FINC 515 Exam 1
What companies went bankrupt between the years of 2000 and 2008?
-Enron -Lehman Brothers -WorldCom
What US firms manipulated and misstated their accounts to the tune of billions of dollars?
-Qwest Communications -HealthSouth
Absolute purchasing power parity tells us that ___.
$1 will buy you the same number of tangerines anywhere in the world
The difference between the expected return on the market portfolio and the riskless rate is known as the
-expected excess market return. -market risk premium.
What is true about fixed assets?
-fixed assets have a longer life than current assets. -fixed assets can be tangible or intangible.
The types of financial assets include _____, _____, and ______.
-fixed income -equity -derivatives
What is important when considering a partnership?
-fund raising limitations -taxation of partnership income -personal liability for firm debts
What are considered non-owner stakeholders in a company?
-government -suppliers -employees
What are the two questions to be asked in ascertaining how effective managers will be in advocating for stockholders' best interests?
-how closely are management goals aligned with stockholder goals? -can managers be replaced if they do not pursue stockholder goals?
What conditions are necessary for absolute purchasing power parity?
-identical goods -no trade barriers -no transaction costs
A good financial decision will?
-increase market value of shareholders' equity -increase the value of the firm's existing stock
Financial assets examples:
-stocks -bonds -dollar bills
What two groups are most interested in liquidity ratios?
-suppliers -bankers
The historical market risk premium is estimated to be ______.
7%
What financial assets are included in household wealth?
Bank accounts, corporate stock, and bonds
Money deposited in a financial center outside the country whose currency is involved is called
Eurocurrency
A Eurobond is issued in multiple countries and denominated in multiple currencies. TF
False
Agency problems are easy to fix. TF
False
An decrease in operating leverage increases beta. TF
False
Firms that are better able to estimate cash flows are less likely to use NPV. TF
False
Fixed costs do change as quantity changes. TF
False
Ownership of a corporation is difficult to transfer. TF
False
______ involves an iterative process that culminates in a result negotiated between various parties involved in the process.
Financial planning
If a firm accepts a project, the value of the firm will rise by the ______ of the project.
NPV
You must know the discount rate to make a decision under
NPV and IRR
If PepsiCo's capital intensity ratio is 1.26 and Coca Cola Company's capital intensity ratio is 1.60, what statement is correct?
PepsiCo is more efficient in using its assets to generate sales.
_________ PPP explains the changes in exchange rates over time.
Relative
In 2002 in response to the spate of ethics scandals, what act did Congress pass to tighten the rules of corporate governance?
Sarbanes-Oxley Act
What can be used as the U.S. nominal risk-free rate?
T-bill rate
A firm can use its extra cash to either pay a dividend or invest in a project. TF
True
Firms often face a trade-off between fixed and variable costs. TF
True
The problem with IRR is that it ignores issues of scale. TF
True
With the MIRR, the cash flows are modified first and then those modified cash flows are used to calculate the IRR. TF
True
Almost all currency trading takes place in terms of the
US dollar
The material wealth of a society, determined by the productive capacity of the economy is a function of real ______ of the economy.
assets
The average accounting return is calculated as the average net income of the project divided by the
average book value of the investment during the project's life.
Capital ______ is the decision-making process for accepting and rejecting projects.
budgeting
In a financial plan, how is the amount of borrowing determined?
by management's D/E decision
The rules used by a corporation to regulate its existence are known as _________
bylaws
______ budgeting is the process of making and managing expenditures on long-term assets.
capital
The ratio of total assets to sales is known as the ______.
capital intensity ratio
What term applies to the mixture of debt and equity maintained by a firm?
capital structure
The federal government taxes what?
corporate earnings and shareholder dividends
The corporation comprises shareholders, directors, and:
corporation officers
What is an agreement to deliver one currency in exchange for another?
currency swap
The current ratio computes the relationship between ______.
current assets and current liabilities.
U.S. Treasury securities considered to be risk-free because they have minimal, if any, ____ risk.
default
Unlimited liability, limited life of the enterprise, and difficulty in transferring ownership are all _______ organizing as a partnership or sole proprietorship.
disadvantages of
We can evaluate two mutually exclusive projects by comparing the incremental IRR to the ______.
discount rate
What capital budgeting decision method finds the present value of each cash flow before calculating a payback period?
discounted payback period
NPV ______ cash flows properly.
discounts
What must decrease in order to increase a firm's sustainable growth?
dividends paid
What is not a participant in the foreign exchange market?
domestic stock traders
One tax disadvantage corporations face is:
double taxation
The total value of the stock in a for-profit corporation is ________ _____ the value of the owners' equity.
equal to
The total value of the stock in a for-profit corporation is _____________ the value of the owners' equity.
equal to
A firm should only undertake a project if its expected return is ______ that of a financial asset of comparable risk.
equal to or greater than
International ________ rates, interest rates, and inflation rates are closely related.
exchange
Shareholders are the ONLY stakeholder in a firm as they are the owners. TF
false
A security such as a bond that pays a specified cash flow over a specific period is a(n) ______-_____ or _____ security.
fixed-income, debt
The issuance costs of bonds and stocks are referred to as ______ costs.
flotation
Bonds issued in a single country and usually denominated in that country's currency are
foreign bonds.
