FIN 302 EXAM 1 PRACTICE

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The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

.05/(1 − t*) = .07.

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

3-year; 6 percent coupon Higher time to maturity → higher sensitivity, lower coupon rate → higher sensitivity

A bond that can be paid off early at the issuers discretion is referred to as being which type of bond?

Callable

An example of a negative covenant that might be found in a bond indenture is a statement that the company:

Cannot lease any major assets without bondholder approval

Which ratio identifies the amount of total assets a firm needs in order to generate $1 in sales?

Capital intensity ratio

A bond is quoted at a price of $1,037. This price is referred to as the:

Clean price

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

Coupon rate decreases and the time to maturity increases

Which one of the following relationships is stated correctly?

Decreasing the time to maturity increases the price of a discount bond, all else constant.

Which of the following questions involves a capital structure decision?

How much debt should the firm incur to fund a project?

Which one of the following questions involves a capital structure decision?

How much debt should the firm incur to fund a project?

Working Capital Management

How should short-term assets be managed and financed?

Capital Structure

How should the firm raise funds for the selected investments?

The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return.

Inflation

Wei Bridal is a profitable firm with a dividend payout ratio of 25 percent. The firm does not want to issue additional equity shares nor increase its long-term debt. Which one of the following defines the maximum rate at which this firm can currently grow?

Internal growth rate

What is the goal of financial management?

Maximize shareholder wealth

Which one of the following best states the primary goal of financial management in the United States?

Maximize the current value per share

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

Number of future dividends, provided the total number of dividends is less than infinite

When preparing pro forma statements, which one of the following is an analyst most likely to estimate first?

Projected sales

Symone sold shares of Naraghi Corporation stock to Aleena. The stock is listed on the NYSE. This trade occurred in which one of the following?

Secondary, auction market

Which one of the following statements concerning bond ratings is correct?

Split-rated bonds are called crossover bonds.

The plowback ratio is:

The percentage of net income available to the firm to fund future growth

Which one of these statements related to growing annuities and perpetuities is correct?

The present value of a growing perpetuity will decrease if the discount rate is increased.

A Treasury yield curve plots Treasury interest rates relative to:

Time to maturity

A firm is currently operating at 78 percent of capacity. Next year's pro forma statement is based on an annual increase in sales of 5 percent. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this information, the:

Total assets will increase by less than 5 percent

Which one of the following must be true if the sustainable growth rate will be greater than the internal growth rate?

Total debt > $0

What is the biggest disadvantage of a partnership & the biggest advantage of forming a corporation?

Unlimited liability vs. limited liability

Capital Budgeting

What long-term investments should the firm choose?

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a discount; less than

An example of a negative covenant that might be found in a bond indenture is a statement that the company:

cannot lease any major assets without bondholder approval.

All else constant, a(n) ______ will increase the internal rate of growth.

decrease in total assets

The maximum rate of growth a corporation can achieve can be increased by:

increasing the retention ratio.

A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume the firm:

is currently operating at full capacity.

The Sarbanes-Oxley Act of 2002 is a governmental response to:

management greed and abuses.

The Sarbanes-Oxley Act of 2002 holds a public company's ______ responsible for the accuracy of the company's financial statements.

managers

Decisions made by financial managers in the United States should primarily focus on increasing the:

market value per share of outstanding stock.

The sustainable growth rate of a firm is best described as the ______ growth rate achievable ______.

maximum; excluding any external equity financing, while maintaining a constant debt-equity ratio


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