finc mgmt exam 2

Given the following information, calculate the stock's Beta: Market Rate of Return (rm) 6% Stock's Rate of Return (rs) 8% Risk-Free Rate of Return (RF) 2%

1.5

The expected inflation is 4% and the risk-free rate is 6%; the real rate of interest is:

2%

With respect to the time value of money, the future value of a given dollar amount has what kind of relationship to the rate of interest used in computing the future value?

A positive relationship

Which would have a higher future value?

An investment with continuous compounded

Corporate Bonds:

Are long-term debt instruments

Given the following information, calculate the required return of this firm's securities: Hint: use the CAPM Equation Required return on overall market 9% Risk free rate 6% Beta 1.5

CAPM = 6% + 1.5*(9% - 6%) = 10.5%

When comparing investments that have different means, the ______ ___ ______ measures the relative riskiness of each investment and is a better indicator of risk than the standard deviation.

Coefficient of Variation

The three most important financial instruments in Corporate Finance are:

Corporate Bonds, Common Stock, Preferred Stock

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on a firm's net income and earnings per share.

Financial leverage

Today's dollar value of a specific amount is called the ______ _______.

PV

An annuity that goes on forever is called a _______ annuity.

Perpetual

Each of the following statements is false except:

The nominal interest rate consists of the real interest rate plus various premiums.

treasury bill:

a short-term debt instrument issued by the US Treasury that is very nearly risk-free.

A perpetuity can be described as:

an annuity that goes on forever

A competitive market where securities can be traded easily, quickly and at a low-cost is called ______.

an efficient market

Car payments and lottery pay-outs are generally set up as ________.

annuities

In a financial setting, evidence shows that most people ______ risk when possible.

avoid

Investment bankers arrange securities sales on either an underwriting or ______ ______ basis

best efforts

________ risk is the degree of uncertainty about operating income (EBIT).

business

Financial markets bring together ___ and ___ of financial securities

buyers & sellers

The ______ markets trade securities with maturities greater than one year, expose the investor to somewhat higher risk, have higher expected rates of return, and are less liquid.

capital

The greater the fixed expenses, the greater the ______ in operating income for a given change in sales.

change

______ stockholders own a portion of the company.

common

The coefficient of variation provides a standardized measure of the degree of risk that can be used to ______ alternatives.

compare

In financial markets, most people seek to avoid risk unless they are adequately ______ for it.

compensated

Financial risk, which comes from borrowing money, ______ the effect of business risk and intensifies the volatility of net income.

compounds

A ______ occurs when a borrower fails to pay interest and principal on a loan.

default

The process of taking a cash flow that is received or expected in the future and stating that cash flow in present value terms is called ________.

discounting

In statistics, ______ are used to describe the many values variables may have.

distributitions

Combining two negatively correlated assets to reduce risk is known as ________.

diversification

When individual assets are combined in a portfolio, __________ results in a reduction in fluctuation of returns.

diversification

Common stockholders receive a return on their investment in the form of common stock

dividends

The 12 district ______ ______ banks lend money to financial institutions at the discount window.

federal reserve

The additional volatility of a firm's net income caused by fixed interest expense of debt financing is called________ risk.

financial

What are the three main types of economic units?

governments, businesses, and households.

An example of a single amount investment would be:

he purchase of a certificate of deposit (CD) a single deposit into a savings account the purchase of a treasury bill

Commercial banks make money by charging a ______ interest rate on the money they lend than the rate they pay on money lent to them in the form of deposits

higher

Fixed expenses ______ the effect of sales volatility on operating income volatility.

increase

If the discount rate is lowered, the PV will _____. (increase or decrease)

increase

As the discount rate decreases, the PV of a given cash flow to be received at a particular time in the future ______

increases

The future value of a dollar ________ as the interest rate increases and ________ the longer the money remains invested.

increases; increases

The risk-free interest rate is the real rate of interest plus an ______ premium.

inflation

What is simple interest?

interest earned only on the original principal

All securities have some risk that is due to common market factors. This type of risk is called _______risk.

market

Bonds issued by state and local governments are known as ______ bonds.

municipal

The cost paid by the borrower to the lender for reducing consumption, known as an ______ cost, is the real rate of interest.

opportunity

In an ______ annuity, the cash flows occur at end of each of the specified time periods.

ordinary

______ interest rates indicate that money has a time value.

positive

A ______ ______ is usually a graph, table, or formula that specifies the probability associated with each possible return the investment may generate.

probability distribution

In an efficient market, securities can be traded easily, ______, and at low-cost

quickly

The pure time value of money uses the _____ rate of interest.

real

The required level of reserves a bank must hold is determined by applying a percentage to the average weekly deposits held by the bank and is referred to as the ______ ______ ratio.

required reserve

The Federal Reserve requires all commercial banks to keep a minimum amount of ______ on hand.

reserve

The CAPM can be divided into the _________

risk-free rate and market risk premium

The FV moves in the _____ direction as the number of periods.

same

When the Fed wants to slow down the economy, it decreases the money supply by ______ treasury securities.

selling

A business or household that has more income than expenses is called a ______ economic unit.

surplus

National commercial banks are examined primarily by:

the Comptroller of the Currency

When bond investors have a strong desire for keeping their money safe:

they may accept a lower interest rate, perhaps even a negative rate, if the promise of safety is there in the bond.

Stocks that are not traded on national or regional exchanges, but instead are offered for sale in a secondary market, which consists of a network of dealers trading over computers, are:

traded on the ""over-the-counter market"

The best way to compare multiple investments is to compute the PV of each investment.

true

The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity for interest rates greater than zero.

true

The nominal interest rate is the rate observed in the financial marketplace that includes the real rate of interest and various premiums.

true

To calculate a standard deviation of a distribution, you must first fine the expected ______, or mean, of the distribution.

value

Measured after the fact, business risk is best measured as:

volatility of operating income

The ______ curve is a plot of interest rates and time to maturity of bonds with similar characteristics.

yield