One of the most significant complications faced by multinationals daily is
foreign exchange rates.
A ______ trade is an agreement to exchange currency at some time in the future.
forward
The use of _______ exchange agreements can help reduce the short-term exposure to exchange rate risk.
forward
In covered interest arbitrage, investors protect themselves against changes in exchange rates by locking in the ______.
forward exchange rate
What determines when a sale is recorded for accounting purposes?
generally accepted accounting principles
__________ implies that the NPV of a project is that project's contribution to a firm's value.
Value additivity
The internal rate of return is a function of
a project's cash flow
An independent project would be ______ when the profitability index is great than 1 and ______ when the profitability index is less than 1.
accepted' rejected
What is an example of a current liability?
accounts payable
The attempt to improve performance either by identifying mis-priced securities or by timing the performance of broad asset classes is referred to as _______ management.
active
In a financial plan using the percentage of sales approach, why is it assumed that some assets increase with sales?
additional working capital and fixed assets are needed to support growth
The property of value ______ implies that the contribution of any project to a firm's value is simply the NPV of the project.
additivity
That managers of a public corporation often pursue their own interests rather than the interests of the shareholders is referred to as the ______ problem.
agency
The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.
agency
The relationship between stockholders and management can best be described as a(n) ______ relationship.
agency
The agency problem refers to the possible conflicts of interest between self-interested managers as ______ and shareholders of the firm who are the ______.
agents; principals
The information needed to compute the profit margin can be found on the ______.
income statement
The problems with scale in the profitability index can be corrected by using ______ analysis.
incremental
The _________ exchange rate quote for the Swiss franc shows that you could buy .97 Swiss francs for $1, written CHF.97/USD1.
indirect
If the operations of a firm are similar to its industry, the ______ beta should be used to estimate the firm's cost of equity capital.
industry
The net present value of a project's cash flows is divided by the ______ to calculate the profitability index.
initial investment
When two parties exchange a floating-rate payment for a fixed-rate payment or vice versa, what occurs?
interest rate swap
The enterprise value multiple is useful for comparisons of firms when there are differences in each of the following except ______.
inventory methods
A commitment of current resources in the expectation of deriving greater resources in the future is the definition of a(n) ______.
investment
Firms specializing in the sale of new securities to the public, typically by underwriting the issue, are called ______.
investment banks
Capital markets allow the risk inherent in all investments to be borne by ______ the most willing to bear it.
investors
The foreign exchange market ___.
is an over-the-counter market
A sole proprietorship is a business that _______.
is owned by one person
The life of a corporation ______.
is unlimited
The purpose of the Securities Act of 1933 was to provide the basic regulatory framework for what function?
issuing new securities
A problem with the payback method is that
it does not consider the timing of cash flows within the payback period.
What is true of the discounted payback period method?
it has some of the same major flaws as the payback method.
A ______ liability does not have to be paid within one year.
long-term
Capital budgeting is concerned with making and managing expenditures on _____.
long-term assets
Unanticipated changes in relative economic conditions that affect the value of a foreign operation are known as ___.
long-term exposures to exchange rate risk
Unexpected changes in economic conditions can cause fluctuations in the value of a foreign operation. The risk of those fluctuations is known as
long-term exposures to exchange rate risk.
Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ______ effectively controls the firm.
management
When a large group owns stock in a company, stockholders individually have very little power to control the direction of the firm. This means that ______ effectively controls the firm.
management
Individual divisions of a firm attempting to hedge risk could cause the overall firm's exchange rate risk to go up. This serves as evidence that
management of overall rate risk is probably best handled on a centralized basis.
__________ help to allocate capital efficiently only if investors are acting on accurate information.
market signals
The price-earnings (PE) ratio is a ______ ratio.
market value
What is a strategy for hedging long-term exchange rate risk?
matching foreign currency inflows and outflows
The goal of a for-profit business is to ______ the value of existing owners' equity.
maximize
What is Eurocurrency?
money deposited in a financial center outside of the country with the involved currency
Corporations with significant foreign operations are often called ___.
multinationals
As long as the cash flows are positive, the discounted payback period will ______ the payback period because discounting reduces the value of the cash flows.
never be smaller than
The foreign exchange market is where ____.
one country's currency is traded for another country's currency
Indirect agency costs are often due to lost ______.
opportunities
Why is it more challenging to manage long-term exchange rate risk exposure than to hedge short-term risks?
organized forward markets do not exist for long-term needs of corporations.
