers you a 5-year loan wiht an 8 percent APR. What are the monthly payments
$405.53
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $75,000, to be used for 3 years. The truck will be depreciated over 10 years using straight-line depreciation, but it will be sold after three years for $10,000. Use of the truck will require an increase in NWC (spare parts inventory) of $4,000. The truck will have no effect on revenues, but it is expected to save the firm $30,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 30 percent. What will the after-tax operating cash flow for this project be in its final third year (year 3 only- make sure you only include all relevant cash flows from year 3)
$50,000
Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. (assume semi-annual compounding and $1,000 par value)
$553.68
what is the present value of a $500 deposit in year 1 and another $100 deposit at the end of year 4 if interest rates are 5%?
$558.46
A firm recently paid a $1.00 annual dividend. The dividend is expected to increase by 15 percent in each of the next four years. In the fourth year, the stock price is expected to be $100. If the required rate for this stock is 16 percent, what is its value?
$59.14
A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts believe the stock will be at their target price of $65.00 in two years. Compute the value of this stock with a required return of 8 percent.
$59.41
Fina's Faucets, Inc. has net cash flows from operating activities for the last year of $17 million. The income statement shows that net income is $15 million and depreciation expense is $6 million. During the year, the change in inventory on the balance sheet was an increase of $4 million, change in accrued wages and taxes was an increase of $1 million and change in accounts payable was an increase of $1 million. At the beginning of the year the balance of accounts receivable was $5 million. What was the end of year balance for accounts receivable?
$7 million
Assume you currently have $3,000. If you deposit this money in a bank account at an annual interest rate of 4%, ad in addition deposit $1000 at the end of each year for the next 5 years, how much will you have in the account after 5 years
$9,066
If you deposit $700 in an account today at 4% annual interest rate, 8 years from today you will have ________ in your account.
$958
A new project would require an immediate increase in raw materials in the amount of $10,000. The firm expects that accounts payable will automatically increase $7,500. What will be the impact of the resulting change in the firm's net working capital on the firm's cash flows?
-2,500
The past four monthly returns for K and Company are 1.50 percent, 0.40 percent, -0.60 percent, and 1.20 percent. What is the average monthly return?
.63 percent
Year-to-date, Company O had earned a 3.60 percent return. During the same time period, Company V earned - 2.50 percent and Company M earned 1.60 percent. If you have a portfolio made up of 20 percent Company O, 30 percent Company V, and 50 percent Company m, what is your portfolio return?
.77 percent
A corporation's 10-year bonds are currently yielding a return of 7.75 percent. The expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. The liquidity risk premium on the corporation's bonds is 0.50 percent. The maturity risk premium is 0.25 percent on two-year securities and increases by 0.10 percent for each additional yera to maturity. What is the default risk premium on the corporation's 10-year bonds?
0.20 percent
Assume that a company had a net income equal to $500,000, and paid out $200,000 in dividends. The balance in the retained earnings account at the beginning of the uear was $800,000. What is the balance in the reatianed earnings account at the end of the year?
1,100,000
The past four monthly returns for K and Company are 2.50 percent, 1.20 percent, -0.40 percent, and 0.80 percent. What is the standard deviation of monthly returns?
1.20 percent
A two-year Treasury security currently earns 5.13 percent. Over the next two years, the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year. Calculate the maturity risk premium on the two-year Treasury security.
1.23 percent
You own $1,000 of City Steel stock that has a beta of 1. You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of lincoln corporation (beta = 2). What is the beta of your portfolio?
1.75
A bond is issued by a corporation on May 1, 1999, is scheduled to mature on May 1, 2019. If today is May 2, 2009, what is this bond's time to maturity?
10 years
Suppose that TipsNToes, Inc.'s capital structure features 65 percent equity, 35 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 13 percent. If the appropriate weighted average tax rate is 38 percent, what will be TipsNToes' WACC?
10.186 percent
A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the security's equilibrium rate of return.
10.25 percent
Company A has an outstanding debt of $10,000,000, its interest payments equal $1,500,000 annually, and its marginal tax rate equals 30%. What is the after-tax cost of debt for Company C to be used in its WACC equation?
10.5%
You have been given the following information for Fina's Furniture corp. Net Sales = 25,500,00 COGS = 10,250,000 Addition to retained earnings = 305000 dividends paid to preferred and common stockholders = 500000 interest expense = 2000000 The firm's tax rate is 30 percent. What is the depreciation expense for Fina's furniture corp
12.100.000
FedEx Corp. stock ended the previous year at $118.30 per share. It paid a $1.30 per share dividend last year. It ended last year at $131.70. If you owned 500 shares of FedEx, what was your percent return?
