Current

An exchange rate deals with the price of:

Currencies of different countries

Stock A's beta is 1.0; this means that the stock moves in the same direction and magnitude as the market

True

When the Fed increases the money supply, short-term interest rates tend to decline

True

Current market prices reflect all information contained in past price movements

Weak-form efficiency

A legal document that details the rights of bondholders and the issuer is called

an indenture

A financial instrument whose value is derived from the value of an underlying asset is called a________

derivative

Kessen Inc.'s bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

Excel

Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure?

Excel

You have just purchased a U.S. Treasury bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate will you earn on this bond?

Excel

You plan to borrow $29,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Excel

Which of the following statements is CORRECT?

If expected inflation increases, interest rates are likely to increase

The goal of quantitative easing is to:

Increase liquidity in financial markets

Krit Corp. is a U.S. manufacturing company based in the Midwest. As an investor, Wilson bought 100 shares of stock in Krit Corp. The stock price of Krit Corp. is currently trading at $35.00 per share.

35.00 x 100 = 3500

Spordyne Inc. recently raised capital through an initial public offering (IPO). Its stock can now be purchased on NYSE. this company is referred to as:

A publicly owned corporation

Which of the following is an example of an annuity?

A retirement fund set up to pay a series of regular payments

The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called ______

An indenture

These bonds are NOT backed by any physical collateral. They are backed by the reputation and creditworthiness of the issuing company

Debentures

Ratios that help assess a company's ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called Debt or Financial Leverage Management ratios

Debt or Financial Leverage Management

A bond issuer is said to be in ____ if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issuers restrictive covenants

Default

In a state of market equilibrium, the intrinsic value of the stock will be_______ the market price of the stock.

Equal to

Generally, investors would prefer to invest in assets that have:

A higher-than-average expected rate of return given its perceived risk

A small startup firm has each of the partners contribute $50,000 in capital to help the company make payroll for the next three months

Direct Transfers

The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio

False

xEdu.com is an early-stage start up company that plans to issue its first public common stock-called a initial public offering (IPO)-in six months. It hires an investment bank to underwrite the issue.

Indirect transfers through investment banks

Which of the following is true about the leveraging effect?

Interest on debt is a tax deductible expense, which means that it can reduce a firm's table income and tax obligation

Based on your understanding of the key attributes of successful companies, which of the following statements best describes the attributes that make companies successful

Successful companies hire a team of talented employees and create an environment that helps them develop their skills

A stocks contribution to the market risk of a well-diversified portfolio is called ________

Systematic

A stock that is more volatile than the market will have a beta of more than 1.0

True

This type of risk relates to the possibility that a firm will not be able to service its existing debt

Unsystematic risk

Harper Corp.'s sales last year were $395,000, and its year-end receivables were $42,500. Harper sells on terms that call for customers to pay 30 days after the purchase, but many delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO − Allowed credit period = Average days late, and use a 365-day year when calculating the DSO

($42,500/$395,000) * 365 = 39.27 .......39.27 - 30...... = 9.27 days

Bostian, Inc. has total assets of $535,000. Its total debt outstanding is $185,000. The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?

535,000 x 55% = 294250 ; 294250 - 185000 = 109,250

A company with no debt on its books is referred to as:

A company with no leverage, or an unleveraged company

Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios

A higher operating profit margin than the industry average indicates either lower operating costs, higher product pricing, or both ; If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes

Which of the following statements about annuities are true

An annuity due earns more interest than an ordinary annuity of equal time ; An annuity is a series of equal payments made at fixed intervals for a specified number of periods ; An annuity due is an annuity that makes a payment at the beginning of each period for a certain time period

Ratios that help determine the efficiency with which a company manages its day-to-day tasks and assets are called Asset Management or Activity ratios

Asset Management or Activity

This model argues that the realized return on any stock is the sum of the market's risk-free rate and the market premium multiplied by the sensitivity of the stock to this market return

Capital asset pricing model

Long-term mortgage-backed securities are traded between investors and issuers.

Capital markets

Which of the following asset classes is generally considered to be the most liquid?

