Finance Final Exam
What are different mechanisms to align managers' interest with shareholders' interests?
-employee stock option -Performance based cash bonus -proxy fight -takeover threat.
Pros of the SOX Act of 2002
1) Assurance of accuracy and transparency of a firm's accounting/financial statements to strengthen the protection against corporate fraud. 2) Hold CEO/CFO accountable for the content of financial statements to fairly represent a firm's financial results without false statements or material omission
Cons of the SOX Act of 2002
1) Cost of complying with SOX is proportionally more for smaller firms. 2) Firms are inclined to delist from U.S exchange and re-list to foreign exchanges
Disadvantages of operating as public corporation
1) Double taxation - corporate tax and personal tax (dividend income) 2) Agency problem - conflicts of interest - separation between manager and stockholders
Please list two limitations of the constant dividend growth model
1) It is only applicable to a firm paying dividends. 2) R must be larger than g
Advantages of operating as public corporation
1) Limited liability/ not exceeding the investment amount 2) Easier to raise capital/ more channels of finding capital 3) Easier to transfer the ownership 4) Unlimited life
Which of the following bonds will have a higher coupon, all else equal? 1.Secured debt versus a debenture 2. Subordinated debenture versus senior debt 3.A bond with a sinking fund versus one without 4.A callable bond versus a non-callable bond
1.Debenture 2.Subordinated Debenture 3. One without 4. Callable Bond
Which of the following statements is CORRECT? a. Portfolio diversification reduces the variability of returns (as measured by its standard deviation) of each individual stock held in the portfolio. (Only impact the overall portfolio risk not changing individual risk) b. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks it would be essentially riskless. (Remember - Market risk still remains) c. The required return on a firm's common stock is, in theory, determined solely by its market risk. If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return. (You still need to know risk-free rate and beta - Remember SML) d. A security's beta measures its nondiversifiable, or market, risk relative to that of an average stock. e. A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock. (As for the well-diversified portfolio - relevant risk -is MARKET RISK because all other specific risk is presumably diversified away)
A security's beta measures its nondiversifiable, or market, risk relative to that of an average stock
Which of the following statements is CORRECT? a. A sunk cost is any cost that must be expended in order to complete a project and bring it into operation. b. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project. c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project. d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the PV. e. A good example of a sunk cost is a situation where a retailer opens a new store, and that leads to a decline in sales of some of the firm's existing stores.
A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
Which of the following would be most likely to increase the coupon rate that is required to enable a bond to be issued at par?
Adding a call provision
Disadvantages of the payback method include the following. a. It ignores the time value of money. b. It is inconsistent with the goal of maximizing shareholder wealth. c. It ignores cash flows beyond the payback period. d. All of the above
All of the above
Which of the following statements is/are CORRECT? a. Projects with "conventional" cash flows can have only one real IRR. b. Projects with "unconventional" cash flows could have two or more real IRR's. c. IRR assumes the cash flows to be reinvested at the IRR rate. d. All of the above are correct. e. Both a and c are correct
All of the above are correct
Which of the following statements is/are INCORRECT? a. A bond sells well above par value when its yield to maturity is higher than its coupon rate. b. Convertible bonds can be converted into a certain amount of cash at the discretion of CEO of the firm. c. Most bonds are trading in the NYSE market. d. All of the statements above are incorrect. e. Statements b and c are incorrect.
All of the statements above are incorrect.
Which of the following statements is/are correct? a. All secondary markets are dealer markets. b. All secondary markets are broker markets. c. All stock trades between existing shareholders are secondary market transactions. d. NYSE is an example of dealer market. e. Both a and d.
All stock trades between existing shareholders are secondary market transactions
What are agency conflicts?
An agency conflict occurs when the goals of the principals (stockholders) are not aligned with the goals of the agents (managers).
How is the current yield calculated?
Annual Coupon Rate/Bond Market Price
Which of the following statements is/are correct? a. The primary goal of a financial manager is to maximize the firm's current net income. b.Debt is a basic source of capital for the firm, but equity is not a source of capital. c.As compared to a sole proprietorship, a corporation faces double taxation. d.All of the above are correct. e.Both a and c are correct
As compared to a sole proprietorship, a corporation faces double taxation
Which of the following statements is/are most INCORRECT? a. Junk bonds typically offer high risk and high yields relative to AAA investment grade bonds. b. As for the callable bond, the firm normally calls the bond for early redemption when interest rates rise because the firm can save on interest expenses. c. All else equal, a bond is sold at a premium when its YTM is lower than its coupon rate. d. All else equal, bond prices move inversely with changes in yield to maturity.
As for the callable bond, the firm normally calls the bond for early redemption when interest rates rise because the firm can save on interest expenses.
Snoop Dogg's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship?
