Finance 3770 Final Conceptual Questions
Buxton Corp. has outstanding borrowings. One of these borrowings is nonconvertible preferred stock (cumulative) with a par value of $85 and an annual dividend rate of 6.20%. This preferred stock is currently selling for $56.50 per share. What is the yield or return (r) on this preferred stock? - 9.89% - 9.22% - 9.56% - 9.32%
9.32%
Andy would like to buy a new car but must complete a two−year commitment to the Peace Corp before he will drive the new car. The current price of the car Andy wants to buy is $32,000, and the dealer expects the price of a similar new car to be $35,000 in two years. If Andy can earn an annual interest rate of 4% on his money, should he buy the car now or wait for two years? Why? Note: Storage costs if Andy purchases the car are $0. Please limit your considerations to the factors offered in the answer choices. - Buy in two years because $35,000 is a "real deal" for the car Andy wants. - Buy in two years because at $35,000 the car will cost less than the $36,385 Andy will have after investing the money for two years. - Buy now because if Andy invests the $32,000 today it will only increase in value to $34,611, and this is less than the cost of his desired new car in two years. - Andy is indifferent because his $32,000 investment will be worth exactly $35,000 after two years.
Buy now because if Andy invests the $32,000 today it will only increase in value to $34,611, and this is less than the cost of his desired new car in two years.
________ refers to how quickly information is reflected in the available prices for trading. - Informational efficiency - Market efficiency - Operational efficiency - Mechanical efficiency
Informational efficiency
Which of the following are tax-deductible expenses for corporations
Interest expenses
A beta of 1.0 is the beta of the ________, while a beta of 0.0 is the measure for a ________. - risk−free security; market. - market; single security held on its own. - market; risk−free security. - Risk −free security; single security held on its own.
market; risk−free security.
The truly wonderful thing about diversification is that 100% of risk can be diversified away, given a large enough portfolio. True/False
False
A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future. - short −term debt - long−term equity - long−term debt - short −term equity
long−term debt
"Junk" bonds are a street name for ________ grade bonds. - investment - extremely speculative - speculative - speculative and investment
speculative
Net income is _______
the accounting profit from the operations of the company during the period
Net Working Capital for 2016 is $1,890 and Net Working Capital for 2017 is $3,597. What is the change in Net Working Capital? - $2,527 - −$1,727 - $1,707 - −$1,707
$1,707
A corporation is scheduled to produce a line of products for the next ten years and then go out of business. The firm will pay an annual dividend of $1.75 for only those ten years. What is the present value of a share for this company if we want an 8% annual return on the stock? - $12.97 - $15.97 - $11.74 - $14.97
$11.74
A wealthy man just died and left his pet dogs the following estate: $20,000 per year for the next 11 years with the first cash flow today. At a discount rate of 4.2%, what is the doggy estate worth in today's dollars? - $98,352.84 - $180,614.80 - $607,180.14 - $220,000.00
$180,614.80
Your firm intends to finance the purchase of a new construction crane. The cost is $2,500,000. What is the size of the first payment if the crane is financed with an interest−only loan at an annual rate of 7.50%? - $187,500.00 - $3,391,475.16 - $127,500.00
$187,500.00
You want to invest in a stock that pays $4.00 annual cash dividends for the next three years. At the end of the three years, you will sell the stock for $35.00. If you want to earn 9% on this investment, what is a fair price for this stock if you buy it today? - $18.91 - $41.37 - $37.15 - $24.75
$37.15
Rogue Motors Inc. has a 11% required rate of return. The firm does not expect to initiate dividends for 10 years, at which time it will pay $2.00 per share in dividends. At that time, the firm expects its dividends to grow at 6% forever. What is an estimate of the firms' price in 10 years (P10) if its dividend at the end of year 10 is $2.00? - $33.40 - $42.40 - $31.20 - $42.80
$42.40
Cash and Equivalents are $1,561; Short−Term Investments are $1,000; Accounts Receivables are $3,616; Accounts Payable are $5,121; Short−Term Debt is $288; Inventories are $1,816; Other Current Liabilities are $1,401; and Other Current Assets are $707. What is the amount of Total Current Liabilities? - $8,752 - $6,974 - $6,862 - $6,810
$6,810
Cash and Equivalents are $1,561, Short−Term Investments are $1,000, Accounts Receivables are $3,616, Accounts Payable is $5,121, Short−Term Debt is $288, Inventories are $1,816, Other Current Liabilities are $1,401, and Other Current Assets are $707. What are the Total Current Assets? - $5,136 - $8,752 - $8,700 - $6,862
$8,700
In January of 1997, the U.S. Consumer Price Index (CPI) stood at 159.1. By January of 2017, the level had risen to 242.84. What was the average annual rate of inflation over this time period as measured by the CPI? - 2.14% - 2.60% - 3.35% - 2.35%
2.14%
You have saved $44,000 for college and wish to use $12,000 per year. If you use the money as an ordinary annuity and earn 5.15% on your investment, how many years will your annuity last? Use a calculator to determine your answer. - 3.36 years - 4.17 years - 3.59 years - 4.27 years
4.17 years
year−end payments of $8,500 each. What annual rate of return must you make on this account to meet your objective? - 7.32% - 4.16% - 6.42% - 4.58%
4.58%
Which of the following is NOT a definition of beta? - A measure of systematic risk - A statistical measure of an individual asset's or portfolio's co−movement with the returns of the market - A measure of nondiversifiable risk - A measure of risk that can be avoided
A measure of risk that can be avoided
Select the statements below which correctly describe the relationship between a company and the community within which it operates. - If the firm pollutes local streams or destroys the quality of life through noise pollution or other types of pollution, the local community may sue the company for its damages and the best local workforce members may choose not to work for the company. Maintaining a good working relationship with the surrounding community is a good business practice. - A good community relationship is embedded in the goal of maximizing current share price or the equity value of the company. - If a company fails to maintain a good relationship with the community, employees may not be loyal to the company causing high turnover and increased personnel costs for recruiting and training. - If a company abuses local facilities such as roads, and in general does not participate in the economic advancement of the local community, facilities such as roads and utilities may not be repaired or modernized by the local community impacting the company's ability to produce a profit.