An LLC is meant to be a hybrid of what two types of ownership?
partnership and corporation
Changes in the value of international investments due to the actions of governments is referred to as ______ risk.
political
Investments in firms that do not trade on public stock exchanges are known as __________ investments.
private equity
Financial planning using the percentage of sales approach produces ______.
pro forma financial statements
Profit maximization is a ________ goal for a firm to pursue.
problematic
When the typical stock in the S&P 500 Index has a PE ratio 12, a company with a PE ratio of 15 may have ______ than average growth prospects, given similar earnings per share.
higher
A _________ is the authority to vote someone else's stock.
proxy
What is an important mechanism used by unhappy stockholders to replace current management?
proxy fight
If a company's common-size income statement shows a lower percentage for cost of goods sold this period compared to last period, the company may be controlling its costs well or it has ______.
raised its prices relative to costs
The international Fisher effect asserts that ______ interest rates are equal across countries.
real
Unlike _____ assets, one person's _____ asset is another person's liability.
real, financial
The CAPM can be used to estimate the _____ return.
required
The CAPM can be used to estimate the ___.
required return on equity
As the amount and timing of cash flows are not known with certainty, this means that investors carry a certain amount of _____, which firms should be aware of.
risk
The discount rate is determined by the ______ of a project.
risk
A common-size income statement expresses items as a percentage of ______ thereby simplifying the comparison of companies within an industry
sales
NPV accounts for the size of the project, eliminating the effects of ______.
scale
In constructing portfolios, the choice of which particular assets to hold within an asset class is the __________ decision.
security selection
The owners of a corporation are called ______.
shareholders
What party would be the last party to receive payment if a firm were to close?
shareholders
Bylaws are meant to regulate:
shareholders, directors, and officers
A current asset has a(n) ______ life.
short
Alpha Co. imports raw materials and uses forward contracts to reduce what risks?
short-run exposure to exchange rate risk
The day-to-day fluctuations in exchange rates create ___.
short-term exchange rate risk exposure
The IRR allows a manager to summarize the information about a project in a ______ rate of return.
single
Common-size statements are used for comparing firms with differing ______.
sizes
An agreement to trade currencies within two business days at today's exchange rate is called a ___.
spot trade
______ financial statements provide for comparison of firms that differ in size.
standardized
When using the spreadsheet function NPV, the cash outflow at Time 0 must be ______.
subtracted from the PV of the other cash flows
If a firm maintains a constant debt-equity ratio and dividend payout ratio, and does not use any new external equity financing, the firm can grow at a rate no greater than its ______.
sustainable growth rate
What is not a determinant in approximating the beta when a new project constitutes its own industry?
tax rate
A shareholder's liability is limited to what?
the amount the shareholder invested in the corporation
What does it mean when a company reports ROA of 12 percent?
the company generates $12 in net income for every $100 invested in assets.
What are not true of MIRRs?
the discounting approach is clearly the best MIRR method.
What is not true of MIRRs?
the discounting approach is clearly the best MIRR method.
What does an inventory turnover ratio of 5 mean?
the entire inventory was sold and replaced 5 times during the year.
The primary responsibility of financial managers is to increase the value of _____.
the existing shares of stock
What does it mean when a firm has a days' sales in receivables of 45?
the firm collects its credit sales in 45 days on average.
What statements is most likely correct for a firm with days' sales in receivables of 30 days?
the firm finances approximately 8 percent of its annual sales at any given time.
What does a total asset turnover ratio of .75 mean?
the firm generated $.75 in sales for every $1 in assets.
What does a current ratio of 1.2 mean?
the firm has $1.20 in current assets for every $1 in current liabilities.
How do you interpret a current ratio of 1.38 times?
the firm has its current liabilities covered 1.38 times over.
The capital budgeting method that allows lower management to make smaller, everyday financial decisions easily is
the payback method
What is true of the payback method?
the payback method is useful to companies with limited capital.
What is NOT required when using the CAPM to compute the cost of equity capital?
the rate of inflation
According to the CAPM, what is the expected return on a stock if its beta is equal to zero?
the risk-free rate
The firm's cost of equity capital is ______ the required rate of return to the shareholders.
the same as
With mutually exclusive projects, the profitability index suffers from the same problem that the IRR rule does in that it fails to consider
the size or scale of projects.
