Finance 450 Final

Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in: 20-year, 6 percent coupon bonds. 3-year, zero coupon bonds. 5-year, 7 percent coupon bonds. 20-year, zero coupon bonds. 2-year, 7 percent coupon bonds.

2-year, 7 percent coupon bonds.

Which one of the following statements concerning annuities is correct? The present value of an annuity is equal to the cash flow amount divided by the discount rate. An annuity due has payments that occur at the beginning of each time period. An annuity is an unending stream of equal payments occurring at equal intervals of time. If unspecified, you should assume an annuity is an annuity due. The future value of an annuity decreases as the interest rate increases.

An annuity due has payments that occur at the beginning of each time period.

Which statement is true? Bonds are generally called at par value. A bondholder has the right to determine when his or her bond is called. A current list of all bondholders is maintained whenever a firm issues bearer bonds. An indenture is a contract between a bond's issuer and its holders. Collateralized bonds are called debentures.

An indenture is a contract between a bond's issuer and its holders.

Which one of the following statements concerning the balance sheet is correct? Total assets equal total liabilities minus total equity. Net working capital is equal total assets minus total liabilities. Assets are listed in descending order of liquidity. Current assets are equal to total assets minus net working capital. Shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt.

Assets are listed in descending order of liquidity. Current assets are equal to total assets minus net working capital.

The security market line is a positively sloped straight line that displays the relationship between expected return and ____________. WACC Risk Portfolio Market Risk Premium Beta

Beta

Which statement is correct? Municipal bond prices are highly transparent. Bond markets are dealer based. There are fewer bond issues outstanding than there are equity issues. Most bond trades occur on the NYSE. Bond markets have less daily trading volume than equity markets.

Bond markets are dealer based.

Which one of the following must equal zero if a firm pays a constant annual dividend? Capital gains yield Book value per share Par value per share Total return Dividend yield

Capital gains yield

Which one of the following types of securities has the lowest priority in a bankruptcy proceeding? Convertible bond Straight bond Senior debt Preferred stock Common stock

Common stock

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes? Income statement Balance sheet Common-size income statement Common-size balance sheet Statement of cash flows

Common-size income statement

The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s? Increased stock market volatility Increased executive compensation Increased foreign investment in U.S. stock markets Increased use of tax loopholes Corporate accounting and financial fraud

Corporate accounting and financial fraud

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts? Corporation General partnership Public company Sole proprietorship Limited partnership

Corporation

Which one of the following can be classified as an annuity but not as a perpetuity? Unequal payments each year for nine years Equal weekly payments forever Increasing quarterly payments for six years Increasing monthly payments forever Equal annual payments for life

Equal annual payments for life

What is the principal amount of a bond that is repaid at the end of the loan term called? Accrued price Face value Dirty price Coupon Market price

Face value

The cost of capital depends primarily on the source of the funds, not the use. True False

False

The coupon rate on the firm's outstanding debt can be used as a substitute for the cost of debt. True False

False

Which statement is true? Common shareholders elect the corporate directors while the preferred shareholders vote on mergers and acquisitions. All classes of stock must have equal voting rights per share. Preferred dividends provide tax-free income to individual investors. Preferred shareholders prefer noncumulative dividends over cumulative dividends. From a legal perspective, preferred stock is a form of corporate equity.

From a legal perspective, preferred stock is a form of corporate equity.

Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts? Sole proprietorship Limited partnership Corporation Joint stock company General partnership

General partnership

The DuPont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm. II. operating efficiency of a firm. III. utilization rate of a firm's assets. IV. rate of return on a firm's assets. II, III, and IV only I, II, III, and IV I and III only II and III only I, II, and III only

I, II, III, and IV

Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years: Both Stacey and Kurt will have accounts of equal value. Kurt will have twice the money saved that Stacey does. Kurt will earn exactly twice the amount of interest that Stacey earns. Kurt will have a larger account value than Stacey will. Stacey will have more money saved than Kurt.

