Finance- Final Exam

Jerilu Markets has a beta of 1.09. The risk free rate of return is 3.18% and the market rate of return is 11.27%. What is the risk premium of the stock? ​a.​3.47% ​b.​7.03% ​c.​7.80% ​d.​8.82% ​e.​8.99%

8.82%

convertible bond

A ___ is a bond that is exchangeable, at the option of the bondholder, for shares of common stock in the issuing corporation

Which of the following statements related to the cash flow to creditors must be correct? a) If the cash flow to creditors is positive, then the firm must have borrowed more money than it repaid b) A positive cash flow to creditors represents a net cash outflow from the firm c) If the cash flow to creditors is negative, then the firm must have a negative cash flow from assets d) If the cash flow to creditors is zero, then a firm has no long-term debt e) A positive cash flow to creditors means that a firm has increased its long-term debt

A positive cash flow to creditors represents a net cash outflow from the firm.

Which of the following statements is correct concerning a corporation with taxable income of $250,000?

An increase in depreciation will increase the operating cash flow.

Which one of the following statements is correct concerning a corporation with taxable income of $125,000? a. Taxable income minus dividends paid will equal the ending retained earnings for the year b. An increase in depreciation will increase the operating cash flow. c. Net income divided by the number of shares outstanding will equal the dividends per share. d. Interest paid will be included in both net income and operating cash flow. e. An increase in the tax rate will increase both net income and operating cash flow.

An increase in depreciation will increase the operating cash flow.

The External Financing Formula for financial planning shows how external financing needs depend on several key variables , including:

Capital intensity, profit margins, and sales growth

Which one of the following statements is correct? A Corporate profits are taxable income to the shareholders when earned. B The majority of firms in the U.S. are structured as corporations. C Shareholders are protected from all potential losses. D Shareholders directly elect the corporate president. E Corporations can have an unlimited life.

Corporations can have an unlimited life.

The standard deviation of a portfolio: A. is a measure of that portfolio's systematic risk. B. is a weighed average of the standard deviations of the individual securities held in that portfolio. C. measures the amount of diversifiable risk inherent in the portfolio. D. serves as the basis for computing the appropriate risk premium for that portfolio. E. can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

E. can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

If a company produces a ROA of 16% and a ROE of 16%, then the firm:

Has an equity multiplier of 1.0

Call provision

If interest rates fall substantially below the coupon rate, a corporation will likely use the ______ on their bond issue to redeem the bonds prior to maturity.

Which of the following statements is not true? a. In weak-form efficient markets, stock prices fully reflect all information contained in past price movements b. In semi-strong form efficient markets, stock prices fully reflect all relevant public information except that relating to past price movements c. In strong-form efficient markets, stock prices reflect all relevant information including that which is privately held d. A number of empirical studies have indicated anomalies, or inefficiencies, in share pricing with regard to price-to-earnings ratios, the reversal of price trends (e.g. overreaction hypothesis), and the existence of market bubbles

In semi-strong form efficient markets, stock prices fully reflect all relevant public information except that relating to past price movements.

Which one of the following is least likely to help convince managers to work in the best interest of the stockholders? a. Compensation based on the value of the stock b. Stock option plans c. Threat of a company takeover d. Threat of a proxy fight e. Increasing managers' base salaries

Increasing managers' base salaries.

Which one of the following statements related to liquidity is correct?A. Liquid assets tend to earn a high rate of return. B. Liquid assets are valuable to a firm. C. Liquid assets are defined as assets that can be sold quickly regardless of the price obtained. D. Inventory is more liquid than accounts receivable because inventory is tangible. E. Any asset that can be sold is considered liquid.

Liquid assets are valuable to a firm

Mortgage lenders probably have the most interest in the ____________ ratios .a. Long-term Debt and Times Interest Earned b. Return on Assets and Profit Margin c. Price-Earnings and Debt-Equity d. Market-to-Book and Times Interest Earned e. Return on Equity and Price-Earnings

Long-term debt and times interest earned

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends on the:

Market risk premium and the amount of systematic risk inherent in the security.

Which of the following statements related to market efficiency tends to be supported by current evidence? a. Markets are most likely only weak form efficient. ​b. ​Short run price movements are easy to predict. ​c. ​Markets tend to respond quickly to new information. ​d. ​Mispriced stocks are easy to identify. ​e. ​It is easy for investors to earn abnormal returns.

Markets tend to respond quickly to new information.

The operating cycle describes how a product...

Moves through the current asset accounts.

Which of the following statements concerning NWC is correct? A. Net working capital increases when inventory is purchased with cash. B. Net working capital excludes inventory. C. Total assets must increase if net working capital increases. D. Net working capital may be a negative value. E. Net working capital is the amount of cash a firm currently has available for spending.

Net working capital may be a negative value.

classified board

One effect of a(n) _______ is that it is more difficult for a minority to elect a director than it would be otherwise, because there are fewer directors to be elected at any one time.