ALL OF THEM
The cost of retained earnings ________. - is the appropriate cost of capital for the shareholders - is the cost of issuing new common stock without the flotation costs - is the loss of the dividend option for the owners - All of the above
All of the above
________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings. - Capital structure - NPV - Cost of capital - Working capital management
Capital structure
Which of the following identities is FALSE? - Net New Borrowing = Ending Long−term Liabilities− Beginning Long−Term Liabilities - Cash Flow to Owners = Dividends + Net New Borrowing from Owners - Net New Borrowing from Owners = Change in Equity - Cash Flow to Creditors = Interest Expense− Net New Borrowing from Creditors
Cash Flow to Owners = Dividends + Net New Borrowing from Owners
Shaky Company has just issued a five-year bond with a yield of 9%; Stable Company has issued an identical five-year bond, but with a yield of 7%. Why did the market demand a higher return from Shaky? - Companies with poor financials tend to compensate investors for the default risk by issuing bonds with high yields. - Companies with poor financials tend to compensate investors for the systematic risk by issuing bonds with high yields. - Companies with poor financials tend to compensate investors for the liquidity risk by issuing bonds with high yields. - Companies with poor financials tend to compensate investors for the inflation risk by issuing bonds with high yields.
Companies with poor financials tend to compensate investors for the default risk by issuing bonds with high yields.
________ is simply the interest earned in subsequent periods on the interest earned in prior periods. - Quoted interest - Anticipated interest - Simple interest - Compound interest
Compound interest
What are the four areas of finance? Give an example of a financial activity that would fall into each area.
Corporate Finance—the financial activities that support the operations of a business. A typical financial activity in this area is borrowing funds to support a plant expansion or supplementing short term cash needs.
All else equal, which of the following actions will increase the present value of an investment?
Decrease the interest rate
Which of the following actions will INCREASE the present value of an investment? - Decrease the future value. - Decrease the interest rate. - Increase the amount of time. - All of the above will increase the present value.
Decrease the interest rate.
Ben has just purchased a long-term government bond and expects to make a 7% return. Donna has just purchased a stock in a new startup company, but expects to make a 20% return. Why is Donna expecting a higher return? - Donna is expecting a higher return on the stock due to change in the risk-free interest rate. - Donna is expecting a higher return on the stock due to the default premium only. - Donna is expecting a higher return on the stock due to the maturity premium only. - Donna is expecting a higher return on the stock due to both the maturity premium and default premium.
Donna is expecting a higher return on the stock due to both the maturity premium and default premium.
Which of the following is NOT a generally accepted way to remove ineffective management of a publicly traded firm? - The shareholders can vote out directors who won't discipline managers. - Outside management teams can "take over" the company - The Board of Directors can vote to remove management. - Each of the above are recognized methods for the removal of ineffective management.
Each of the above are recognized methods for the removal of ineffective management.
A bull market is a prolonged declining market. True/False
False
Adding treasury bills which has a correlation coefficient of 0.0 wit hyour investment portfolio could NOT have any benefits for diversification with your investment portfolio T/F
False
Consider the TVM equation: A decrease in the time period will increase the future value, other things remaining equal. True/False
False
Consider the TVM equation: An increase in the present value will decrease the future value, other things remaining equal. True/False
False
Consider the TVM equation: The greater the interest rate, other things remaining equal, the greater the present value. True/False
False
Fortunately for investors, assigning a beta to individual projects is more of a science than an art T/F
False
If a bond is selling at a premium above the par value that means that the yield to maturity is greater than the coupon rate. True/False
False
If stock A has a greater standard deviation than stock B then it must also have a greater return. True/False
False
If two investments have the same expected return, a rational investor will choose the investment with the greater risk in an effort to get a much larger return. True/False
False
Over the 50−year period from 1950 to 1999, 3−month Treasury bills earned a higher average annual rate of return than long−term government bonds. True/False
False
What are the four areas of finance? Give an example of a financial activity that would fall into each area.
Financial Institutions—the organizations that promote and facilitate the cycle of money. A typical financial activity is offering checking and savings accounts as well as selling securities such as certificates of deposit, stocks and bonds.
Which of the statements below is FALSE? - Firms rarely use the payback period for small−dollar decisions. - Many companies use the payback period for small−dollar decisions because the future cash flows on these smaller projects may be quite difficult to accurately estimate far into the future. - Many companies use the payback period for small−dollar decisions because the time spent gathering the accurate cash flow may be lowered substantially if it is necessary to estimate only through the first few years. - Many companies use the payback period for small−dollar decisions because it does prevent a serious error when the future cash flow is insufficient to recover the initial cash outlay.
Firms rarely use the payback period for small−dollar decisions.
Which of the following is NOT an example of an equity market transaction? -Grant contacts his broker and requests a purchase of IBM bonds. -Mark sells his shares of Apple stock. -Pavlina buys shares of a small company stock traded on the NASDAQ. -All of the above are equity market transactions.