Cash

Which of the following best describes the difference between a convertible bond and a warrant

Convertible bonds give the investor the option to exchange bonds for share sat a certain price, whereas warrants give the investor the option to buy shares at a certain price

Rock Inc. is a mineral mining company. The CEO of Rock Inc. recently died. The news led to a short-term decline in the company's stock price, but it bounced back after the company announced its quarterly earnings.

Corporation

Analysts and theorists have debated over the different factors that caused the subprime mortgage meltdown. According to your understanding of the crisis, which of the following factors led to the financial crisis? Check all that apply

Credit default swaps claimed to insure CDOs; Mortages brokers did not verify borrowers carefully; The Fed kept interest rates low to encourage home ownership

Steve's grandfather loans him $30,000 to start a small coffee shop in the East Village in Manhattan

Direct transfers

This can be used to reduce the stand-alone risk of an investment by combining it with other investments in a portfolio

Diversification

Muscarella Inc. has the following balance sheet and income statement data: The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?

Excel

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Excel

The store where you bought new home furnishings offers you two alternative payment plans. The first plan requires a $4,500 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan?

Excel

A bond's ________ is generally $1,000 and represents the amount borrowed from the bond's first pruchaser

Face or maturity value

A Money Market Mutual Fund is not a very liquid account from a saver's perspective.

False

All other factors being equal, both the simple interest and the compound interest methods will Not generate the amount of earned interest by the end of the first year

False

Higher-beta stocks are expected to have lower required returns

False

The default risk on Walmart's short-term debt will be higher than the default risk on its long-term debt

False

The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

False

The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio

False

You are considering 2 bonds that will be issued tomorrow. Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values. However, Bond SF has a sinking fund while Bond NSF does not. Under the sinking fund, the company must call and pay off 5% of the bonds at par each year. The yield curve at the time is upward sloping. The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

False

This model uses market risk, the company's size, and the company's book-to-market value to estimate the required return on a security

Fama-French three- factor model

Karl spends $1500 to buy Google stock options through his online brokerage account.

Financial asset markets

Which of the following is true about finding the present value of cash flows?

Finding the present value of cash flows in future years tells you how much you would need to invest today so that it would grow to equal the given future amount

With the use of advanced investment techniques, these unregulated portfolios are invested in securities. The investment objective is to offset potential losses by investing in counterbalancing securities. They are open to only a select class of investors.

Hedge funds

Which of the following statements is CORRECT?

If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline

The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Refer to the data for Pettijohn Inc. What is the firm's inventory turnover ratio?

Inventory turnover ratio = (Cost of goods sold except depreciation + Depreciation)/Inventory = 4.17

When determining the value of a firm, which of the following statements is true?

Investors are risk averse. Other things being equal, they prefer to pay more for stocks that are less risky and that have relatively more certain cash flows than other stocks

Ratios that help determine whether a company can access its cash and pay its short-term obligations are called Liquidity ratios

Liquidity

Ratios examine the market value of a company's share price, its profits and cash dividend, and the book value of the firm's assets and relate them to other data items to determine how the firm is perceived in the stock market

Market-value or Market-based

Your Green Investment Tips subscription is about to expire. You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for $860, also payable immediately. Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?

NPER = 6%,-85, 860, 0,1

Company A issued its first public offering this year. The demand for the initial public offering (IPO) of the security was less than the umber of securities issued. was this IPO oversubscribed?

No

Bonds that offer a lower coupon rate than the market interest rate for a similar bond at the time of issue

Original issue discount bonds

An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandlays Inc.'s stock should be $78.54 per share, but Mandalys Inc.'s stock is trading at $99.25 per share on the New York Stock Exchange (NYSE). Considering the analyst's expectations, the stock is currently:

Overvalued

Jackson and his friend Shirley run a carpet cleaning business. They distribute the profits proportionately and file their individual taxes.