12.43%
Compute the expected return given these three economic states, their likelihoods, and the potential returns: fast growth: 0.3, 40% Slow growth: 0.4, 15% Recession: 0.3, -15%
13.5 percent
A manager believes his firm will earn a 12 percent return next year. His firm has a beta of 1.6, the expected return on the market is 11 percent, and the risk-free rate is 3 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.
15.8 percent, undervalued
American Eagle Outfitters (AEO) recently paid a $0.38 dividend. The dividend is expected to grow at a 14.5 percent rate. At the current stock price of $26.07, what is the return shareholders are expecting?
16.17 percent
How many years will it take $1 million to grow to $3 million with an annual interest rate of 7 percent
16.24 years
FlavR Co. stock has a beta of 1.5, the current risk-free rate is 3, and the expected return on the market is 12 percent. What is FlavR Co's cost of equity?
16.5 percent
Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. For all securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the bond's default risk premium.
2.10 percent
You are evaluating the balance sheet for Blue Jays Corporation. From the balance sheet you find the followinf balances: cash and marketable securities = 200000, AR = 800000, inventory = 1000000, accrued wages and taxes = 250000, AP = 400000, and notes payable = 300000. What are Blue Jays' current ratio, quick ratio, and cash ratio, respectively?
2.10526, 1.05263, .21053
As the production manager of HPG, Inc., you have received an offer from the supplier who provides the wires used in headsets. Due to poor planning, the supplier has an excess amount of wire and is willing to sell$750,000 worth for only $600,000. You already have one year's supply of wire on hand. This new wire would be used one year from today. What implied interest rate would your firm be earning if you purchased the wire?
25 percent
A firm does not pay a dividend. It is expected to pay its first dividend of $0.10 per share in three years. This dividend will grow at 11 percent indefinitely. Using a 13 percent discount rate, compute the value of this stock.
3.92
Zoe's Dog Toys, Inc. reported a debt to equtiy ratio of .5 times at the end of 2011. If the firm;s total assets at year-end are $50 million, how much of their assets in financed with equity?
33.33 million
Assume inventory turnover is equal to 10. What is the days' sales in inventory equal to?
36.5 days
In 2013, Upper Crust had cash flows from investing activities of (250000) and cash flows from financing activities of (150000). The balance in the firm's cash account was 90000 at the beginning of 2013 and 105000 at the end of the year. what was upper crust's cash flow from operations for 2013?
415000
If you want to get a 2% real raise at work so that you can buy 2% more of the things you like, and expect the inflation rate to be around 3% in the future, you will have to ask for a
5% raise in your salary
What is the interest rate of a 4-year, annual $1,000 annuity with present value of $3,500?
5.56 percent
IVY has preferred stock selling for 105 percent of par that pays a 6 percent annual coupon. What would be IVY's component cost of preferred stock?
5.71 percent
Jack and Jill corporations year-end 2013 balance sheet lists current assets of $250,000, fixed assets of $800,000, and current liabilities of $195,000, and long-term debt of $300,000. What is Jack and Jill's total stockholders' equity?
555,000
How many years would you have to wait in order for a deposit to grow from $500 to $5,000, assume a 4% interest rate
59
WC Inc. has a $10 million (face value), 10-year bond issue selling for 97 percent of par that pays an annual coupon of 6 percent. What would be WC's before-tax component cost of debt?
6.41 percent
A firm has a profit margin of 12 percent; total asset turnover of 0.55 and an equity multiplier of 2.2. What is the firm's ROA and ROE?
6.6 14.52
Acme Bricks balance sheet lists net fixed assets as $40 million. The fixed assets could currently be sold for $50 million. Acme's current balance sheet shows current liabilities of $15 million and net working capital of $12 million. If all current accounts were liquidated today, the company would receive $77 million cash after paying $15 million in liabilities. What is the book value of Acme's assets today? What is the market value of these assets?
67 million, 142 million
The annual return on the S&P 500 Index was 11.5 percent. The annual T-bill yield during the same period was 4.3 percent. What was the market risk premium during that year?
7.2 percent
What is the future value of $700 deposited for one year earning 4 percent interest rate annually?
728
The wall street journal reports that the current rate on 10-year Treasury bonds is 6.75 percent, on 20-year treasury bonds is 8.50 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, what is the current rate on a 10-year corporate bond.