Kurt will have a larger account value than Stacey will.

uppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds? Inflation premium Liquidity premium Real rate Taxability premium Interest rate risk premium

Liquidity premium

Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows? Profitability index Indexed rate of return Modified internal rate of return Average accounting return Internal rate of return

Modified internal rate of return

Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years. New tires that will be purchased this winter Engine tune-up that is scheduled for this afternoon Money spent last month repairing a damaged front fender Costs of repairs needed so the truck can pass inspection next month Cost for a truck driver for the remainder of the truck's useful life

Money spent last month repairing a damaged front fender

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? Internal rate of return Accounting rate of return Profitability index Payback Net present value

Net present value

Which one of the following terms refers to the best option that was foregone when a particular investment is selected? Erosion Side effect Marginal cost Opportunity cost Sunk cost

Opportunity cost

Which one of the following methods of analysis ignores the time value of money? Internal rate of return Payback Net present value Discounted cash flow analysis Profitability index

Payback

Which one of the following indicators offers the best assurance that a project will produce value for its owners? Positive AAR Positive IRR Negative rate of return PI equal to zero Positive NPV

Positive NPV

Katlyn needs to invest $5,318 today in order for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318? Present value Compound value Future value Complex value Factor value

Present value

Which ratio was primarily designed to monitor firms with negative earnings? Price-sales ratio Market-to-book ratio Profit margin ROE ROA

Profit margin

Cindy is taking out a loan today. The cash amount that she is receiving is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this? Interest-only Pure discount Amortized Compound Principal-only

Pure discount

eon is the owner of a corner store. Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due. Current ratio Debt ratio Cash coverage ratio Cash ratio Quick ratio

Quick ratio

For the Dividend Growth Model, the equation can be written as follows: P0 = =D1/(RE - g). How can this equation be rearranged? RE = D1/g + P0 RE = D1 * P0 + g RE = D1/P0 + g RE = g /P0 + D1 RE = P0/D1 + g

RE = D1/P0 + g

What is the market called that facilitates the sale of shares between individual investors? Inside Primary Secondary Initial Proxy

Secondary

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows? Fallacy principle Base assumption principle Erosion principle Stand-alone principle Forecast assumption principle

Stand-alone principle

Which one of the following statements is correct? The APR is the best measure of the actual rate you are paying on a loan. The EAR, rather than the APR, should be used to compare both investment and loan options. The APR on a monthly loan is equal to (1 + monthly interest rate)12- 1. The APR is equal to the EAR for a loan that charges interest monthly. The EAR is always greater than the APR.

The EAR, rather than the APR, should be used to compare both investment and loan options.

Risk-free assets have a beta of 0 and the market portfolio has a beta of 1. True False

True

Since preferred stock has a fixed dividend paid every period forever, it is essentially a perpetuity. True False

True

Which one of the following statements is true regarding the period 1926-2014? U.S. Treasury bills had a positive average real rate of return. The inflation rate was just as volatile as the return on long-term bonds. The returns on small-company stocks were less volatile than the returns on large-company stocks. Bonds had an average rate of return that exceeded the average return on stocks. The risk-free rate of return remained constant over the time period.

U.S. Treasury bills had a positive average real rate of return.

What is the subjective approach? Using a WACC that offers room to play with the rates as needed. Using a WACC that involves making subjective adjustments based upon the project. Using a WACC that allows subjective adjustments to the revenue for the project. Using a WACC that adjusts to market interest rates. Using a WACC that is based on companies in similar lines of business.

Using a WACC that involves making subjective adjustments based upon the project.

What is the pure play approach? Using a WACC that offers room to play with the rates as needed. Using a WACC that involves making subjective adjustments based upon the project. Using a WACC that allows subjective adjustments to the revenue for the project. Using a WACC that adjusts to market interest rates. Using a WACC that is based on companies in similar lines of business.

Using a WACC that is based on companies in similar lines of business.

