Chapter 2 - 14 Review

Net present value:

A. is the best method of analyzing mutually exclusive projects.

Which of the following accounts is most liquid?

C. Accounts Receivable

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning at 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?

C. Barb will earn more interest in Year 2 than Andy.

Which one of the following relationships applies to par value bond?

C. Coupon Rate = Current Yield = YTM

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

C. Coupon rate decreases and the time to maturity increases

An increase in current liabilities will have which of the following effects, all else held constant? Assume all ratios have positive values.

C. Decrease the quick ratio

All else constant, a bond will sell at ____ when the coupon rate is _____ the YTM.

C. a discount; less than

A company's overall cost of equity is:

C. directly related to the risk level of the firm

Which two methods of project analysis are the most biased towards short-term projects?

C. payback and discounted payback

Which one of the following transactions occurs in the primary market?

D. A purchase of newly issued stock from the issuer.

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

D. Discount rate

DLQ Inc., bonds mature in 12 years and have a coupon rate of 6%. If the market rate of interest increases, then the:

D. Market price of the bond will decrease

Which one of the following ratios is a measure of a firm's liquidity?

D. Quick Ratio

The average compound return earned per year over a multiyear period is called the _____ average return

D. geometric

The present value of an investment's future cash flows divided by the initial cost of the investment is called:

D. profitability index

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

A. Coupon

The return earned in an average year over a multiyear period is called the ______ average return.

A. arithmetic

Unsystematic risk:

A. can be effectively eliminated by portfolio diversification

Which of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

A. income statement

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the projects:

A. incremental cash flows

Assume the market rate of return is 10.1% and the risk-free rate of return is 3.2%. Lexant stock has 2% less systemic risk than the market and has an actual return of 10.2%. This stock:

A. is underpriced

As the degree of financial leverage increases, the:

A. probability a firm will encounter financial distress increase

As the degree of financial leverage increases, the:

A. probability a firm will encounter financial distress increases

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?

A. project A only

Assume that last year T-bills returned 2.8% while your investment in large-company stocks earned an average 7.6%. Which of the following terms refer to the difference between these two rates of return?

A. risk premium

Which one of the following is an example of a sunk cost?

B. $1,200 paid to repair a machine last year

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

B. 0.5

Which one of the following bonds is the least sensitive to interest rate risk?

B. 3-year; 6% coupon

A supplier, who requires payment within 10 days, should be most concerned with which of the following ratios when granting credit?

B. Cash

The fact that a proposed project is analyzed based on the project's incremental cash flow is the assumption behind which of the following principles?

B. Stand-alone principle

Standard deviation is a measure of which one of the following?

B. Volatility

Which one of these will increase a company's aftertax cost of debt?

B. a decrease in the company's tax rate

The capital structure weights used in computing a company's weighted average cost of capital:

B. are bared on the market values of the outstanding securities

Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

B. compounding

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

B. discounting

Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:

B. increase

To convince investor to accept greater volatility, you must:

B. increase the risk premium

The weighted average cost of capital for a firm with debt is the:

B. rate of return a company must earn on its earning assets to maintain the current value of stock

The excess return is computed as the:

B. return on a risk security minus the risk-free rate

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which of the following is the best example of an incremental operating cash flow related to the wreath project?

C Hiring additional employees to handle the increased workload should the firm accept the wreath project

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

C. Long-term; zero-coupon

Renee invested $2,000 six years ago at 4.5% interest. She spends all of her interest earnings immediately so she only received interest on her initial $2,000 investment. Which type of interest is she earning?

C. Simple interest

The subjective approach to project analysis:

C. assigns discount rate to projects based on the discretion of the senior managers of a firm.

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?

C. balance sheet

Which one of the following best describes the concept of erosion?

C. the cash flows of a new project that come at the expense of a firm's existing cash flows

The secondary market is best defined as the market:

D. Where outstanding shares of stock are resold.

Non-cash items refer to:

D. expenses that do not directly affect cash flows

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. In the second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in the rest of the second year is referred to as:

D. interest on interest

Which one of the following types of stock is defined by the fact that no preferential treatment in respect toe their dividends or bankruptcy proceedings?

E. Common

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

E. Compound interest

The percentage of the next dollar you earn that must be paid in taxes is referred to as the ____ tax rate.

E. Marginal

Project X has cash flows of $8,500, $8,000, $7,500 and $7,000 for Year 1 to 4 respectively. Project Y has cash flows of $7,000, $7,500, $8,000 and $8,500 for years 1 to 4. Which one of the following statements is true concerning these two projects given a positive discount rate?

E. Project X has both a higher present and higher future value than Project Y

Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management?

E. Proxy fight for control of the board

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

E. Sales

Which one of the of the following statements correctly defines a time value of money relationship?

E. Time and present value are inversely related, all else held constant

On a common-size balance sheet, ll accounts for the current year are expressed as a percentage of:

E. Total assets for the current year

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

E. Voting by proxy

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

E. YTM < Coupon Rate

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called:

E. crossover rate

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

E. discounted payback period

The aftertax cost of debt:

E. is highly dependent upon a company's tax rate

Which one of the following methods of analysis provides the best information of the benefit of project relative to the cost?

E. profitability index

The discount rate assigned to an individual project should be based on:

E. the risks associated with the use of the funds required by the project