8.00 percent
Pumpkin Pie industries has 7 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $80 per share, the preferred shares are selling for $25 per share, and the bonds are selling for 110 percent of par ($1,000), what would be the weights used in the calculation fo Pumpkin Pie's WACC for common stock, preferred stock, and bonds respectively?
84.21 percent, 7.52 percent, 8.27 percent
Your firm needs a computerized machine tool lathe that costs $75,000, requires $10,000 in installation. $10,000 in freight charges, and another $14,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category (depreciation of 33.33%, 44.45%, and 14.81% in years 1, 2, and 3, respectively). Assume a tax rate of 30 percent and a discount rate of 12 percent. If the lathe can be sold for $10,000 at the end of year 3, what is the after-tax cash flow from selling it?
9,112
Which of the following statements is correct?
A single stock has a lot of diversifiable risk
An investor owns $10,000 of Adobe Systems stock, $15,000 of Dow Chemical and $25,000 of Office Depot. What are the portfolio weights of each stock?
Adobe System = 0.2, Dow Chemical = 0.3, Office Depot = 0.5
Which of the following statements is correct?
All else the same, an investor will require more return to invest in a callable bond than one that is not callable
All of the following are reasons that one should be cautious in interpreting financial statements except:
All of these answers are reasons to be cautious in interpreting financial statements
Which of these are NOT basic approaches to minimizing the agency problem -ignore the conflict of interest -monitor managers' actions -align managers' personal interest with those of the owners by making the managers owners
All of these are basic approaches to minimizing the agency problem
Which of the following personal decisions is NOT impacted by finance?
All of these are impacted by finance
Time value of money concepts can be used by
All of these are users of time value of money concepts
Which of the following will increase the future value of an annuity?
All of these will increase the future value of an annuity
Methods to minimize agency problem include all except
Allow the CEO to purchase bonds via an employee bond option plan
Which of the following would likely increase the weighted average cost of capital for a company?
An increase in the market risk premium
Stock A has a required return of 19%. Stock B has a required return of 26%. Assume a risk-free rate of 4.75%. Which of the following is most likely a correct statement about the two stocks?
An investor is most likely to consider stock B to be riskier than stock A
Why is it expected to be using higher discount rates to discount stock dividend payments compared to the discount rates used to discount bond coupon payments?
Because the cash flows resulting from owning a stock are typically more risky than the cash flows resulting from owning a bond
Relative to a typical level of risk for Company Z's projects, project A is twice as risky, project B is half as risky, and project C is of about the same risk. Thus firm WACC should be used to discount cash flows for project(s) _____, and project-specific WACC should be used for project(s) ______.
C; A and B
The correlation between Thumb Devices and Air Comfort is -0.12. The correlation between Thumb Devices and Sport Garb is 0.89. The correlation between Air Comfort and Sport Garb is -0.85. If you can pick only two stocks for your portfolio, which would you pick? Why?
Combine Air Comfort and Sport Garb due to negative correlation
The practice generally known as double taxation is due to
Corporate incomes being taxed at the corporate level, then again at the shareholder level when corporate profits are paid out as dividends
Which of these is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division?
Divisional WACC
The sub-area of finance looks at firms decisions in acquiring and utilizing cash received from investors or from retained earnings
Financial management
Jane Adams invests all her money in the stock of one firm. Which of the following will likely be true?
Her return will have more volatility than the return in the overall stock market
Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division?
If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be.
Which of the following statements is correct?
If the sole proprietorship gets sued, the owner is liable
All of the below are advantages associated with a sole proprietorship (relative to a corporation), EXCEPT
Limited liability on the part of the owners
For corporations, maximizing the value of owners equity can also be stated as
Maximizing the stock price
Which of the statements below is correct?
Most companies use divisional WACC for most projects, while using project WACC for the most important ones
Which of these is the interest rate that is actually observed in financial markets?
Nominal interest rates
Which of the following statements is correct? -A correlation of -1.0 means that the two firms are uncorrelated or that they have no relationship -For a few firms in completely different industries, it is possible to have a correlation that approaches -2.0 -Most common stocks have low correlation approaching zero with each other since they operate in different industries
None of these statements is correct
Which of the following activities will increase a firm's current ratio? -purchase inventory using cash -accounts receivable are paid in cash -accrued wages and taxes increase
None of these statements will increase a firm's current ratio
As individual legal entities, corporations assume liability for their own debts, so the shareholders hold
Only limited liability
Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 8 percent and standard deviation of 10 percent. The average return and standard deviation of Idol Staff are 10 percent and 15 percent; and of Poker-R-Us are 6 percent and 20 percent.