Partnership

They are established by an employer to facilitate and organize employee retirement funds. They are asset pools that invest in securities that have a potential to give stable returns

Pension funds

Issued by corporations, these financial instruments give their holders a class ownership in a company. They are riskier than bonds but less risky than the general class of ownership

Preferred stocks

If the value of the dollar falls in the foreign exchange market most likely we can expect to see:

Prices of imports in the US increase

A listing of each possible outcome and the probability of each outcome occurring

Probability distribution

Ratios help measure a company's ability to generate income and profits based on its invested capital

Profitability

Michael founded and operated a wedding planning agency, which specialized in celebrity weddings. When he died, his business was dissolved because there was no plan for control after his death

Proprietorship

These government chartered institutions accept deposits from savers and use the pool of deposits to provide loans, usually fixed-rat e mortgages, to borrowers.

Savings and loan associations

Martha Stewart sold 3,928 shares of ImClone stock on December 27, 2001.

Secondary markets

As a risk averse investor, which of the following four otherwise identical investment would you prefer?

Security W, which exhibits a standard deviation of 2% and offers an average return of 12%

These bonds are backed by real estate holdings and equipment, and if a company goes bankrupt, the collateral can be sold off to compensate for the default. These bonds, more so than other collateralized securities, have prior claims over assets

Senior mortgage bonds

The owners of a corporation are the ______.The primary objective of the corporate management team is to_____ the shareholders' wealth by ____ the____ over the long run.

Shareholders of the company; maximize; maximizing; fundamental price of the company's common stock

An inevstor buys $10000 worth of gold at a certain price today

Spot markets

Issued by nonfederal government entities, these financial instruments are debt securities that fund their capital expenditures. They are exempt from most taxes imposed in the area where the securities are issued

State and local government bonds

The SML helps determine the level of risk aversion among investors. The higher the level of risk aversion, the_________ the slope of the SML

Steeper

Bonds that must increase the bond's coupon rate if the company's rating is downgraded

Step-up provision in bonds

Which of the following is not something that a MMMF manager would buy with the Fund's pooled savings?

Stock of a start up company

These bonds have a claim on assets only after senior debt has been paid in full

Subordinated debentures

An analyst who attempsts to find undervalued securities by analyzing past trends, patterns, and investor mood, performs a ____________

Technical analysis

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

The beta of the portfolio is equal to the average of the betas of the individual stocks

Which of the following statements is CORRECT?

The corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm's managers run the firm in accordance with state laws. Procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter.

What does the value of a firm depend on?

The firm's ability to generate positive cash flows now and in the future

What is the most commonly used base item for a common size balance sheet?

Total assets

Which of the following types of bonds has the least default risk?

Treasury bonds

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

True

A portfolio's risk is not equal to the weighted average of the individual stocks' standard deviations

True

After the end of the second year and all other factors remaining equal, a future value based on compound interest will exceed a future value based on simple interest

True

If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping

True

In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.

True

Junk bonds are high risk, high yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

True

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

True

When returns on Stock A increase, returns on Stock B also increase. In general, this would mean that Stocks A and B are positively correlated

True

Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets

True

Amit receives quarterly dividends from his investment in a high dividend yield, index exchange-traded fund

Uneven cash flows

Debbie has been donating 10% of her salary at the end of every year to charity for the last thee years

Uneven cash flows

Citibank issues a loan to Jennifer for the expansion of her flower delivery business

indirect transfers through financial intermediaries

Selena and Mario run a law firm in Chicago. The firm has debt of $100,000 but Selena and Mario will not be held personally liable for the law firm's debt.

LLC/LLP

Different forms of businesses have different characteristics. Which of the following characterics would apply to a partnership? Check all that apply.

Legal arrangement between two or more people ;Taxed at individual level; Subject to unlimited liability ;Income is allocated on a pro rata basis

Which of the following is true about market value ratios?

Low P/E ratios could mean that the company has a great deal of uncertainty in its future earnings

Quantitative easing came about because which policy was not working properly?

Monetary Policy

These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated.

Money market mutual funds

Which of the following statements is CORRECT?

One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.

This type of risk relates to changes in the interest rate

Systematic risk

In general, it is reasonable to expect that holding a portfolio consisting of both international and domestic assets, rather than domestic stocks alone, will provide greater risk-reduction benefits due to which of the following factors?