Grant contacts his broker and requests a purchase of IBM bonds.
What are the four areas of finance? Give an example of a financial activity that would fall into each area.
International Finance—the financial activities performed in foreign countries for a domestic company. A typical financial activity is the changing of the currency of one country into the currency of another country.
What are the four areas of finance? Give an example of a financial activity that would fall into each area.
Investments—the activities around the buying and selling of financial assets. A typical activity is the selling of a bond issue such as a school bond for building a new school.
Which of the statements below is TRUE? - Investors want to maximize return and minimize risk. - Investors want to maximize return and maximize risk. - Investors want to minimize return and maximize risk. - Investors want to minimize return and minimize risk.
Investors want to maximize return and minimize risk.
________ has to do with the speed and accuracy of processing a buy or sell order at the best available price. - Mechanical efficiency - Operational efficiency - Informational efficiency - Market efficiency
Operational efficiency
When considering expected returns, what is true about the states of the world? - They must have probabilities that sum to 100%. - They represent all possible outcomes. - They are sometimes simplified into outcomes such as boom, bust, and normal. - Statements A through C are all true.
Statements A through C are all true.
Which of the following would be classified as debt lenders for a firm?
Suppliers, nonbank lenders, and commercial banks
List a capital budgeting decision, a capital structure decision, and a working capital management decision a business might make. That a company chooses a new product to introduce into the market is a _________ __________ decision, that a company chooses to sell a bond to finance the new product is a ____________ _________ decision, and that a company sets production and inventory levels on the new product is a ___________ ___________ ______________ _______________.
That a company chooses a new product to introduce into the market is a CAPITAL BUDGETING decision, that a company chooses to sell a bond to finance the new product is a CAPITAL STRUCTURE decision, and that a company sets production and inventory levels on the new product is a WORKING CAPITAL MANAGEMENT DECISION .
List the advantages and disadvantages of the three different types of business organizations. PSRTNERSHIP
The Partnership is a business owned jointly by two or more individuals. The advantages of this form of business are that it involves more than one person in the business and all the profits are distributed to only this set of individuals. The larger number of owners usually increases the amount of capital and talent available over that available to the sole proprietorship. The disadvantage of this form of ownership is that the personal assets of the owners are commingled with the business assets and could potentially be required to settle business debts. Other disadvantages of this form of ownership is that taxes are paid at personal income tax rates, which may be higher than corporate tax rates and transference of ownership may be potentially difficult if one of the owners dies or wants to leave the business.
What is the difference between the primary market and the secondary market? The ____________ market is the sale of "used" stock in that the current owner sells it to a new owner and the proceeds go to the current owner, not the company, while the ____________ market is the market where the initial sale of common stock is made by a company and the proceeds of the sale go to the company for the newly issued stock.
The SECONDARY market is the sale of "used" stock in that the current owner sells it to a new owner and the proceeds go to the current owner, not the company, while the PRIMARY market is the market where the initial sale of common stock is made by a company and the proceeds of the sale go to the company for the newly issued stock.
Which of the statements below is FALSE? - The standard of one vote for each share cannot be altered. - Some firms issue several classes of common stock, and these classes may have unequal voting rights. - Common stock usually carries the right to participate in the management of the firm through the right to vote for the members of the Board of Directors and for changes to the charter and bylaws of the company. - Shareholders with super voting right shares have multiple votes per share− a fact that increases their influence and control over the company
The standard of one vote for each share cannot be altered.
Which of the following statements is incorrect?
There is no cost for using retained earnings because companies do not have to issue new bonds or shares to raise capital
Which of the following is NOT a function of a financial intermediary in the lending/borrowing process? - To bear the risk that the lender will not repay - To match the borrower and the lender - To bear the risk that the borrower will not repay - To help establish terms of the lending/borrowing agreement
To bear the risk that the lender will not repay
Which of the following are issued with the shortest time to maturity? - Treasury bonds - Treasury stocks - Treasury bills - Treasury notes
Treasury bills
Which of the following investments is considered to be default risk −free? - Treasury bills - AAA rated corporate bonds - Common stock - Currency options
Treasury bills
Because money is often limited, companies must be careful to choose projects that are feasible and profitable. True/False
True
When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise. - effective annual rates - daily rates - annual percentage rates - APYs
annual percentage rate
________________ is a major disadvantage of the corporate form of business
double taxation
Family Construction had sales three years ago of $2,150,000. This year their sales hit $2,900,000. What has been the firm's average annual rate of growth of sales? - $350,000 per year - 30.56% - 10.49%
10.49%
Wallboard Inc, plans to pay a dividend in one year (Div1) of $0.80, the dividend growth rate (g) is expected to be 6%, and the required rate of return (r) for the firm's stock is 10%. What is the stock price, according to the constant growth dividend model? - $15.00 - $30.80 - $20.00 - $20.80
$20.00
Creative Solutions Inc. has issued 10−year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________. - $40 - $80 - $90 - $45
$80
Five years ago, Simpson Warehouses Inc. issued twenty−five−year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond? - $1,181.54 - $1,170.27 - $843.14 - $850.61
$850.61
A U.S. Treasury bill is currently selling at a discount basis of 2.25%. The par value of the bill is $100,000, and will mature in ninety days. What is the price of this Treasury bill? - $99,952.05 - $99,437.5 - $97,952.78 - $97,750.00
$99,437.5
Douglas Dynamics Inc. has outstanding $1,000 face value 4% coupon bonds that make semiannual payments, and have 10 years remaining to maturity. If the current price for these bonds is $938.57, what is the annualized yield to maturity? - 5.02% - 5.13% - 4.96% - 4.78%
4.78%
The weighted average cost of capital is ________. - the average of the cost of each financing component, weighted by the proportion of each component - made up of three financing components: the cost of debt, the cost of preferred stock, and the cost of equity - the cost of capital for the firm as a whole - All of the above
All of the above
In regards to the fact that the pricing of stocks is more difficult than the pricing of bonds, which of the below statements is FALSE? - A stock's final sale is fixed in time on its maturity date. - Because a stock has no maturity date, the number of its payments are unknown. - The ending price of the stock at any point in time is not fixed like the par value of the principal. - Cash dividends, unlike coupons for bonds, typically change from year to year.