Poker-R-Us, Idol Staff, Rail Haul
Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 13 percent and risk of 17 percent. The expected return and risk of portfolio Yellow are 15 percent and 19 percent, and for the Purple portfolio are 12 percent and 18 percent.
Portfolio Blue dominates Portfolio Purple
Which of the following statements is true regarding the calculation of component costs for the WACC formula?
Preferred stock represents a special case of the constant growth model, wherein the g equals zero
An all-equity firm is considering the projects shown as follows. The T-bill rate is 3 percent and the market risk premium is 6 percent. If the firm uses its current WACC of 11 percent to evaluate these projects, which project(s) will be incorrectly accepted? A 10.0% .9 B 17.0% 1.1 C 12.0% 1.4 D 15.0% 2.2
Project D
The difference between ROE and ROA is that
ROE takes into account the impact of financial leverage
Which of the below is the best description of the effect of portfolio diversification?
Risk is reduced without necessarily reducing the expected return
Which of the following is the reward investors require for taking risk?
Risk premium
Sally wants to invest in only two stocks. Which pair of stocks should Sally select, provided they all offer similar returns?
Stocks C and D, which move in opposite directions at the same time
Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?
Sue will have more money than Neal as long as they retire at the same time.
Due to rapid growth, a computer superstore is contemplating expanding by adding another location. Which of the following items should the financial officer NOT include in estimating the cash flow associated with this expansion?
The company spent $100,000 six months ago in a major advertising campaign which will help the new store become profitable sooner.
Which of these statements is true?
The higher the liquidity risk, the higher the interest rate that security buyers will demand
Assume you borrow 100 apples and in 1 year you return 107apples. Also assume inflation rate of 3%. Which of the below would eb correct?
The real rate of interest on the loan is equal to 4%
If the management team of a company decides to increase the dividend payment for the current year
The stock price should not be impacted because nothing fundamental about the company has been changed, and as there will be less funds generated to pay out future dividends
The liquidity premium will be larger if
There is typically not much trading activity related to the security
U.S. bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4. Given this information which of the following statements is correct?
This is an example of a market overreaction
Which of the following is a true statement
To estimate the before-tax cost of debt, it would be best to solve for the yield to maturity (YTM) on the firm's existing debt
Which of these statements is true regarding divisional WACC?
Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk that the firm's average beta.
Which of these statements is true?
When people purchase a stock, they do not know what their return is going to be - either short term or in the long run.
Which of the following is a situation in which you would want to use the constant growth model approach for estimating the component cost of equity?
When the firm's stock is expected to experience constant dividend growth
Which of the following is a situation in which we would most likely use the CAPM approach for estimating the component cost of equity?
When we are able to estimate the firm's beta with a high degree of confidence
Which of the following will only be executed if the order's price conditions are met?
a limit order
Which of the below would be the lease likely to lead to a higher times interest earned ratio?
a lower tax rate
which of the below should be the most alarming to a company's CEO looking at the company's cash flow statement?
a negative total for the operating activities section
Which of the following statements is correct?
a single stock has a lot of diversifiable risk
When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as
a weighted average of the capital components costs
Which of the statements below is correct? -All of the statements are correct -Using firm WACC for all projects leads to incorrect rejection of low risk projects and thus to an increase in the overall company risk. -In theory (assuming no estimation errors), using divisional WACC does not eliminate the possibility of incorrectly accepting or rejecting a project. -Using firm WACC for all projects leads to incorrect acceptance of high risk projects and thus to an increase in the overall company risk
all of the statements are correct
Bonds are issued by which of the following -corporations -federal government or its agencies -state and local governments
all of these
Which of the following is a concern regarding beta? -research indicates that a company's beta does not appear to predict its future return very well. -a company can alter its risk level which may make the beta estimate obsolete -using different market proxies will result in different estimates of beta.
all of these statements are valid concerns regarding beta
which of the following will increase a firm's quick ratio assuming no other accounts change?
all of these statements will increase a firm's quick ratio
Using the pure-play approach for estimating a project's beta, to evaluate a new project consisting of opening a new line of business delivering packages across the United States, it would be best to use
an estimate of a beta of a company that specifies in delivering packages, such as Fed-Ex, adjusting for financial leverage
Level sets of frequent,
annuities
If a company reports a large amount of net income on its income statement during a year, the firm will have
any of these scenarios are possible
Bond prices are usually quoted
as a percentage of its par value
Which of the below is a measure of the sensitivity of a stock or portfolio to market risk?