What is the difference in results between the home currency approach and the foreign currency approach?
the two procedures produce the same answer
A poorly managed firm is an attractive target for a hostile takeover because:
there is greater profit potential
What is not a problem with measuring beta?
there is no basic method that can be used to measure beta.
Why do bondholders and stockholders invest in a company?
to make money
What is the fundamental goal of the Sarbanes-Oxley Act of 2002?
to protect investors from corporate abuse
What best explains why financial managers use a common-size balance sheet?
to track changes in a firm's capital structure
If a firm uses its overall cost of capital to discount cash flows from higher risk projects, it will accept ______ projects.
too many high-risk
Portfolio construction techniques that start with the asset allocation decision and then progress to more specific security-selection decisions are referred to as ______.
top-down
The capital intensity ratio is the reciprocal of the ______ ratio.
total asset turnover
A common-size balance sheet expresses accounts as a percentage of ______.
total assets
Shareholders' equity is the difference between what?
total assets and total debt
Some financial ratios measure a firm's ______, which indicates how efficiently a firm is using its assets to generate sales, while others measure a firm's financial ______, which demonstrates the ability to pay its bills over the short run without undue stress.
turnover, liquidity
The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates between the countries is called ___.
uncovered interest parity
The difference between the cash flows generated by a foreign project and the amount that is actually repatriated to the parent firm is referred to as ______ cash flows.
unremitted
The weighted average cost of capital (RWACC) is the overall expected return the firm must earn on its existing assets to maintain its ___.
value
There is often a trade-off between a firm's fixed costs and its ______ costs.
variable
Start-up companies rely on bank loans and investors who are willing to invest in them in return for an ownership stake in the firm. What do you call the equity investment in these young companies?
venture capital
What does WACC stand for?
weighted average cost of capital
The Securities Exchange Act of 1934 established what government agency?
SEC
A firm's cost of debt can be ___.
-estimated more easily than its cost of equity -obtained by talking to investment bankers -obtained by checking yields on publicly traded bonds
What does it mean if a company's capital intensity ratio is 2.4?
The firm requires $2.40 in assets to generate $1 in sales.
The discount rate for the firm's projects equals the cost of capital for the firm as a whole when ___.
all projects have the same risk
Sources of venture capital are dedicated venture capital funds, wealthy individuals known as __________ and institutions such as pension funds.
angel investors
Because there is no guide for choosing the payback cutoff date under the payback method, the payback cutoff date is
arbituray
An organization must prepare ______ and bylaws when forming a corporation.
articles of incorporation
A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons.
legal
A dollar received one year from today has ______ value than a dollar received today.
less
What companies were involved in corporate scandals that led to Sarbanes-Oxley?
-WorldCom -Tyco -Enron
When a corporation is formed, it is granted what?
-ability to issue stock -legal powers to sue -provincial citizenship for jurisdictional purposes
According to the basic investment rule for NPV, a firm should ______.
-accept a project if the NPV is greater than zero. -reject a project if NPV is less than zero. -be indifferent towards accepting a project if NPV is equal to zero
According to the basic IRR rule, we should ______ a project if the IRR is ______ than the discount rate.
-accept; greater -reject; less
The decision rule for a project for which the first cash flow is an inflow and subsequent cash flows are negative states that we should ______ the project when the IRR is ______ than the discount rate.
-accept; less -reject; greater
Using accounting numbers in the AAR method is a weakness because
-accounting numbers are somewhat arbitrary. -the basic inputs are affected by the accountant's judgment.
What items are used to compute the current ratio?
-accounts payable -cash
What non-cash expenses are on the income statement?
-amortization expense -depreciation expense
What is true concerning triangle arbitrage?
-arbitrage opportunities can exist in either the spot or the forward markets. -it helps keep the currency market in equilibrium. -it is a profitable situation involving three separate currency exchange transactions.
The discounted payback period has what weaknesses?
-arbitrary cutoff date -exclusion of some cash flows -loss of simplicity as compared to the payback method
What is generally true about firm betas and industry membership?
-betas are likely to change when a firm changes industries -betas can change even when a firm remains in the same industry.
What are true of MIRR?
-MIRRs are controversial. -MIRRs don't suffer from the multiple rate of return problem.
Preferred stock ___.
-pays dividends in perpetuity -pays a constant dividend
Projects should always be discounted at the firm's overall cost of capital. TF
False
What is the acronym for the interest rate most international banks charge one another for overnight Eurodollar loans?