Portfolio Beta is the ______________ average of the Betas of the investments included in the portfolio. Weighted Arithmetic Geometric Riskless Expected

Weighted

Which one of the following statements is correct? Assume cash flows are conventional. The profitability index will be greater than 1.0 when the net present value is negative. When the internal rate of return is greater than the required return, the net present value is positive. If two projects are mutually exclusive, you should select the project with the shortest payback period. Projects with conventional cash flows have multiple internal rates of return. If the IRR exceeds the required return, the profitability index will be less than 1.0.

When the internal rate of return is greater than the required return, the net present value is positive.

A firm's target capital structure represents: the cost of equity to achieve the desired NPV. the cost of debt to achieve the desired NPV. a fixed debt-equity ratio that the company attempts to maintain. a fixed cost of capital that the company maintains. the required return for the project with the highest NPV.

a fixed debt-equity ratio that the company attempts to maintain.

Semistrong form market efficiency states that the value of a security is based on: all publicly available information plus any data that can be gathered from insider trading. all publicly available information. all public and private information. historical information only. random information with no clear distinction as to the source of that information.

all publicly available information.

he shareholders of Weil's Markets would benefit if the firm were to be acquired by Better Foods. However, Weil's board of directors rejects the acquisition offer. This is an example of: a corporate takeover. a capital structure issue. a working capital decision. an agency conflict. a compensation issue.

an agency conflict.

The price at which an investor can purchase in the bond market is called the _____ price. asked coupon face bid call

asked

Net working capital is defined as: the depreciated book value of a firm's fixed assets. the value of a firm's current assets. available cash minus current liabilities. total assets minus total liabilities. current assets minus current liabilities.

current assets minus current liabilities.

he goal of financial management is to increase the: future value of the firm's total equity. book value of equity. dividends paid per share. current market value per share. number of shares outstanding.

current market value per share.

An agent who buys and sells securities from inventory is called a: dealer. floor broker. commission broker. broker. floor trader.

dealer

Bond ratings classify bonds based on: liquidity, interest rate, and default risk. default risk only. default and liquidity risks. interest rate, inflation rate, and default risk. liquidity, market, and default risk.

default risk only.

Russell?s has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance. This provision is referred to as the _____ provision. liquidity safeguard deferred call sinking fund market

deferred call

The internal rate of return is the: discount rate that results in a net present value equal to the project's initial cost. rate of return required by the project's investors. discount rate that results in a zero net present value for the project. discount rate that causes a project's aftertax income to equal zero. project's current market rate of return.

discount rate that results in a zero net present value for the project.

The required return of preferred stock is equal to the ________ ________ on the preferred stock. fixed dividend current price bond rating perpetuity rating dividend yield

dividend yield

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be: upward sloping. humped. downward sloping. flat. double-humped.

downward sloping.

Anna pays .85 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the: effective annual rate. simplified rate. quoted rate. stated rate. annual percentage rate.

effective annual rate.

PG&E Corp., the California utility facing billions in liabilities from the potential role it played in a huge recent wildfire, was recently downgraded from investment grade to junk bond status. PG&E Corp. is now a: lost sheep. converted bond. fallen angel. defaulter. sinking ship.

fallen angel.

The percent of investment that the project costs can be referred to as all of the following, except: required return appropriate discount rate cost of money free cash flow cost of capital

free cash flow

You want to undertake financial statement analysis for Powercat Paints so have obtained the company's 2017 and 2018 financial statements which have a December 31 year end. To be able to calculate market value ratios for Powercat Paints you would need Powercat Paint's share price: for December 31 2017 and 2018 to take the average price for December 31 2017 from the most recent market information for December 31 2018 for June 30 2018

from the most recent market information

Net present value involves discounting an investment's: future cash flows. liabilities. costs. future profits. assets.

future cash flows.

Sensitivity analysis: is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable. helps identify the variable within a project that presents the greatest forecasting risk. illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project. is used for projects that cannot be analyzed by scenario analysis because the cash flows are unconventional. looks at the most reasonably optimistic and pessimistic results for a project.

helps identify the variable within a project that presents the greatest forecasting risk.

