MFL Final Exam
Formula for EAR and EPR
1 + EAR = (1 + EPR)^t
Inventory turnover ratio
COGS/inventory
A bond's "spread" refers to the difference between it's Moody's rating and its Standard & Poors rating.
False
Miller Motorworks has a $1,000 par value, 8% annual coupon bond with interest payable semiannually with a remaining term of 15 years. The annual market yield on similar bonds is 6%. This bond will at a discount from par.
False
Why is the quick ratio a more refined measure of liquidity than the current ratio?
Inventories are omitted
All of the following operate as financial intermediaries except: -commercial banks -mutual funds -insurance companies -the US Treasury
The US treasury
All of the following are true about insurance companies EXCEPT -they may only invest their reserves in interest paying bank accounts under Federal Law -they participate in equipment leasing -they invest their reserves -they may guarantee to reimburse lenders should lenders' loans go into default
They may only invest their reserves in interest paying bank accounts under Federal Law
All else constant, an individual would be indifferent between receiving $2000 today or receiving a $200 perpetuity when the discount rate is 10% annually.
True
The purpose of financial markets is to bring borrowers and savers together
True
The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%. The coefficient of correlation between the stocks is .75. The standard deviation of any portfolio combining the two stocks will be less than 20%.
True
Which of the following is true? -a bond will sell at premium if the required rate of return < the bond's coupon rate -a bond that has a rating of AA is a junk bond -a zero coupon is a bond that is secured by a lien on real property -the legal document that describes all the terms and conditions of a bond issue is called a debenture agreement
a bond will sell at premium if the required rate of return < the bond's coupon rate
Which of the following has a beta of zero? -the market -a risk free asset -a high risk asset -both a and B
a risk free asset
CEOs naming friends to the board of directors and paying them more than the norm is an example of
agency problem
Common stockholders expect greater returns than bondholders because A. they bear greater risk. B. they have no legal right to receive dividends. C. in the event of liquidation, they are only entitled to receive any cash that is left after all creditors are paid. D. all of the above.
all of the above
Jayden spends a lot of time studying charts of stocks past performance, but his investment return are only average. This outcome supports -the strong form efficient market hypothesis -the weak form efficient market hyptohesis -the semi strong form efficient market hypothesis -all of the above
all of the above
Which of the following factors will influence a firm's P/E ratio? A. Firm investment opportunities B. General market conditions C. The investors' required rate of return D. All of the above
all of the above
the issuance of bonds to raise capital for a corporation -increases risk to stockholders -is a cheaper form of capital than the issuance of common stock -magnifies the returns to stockholders -all the above
all the above
business that wish to issue public debt will usually seek help from
an investment banking firm
a negative coefficient of correlation implies that
asset returns tend to move in opposite directions
managers of corporations need to act in an ethical manner
because a business must be trusted by investors, customers, and the public if it is to succeed
evidence that agency costs exists
because stock prices increase when an underperforming CEO is unexpectedly replaced
Interest rates have increased by 50 basis points (0.5%). Which of the following bonds will decline most in price? All of the bonds have AA ratings. -bond that matures in 5 years -bond that matures in 10 days -bond that matures in 10 years -all will decline by the same amount
bond that matures in 10 years
a bond investor seeking capital gains should purchase
bonds with distant maturity dates when interest rates are expected to decline
All else constant, the present value of an investment will increase if (a) the investment is discounted at a higher interest rate (b) the investment is discounted for fewer years (c) the investment is discounted at a lower interest rate (d) both B and C
both B and C
What allows a borrower to redeem or repurchase a bond issue before its maturity date?
call provision
a decrease in ______ will increase gross profit margin
cost of goods sold
Acid Test Ratio
current assets - inventory / current liabilities
if the total asset turnover decreases, then the return on equity will
decrease
which of the following is not included in computing EBT (earnings before taxes)? -depreciation expense -marketing expenses -dividends -cost of goods sold
dividends
Which of the following best represents operating income? -earnings before interest and taxes -income from discontinued operations -income from capital gains -income after financing activities
earnings before interest and taxes
Currently, the expected return on the market is 12.5% and the required rate of return for Alpha, inc. is 12.5%. Therefore, Alpha's beta must be
equal to 1
Portfolio returns can be calculated as the geometric mean of the returns on the individual assets in the portfolio
false
adequate portfolio diversification can be achieved by investing in several companies in the same industry
false
bonds cannot be worth less than their book value
false
if a market is weak form efficient, an investor can make higher than expected profits by studying the past price patterns of a stock
false
if an investor earns 10% on her investment in the first year and loses 10% the next year, she will have neither a gain nor a loss.
false
if investors become more risk averse the SML would shift downward and the slope of the SML would fall
false
shorter term bonds have greater interest rate risk than do longer term bonds
false
the arithmetic average rate of return takes compounding into effect
false
the goal of profit maximization is equivalent to the goal of maximization of share value
false
the par value of a corporate bond indicates the level of interest payments that will be paid to investors
false
Over the period 1995-2015, which pair of investments does not perfectly fit the "higher risk, higher return" pattern
government bonds, treasury bills
Which of the following statements about bonds is true? A. Bond prices move in the same direction as market interest rates. B. If market interest rates are above a bond's coupon interest rate, then the bond will sell below its par value. Your answer is correct.C. Longminusterm bonds have less interest rate risk than do shortminusterm bonds. D. As the maturity date of a bond approaches, the market value of a bond will become more volatile.
if market interest rates are above a bond's coupon interest rate, then the bond will sell below its par value
Which of the following statements about bonds is true? A. If market interest rates are below a bond's coupon interest rate, then the bond will sell above its par value. Your answer is correct.B. Longminusterm bonds have less interest rate risk than do shortminusterm bonds. C. As the maturity date of a bond approaches, the market value of a bond will become more volatile. D. Bond prices move in the same direction as market interest rates.