LIBOR
What is a Eurobond?
a bond issued in multiple countries but denominated in a single currency
What is the implicit exchange rate between two currencies quoted in a third currency?
cross-rate
On the balance sheet, total assets must equal total ______.
liabilities and owners' equity
Investment banking firms handle the _____ marketing of new issues in the market, and later investors trade the previously-issued securities among themselves in the _____ market.
primary, secondary
Return on equity (ROE) is a measure of ______.
profitability
The concept that exchange rates adjust to keep purchasing power constant among currencies is referred to as ___.
purchasing power parity
Other companies that specialize only in projects similar to the project your firm is considering are called ___.
pure plays
An international firm that has contractual agreements to buy and sell goods in the near future at set prices are subject to
short-term exchange rate risk exposure.
The payback method ignores all cash flows occurring after the payback period which means
that some valuable long-term projects are likely to be rejected.
What do we know about the stability of a firm's beta?
-betas can change over time. -betas are more likely to be stable if the firm remains in the same industry.
What is true concerning beta?
-betas may vary over time. -firm's beta may change if the firm increases its debt-equity ratio. -the sample size used to compute a firm's beta may be inadequate.
Financial planning models typically do NOT rely on what?
-cash flow size -risk -timing
What are weaknesses of the payback method?
-cash flows received after the payback period are ignored. -the cutoff date is arbitrary. -timing of cash flows within the payback period are not considered.
What can cause a firm's beta to change over time?
-changes in technology -changes in leverage -changes in product line
What can be used to determine the cost of debt?
-checking the yield on publicly traded bonds -talking to commercial and investment bankers
Two mutually exclusive projects can be correctly evaluated by ______.
-comparing the incremental IRR to the discount rate -comparing the NPVs of the two projects -examining the NPV of the incremental cash flows
What real assets are included in household wealth?
-consumer durables -real estate
Why a are corporations the most important form of business?
-corporation is a separate legal entity with the ability to acquire and exchange property. -corporations can sue and be sued. -corporations can enter into contracts.
What potential goals for a company relate to profitability?
-cost control -market share -sales
What components are used in the construction of the WACC?
-cost of debt -cost of common stock -cost of preferred stock
When a new project constitutes its own industry, comparing the values of its ______ to comparable firms should help determine an appropriate beta.
-cyclicality of revenues -financial leverage -operating leverage
Financial analysis uses EBITDA over EBIT because the former adds back ______ and ______ and is thus a better measure of pretax operating cash flow.
-depreciation expense -amortization expense
What are some ways in which a foreign subsidiary can remit cash flows to a parent?
-dividends -management fees for central services -royalties for the use of trade names and patents
What are the two basic classifications under which most potential financial goals fall?
-earning or increasing profits -controlling risk
What are included in a firm's capital structure?
-equity -long-term debt
Firms raise cash by issuing
-equity securities -debt securities
Users of the foreign exchange market include ___.
-importers who pay for goods using foreign currencies -speculators who try to profit from changes in exchange rates -foreign exchange brokers who match buy and sell orders
According to Graham and Harvey's 2001 survey of 392 CFOs, what two capital budgeting methods are most used by firms in the U.S. and Canada?
-internal rate of return -net present value
The foreign currency approach to capital budgeting analysis ___.
-is computationally easier than the home currency approach -computes the NPV of a project in both the foreign and domestic currency -produces the same results as the home currency approach
The timing of cash flows within the payback period
-is not considered by the payback method. -impacts the NPV of the project.
What is true of the DDM?
-it is only useful for firms that pay steady dividends. -it is simple.
What is true about the WACC?
-it is the expected return a firm must earn on its existing assets to maintain its current value. -it is also referred to as the discount rate that is used to discount cash flows in capital budgeting problems.
What is true of the internal rate of return method?
-it is the most important alternative to the NPV method. -the IRR depends solely on the cash flows of the project. -it provides a single number summarizing the merits of a project.
Why do companies choose to use IRR?
-it summarizes information about a project in a single rate of return. -it provides a simple way of discussing projects.
What securities are considered fixed income?
-junk bonds -floating-rate bonds
What are the disadvantages to a sole proprietorship?
-limited life of the enterprise -difficulty in raising cash -unlimited liability
The Sarbanes-Oxley Act requires corporate officers to do what?
-list any deficiencies in internal controls -accept responsibility for material errors in the annual report -confirm the validity of the annual financial report
What are the best examples of cyclical firms?
-luxury retailers -automakers
A foreign subsidiary can remit funds to the parent company in which of the following ways?
-management fees -royalties -dividends
To estimate a firm's equity cost of capital using the CAPM, we need to know the ___.
-market risk premium -risk-free rate -stock's beta
What are weaknesses of the AAR method of project analysis?
-no account of timing -use of accounting values rather than cash flows -arbitrary target rate
What is correct when describing purchasing power parity?