beta
The group elected by stockholders to oversee management in a corporation
board of directors
Sally has researched GLE and wants to pay no more than $50 for the stock. Currently, GLE is trading in the market for $51. Sally would be best served to:
buy using a limit order
How could an investor, in theory, obtain a portfolio with the same standard deviation of returns and a higher expected return relative to one of the efficient portfolios?
by combining the market portfolio with a risk-free asset
Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio?
capital market line
A decrease in net working capital (NWC) is treated as a ________ in capital budgeting.
cash inflow
An example of an illiquid asset is
common stock issued by a small but financially strong firm
As residual claimants, these investors claim any cash flows to the firm that remain after the firm pays all other claims
common stockholders
Assume that for year 2015 company a has a current ratio equal to 1.5, while company b has a current ratio equal to 2.5. based on this information we would most likely conclude that
company b has a better liquidity position than company a
When moving from the left to the right of a time line, we are using
compound interest to calculate future values
Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?
compounding
We call the process of earning interest on both the original deposit and on the earlier interest payments:
compounding
This is a measurement of the co-movement between two variable that ranges between -1 and +1.
correlation
This determines the dollar amount of interest paid to bondholders
coupon rate
Net working capital is computed as
current assets minus current liabilities
Which type of ratio measures the dollars of current assets available to pay each dollar of current liabilities?
current ratio
Which of the following activities result in an increase in a firm's cash?
decrease in fixed assets
This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments
default risk
Assume that you observe the following rates on the following 20 year bonds: US treasury bonds = 4.15 percent AAA Corporate bonds = 6.2 percent BBB Corporate bonds = 7.15 percent The main reason for the differences in the interest rates it:
default risk premium
We can estimate a stocks value by
discounting the future dividends and future stock price appreciation
To find the percentage return of an investment,
divide the dollar return by the investment's value at the beginning of the period
Which of these is the term for portfolios with the highest return possible for each risk level?
efficient portfolios
Which ratio assesses how efficiently a firm uses its fixed assets?
fixed asset turnover
Compounding monthly versus annually causes the interest rate to be effectively _________, and thus the future value
higher; is also higher
Which of the following is most correct?
in an efficient market, investors will sell overvalued stock which will drive its price down.
All of the following are cash flows associated with financing activities except
increase in account payable
When we say that a bondholder faces interest rate risk, we mean that the bondholder faces the possibility of a/an ____ in a market interest rates and a/an ____ in the value of the bond as a result.
increase; decline
A local bank is contemplating adding a new ATM to their lobby. They will need to add another communication line to connect the new ATM machine to the network, resulting in an additional monthly cost of $50. This is an example of :
incremental cash flow
Which of the following is the continual increase in the price level of a basket of goods and services?
inflation
ABC engineering just bought a new machine. All of the following are examples of incremental cash flows to be used in evaluating this project except
interest expense on the loan used to purchase the machine
Compunding interest means the following
interest is earned not only on the initial balance, but also on previously received interest payments
If a bond si selling at a premium, then
its yield should be lower than its coupon rate
Which of these is the portion of total risk that is attributable to overall economic factors?
market risk
When calculating the weighted average cost of capital, weights are based on
market values
The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a
more accurate measure of the interest rate paid for monthly compounding
To move a cash flow from period 4 to period 6 we would need to
multiply the cash flow by a number greater than one
Which of the following statements is correct regarding diversification? -Diversifying reduces the dollar return of the portfolio -diversifying reduces the percentage return of the portfolio -diversifying reduces the market risk of the portfolio
none of these statements are correct
a dollar paid ( or received ) in the future is
not worth as much as a dollar paid (or received) today
An equity-financed firm will
pay more in income taxes than an otherwise identical debt-financed firm
Bond prices are quoted in terms of which of the following?
percent of par value
These are valued as a special zero-growth case of the constant growth rate model
preferred stock
Coke is planning on marketing a new drink called Very Berry Coke which is a mixture of raspberry and blackberry flavors blended to perfection and added to the highly secret Coca-Cola formula. This new product is expected to reduce the sales of their existing product, Cherry Coke, by $10 million dollars per year. This is an example of a:
substitutionary effect
Assume that a bond is quoted to be selling at a price equal to $106, per $100 of face value. This implies that
the bond is a premium bond
According to the Fisher Effect equation the nominal rate of interest is equal to
the real rate of interest plus the inflation rate
Which of the following statements is correct?
the weights of debt and equity should be based on market values because this is the most accurate assessment of the valuation
assume the present value of a series of cash flows is equal to $100,000. Which of the below would be a possible interpretation of this result?