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate?

Project X has both a higher present value and a higher future value than project Y.

Lumber Inc. has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights Is most likely to be granted to the preferred shareholders?

Right to share in company profits prior to other shareholders.

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? A. Moving furniture to provide floor space for the appliances. B. Paying the rent for the store. C. Selling furniture to appliance customers. D. Having the current store manager oversee appliance sales. E. Using the store's billing system for appliance sales.

Selling furniture to appliance customers.

Financial managers should primarily focus on the interests of: a. Stakeholders. b. Shareholders. c. Their immediate supervisor. d. The Chief Financial Officer. e. The Board of Directors.

Shareholders

Which of the following statements is incorrect?

Shareholders are protected from all potential losses.

Which of the following statements related to the IRR is correct?

The IRR is equal to the required return when the net present value is equal to zero.

Consider a bond that has a $1000 face value, a 6.875% coupon rate, and pays interest semiannually. The bond has ten years remaining until maturity. The current price reflects an 8.125% required annual return to investors. Which of the following statements concerning this bond is true? a. The bond will sell at a discount. b. The bond will sell for exactly par value. c. The bond will sell at a premium.

The bond will sell at a discount.

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?

The cash flow in year two is valued just as highly as the cash flow in year one.

A project has a net present value of zero. Which one of the following best describes this project?

The project's cash inflows are equal to its cash outflows in current dollar terms.

You are looking at two different stocks. Climber, Inc. has a beta of 1.25 and Steady As She Goes Co. has a beta of .95. Which statement is true about these investments? a. Climber, Inc. is a better addition to your portfolio. b. Steady As She Goes Co. is a better addition to your portfolio. c. The stock in Steady As She Goes Co. has a lower risk premium than Climber Inc. d. The expected return on Climber will be the lower of the two.

The stock in Steady As She Goes Co. has a lower risk premium than Climber Inc.

Which of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant.

Which of the following statements related to loan interest rates is correct? A. The annual percentage rate considers the compounding of interest. B. When comparing loans you should compare the effective annual rates. C. Lenders are most apt to quote the effective annual rate. D. Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. E. The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

When comparing loans you should compare the effective annual rates.

mortgage bond

_ is a bond that is backed by real estate holdings or real property which serves as security (collateral) for the bond issue.

junk bond

a bond that is rated by Standard & Poor or Moody's as "below investment grade", indicating that it has a high level of risk

floating rate bond

a bond where the coupon payments are adjustable and the adjustments are tied to an interest rate index or 'benchmark' such as the federal funds rate or treasury bill rate

Proxy

a grant of authority by a shareholder allowing another individual to vote his or her shares

1. The yield to maturity of a bond: I. Is always the same as the coupon rate II. Reflects the default risk of the bond III. Is positively correlated to the bond price IV. Includes compensation for potential changes in interest rates a. Only statement I is correct. b. Statements I and III are correct. c. Statements II and IV are correct. d. All of the above are correct.

a. Statements II and IV are correct.

debenture

an unsecured bond-backed solely by the issuer's credit rating rather than a specific pledge of property

indenture 1

contract between an issuer and an investor that details the terms, collateral, and covenants of an issuance.

indenture

contract between an issuer of bonds and the investors in the bonds

The price sensitivity of a bond increases in response to a change in the market rate of interest as the: ​a.​coupon rate increases. b. time to maturity decreases c.​coupon rate decreases and the time to maturity increases d. ​time to maturity and coupon rate both decrease.e.​coupon rate and time to maturity both increase

coupon rate decreases and the time to maturity increases.

Weak form (EMH)

current market prices reflect information about past prices

semi-strong form

current market prices reflect information about past prices and all publicly available info

strong form

current market prices reflect information about past prices, all publicly available info, and private or inside info

Which of the following statements is most correct? a. Bonds with shorter times to maturity have less sensitivity to changes in interest rates, all else equal. b. If market interest rates increase, firms that can call their bonds will be inclined to do so.c. Default risk refers to the risk that firms may not be able to make debt service payments. d. Statements (a) and (c) are both correct. e. Statements (b) and (c) are both correct.

d. Statements (a) and (c) are both correct.

Which of the following is an agency cost? A. accepting an investment opportunity that will add value to the firm. B increasing the quarterly dividend C. investing in a new project that creates firm value D.hiring outside accountants to audit the company's financial statements E. closing a division of the firm that is operating at a loss

hiring outside accountants to audit the company's financial statements.

preemptive right

the first right to buy into new share issuances.

Efficient Market Hypothesis 3 forms

weak form, semi-strong form, strong form

The secondary market is best defined as the market: ​a.​in which subordinated shares are issued and resold. ​b.​conducted solely by brokers. ​c. ​dominated by dealers. ​d.​where outstanding shares of stock are resold. ​e.​where warrants are offered and sold.

where outstanding shares of stock are sold.