A stock's final sale is fixed in time on its maturity date.
Present values and interest rates are inversely related. This means that if you deposit $1,000 into an interest−earning account today, it will take longer to reach a future value of $5,000 at an interest rate of 6% than at a rate of 4%. True/False
False
The coupon payment for an annual-coupon corporate bond is equal to the YTM multiplied by the par value of the bond T/F
False
The future value of a combination of positive and negative cash flows cannot be determined. True/False
False
The principal−agent problem is most severe for the sole proprietorship because there are fewer owners who can monitor the relationship. True/False
False
Which of the following is not a definition of beta
Has a value from -1.0 to 1.0
To estimate the market value of a publicly traded bond that has a broad market with frequent trading, it is usually best to multiply the number of bonds outstanding by the market value of the bond T/F
True
Double taxation refers to which of the following scenarios? - Both bondholders AND shareholders of a corporation must pay taxes on proceeds received. - The corporation pays taxes on its earnings, and shareholders pay taxes on dividends received. - The corporation pays taxes on its earnings, and creditors pay taxes on interest received. - All of the above
The corporation pays taxes on its earnings, and shareholders pay taxes on dividends received.
When estimating the cost of debt financing from bonds, a firm can use the yield−to−maturity as the before−tax cost of debt. True/False
True
The ________ model answers one basic question: How soon will I recover my initial investment? - IRR - NPV - payback period - profitability index
payback period
Your university is running a special offer on tuition. This year's tuition cost is $16,000. Next year's tuition cost is scheduled to be $16,640. The university offers to discount next year's tuition at a rate of 4% if you agree to pay both years' tuition in full today. How much is the total tuition bill today if you take the offer? - $32,080 - $33118 - $32,981 - $32,000
$32,000
You intend to buy a vacation home in eight years and plan to have saved $75,000 for a down payment. How much money would you have to place today into an investment that earns 9% per year to have enough for your desired down payment? - $37,218 - $37,640 - $34,989 - $35,335
$37,640
Dividend growth rate is important to many investors. You are considering investing in a firm after looking at the firm's dividends over a six−year period. At the end of the year 2010, the firm paid a dividend of $0.98. At year−end 2016, it paid a dividend of $1.64. What was the average annual growth rate of dividends for this firm? - 8.25% - 8.96% - 9.86%
8.96%
Susan and her spouse have saved $5,500 for a 12−day cruise vacation in Europe. The couple needs $6,500 for a "nice" cabin or $7,000 for a "luxury" cabin. If cabin prices are expected to remain constant for the next three years and Susan expects to earn 5% per year on her investments, will the couple's savings be enough to afford the "nice" cabin in three years? Can they afford the luxury cabin? Why or why not? - Yes, they can afford the "nice" cabin or the luxury cabin because their $5,500 investment will increase to $7,082 by the end of year three. - Yes, they can afford the "nice" cabin but NOT the luxury cabin because their $5,500 investment will only increase to $6,482 by the end of year three. - No, they cannot afford the "nice" cabin or the luxury cabin because their $5,500 investment will only increase to $6,367 by the end of year three - Yes, they can afford the "nice" cabin or the luxury cabin because their $5,500 investment will increase to $6,367 by the end of year three.
No, they cannot afford the "nice" cabin or the luxury cabin because their $5,500 investment will only increase to $6,367 by the end of year three
Stock A, has returns of 10%, 20%, 30%, and 40%, over the last four years. What is the stock's standard deviation? - 12.91% - 166.67% - 4.08% - 2.15%
12.91%
Assume the following information about the market and Lithium Motors Stock. Lithium's beta = 1.80, the risk−free rate is 2.50%, the market risk premium is 8.0%. Using the SML, what is the expected return for the firm's stock? - 18.50% - 16.90% - 27.00% - 13.50%
16.90%
Which of the following is NOT a DISADVANTAGE of a partnership? - The potential difficulty in transferring ownership - Unlimited liability to at least some of the owners - The limited life of the business - All are disadvantages of a partnership.
All are disadvantages of a partnership.
Which of the following statements is FALSE? - The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year. - The APR can be referred to as a promised annual percentage rate. - Although an APR is quoted on an annual basis, interest can be paid monthly but never daily. - Although an APR is quoted on an annual basis, interest can be paid quarterly.
Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.
The Internal Rate of Return (IRR) Model suffers from three problems. Which of the below is NOT one of these problems? - Comparing mutually exclusive projects - Incorporates the IRR as the reinvestment rate for the future cash flows - Multiple IRRs - Cumbersome computations not resolvable by the latest technology
Cumbersome computations not resolvable by the latest technology
Which od the following statements below is TRUE of the payback period method?