$100,000 is the maximum we should be willing to pay for this series of cash flows.
Lemmon Inc. lists assets of $100 on its balance sheet. The firm's fixed assets have recently been appraised at $140. The firm's balance sheet also lists current assets at $15. Current assets were appraised at $16.50. current liabilities book and market values stand at $12 and the firm's long-term debt is $40. Calculate the market value of the firm's stockholders' equity.
$104.50
Catering Corp reported free cash flows for 2013 of $8 million and investment in operating capital of $2 million. Catering listed $1 million in depreciation expense and $2 million in taxes on its 2008 income statement. What was Catering's 2013 EBIT?
$11 million
If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends, and the required return on the preferred stock is 17 percent, what's the value of the stock?
$17.65
A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price the bond will experience in dollars? (assume semi-annual interest payments and $1,000 par value)
$21.55
A fast growing firm recently paid a dividend of $0.50 per share. The dividend is expected to increase at a 20 percent rate for the next 3 years. Afterwards, a more stable 10 percent growth rate can be assumed. If a 13 percent discount rate is appropriate for this stock, what is its value?
$23.65
Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semi-annually), 6.45 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years.
$27.50, $32.25, $0, respectively
When saving for future expenditures, we can add the ________ of contributions over time to see what the total will be worth at some point in time.
future value
When residual cash flows are high, stock values will be
high
Stock valuation model dynamics make clear that higher dividend growth rates lead to
higher valuations
Stock valuation model dynamics make clear that lower discount rates lead to
higher valuations
Which of these are valued as a special zero-growth case of the constant growth rate model?
preferred stock
Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc?
public information
Which type of ratio measures a firm's ability to pay off short-term obligations without relying on inventory sales?
quick or acid test
Which is more valuable, receiving $775 today or receiving $885 in 2.5 years if interest rates are 7.25 percent?
receiving $775 today
Assume a risk-averse investor holds a portfolio of bonds, because bonds are known to be less risky than stocks. Adding some stocks to the existing bond portfolio would most likely
reduce the risk of the portfolio even though stocks are more risky than bonds
This is typically considered the return on U.S. government bonds and bills and equals the real interest and the expected inflation premium.
risk-free rate
A local bank is contemplating opening a new branch bank in a large superstore across town from their main office. It is estimated that the new branch will generate $20,000 after expenses each month. The manager wonders if all these revenues should be considered an incremental cash flow. Given this information, which of the following statements is correct?
some amount less that the $20,000 is incremental because of substitutionary effects
Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call
stock market bubble
Which of these investors earn returns from receiving dividends and from stock price appreciation?
stockholders
Effects that arise from a new product or service that decrease sales of the firm's existing products or services are referred to as
substitutionary effects
With regard to depreciation, the time value of money concept tells us that:
taking depreciation expense sooner is always better
When computing the rate of return from selling an investment, the number of years between the present and future cash flows is an important factor in determining
the annual rate earned
Financial statements of a corporation can typically be found in
the annual report
A proxy beta is
the average beta of firms that are only engaged in the proposed new line of business
Assume that a bond is quoted to be selling at a price equal to $93, per $100 of face value. This implies that
the bond is a discount bond
which of the following will increase the percent value of an annuity
the discount rate decreases
Which of the following describes what will occur as you randomly add stocks to your portfolio?
the diversifiable risk will decrease
When computing the future value of an annuity, the higher the compound frequency,
the higher the future value will be
How are future values affected by changes in interest rates
the higher the interest rate, the larger the future value will be
How are present values affected by changes in interest rates
the lower the interest rate, the larger the present value will be
The real interest rate is
the rate that a security would pay if no inflation were expected over its holding period
Which of these makes this a true statement? The WACC formula
uses market values to determine weights
If the coupon rate equals 7% then a corresponding $1,000 face value bond
will pay $35 every six months
The present value of annuity payments made far into the future is
worth very little today
When you get your credit card bill, if you make a payment larger than the minimum payment
you will reduce the payoff time
Assume you deposit $100 in an account today and that a friend of yours deposits $100 in an account of another bank, also today. In one year, you have $110 in your account and your friend have $108 in his/her account. We can conclude that
your friend earned a lower rate of interest than you
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