-parity is expressed as both absolute and relative. -exchange rates adjust to keep purchasing power level between currencies. -purchasing power parity is a major factor in the rate of change in exchange rates.
Real assets examples:
-patents -land
What are costs to a firm associated with Sarbox compliance?
-paying auditors and other compliance fees -choosing to delist from U.S. stock exchanges
What costs to a firm associated with Sarbox compliance?
-paying auditors and other compliance fees -choosing to delist from U.S. stock exchanges
What are mechanisms to mitigate potential agency problems:
-poor or bad performers may be subjected to the threat of a takeover. -compensation plans tie to the income of managers to the success of the firm. -boards of directors can force out management teams that are underperforming.
Based on the sustainable growth rate, what factors affect a firm's ability to sustain growth?
-profit margin -financial policy -dividend policy
According to Graham and Harvey's 2001 survey of 392 CFOs, what capital budgeting methods are used by less than 50% of firms in the U.S. and Canada?
-profitability index -discounted payback -accounting rate of return
Regulation is meant to:
-reduce conflicts of interest -improve corporate governance
What is true concerning government regulation?
-regulation can help ensure firms disclose relevant information to investors. -regulation can help reduce conflicts of interest between managers and shareholders. -regulation can be costly to a firm.
The discount rate assigned to a project reflects the ______.
-risk of the project -opportunity cost to the investor
What is true about shareholders' equity?
-shareholders' equity is a residual claim on a firm's assets. -shareholders' equity is the difference between the value of a firm's assets and its debt.
What are the five categories of financial ratios?
-short-term solvency -long-term solvency -asset management -profitability -market value.
What can be used to encourage managers to act in the best interests of shareholders?
-stock options and bonuses -threat of termination -monitoring through reports -managerial compensation tied to performance
A corporation receives cash from financial markets by selling ______ and ______.
-stocks -bonds
Large businesses do not organize as partnerships or sole proprietorships because of:
-the difficulty in raising funds -the risks of unlimited liability -the difficulty in transferring ownership
In order to apply the dividend discount model to a particular stock, we have to estimate
-the dividend yield. -the growth rate.
What is true of the modified IRR (MIRR)?
-the idea is to modify cash flows first then calculate the IRR using the modified cash flows. -there are several different ways to calculate the MIRR.
What is not a reason that projects with the same payback period may not be equally attractive?
-the payback method includes cash flows that occur outside the payback period. -the cutoff date for the payback method is assigned by the SEC so firms have no say in the date used.
The growth rate of dividends can be estimated using ___.
-the retention ratio × ROE -security analysts' forecasts -historical dividend growth rates
What does value additivity mean for a firm?
-the value of a firm is simply the combined value of the firm's projects, divisions, and entities owned by the firm. -the NPV values of individual projects can be added together.
What is true about security analysts?
-they are sometimes employees of investment banking houses. -they are sometimes employees of money management firms.
What roles are of security analysts?
-they forecast dividends and earnings. -they make stock recommendations.
What are true about U.S. Treasury instruments?
-they have never defaulted. -they are not expected to default at this time.
Financial assets allow the risk of a real asset to be borne by investors ______.
-through the sale of securities for the best prices -whose preferences match the securities' risk-return characteristics
What are mechanisms to mitigate potential agency problems?
-top executives are provided with shares or stock options. -shareholders can launch proxy contests.
The different types of exchange rate risk include which of the following?
-translation exposure -short-term exposure -long-term exposure
What is true of the CAPM?
-tt is applicable to firms that pay no dividends. it explicitly adjusts for risk.
what are weaknesses of the AAR method of project analysis?
-use of accounting values rather than cash flows -no account of timing -arbitrary target rate
What is true of variable costs?
-variable costs increase as output increases. -variable costs "vary" with level of output.
What are examples of fixed assets?
-warehouses -equipment
How prevalent is the use of the CAPM in valuation in the U.S.?
Almost three-fourths of U.S. companies use the CAPM in valuation.
For both academics and practitioners, the pendulum has swung over to the _______ for estimating the cost of equity capital.
CAPM
Cal's Market has ROE of 15 percent. What does this mean?
Cal's generated $.15 in profit for every $1 of book value of equity.
Political risk refers only to problems for U.S. companies caused by foreign governments. TF
False
The Sarbanes-Oxley Act provides incentives for companies to go public in US markets. TF
False
______ refers to any difference in interest rates between two countries for some period offset by just the change in the relative value of the currencies, thus eliminating any arbitrage possibilities.
IRP
__________ involves moving through three different exchange rates and is an opportunity that exists when cross-rates are inconsistent with exchange rates.
