FI 302 optional exam
___ refers to how quickly information is reflected in the available prices for trading.
informational efficiency
What type of loan makes interest payments throughout the life of the loan and then pays the principal and final interest payment at the maturity date?
interest only loan
Generally speaking, when the information is available, investors prefer to use ___ rather than___ when evaluating a firm.
market value, book value
The ___ model is usually considered the best of the capital budgeting decision making models.
net present value
___ has to do with the speed and accuracy of processing a buy or sell order at the best available price.
operational efficiency
___ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow since we are foregoing another alternative.
opportunity costs
The ___ model determines at what point in time cash outflow is recovered by the corresponding future cash inflow.
payback period
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
Zero-Coupon Bonds are ____.
priced at a deep discount
The ___ is the market of first sale in which companies first sell their authorized shares to the public.
primary
The ___ method of capital budgeting is a ratio of the present value of benefits divided to the initial investment cost.
profitability index
Nominal interest rates are the sum of two major components. These components are __.
real interest rate and inflation
The ___ is the intercept on the Security Market Line.
risk free rate
You can think of the ___ as the "used stock" market because these shares have been owned or "used" previously.
secondary market
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
Stocks are different from bonds because
stocks, unlike bonds, represent residual ownership
Net income is __
the cash flow from the operations of the company during the period
The net present value of an investment is ___.
the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project
True/false: accounting identity is assets = liabilities + owner's equity
true
The ___ is the return the bondholder receives on the bond if held to maturity
yield to maturity
The appropriate rate to use to discount the cash flows of a bond in order to determine the current price is the ___.
yield to maturity
If the equation E(ri) = rf +[E(rm)−rf ]×i is the linear equation for the Security Market Line, what portion represents the market risk premium for a stock that does not have a beta of 1.0?
βi ∗ [E(rm) − rf ]
The real rate is 2.50% and inflation is 3.25%. What is the approximate nominal rate?
2.5% + 3.25%= 5.75%
In capital budgeting, the appropriate decision rule for an average-risk project is to accept if the___ is greater than the WACC.
IRR
To get the operating cash flow, given the net income, we add back___.
depreciation
Operating Cash Flow (OCF) is equal to what?
EBIT + depreciation - taxes
Elizabeth is seeking to expand her rare coin collection. Each year, rare coins increase in price at a three percent rate. She believes that if she invests her money for one year, she should be able to buy 26 coins for what 25 coins would cost today. What is her real interest rate or reward for waiting?
FV= 26 PV= 25 n= 1 cmpt i/y= 4%
Which of the statements below is TRUE of the payback period method?
It ignores the cash flow after the initial outflow has been recovered
The advantage of ___ over ___ depreciation is that you can write off more of your capital costs in the earlier years.
MACRS; straight line depreciation
The best rule for choosing projects when a firm has a limited amount of funds is to accept the group of projects with the greatest combined ___.
NPV
___ are an accounting measure of performance during a specific period of time, while ___ is the actual inflow or outflow of money.
Profits, cash flow
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)
In capital budgeting, the ___ is the appropriate discount rate to use when calculating the NPV of an average risk project.
WACC
Which of the following is NOT a definition of beta?
a measure of risk that can be avoided
Pricing preferred stock is most similar to pricing ___.
a perpetuity
A high discount rate implies __
a preference for consumption now as opposed to later
Stocks differ from bonds because:
all of the above
What type of loan requires both principal and interest payments as you go by making equal payments each period?
amortized loan
The IRR is the discount rate that produces ___.
an NPV equal to zero
Bonds are different from stocks because ___.
bonds promise fixed payments for the length of their maturity
A geometric average is preferred to an arithmetic average because the geometric average __.
can be expressed as a percentage change while the arithmetic average does not
___ means that the percentage increase in the dividend is the same each year.
constant growth
__ is the area of finance concerned with activities such as borrowing funds to finance projects such as plant expansions or new product launches.
corporate finance
A ____ has limited liability, is a legal entity, and has the greatest potential to raise capital.
corporation
The___is the regular interest payment of the bond.
coupon
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
If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the total amount of principal and interest due of $215,892.50 at the end of 10 years, what type of loan did you have?
discount loan
The terms ___ and ___ mean the same thing.
diversifiable risk, unsystematic risk
The practice of not putting all of your eggs in one basket is an illustration of ___.
diversification
___ is a major disadvantage of the corporate form of business
double taxation
Whenever a new product competes against a company's already existing products and reduces the sales of those products, ___ occur.
erosion costs
The holder of preferred stock is entitled to a constant dividend ___.
every period
True/false: Two projects are mutually exclusive if the acceptance of one project has no bearing on the acceptance or rejection of the other project
false
True/false: reducing principal at a faster pace increases the overall interest paid on a loan
false
The organized financial intermediaries and the forums that promote the cycle of money is a good definition of which of the following main areas of finance?
financial institutions and markets
An investment banker's fees are part of the ___ associated with issuing new debt or equity.
flotation costs
Which of the below is NOT a major component of interest rates?
historical interest rates
Which of the following is NOT an example of ordinary annuity cash flows?
insurance payments due at the start of the period
Which of the following is NOT an ADVANTAGE of a sole proprietorship?
limited liability
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
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
At its most basic level, the function of financial intermediaries is to
move money from lenders to borrowers and back again
Which of the following investments is considered to be default risk-free?
treasury bill
True/false: investors want to maximize return and minimize risk
true
True/false: the frequency of bankruptcy for a high tech start up firm is higher than for a blue chip firm so we see higher borrowing rates for start ups than for mature firms
true
Financial markets can be classified by which of the following?
type of asset traded, owner of the financial asset, maturity of the financial asset, All of the above
The type of risk that can be diversified away is called ___.
unsystematic risk
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
You parents are going to give you $10,000 as a gift upon graduation. Which of the following would cause the present value of this gift to rise?
an increase in the interest rate
true/false: an increase in working capital can be brought about by an increase in inventory
an increase in working capital can be brought about by an increase in inventory. true
Which of the following investments has a larger future value: A $100 investment earning 10% per year for 5 years or a $100 investment earning 5% per year for 10 years?
an investment of 100 at 5% for 10 years because future value is 162.89
The measure of systematic risk is called ___.
beta
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 market
In agency theory, the owners of the business are referred to as __ , and the managers are referred to as __ .
principals, agents
___ of a project are those that have already been incurred and are irrelevant to our current financing decisions.
sunk costs
Your grandmother places $13,000 into an account earning an interest rate of 7% per year. After 5 years the account will be valued at $18,233.17. Which of the following statements is correct?
the principal is 13,000. the time period is 5 years. the future value is 18,233 and the interest rate is 7%
The premise of time value of money rests on which of the following?
there is a disutility from forgoing consumption