The differing economic, regulatory, and political systems expose domestic and international securities to different, and potentially offsetting, sources and amounts of diversifiable and market risks.

Which of the following statements is CORRECT?

The most likely explanation for an inverted yield curve is that investors expect inflation to decrease

Another word for intrinsic value is:

True value

Which of the following statements is true about bonds?

When interest rates increase, the prices of U.S. Treasuries decline

Which of the following are characteristics of a perpetuity?

A perpetuity is a stream of regularly timed, equal cash flows that continues forever ; The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows ; The value of a perpetuity is equal to the sum of the present value of its expected future cash flows

A financial planner is examining the portfolios held by several of her clients

A portfolio consisting of about 30 randomly selected stocks

Aakash borrowed some money from his friend to star a new business. he promised to pay hid friend $2,650 every year for the next five years to pay off his loan along with interest

Annuity payments

You deposit a certain equal amount of money every year into you pension fund

Annuity payments

The filing document, which includes a set of rules created by the founders of the corporation such as: (1) directors' election process, (2) terms of the directorial position, (3) whether the existing stockholders will have the right to buy new shares the firm issues, and (4) procedures to amend the bylaws, and so on, is called the corporate:____

Bylaws

Issued by corporations, these unsecured debt instruments are used to fund corporate short-term financing requirements. if issued by a financially strong company, they have less risk

Commercial paper

Which of the following are money market instruments? Check all that apply

Commercial paper; Certificates of deposit; Treasury bills; Eurodollar time deposits

The process for converting present values into future values is called

Compounding

A bond's _______ allows a bondholder or preferred stockholder to convert their bond or preferred share, respectively into a specified number or value of common shares

Convertibility provision

If stock price of Krit Corp. decreases in the next two years, Wilson's wealth in Krit Corp. will _________

Decrease

Which of the following statements represent a weakness or limitation of ratio analysis? Check all that apply

Different firms may use different accounting practices ; A firm may operate in multiple industries

Intrinsic value is equal to market value when markets are:

Efficient

Chandler Co.'s 5-year bonds yield 6.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Chandler's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) × 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Chandler's bonds?

Excel

Nystrand Corporation's stock has an expected return of 12.50%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Excel

When the economy is weakening, the Fed is likely to increase short-term interest rates.

False

Calculation of a future value

Future Value = Present Value x Interest Factor

Which kind of stock is most affected by changes in risk aversion?

High-beta stocks

Which of the following is not true about mortgages?

If the payment is less than the interest due, the ending balance of the loan will decrease

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. The risk-free rate is 6% and the market risk premium is 5%. Which of the following statements is CORRECT?

If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's required return will increase by more than 2%

Your boss asked you to analyze Green Hamster Manufacturing performance for the past three years...Along with calculating the ratios, what else is needed for your report?

Making observations and identifying trends that are suggested by the ratio analysis ; Identifying the factors that drive the rends in the ratios

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?

The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas.

Your financial planner advises you to allocate 10% of your portfolio in foreign stocks for diversification purposes. Your portfolio has a total international exposure of $1000000, but you also face certain risks. Keeping other factors constant, which of the following statements describes the risk involved with investing in the international market?

The value of your investment will increase if the foreign stocks increase in their local markets

Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction.

True

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.

True

The changes in the value of a foreign currency affect business operations and the value of investment assets in that currency. If the value of the foreign currency increases relative to the home currency, invested assets would lose value.

True

The process of earning compound interest allows a deposit or investor to earn interest on any interest earner in prior periods

True

The yield curve for a BBB-rated corporate bond is expected to be above the U.S Treasury bond yield curve

True

To qualify as a growing annuity, the growth rate in each period has to be the same as the growth rate in the prior period

True

When the economy is weakening, the Fed is likely to decrease short-term interest rates.

True

Under what circumstances would a firm be more likely to buy the required number of bonds in the open market as opposed to using one of the other procedures?

When interest rates are higher than they were when the bonds were issued

Is it possible for a company to exhibit a negative EPS and thus a negative P/E ratio?

Yes

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

excel