Final Exam Review

Which one of the following actions by a financial manager is most apt to create an agency problem? A) refusing to borrow money when doing so will create losses for the firm B) Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales C) increasing current profits when doing so lowers the value of the company's equity

C) increasing current profits when doing so lowers the value of the company's equity

A $1000 par value corporate bond that pays $45 annually in interest was issued last year. If the current price of the bond is $989.42, what is the relationship between the current yield and the coupon rate?

Current yield exceeds the coupon rate.

__________________ is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected.

Default risk

Today Hannah paid a total of $1,176, including accrued interest, to purchase a 20-year bond that has 6 years left until maturity. This price is referred to as the:

Dirty price

What is the most important reason to diversify a portfolio?

Eliminate asset-specific risk

What type of risk would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Interest rate risk

A sinking fund is managed by a trustee for what purpose?

Paying Bond interest payments.

________________ represents the residual value of a firm.

Shareholder's equity

You want to be on the Board of Directors for Uptown Communications. Since you are the only shareholder who will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected?

Straight

Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares outstanding. How would this be reported?

The company must declare each dividend before it becomes an actual company liability.

True or False: A portfolio's standard deviation can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

True

True or False: A positive cash flow to creditors represents a net cash outflow from the firm.

True

True or False: Federal income tax is applied at a flat rate across all levels of taxable income.

True

True or False: Net present value predicts the amount by which the value of a firm will change if a project is accepted.

True

True or False: The listing requirements for the NYSE are more stringent than those of Nasdaq.

True

Jonathan has researched Tejeda Tech and believes the firm is poised to vastly increase in value. He has decided to purchase Tejeda tech bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholder's. Which bond feature would help him fulfill his wish?

Warrant

The costs of acquiring a product are expressed when the product is sold is an example of __________________ accounting.

accrual

A bond that is payable to whomever has physical possession of the bond is said to be in:

bearer form

Which of the following statements is correct? a) Nominal rates exceed real rates by the amount of risk-free rate. b) Any return greater than the inflation rate represents the risk premium. c) Given a positive rate of inflation, the real rate must be less than the nominal rate.

c) Given a positive rate of inflation, the real rate must be less than the nominal rate.

Deciding which long-term investment a firm should make is a ______________________ decision.

capital budgeting

______________________ determine how a corporation regulates itself.

corporate bylaws

Aftertax income from the corporation which becomes taxable income for the recipient are known as:

corporate dividends

An invoice payable in 45 days is an example of a _________________ liability.

current

Cash flow from assets is also known as the firm's ________________ cash flow.

free

The dividend model requires the ____________ rate to be more than the ____________________.

growth; required return

If a stock experiences an actual return that is above the security market line. An analyst can safely conclude that the stock has a _______________ (higher/lower) return than expected for the level of risk assumed.

higher

Depreciation expense _____________ expenses and ______________ taxes for a firm that must pay income tax.

increases;decreases

The maximum level of cash to be kept in the firm's bank account (is/is not) a working capital management decision.

is

Financial managers should strive to (maximize/minimize) the current value per share of the existing stock to best represent the interests of the current owners of the firm.

maximize

Cash flow to stockholders is defined as: operating cashflow (+/-) cash flow to creditors.

minus (-)

The stream of costumer orders coming in to the NYSE trading floor is called the:

order flow

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

profitability index

Mutually exclusive projects are best defined as competing projects that _____________ (require/do not require) the total use of the same limited resource.

require

Javangula Foods is considering two mutually exclusive projects and has determined that the crossover rate for these projects is 12.3 percent. Given this information, you know that:

the project that is acceptable at a discount rate of 12 percent should be rejected at a discount rate of 13 percent.

Standard deviation measures _____________ risk and beta measures ___________________ risk.

total; systematic

The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

weighted average of the returns for each economic state