It ignores the cash flow after the initial outflow has been recovered
Which of the statements below is TRUE of the payback period method? - It ignores the cash flow after the initial outflow has been recovered. - It is biased against projects with earl−term payouts. - It focuses on cash flows after the initial outflow has been recovered. - It incorporates tim−value−of−money principles.
It ignores the cash flow after the initial outflow has been recovered.
You are presented with two cash flow options: Option Near, a $5,000 annuity for three years, with the first cash flow one year from today, or Option Far, a $5,000 annuity for six years with the first cash flow ten years from today. Assuming an interest rate of 7.0%, which set of cash flows has a greater present value? - Option Near has a greater PV of $13,121.58 vs. Option Far PV of $12,963.41. - Option Near and Option Far have the same PV of $12,963.41. - Option Far has a greater PV of $30,000 vs. Option Near PV of $15,000. - Option Far has a greater PV of $13,121.58 vs. Option Near PV of $12,963.41.
Option Near has a greater PV of $13,121.58 vs. Option Far PV of $12,963.41.
Which of the following statements is TRUE? - Some preferred stocks are cumulative with respect to dividends, meaning that if a company skips a cash dividend, it must pay it at some point in the future. - The par value for preferred stock, unlike bonds, is never paid back. - Preferred stock usually has a stated or par value and, like bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date. - A preferred stock's cash dividend due each year is based on the stated dividend rate times the market value of the stock.
Some preferred stocks are cumulative with respect to dividends, meaning that if a company skips a cash dividend, it must pay it at some point in the future.
Which of the statements below is FALSE? - A typical practice of many companies is to distribute part of the earnings to shareholders through cash dividends. - Unlike coupon payments on bonds, which are treated as an interest expense of the firm, common stock dividends are considered a return of capital to shareholders and not an expense of the firm. - For the shareholder, receipt of dividends is a taxable event. - The payment of cash dividends to shareholders is a deductible expense for the company.
The payment of cash dividends to shareholders is a deductible expense for the company.
Consider a two−year investment: Given a constant and positive interest rate, the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding). True/False
True
Consider the TVM equation: A decrease in the interest rate will decrease the future value, other things remaining equal. True/False
True
Given positive equal annual cash flows and a positive interest rate, the future value of an annuity will be greater than the sum of the cash flows. True/False
True
The most common shape for a yield curve is upward sloping. True/False
True
There are two major markets for the sale of stock: the primary market and the secondary market. True/False
True
Unlike coupon payments on bonds which are treated as an interest expense of the firm, common stock dividends are considered a return of capital to shareholders and not an expense of the firm T/F
True
Which of the following statements about the relationship between yield to maturity and bond prices is FALSE? - A bond selling at a discount means that the coupon rate is less than the yield to maturity. - A bond selling at a premium means that the coupon rate is greater than the yield to maturity. - When interest rates go up, bond prices go up. - When the yield to maturity and coupon rate are the same, the bond is called a par value bond.
When interest rates go up, bond prices go up.
When you pay off the principal and all of the interest at one time at the maturity date of the loan, we call this type of loan a/an ________. - amortized loan - interest−only loan - discount loan - compound loan
discount loan
APRs must be converted to the appropriate periodic rates when compounding is ________. - more frequent than once a year - less frequent than once every six months - more frequent than once a month - less frequent than once a year
more frequent than once a year
Which of the following is NOT a form of perpetuity? - Preferred stock that pays the same dividend forever - A British consol bond - A philanthropic endowment fund that pays the same charitable amount every year forever - All are examples of perpetuities.
All are examples of perpetuities.
Free cash flow is the ________. - cash flow from assets - cash that a company generates to operate the company - remaining cash free to distribute to creditors and owners of the firm - All of the above
All of the above
Stocks differ from bonds because: - the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase. - bond cash flows are known while stock cash flows are uncertain. - firms pay bond cash flows prior to paying taxes while stock cash flows are after tax. - All of the above
All of the above
Which of the following may be TRUE regarding mutually exclusive capital budgeting projects? - There is a scarce resource that both projects would need. - There is need for only one project, and both projects can fulfill that current need. - By using funds for one project, there are not enough funds available for the other project. - All of the above
All of the above
Which of the following is NOT an example of a financial transaction? - You use the ATM at Heathrow airport in London to withdraw British pounds. - Your roommate lends you $20 and you repay it in one week. - Your parents use their credit card to pay for your current term's college tuition. All of the above are financial transactions
All of the above are financial transactions
Financial markets can be classified by which of the following? - Owner of the financial asset - Type of asset traded - Maturity of the financial asset - All of the above can be classifications of financial markets.
All of the above can be classifications of financial markets.
Which of the following statements is true about variance? - Variance describes how spread out a set of numbers or a value is around its mean or average. - Variance is essentially the variability from the average. - The larger the variance, the greater the dispersion. - All of the above statements are true.
All of the above statements are true.
The cost of debt could be which of the following? - The required return on money borrowed from a venture capitalist - The required return on money borrowed as a long−term loan from a bank - The yield−to−maturity on money raised by selling bonds - All of the choices above could be considered the cost of debt.
All of the choices above could be considered the cost of debt.
Which of the following is NOT an example of annuity cash flows? - Regular equal monthly rent payments - The $50 of gasoline you put into your car every two weeks on pay day - Equal annual deposits into a retirement account - All of the examples above are annuity cash flows.
All of the examples above are annuity cash flows.