if market interest rates are below a bond's coupon interest rate, then the bond will sell above its par value
Which of the following statements about bonds is true? A. Bond prices move in the same direction as market interest rates. B. Longminusterm bonds are less risky than shortminusterm bonds. C. If market interest rates change, longminusterm bonds will fluctuate more in value than shortminusterm bonds. Your answer is correct.D. If market interest rates are higher than a bond's coupon interest rate, then the bond will sell above its par value. E. None of the above.
if market interest rates change, long term bonds will fluctuate more in value than short term bonds
the nominal interest rate
includes inflation and the real rate of interest
Which of the following sequences is arranged in the correct order, from highest-long term returns to lowest? (a) corporate bonds, treasury bills, international equities (b) international equities, US government bonds, US equities (c) government bonds, emerging market equities, treasury bills (d) international equities, US government bonds, treasury bills
international equities, US government bonds, treasury bills
if current market interest rates rise, what will happen to the value of outstanding bonds?
it will fall
if current market interest rates fall, what will happen to the value of outstanding bonds?
it will rise
Which of the following is not a component of return on assets (ROA)? -sales -total assets -leverage -cost of goods sold
leverage
Which of the following isn't an example of systematic risk? -recession -interest rate risk -management risk -inflation
management risk
the expected yield of a bond will be less than its yield to maturity when
market interest rates are expected to fall
the market risk premium is measured by
market return less risk free rate
on the income statement, sales revenue, minus COGS and operating expenses, equals
net operating income (EBIT)
evidence exists that directors
often represent the interests of the managers who nominated them for the directorships
which of the following streams of income is not affected by how a firm is financed (whether with debt or equity)? -operating income -income before tax -net working capital -net profit after tax but before dividends
operating income
return on total assets
profit margin x asset turnover
Return on Equity
profit margin x turnover x equity multiplier
the CAPM
provides a risk return trade off in which risk is measured in terms of beta
advantages of privately placing debt include all the following except -restrictive covenants -flexibility -speed -reduced placement costs
restrictive covenants
You're considering investing in Ford. Which is an example of diversifiable risk? -risk from interest rates decreasing -risk from an expected recession -risk from possibility of stock market crash -risk from uncertainty regarding a possible strike against Ford
risk from uncertainty regarding a possible strike against Ford
You're considering buying some stock in Continental Grain. Which of the following is an example of non-diversifiable risk? -risk resulting from an explosion in a grain elevator owned by Continental -risk resulting from an impending lawsuit against continental -risk resulting from a news release that several Continental's grain silos were tainted -risk resulting from a general declie in the stock market
risk resulting from a general decline in the stock market
net profit margin
sales - COGS / sales
bond ratings directly affect a bond's
spread over the treasury yield
All of the following are classified as non-bank financial intermediaries except: -hedge funds -insurance companies -stock borkerages -investment banks
stock brokerages
Which of the following is true? -stock with beta < 1 has higher nondiversifiable risk than a stock with beta = 1. -stock with beta < 1 has lower nondiversifiable risk than a stock with beta = 1 -stock with beta < 0 has no exposure to systematic risk -stock with beta > 1 has lower nodiversifiable risk than stock with beta = 1
stock with beta < 1 has lower nondiversifiable risk than a stock with beta = 1
The SML relates risk to return, for a given set of market conditions. If expected inflation increases, which would occur? -market risk premium would increase -slope of SML would increase -beta would increase -the SML would shift up
the SML would shift up
Quirk Drugs sold an issue of 30minusyear, $1,000 par value bonds to the public that carry a 10.85% coupon rate, payable semiannually. It is now 10 years later, and the current market rate of interest is 9.00%. If interest rates remain at 9.00% until Quirk's bonds mature, what will happen to the value of the bonds over time?
the bonds will sell at a premium and decline in value until maturity
the PE ratio is calculated by dividing
the current stock price by earnings per share
The beta of ABC co. stock is the slope of
the line of best fit for a plot of returns on the S&P 500 versus returns on short-term treasury bills
If risk aversion increases, which would occur? -the SML would shift up -the market risk premium would increase -the slope of the SML would increase -beta would increase
the market risk premium would increase
Which of the following statements about bonds is true? A. As the maturity date of a bond approaches, the market value of a bond will become more volatile. B. The market value of a bond moves in the opposite direction of market interest rates. Your answer is correct.C. Longminusterm bonds are less risky than shortminusterm bonds. D. If market interest rates are higher than a bond's coupon interest rate, then the bond will sell above its par value. E. None of the above.
the market value of a bond moves in the opposite direction of market interest rates
all the following affect the value of a bond except: -investors RRR -the maturity date of the bond -the coupon rate of interest -the recorded value of the firm's assets
the recorded value of the firm's assets
if the market price of a bond increases, then
the yield to maturity decreases
Debt ratio
total liabilities / total assets
A AAA rated bond's yield to maturity will be very close to it's expected yield
true
a basis point is equal to one hundredth of a percentage point
true
as a bond approaches maturity, discounts and premiums become less and less significant
true
debentures are unsecured long term debt
true
for any number of compounding periods per year greater than 1, EAR will always be greater than the APR
true
in a perfectly efficient market, all assets would plot on the Security market line
true
the longer the time to maturity, the more sensitive a bond's price to changes in market interest rates
true
the sensitivity of a bond's value to changing interest rates depends on both the bond's time to maturity and its pattern of cash flows
true
when assets are positively correlated, they tend to rise or fall together.
true
When a bond's coupon rate is lower than the required rate of return, the bond
will sell at a discount from par