BUS303 finance final

Great Underlying Rule of Finance 1, 2 and 3.

#1 - Higher the risk, the higher the required rate of return. Lower the risk, lower the required rate of return. #2 - If the risk is the same, take the option with the highest return. #3 - Dollar today is worth more (or has more value to you) than a dollar received some time in the future

A firm with earnings per share of $3 and a price-earnings (P/E) ratio of 24 will have a stock market price of

$72.00

Which of the following questions does break-even analysis attempt to address?

- How much do changes in volume affect costs and profits? - At what point does the firm have zero profit? - What is the most efficient level of fixed assets to employ? **All of the options

Which of the following is a potential problem of utilizing ratio analysis?

- Trends and industry averages are historical in nature. - Financial data may be distorted due to price-level changes. - Firms within an industry may not use similar accounting methods. **All of the options

A firm's debt-to-equity ratio varies at times because

- a firm will want to sell common stock when prices are high and bonds when interest rates are low. - a firm will want to take advantage of timing its fund-raising in order to minimize costs over the long run. - the market allows some leeway in the debt-to-equity ratio before penalizing the firm with a higher cost of capital. ** All of these are accurate statements.

The reason cash flow is used in capital budgeting is because

- cash rather than income is used to purchase new machines. - cash outlays need to be evaluated in terms of the present value of the resultant cash inflows. - to ignore the tax shield provided from depreciation would ignore the cash flow provided by the machine, which should be reinvested to replace older machines. **All of these options are true.

Which of the following statements regarding financial leverage are true.

- financial leverage reflects the amount of debt used in the capital structure of the firm. - financial leverage primarily affects the right side of the balance sheet. - financial leverage determines how the operation is to be financed. **all of the above.

The modified internal rate of return (MIRR) is used to

- help bridge the reinvestment assumption difference between NPV and IRR. - calculate a new discount rate using future value of the cash inflows and the original value of the investment. - give a more conservative outlook. all of the answers are true.

A banker's acceptance

- is a draft drawn on a bank and paid by that bank when presented to it. - may be accepted by the bank for future payment. - can be traded in a relatively liquid market until maturity. **All of the options are true.

The concept of time value of money is important to financial decision making because

- it emphasizes earning a return on invested capital. - it recognizes that earning a return makes $1 today worth more than $1 received in the future. - it can be applied to future cash flows in order to compare different streams of income. **All of these options are true.

If fixed costs rise while other variables stay constant

- the break-even point rises. - the degree of operating leverage increases. - total profit declines. **All of the options are true.

In forecasting a firm's cash needs for some future period

- the percent-of-sales method is a "broad-brush" approach. - cash budgets are more exact than the percent-of-sales method. - a cash budget approach can deal effectively with both level and seasonal production schedules. **All of the options.

A firm's cost of financing, in an overall sense, is equal to its

- weighted average cost of capital. - required yield that investors seek for various kinds of securities. - required rate of return that investors seek for various kinds of securities. **all of these options are true.

Advantages and disadvantages of each of the following capital budgeting tools: NPV

Advantages: a. fixes all paybacks disadvantages b. Disadvantages: a. assumes all cash inflows can be reinvested at the discount rate. b.

Advantages and disadvantages of each of the following capital budgeting tools: MIRR

Advantages: a. sets the reinvestment rate more conservatively. Also eliminates multiple IRR issue. b. can be compared to the cost of capital (WACC) in accepts-reject decision. Disadvantages: a. Nice to have excel to help with calculations b. none

Advantages and disadvantages of each of the following capital budgeting tools: IRR

Advantages: a. solution is in % b. like NPV, consider all cash flows & considers time value of money Disadvantages: a. Assumes each cash flow will be reinvested at IRR. b. Solution is not straight-forward when the cash flows are not ordinary. Ordinary = one outflow and rest are inflows.

Goal of the financial manager

Building long-term shareholder wealth while watching out for stakeholders.

Which of the following is the most liquid asset?

Cash equivalents

Which of the following securities represents an unsecured promissory note issued by a corporation?

Commercial paper

Ideally, which of the following type of assets should be financed with long-term financing?

Fixed assets and permanent current assets

Which of the following does NOT influence the yield to maturity for a security?

Historic yields

Star Corp. issued bonds two years ago with a 7% coupon rate. The bonds are currently trading for $928 in the market. Which of the following most likely has occurred since the time of issue?

Inflation increased

Which of the following is generally considered to be the least liquid of current assets?

Inventory

Relationship between market interest rates and the price of a bond.

Inverse

The required return by investors is important to financial managers except for which of the following reasons?

It is the primary driver of their financial ratios.

Value to the manager of knowing the WACC

Know what investor's require in a rate of return for new projects. Implies WACC is hurdle rate for our new projects so it can be used as the discount rate in NPV.

Which of the following combinations of asset structures and financing patterns is likely to create the least volatile earnings?

Liquid assets and heavy long-term borrowing

Which of the following is not one of the components included in the required rate of return on a bond?

Market yield

Fundamental basis for the market value of a financial asset.

PV of expected cash flows.

Components of the required rate of return.