You wish to diversify your single−security portfolio in a way that will maximize your reduction in risk. Which of the following securities should you add to your portfolio? - Beta Company stock that has a correlation coefficient of 0.50 with your current security - Alpha Company stock that has a correlation coefficient of−0.25 with your current security - Delta Company bonds that have a correlation coefficient of 0.36 with your current security - Treasury bills that have a correlation coefficient of 0.0 with your current security
Alpha Company stock that has a correlation coefficient of−0.25 with your current security
To estimate the market value of a publicly traded bond that has a broad market with frequent trading, it is usually best to multiply the number of bonds outstanding by the bond par value. True/False
False
You sign a contract to pay back all of the interest and principal of a loan at the maturity date. This is an example of an interest−only loan. True/False
False
Which of the statements below is FALSE? - Most companies have the resident expertise to complete an initial public offering (IPO) or first public equity issue. - A company is said to go "public" when it opens up its ownership structure to the general public through the sale of common stock. - Selling of shares is the selling of ownership in the company. - Companies choose to sell stock to attract permanent financing through equity ownership of the company.
Most companies have the resident expertise to complete an initial public offering (IPO) or first public equity issue.
The crossover rate is the discount rate where both projects have the same ________. - IRR - NPV - PI - length to completion
NPV
Which of the following identities is TRUE? - Net Working Capital (NWC) = Current Assets− Current Liabilities - Operating Cash Flow = EBIT− Depreciation + Taxes - Net Capital Spending = Ending Net Fixed Assets− Depreciation - Cash Flow from Assets = Operating Cash Flow− Net Capital Spending
Net Working Capital (NWC) = Current Assets− Current Liabilities
Maximizing the market value of firm equity and which of the following are mutually exclusive? - Maximizing market value and customer satisfaction are mutually exclusive. - Maximizing market value and good relationships with the local community are mutually exclusive. - Maximizing market value and a safe and happy work place are mutually exclusive. - None of the above is mutually exclusive with maximizing the value of market equity.
None of the above is mutually exclusive with maximizing the value of market equity.
There are two ways to correct for projects with unequal lives when using the NPV approach. Which of the answers below is one of these ways? - One way is to compare the lengths of the projects and take the project with the shortest life. - One way is to find a common life by extending the projects to the least common multiple of their lives. - One way is to find a common life, without the need to extend the projects to the least common multiple of their lives. - One way is to find the present value factors and then compare them
One way is to find a common life by extending the projects to the least common multiple of their lives.
Which of the following identities is TRUE? - Cash Flow from Assets = Operating Cash Flow + Net Capital Spending - Change in Net Working Capital (NWC) = Current Assets− Current Liabilities - Operating Cash Flow = EBIT + Depreciation− Taxes - Net Capital Spending = Ending Net Fixed Assets− Depreciation
Operating Cash Flow = EBIT + Depreciation− Taxes
Which of the following is NOT an example of an agency cost? - The cost of designing contracts that satisfy creditors that their concerns will be met - Paying an accounting firm to audit your financial statements - Paying an insurance company to assure that building codes have been met for new construction - Paying a landscaping firm to maintain your firm's grounds
Paying a landscaping firm to maintain your firm's grounds
We can separate short−term and long−term decisions into three dimensions. Which of the below is NOT one of these? - Cost - Length of impact - Degree of information gathering prior to the decision - Personality of CEO making the decisions
Personality of CEO making the decisions
Which of the sections below is NOT contained in the annual report? - Company highlights - Prediction of competitors' returns - Description of the company's activities (usually with pictures and graphs) - President's letter to the shareholders
Prediction of competitors' returns
Which of the items below is sometimes termed hybrid equity financing? - Retained earnings - Callable bonds - Variable rate bonds - Preferred stock
Preferred stock
Which of the statements below is FALSE? - Preferred shareholders' dividend claims take precedence over common shareholders' dividend claims. - It is common for companies to issue preferred stock with the right to convert to common shares after a specific waiting period. - Preferred stock does not have a maturity date. - Preferred stock cannot be converted into common stock.
Preferred stock cannot be converted into common stock.
Which of the following statements about probabilities is INCORRECT? - The sum of all probabilities of a particular event must sum to 100%. - Probability is associated with an ex−post view. - Each possible outcome must have a non−negative probability. - Probability is a statistical tool for estimating future outcomes.
Probability is associated with an ex−post view.
________ is a modification of NPV to produce the ratio of the present value of the benefits (future cash inflow) to the present value of the costs (initial investment). - Payback Period Method - Discounted Cash Flow Method - Profitability Index (PI) - Modified Internal Rate of Return Method
Profitability Index (PI)
________ may be defined as a measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss. - Risk - Uncertainty - Diversification - Collaboration
Risk
List the advantages and disadvantages of the three different types of business organizations. CORPORATION
The corporation is a business form in which the company is a legal, separate entity from the owners and can enter into contracts, can sue or be sued, and pays taxes. The key advantage of this type of organization is that the shareholders or owners have limited liability. A second advantage is the size of the organization which allows it to borrow money from banks and capital markets. One disadvantage of this form of business organization is that company profits are taxed prior to distribution to the owners and then the owners may be taxed again on distributions received. This form of business organization generally incurs greater legal, administrative and accounting expenses to form and run the company.