Triangle arbitrage
A company can deduct interest paid on debt when computing taxable income. TF
True
A firm choosing to build its own factory would incur a high level of fixed costs. TF
True
Accounting profit does not adequately account for cash flow. TF
True
An increase in financial leverage increases beta. TF
True
An investment, for example the purchase of shares of stock, should justify not only time the money tied up but also the risk of the investment. TF
True
Due to the risk-return trade-off in the securities markets, the higher-risk assets are priced to offer higher expected returns than lower-risk assets. TF
True
Fixed costs tend to magnify the impact of sales cyclicality. TF
True
The Tax Cuts and Jobs Act of 2017 eliminated the repatriation issue with overseas earnings. TF
True
Two challenges with the IRR approach when comparing two mutually exclusive projects are scale and cash flow timing. TF
True
Under US tax law, a corporation's interest payments are tax deductible. TF
True
Variable costs change with changes in quantity. TF
True
If a firm has multiple projects, each project should be discounted using ___.
a discount rate commensurate with the project's risk
What does a financial plan with an internal growth rate of 6% mean?
a firm can achieve a maximum of 6% growth without obtaining external financing.
An agreement to exchange currencies at a future point in time at an exchange rate that is agreed upon today is called ____.
a forward trade
The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes ______ to sell.
a long time
What is ADR?
a security issued in the US that represents shares of a foreign stock
The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.
accepts
Profitability measures such as ROA and ROE are ______ rates of return.
accounting
The owners of a firm wish to make a risky investment with upside, as the value of the stock may go up. Management wants to avoid this investment, as there is significant risk, and jobs may be lost as a result. This is an example of an _________ _________.
agency cost
If you hire a real estate company to sell your house, you are most apt to encounter what?
agency problem
Sarbox requires officers of the corporation to review and sign the company's ______.
annual reports
In constructing portfolios, the choice among stocks, bonds, real estate and other broad classes is the __________ decision.
asset allocation
Some of the cash flow sent from the financial markets to the firm in the form of stock purchases is then used to invest in:
assets
Accepting a positive NPV project will ______ the stockholders by ______ the value of the firm.
benefit; increasing
The slope of the characteristic line of a firm's returns versus those of the market is the ___.
beta
Funds from a foreign subsidiary that cannot currently be remitted are sometimes said to be ___.
blocked
The market-to-book ratio evaluates a company's current market value relative to its ______.
book value
The sustainable growth rate answers the question: How much can the firm grow before it must ______.
borrow money
The percentage of sales approach described in the textbook assumes that any deficit of funds were
borrowed
A problem with the ______ strategy is the possibility of unintended bets on one or another sector of the economy.
bottom-up
Flotation costs are costs incurred to ____.
bring new security issues to the market
The use of local financing from the government of the foreign country where the operation is located ___.
can reduce political risk
The primary purpose of issuing debt or equity shares is to raise ______ for the firm.
cash
The primary purpose of issuing debt or equity shares is to raise ______ for the firm. Multiple choice question.
cash
What would allow analysts to compare the financial leverage of different size firms?
common-size balance sheet
What is tax-deductible to the firm?
coupon interest paid on bonds
Protecting oneself from a change in the exchange rate by locking in the forward exchange rate today is called ______.
covered interest arbitrage
The acid test ratio is considered to be a better measure of liquidity than the ______ ratio because ______ is (are) often the least liquid current asset.
current, inventory
An important accounting goal is to report financial information to users in a way that is useful for ______.
decision making
The ______ discounts cash flows and then determines the time it takes for those cash flows to equal the initial investment.
discounted payback period method
The risk-reward trade-off of an asset depends on its effect on the risk of a(n) ______ portfolio, that is, one with many assets so that the exposure to any particular asset is limited.
diversified
Some of the cash flow generated by a firm goes back to the financial markets in the form of ______.
dividends and debt payments
A cyclical firm is one in which revenues go ______ in the contraction phase of the business cycle.
down
The beta of a new project may be greater than the beta of existing pure play firms since it is likely to be more responsive to ___.
economywide movements
A market is said to be ______ when prices reflect all available information concerning the values of securities.
efficient
If stockholders are receiving residual growth in their share of the firm, that means that:
everyone else affiliated with the firm must also be seeing the benefits of growth
The sustainable growth rate is the maximum growth that a company can sustain without having to increase its ______.
financial leverage
_____ assets are claims to the income generated by _____ assets.
financial, real
On a balance sheet, patents and trademarks are classified as ______.
fixed assets
What assets last a long time and include items such as equipment, land, machinery or buildings.
fixed assets
What is true for a firm whose stock has a PE ratio of 8?
for each share purchased, the investor is investing $8 for every dollar of earnings.