The future value of a lump sum investment will increase if you: decrease the interest rate. decrease the number of compounding periods. decrease the time period. increase the time period. decrease the lump sum amount.

increase the time period.

A corporation wishes to use debt financing (borrowing) to fund an expansion of their product line. To do so they will: issue bonds in the primary market. issue shares of stock in the primary market. take out a loan from a commercial bank. contact their investment bank. sell bonds in the secondary market.

issue bonds in the primary market.

The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk. lower; higher higher; higher higher; lower lower; lower

lower; lower

The primary goal of financial management is most associated with increasing the: traffic flow within the firm's stores. dollar amount of each sale. the fixed costs while lowering the variable costs. firm's liquidity. market value of the firm.

market value of the firm.

The average accounting return: is expressed as a percentage of an investment's current market value. measures profitability rather than cash flow. is used more often by CFOs than the internal rate of return. will equal the required return when the net present value equals zero. discounts all values to today's dollars.

measures profitability rather than cash flow.

The rate of return an investor earns on a bond prior to adjusting for inflation is called the: nominal rate. real rate. coupon rate. clean rate. dirty rate.

nominal rate.

By definition, a bank that pays simple interest on a savings account will pay interest: only if all previous interest payments are reinvested. on both the principal amount and the reinvested interest. only at the beginning of the investment period. only on the principal amount originally invested. on interest.

only on the principal amount originally invested. on interest.

Market values: are affected by the accounting methods selected. are equal to the greater of the initial cost or the current expected sales value. either remain constant or increase over time. reflect expected selling prices given the current economic situation. are equal to the initial cost minus the depreciation to date.

reflect expected selling prices given the current economic situation.

Expected return is the return on a _______ asset expected in the future. average risky no-risk risk-free portfolio

risky

Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as: scenario analysis. erosion planning. opportunity evaluation. sensitivity analysis. benefit planning.

scenario analysis.

Northern Companies has three separate divisions. Each year, the company determines the amount it can afford to spend in total for capital expenditures and then allocates one-third of that amount to each division. This allocation process is called: strategic planning. opportunity cost allocation. divisional separation. hard rationing. soft rationing.

soft rationing.

There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting. simultaneous sequential cumulative straight proxy

straight

Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are: semistrong form efficient. strong form efficient. efficient at any level. aware that the trader is an insider. weak form efficient.

strong form efficient.

One year ago, you purchased 600 shares of a stock. This morning you sold those shares and realized a total return of 3.1 percent. Given this information, you know for sure the: stock price increased by 3.1 percent over the last year. stock paid a dividend. sum of the dividend yield and the capital gains yield is 3.1 percent. dividend yield is greater than zero. stock increased in value over the past year.

sum of the dividend yield and the capital gains yield is 3.1 percent.

When valuing a stock using the constant-growth model, D1 represents the: the next expected annual dividend. last annual dividend paid. expected stock price in one year. expected difference in the stock price over the next year. discount rate.

the next expected annual dividend.

The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all of the following in its analysis with the exception of: the research and development costs to produce the current winter footwear samples. cost of new display counters for the additional winter footwear. increased taxes from winter footwear profits. any expected changes in the sales levels of current products caused by adding the new productline. the expected revenue from winter footwear sales

the research and development costs to produce the current winter footwear samples.

Over the period of 1926-2014: the risk premium on large-company stocks was greater than the risk premium on small- company stocks. U. S. Treasury bills had a negative risk premium. the risk premium on long-term government bonds was zero percent. the risk premium on stocks exceeded the risk premium on bonds. U.S. Treasury bills had a risk premium that was just slightly over 2 percent.

the risk premium on stocks exceeded the risk premium on bonds.

Common-size financial statements present all balance sheet account values as a percentage of: total equity. last year's account value. the forecasted budget. total assets. sales.

total assets.

All else held constant, the present value of a bond increases when the: time to maturity of a zero coupon bond increases. coupon rate decreases. yield to maturity decreases. current yield increases. time to maturity of a premium bond decreases.

yield to maturity decreases.