Which of the statements below describes the IRR decision criterion? - The decision criterion is to reject a project if the IRR exceeds the desired or required return rate. - The decision criterion is to accept a project if the NPV is positive. - The decision criterion is to accept a project if the IRR falls below the desired or required return rate. - The decision criterion is to accept a project if the IRR exceeds the desired or required return rate
The decision criterion is to accept a project if the IRR exceeds the desired or required return rate
The U.S. government offers two bonds: one selling to yield 6.5% and the other to yield 8.5%. Why would one bond sell for a lower yield if the originator is the same on both bonds? - The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments. - The difference between the yields of the U.S. government bonds is due to the default premium of the investments. - The difference between the yields of the U.S. government bonds is due to the liquidity premium of the investments. - The difference between the yields of the U.S. government bonds is due to the forward premium of the investments
The difference between the yields of the U.S. government bonds is due to the maturity premium of the investments.
Under which of the following circumstances is the pure play method of estimating a project's beta particularly useful? - The firm is looking to expand its current business operations into a brand new area unlike any of its internal projects. - The firm is looking to expand its current business operations. The work will be essentially the same as current operations but there is no obvious outside provider of the same service or product. - The firm is looking to expand its current business operations, doing essentially the same work. - The pure play method works equally effectively under each and all of these scenarios.
The firm is looking to expand its current business operations into a brand new area unlike any of its internal projects.
Which of the statements below is FALSE? - The difference in rates as the borrowing time or investment horizon increases is due to the maturity premium of the investments. - The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands. - If you invest money for a short period and buy a six−month CD, you will not receive as high an interest rate as if you bought a CD with a longer maturity period. - The maturity premium represents that portion of the yield that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive repayment in full.
The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.
Which of the statements below is FALSE? - The real interest rate is the reward for waiting. - The reward for postponing consumption implies that at the end of the year you will be able to buy more goods. - The prices of goods and services tend to decrease over time because of inflation. - Nominal interest rates are the sum of two major components: the real interest rate and expected
The prices of goods and services tend to decrease over time because of inflation.
Which of the statements below is FALSE? - Shareholders elect the board of directors, which ultimately selects the management team that runs the day−t−day operations of the company. - Stock is a major financing source for public companies. - The profits for common stock owners come before payment to employees, suppliers, government, and creditors. - Common stock's ownership claim on the assets and cash flow of a company is often referred to as a residual claim.
The profits for common stock owners come before payment to employees, suppliers, government, and creditors.
Which of the following is NOT true with regard to an amortization table? - The remaining principal balance at the end of a payment period is equal to the beginning−of−the−period principal less the total payment. - The total payment is calculated by using the present value of an annuity formula. - The interest payment for a period is equal to the periodic interest rate multiplied by the beginning−of−the−period principal balance. - All of the above are true.
The remaining principal balance at the end of a payment period is equal to the beginning−of−the−period principal less the total payment.
List the advantages and disadvantages of the three different types of business organizations. SOLE PROPIETORSHIP
The sole proprietorship is a business that is entirely owned by an individual. This is the simplest and least complicated business organization with the least amount of formal documentation required. It is also the least regulated form of business. The major advantages of this type of business organization are that the owner makes all the decisions, can act quickly to make business decisions and keeps all of the profits. The financial disadvantage of this form of business organization is that the owner pays all the company bills and may even be required to sell off personal property to cover them. Other disadvantages of the (sole proprietorship, partnership, corporation) include difficulty in passing the business to a new owner and a limited ability to raise capital which may impede the growth and development of the business.
Which of the statements is FALSE
The standard of one vote for each share cannot be altered
Which of the statements below is FALSE? - If a company has constrained capital, then it can only take on a limited number of projects. - Projects are mutually exclusive if picking one project eliminates the ability to pick the other project. - The NPV decision criterion is true when all projects are independent and the company has a sufficient source of funds to accept all positive NPV projects. - Two projects are mutually exclusive if the acceptance of one project has no bearing on the acceptance or rejection of the other project.
Two projects are mutually exclusive if the acceptance of one project has no bearing on the acceptance or rejection of the other project.
Which of the following statements is TRUE if you increase your monthly payment above the required loan payment? - The extra portion of the payment does not go to the principal. - You can significantly increase the number of payments needed to pay off the loan. - The extra portion of the payment increases the principal. - You can significantly reduce the number of payments needed to pay off the loan.
You can significantly reduce the number of payments needed to pay off the loan.
A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________. - amortization - perpetuity - ordinary annuity - annuity due
annuity due
The ________ of an asset or liability is its cost carried on the balance sheet. - hybrid value - book value - market value - theoretical value
book value
A company selling a bond is ________ money. - taking - lending - borrowing - reinvesting
borrowing
Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem arises, however, in that future cash flows may be difficult to predict as to ________ of these cash flows. - neither the timing nor the amount - the timing but not the amount - the amount but not the timing - both the timing and the amount
both the timing and the amount
A ________ has limited liability, is a legal entity, and has the greatest potential to raise capital. - limited partnership - sole proprietorship - corporation - general partnership
corporation
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value. - time to maturity; discount to - coupon rate; discount to - time to maturity; same price as - coupon rate; premium over
coupon rate; discount to
Strong−form efficient markets theory proclaims that ________. - one can chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market - current prices reflect the price and volume history of the stock, all publicly available information, and all private information - one can exploit publicly available news or financial statement information to routinely outperform the market - current prices reflect the price and volume history of the stock, all publicly available information, but no private information
current prices reflect the price and volume history of the stock, all publicly available information, and all private information
The ________ compensates the investor for the additional risk that the loan will not be repaid in full. - inflation premium - default premium - interest rate - real rate
default premium
An investment banker's fees are part of the ________ realized for issuing new debt or equity. - opportunity costs - benefits - revenues - flotation costs
flotation costs
The hurdle rate should be set so that it reflects the proper risk level for the project. If we have to choose between two projects with similar risk and therefore similar hurdle rates, we would select the project that ________. - has a higher internal rate of return - has a lower internal rate of return - has a hurdle rate that is consistent with the discounted payback period model - has a hurdle rate that is consistent with the payback period method
has a higher internal rate of return
James is a rational investor wishing to maximize his return over a 20−year period. The current yield curve is inverted with one−year rates at 5.00% and 20−year rates at 3.50%. James will invest in the lower−rate 20−year bonds if: - he thinks rates will rise in the future and locking in long−term rates today may provide the lowest long−run average return. - he thinks rates will fall in the future and locking in long−term rates today may provide the highest long−run average return. - he thinks rates will remain flat at 5% in the future and locking in long−term rates today will prevent him from appearing greedy to those without this investment opportunity. - he thinks rates will rise in the future and locking in long−term rates today may provide the highest long−run average return.