Assuming the asset beta is positive, the equity beta will always be ______ the asset beta with financial leverage.
greater than
The equity beta of a levered firm will always be ______ the equity beta of an otherwise identical all-equity firm.
greater than
Given an internal growth rate of 3 percent, a firm can ______.
grow by 3 percent or less without any additional external financing
When valuing a complete business enterprise, the same process that is used for individual projects can be used. However, the analysis is complicated because a _________ must be used, and a terminal firm value must be determined.
horizon
Operating leverage refers to the firm's fixed costs of production while financial leverage
is the extent to which a firm relies on debt.
What is true about the average beta across all stocks?
it is equal to 1
What is true of the average accounting return method?
it is flawed but still sometimes used in the real world.
Financial planning is a(n) ______ process.
iterative
If a firm issues no debt, its average cost of capital will equal ___.
its cost of equity
The management of exchange rate risk should probably be centralized so that the firm has an understanding of ___.
its overall positions in foreign currency
The cash flows paid into a corporation by its bondholders and stockholders should be ______ the cash flows paid out to bondholders and stockholders.
less than
If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be ______.
less than 1
Long-term debt on the common-size balance sheet over the past three years was 30, 34, and 40 percent, respectively. This indicates the firm has increased its ______.
leverage
Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts in case of liquidation of a corporation.
limited
Shareholders' liability is _________ to the amount invested in ownership shares.
limited
Credit analysts, bankers, and other short-term lenders are most interested in what?
liquidity
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.
liquidity
Some financial ratios measure a firm's ______, which shows the ability to meet short-term obligations without undue stress, while others measure a firm's financial ______, which demonstrates the ability to meet long-term obligations.
liquidity; leverage
In a shareholder-manager relationship, who is the agent?
managers
The sustainable growth rate is the ______ rate of growth a firm can maintain ______ increasing its financial leverage.
maximum, without
The sales of cyclical firms are ______ sensitive to the business cycle than are the sales of non-cyclical firms.
more
Assuming interest rates are positive, one dollar received today is worth ______ one dollar received next year.
more than
The 1934 Securities Exchange Act restricts anyone who has access to ______ information from trading on that information.
non-public
One of the flaws of the payback period method is that cash flows after the cutoff date are
not considered in the analysis
A current liability is defined as debt that must be repaid within what period of time?
one year
How is ownership transferred in a corporation?
ownership is transferred by gifting or selling shares of stock.
Holding highly diversified portfolios without spending effort or other resources attempting to improve investment performance through security analysis is referred to as ______ management.
passive
If markets are efficient and prices reflect all relevant information, it is probably better to follow ______ strategies.
passive
The length of time, on average, it takes a firm's customers to ______ is referred to as the days' sales in receivables ratio.
pay their bills
The ______ method differs from NPV because it evaluates a project by examining the time needed to recoup the initial investment.
payback
The ______ method is ideal for companies with limited funds that have a need for a quick turn-around of their capital.
payback
The _______ tells us when the cash outflow of an investment is paid back by cash inflows.
payback
Investors' collections of investment assets are referred to as their ______.
portfolios
In general, NPV is
positive for discount rates below the IRR.
For "normal" cash flows, the NPV is ______ if the discount rate is less than the IRR, and it is ______ if the discount rate is greater than the IRR.
positive; negative
In capital budgeting, the net ______ is the value of a project to the company.
present value
The numerator in the profitability ratio is the
present value of the future expected cash flows after the initial investment.
When valuing a firm with the weighted average cost of capital, the ________ value of the firm can be estimated by assuming a constant perpetual growth rate for cash flows beyond the horizon.
terminal
When it is reported that the dollar is stronger in the foreign exchange market it means that ___.
the dollar is more valuable and can buy more of other currencies
What method employs uncovered interest parity to project future exchange rates?
the home currency approach
The theory that real interest rates are equal across countries is called _________.
the international Fisher effect
What statements best describes the purpose of the inventory turnover ratio?
the inventory turnover ratio monitors the rate at which a company is turning over its inventories.
Market value weights are more appropriate than book value weights because
the market values of the securities are closer to the actual dollars that would be received from their sale.
When a securities market conveys accurate information, thereby facilitating the most productive use of capital resources, the market is said to be ______.
transparent
The term premium for long periods is positive because the term structure of interest rates typically slopes
upward
What are ways for a US corporation to reduce political risk in a foreign country?
use local financing
According to the relative purchasing power parity, if the U.S. inflation rate is lower than the foreign country's, the exchange rate will rise because the foreign currency ______ relative to the dollar.
weakens
In the percentage of sales approach to financial planning described in the text book, it is assumed that any surplus funds ______.
were used to pay off debt