Principles of Finance Final Milestone

The purpose of a pro forma balance sheet is to __________.

analyze the effects of a sales forecast

In the case of liquidation, shareholders have a right to company assets after __________.

debt-holders

Determine the value of a stock with the following variables using the constant growth model: Current annual dividend: $2.75 per share Required return rate: 8.5% Constant growth rate: 6%

$116.60

Using the following variables, calculate an organization's cost of debt on a $500,000 bond. Rf: 1% credit-risk rate: 5% t: 15%

$25,500

For which company can trend analysis be most useful?

A software company whose business model and accounting practices have remained stable over time

Select the best definition of an annuity-due.

An annuity whose payments are made at the beginning of the period

Why is an investment portfolio containing a mix of stocks and bonds less risky than one containing a single asset class?

Because stocks and bonds are negatively correlated.

Select the true statement about default risk.

Bondholders have a degree of legal protection against default risk, but it is not comprehensive.

Venture capital bridge financing is appropriate for a company in what stage of development?

Growth

What is one potential advantage of being a privately-held company?

If managers also own the company, they are strongly incentivized to succeed.

What does the residual dividend model mean for a company?

It prioritizes the company's growth over shareholder dividends.

Company A Company B Market Value of Equity $400,000 $600,000 Market Value of Debt $100,000 $800,000 Cost of Equity9% 9% Cost of Debt 3% 4% Tax Rate 35% 35% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 6.5%?

Neither Company A nor Company B

Determine whether the following description is true of a capital lease, an operating lease, neither or both. "A way for a company to acquire equipment for a relatively short-term period, after which the equipment returns to the owner"

Operating lease

Select the statement that is true of preferred stock.

Owners of preferred stock have a stronger claim to a company's assets than owners of common stock.

Jerome needs funding to help start a business selling school supplies. He uses a website that connects him directly with a lender who charges a below-market interest rate. What type of financing resource is Jerome using?

Peer-to-peer lending

Select one reason a company's capital structure may include more equity than debt.

Relying too heavily on debt can increase the interest rate that a company must pay on its debt.

Over the last six years, prices and investing activity in the bond market rose for two years and then fell consistently for the next four years. How is this market classified?

Secular bear market

Before selling bonds to investors, Matteo's company must provide audited financial statements and a detailed description of the terms of the bonds. By doing so, which federal regulation is he complying with?

Securities Act of 1933

Which of the following is an advantage of bonds for a potential investor?

The diversity of bond types means they respond easily to market needs.

What is the amount of money foregone by investing in one asset compared to another known as?

The opportunity cost of capital

What was one outcome of the Sarbanes-Oxley Act of 2002?

Top management of U.S. companies must now individually and personally certify the accuracy of financial information.

Under what circumstance would agency conflict be most likely to increase?

When owners are separated from the business.

Millie owns stock in an energy company. She has noticed that the market value of her stock does not seem to fall when the company issues no dividends. The market's response to the company supports the idea of __________.

dividend irrelevance

Ratios that measure the value of a company's stock are __________.

market ratios

In the United States, the role of corporate governance is to maximize __________.

market value and shareholder value