he thinks rates will fall in the future and locking in long−term rates today may provide the highest long−run average return.
When there are conflicts among managerial goals in U.S. markets, the most important priority is to ________. - keep all of the company's customers happy - increase the current market value of equity - maintain a safe and happy work place - foster good relationships with the community
increase the current market value of equity
The primary goal of the financial manager is to: - ensure that the firm maintains its level of employment within the community so that people are not laid off. - maximize the current share price or equity value of the firm. - improve relations with the community even at the expense of corporate profits. - provide for the economic growth of the community in which the firm resides.
maximize the current share price or equity value of the firm.
The capital budgeting decision model that utilizes all the discounted cash flow of a project is the ________ model, which is one of the single most important models in finance. - internal rate of return (IRR) - profitability index (PI) - net present value (NPV) - discounted payback period
net present value (NPV)
Notes to the financial statements help explain many of the details necessary to gain a more complete picture of the firm's ________. - dividend policy - capital budget - performance - choice of management
performance
Investors ________ for estimating the WACC. - prefer market value to book value - prefer a mix of book and market value - are indifferent between using market and book value - prefer book value to market value
prefer market value to book value
The sale of "new" securities, where the financial asset is being traded for the very first time, is said to take place in the ________ market
primary
Most U.S. corporate and government bonds choose to make ________ coupon payments. - quarterly - monthly - semiannual - annual
semiannual
When a company is in financial difficulty and cannot fully pay all of its creditors, the first lenders to be paid are the ________. - senior debtholders - sinking fund holders - stockholders - junior debtholders
senior debtholders
As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that - the credit rating increases, the default risk decreases, and the required rate of return increases. - the credit rating increases, the default risk decreases, and the required rate of return decreases. - the credit rating decreases, the default risk decreases, and the required rate of return decreases. - the credit rating increases, the default risk increases, and the required rate of return decreases.
the credit rating increases, the default risk decreases, and the required rate of return decreases.
The two major components of the interest rate that cause rates to vary across different investment opportunities or loans are ________. - the inflation premium and the maturity premium - the liquidity premium and the maturity premium - the default premium and the maturity premium - the default premium and the bankruptcy premium
the default premium and the maturity premium
The participants in the cycle of money are: - the Federal Reserve which controls the money supply and provides money for business loans. - a borrower such as a company that is using the funds for operating the business or expanding the business. - the original lender, usually an individual (or household) through direct investment or through a financial institution. - the financial institution that matches the lender with a borrower or bundles up a set of lenders for a single borrower.
the financial institution that matches the lender with a borrower or bundles up a set of lenders for a single borrower.
The cycle of money is - the movement of funds from your savings account to your checking account and back to your savings account. - the movement of money from a borrower to a lender and back to the borrower. - the movement of money from your checking account to the Internal Revenue Service and back to you in the form of a Social Security check. - the movement of funds from a lender to a borrower and back to the lender.
the movement of funds from a lender to a borrower and back to the lender.
The IRR is the discount rate that produces a zero NPV or the specific discount rate at which the present value of the cost equals ________. - the present value of the future benefits or cash inflows - the future value of the present cash outflows - the investment - the present value of the cash outflow
the present value of the future benefits or cash inflows
The form of business organization in the United States that has the greatest amount of capital is ________. - the sole proprietorship - the partnership - the sub−chapter corporation - the publicly traded corporation
the publicly traded corporation
A yield curve constructed using Treasury securities has each of the following components embedded in the nominal interest rates: - the real rate, expected inflation, and a maturity premium. - expected inflation, a default risk premium and a maturity premium. - the real rate, a default risk premium and expected inflation. - the real rate, expected inflation and a default risk premium.
the real rate, expected inflation, and a maturity premium
What is the general definition of the financial management function? - the movement of money from lender to borrower and back again. - those activities which create or preserve the economic value of the assets of an individual, small business or corporation. - those activities which reduce cash outflows for the individual, small business or corporation. - those activities which reduce revenue for an individual, small business or corporation.
those activities which create or preserve the economic value of the assets of an individual, small business or corporation.
A sinking fund may be used for each of the following EXCEPT ________. - to call in bonds early - to be held on to and used to pay off the principal at maturity - to buy back some of the bonds over time - to be used to pay off other outstanding debt issues
to be used to pay off other outstanding debt issues
The objective of every financial transaction is: - to ensure that borrowers are able to make purchases. - to make all parties in the transaction better off. - to ensure that financial institutions remain strong. - to enrich the lenders.
to make all parties in the transaction better off.