Real rate + inflation premium = Risk-free rate Risk-free rate + risk premium = Required rate of return

How many of the following items are found on the balance sheet, rather than the income statement? Accounts receivable Retained earnings Income tax expense Accrued payable Cash Selling and administrative expenses Plant and equipment Operating expense Marketable securities Interest expense

Six of these items are found on the balance sheet.

Benefit of ratio analysis.

Takes sheer dollar amounts out of the picture. Allows you to compare "apples to apples" across time (trends) and comparing to your industry competitors.

What is the importance of risk and return to the financial manager?

That is the means of accomplishing the goal

Cash flow does not rely on which of the following?

The monetary policy of the Federal Reserve.

Which of the following statements about the "payback method" is true?

The payback method does not consider the time value of money.

Which of the following is an inflow of cash?

The sale of the firm's bonds

Preferred stock has all but which of the following characteristics?

The same binding contractual obligation as debt.

Which of the following is not a valid reason for holding cash?

To earn the highest return possible.

Generally, the safest and most marketable instrument for short-term investment is

Treasury bills.

If XYZ's receivables turnover is 4x, what does that mean?

XYZ is able to collect its receivables every 90 days, or 4 times a year

A quick ratio that is much smaller than the current ratio reflects

a large portion of current assets is in inventory.

An annuity may best be defined as

a series of consecutive payments of equal amounts.

Advantages and disadvantages of each of the following capital budgeting tools: Payback period

advantages: a. Emphasis on liquidity b. easy to compute and understand Disadvantages: a. ignores the time value of money b. ignores cash flows after arbitrary cutoff point.

Eurodollar certificates of deposit

are used by banks to loan out funds to anyone seeking U.S. dollars.

The net present value method (NPV) is a more conservative technique for selecting investment projects than the internal rate of return method because the NPV method

assumes that cash flows are reinvested at the firm's weighted average cost of capital.

A bond that has a "yield to maturity" greater than its coupon interest rate will sell for a price

below par.

Within the capital asset pricing model

beta measures the volatility of an individual stock relative to a stock market index.

An aggressive, risk-oriented firm will likely

borrow short-term and carry low levels of liquidity.

The most subjective and also significant segment of the 5 Cs of credit for giving final approval is

character.

When using the economic order quantity model

costs are minimized when total carrying costs and total ordering costs are equal.

An item which may be converted to cash within one year or one operating cycle of the firm is classified as a

current asset.

The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.

fixed costs

Trend and industry analysis provide all of the following information except

future information about the company.

In general, a firm with higher amounts of sales on credit has

higher needs to borrow.

The book value per share is based off of ________ data, while the market value per share is based off of_________ data.

historical; future

A short-term creditor would be most interested in

liquidity ratios.

A firm that wishes to minimize risk when investing idle cash would be LEAST likely to buy

long-term corporate bonds.

Normally, permanent current assets should be financed by

long-term funds.

Desired level of Weighted Average Cost of Capital (WACC).

low as possible

A highly automated plant would generally have

more fixed than variable costs.

The _________ assumes returns are reinvested at the cost of capital.

net present value method

In a general sense, "cash flow" can be said to equal

operating income less taxes plus depreciation.

The costs of carrying inventory do not include

ordering costs.

Total stockholders' equity consists of

preferred stock, common stock, capital paid in excess of par, and retained earnings.

In a general sense, the value of any asset is the

present value of the cash flows expected to be received from the asset.

Marginal cost of capital

recognizes that cost of capital does not stay constant as more funds are raised.

Asset utilization ratios

relate balance sheet assets to income statement sales.

For many firms, the cheapest and most important source of equity capital is in the form of

retained earnings.

A weakness of break-even analysis is that it assumes

revenue and costs are a linear (constant) function of volume.

The market allocates capital to companies based on

risk. efficiency. expected returns. **all of these options are true.

In break-even analysis, the contribution margin is defined as

sales price minus variable cost.

Generally, more use is made of short-term financing because

short-term interest rates are generally lower than long-term interest rates and most firms do not have basic access to the capital markets.

One of the first considerations in cash management is

synchronization of cash inflows and cash outflows.

Assuming that a firm has no capital rationing constraint and that a firm's investment alternatives are not mutually exclusive, the firm should accept all investment proposals

that have a positive net present value.

Price-earnings (P/E) ratio is influenced by all of the following BUT

the business risk the firm takes on. earnings per share. quality of management. **All of the options are true.

An increasing average receivables collection period indicates

the company is becoming less efficient in its collection policy.

Although debt financing is usually the cheapest component of capital, it cannot be used in excess because

the financial risk of the firm may increase and thus drive up the cost of all sources of financing.

In using the internal rate of return method, it is assumed that cash flows can be reinvested at

the internal rate of return.

The longer the life of an investment

the more significant the discount rate.

As a bond approaches its maturity date, its sales price approaches

the par value.

An increase in the riskiness of a particular security would NOT affect

the premium for expected inflation.

If projects are mutually exclusive

the selection of one alternative precludes the selection of other alternatives.

The pre-tax cost of debt for a new issue of debt is determined by

the yield to maturity of outstanding or comparable bonds.

The major limitation of financial statements are

their use of historical cost accounting.

A statement of cash flows allows a financial analyst to determine

whether a cash dividend is affordable. how increases in assets have been financed. whether long-term assets are being financed with long-term or short-term financing. **All of the options

Financial capital does not include

working capital.