Asset turnover
Which of the following statements is/are most CORRECT? a. A yield curve depicts an inverse relationship between bond price and yield to maturity. b. The primary purpose of protective covenants is to help protect bondholders from issuer actions. c. Junk bonds typically provide a lower yield to maturity than investment grade bonds. d. Sinking funds may be used to purchase bonds in the open market. e. Both b and d are correct.
B and D
Which of the following statements is/are INCORRECT? a. Payback period considers the time value of money. b. All else being equal, NPV decreases as the required rate of return increases. c. All else being equal, IRR decreases as the required rate of return increases. (IRR does not utilize R in calculation) d. Both a and c are incorrect. e. Both a and b are incorrect
Both A and C are incorrect
9) Which of the following statements is/are CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. The longer a project's payback period, the more desirable the project is normally considered to be by this criterion. b. One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money. c. If a project's payback is positive, then it must have a positive NPV. d. The regular payback ignores cash flows beyond the payback period. e. Both b and d.
Both B and D
Which of the following statements is/are INCORRECT? a. Beta cannot be negative. (Beta can be positive or negative) b. Beta value is the slope of the SML. (Beta is the horizontal axis of SML) c. Market risk premium is the slope of the SML. d. GDP and inflation rate can be considered market risks. e. Both a and b are incorrect
Both a and b are incorrect
Which of the following statements is/are correct? a. Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength. b. A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently. c. Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position. d. Both a and b are correct. e. Both a and c are correct.
Both a and c are correct.
Which of the following events will increase the company's WACC? a. All else equal, a decrease in the company's beta. b. All else equal, an increase in the flotation costs associated with issuing new common stock. c. All else equal, a decrease in the market risk premium. d. All else equal, an increase in expected inflation. e. Both b and d are correct.
Both b and d are correct.
Which of the following statement is/are CORRECT? a. Zero-coupon bonds sell well above par value because they offer an attractive return. b. Convertible bonds can be converted into a certain amount of cash at the discretion of CEO of the firm. c. Most bonds are trading in the OTC market. d. Municipal bond interest is tax-exempt at the federal level. e. Statements c and d are correct.
C and D
Which one of the following must equal zero if a firm pays a constant annual dividend?
Capital Gains yield
What are different sources of capital?
Cash long-term debt equity
What types of information do common-size financials statements reveal about the firm?
Common size financial statements express all balance sheet accounts as a percentage of total assets and all income statement accounts as a percentage of total sales.
Which of the following statements is/are most CORRECT? a. Cost of external equity should be more expensive than cost of internal equity. b. WACC should be evaluated at the before-tax basis. c. Regardless of the types of projects, the firm's WACC should be applied to all the undertaken projects. d. All of the above statements are correct. e. Both a and b are correct.
Cost of external equity should be more expensive than cost of internal equity.
4. Nicki owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are three open seats in the current election and Nicki casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting?
Cumulative Voting
Dividend just paid is referred to
D0
The dividend is expected to be paid
D1
Supposed the bond was issued at premium 20 years ago, what would happen to its bond price over time if its required rate of return (rd) remained unchanged?
Decrease
If YTM > coupon rate, would the bond be sold at.....discount, premium, or par?
Discount
As a stockholder, you can receive cash in two ways
Dividends Selling Stocks
Which one of the following is a measure of long-term solvency?
Equity multiplier
DuPont Identity
Equity multiplier = 1 + Debt-equity ratio
Because of the risk of bankruptcy, the cost of debt capital is always higher than the cost of equity capital.
False
Highly liquid assets generally produce a high rate of return.
False
The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions
False
The present value of a future sum decreases as either the discount rate or the number of periods per year decreases.
False
The proportion of the payment of a fully amortized loan that goes toward interest increases over time
False
The slope of the SML is determined by the value of beta
False
Higher flotation costs tend to reduce the cost of equity capital
False (Increase)
Which of the following is/are an effective means of aligning management goals with shareholder interests? I. Employee stock options II. Threat of a takeover III. Management bonuses tied to performance goals IV. Threat of union strike
I, II and III only
Which of the following are advantages of forming a corporation? I. Ability to raise large sums of equity capital II. Ease of ownership transfer III. Profits taxed at the corporate level IV. Limited liability for all owners
I, II and IV
Which of the following are determinants of a firm's sustainable rate of growth? I. Amount of sales generated from each dollar invested in assets II. Amount of debt per dollar of equity III. Amount of current assets per dollar of current liabilities IV. Percentage of net income distributed as dividends
I, II and IV only
Based on CAPM, investors are compensated based on which of the following: I. Market risk premium II. Portfolio standard deviation III. Portfolio beta IV. Risk-free rate
I, III and IV only
Which of the following will increase the future value of a lump sum investment? I. Decreasing the interest rate II. Increasing the interest rate III. Increasing the time period IV. Decreasing the amount of the lump sum investment
II and III only
11) Which of the following statements is/are CORRECT? a. If a project with normal cash flows has an IRR greater than the required rate of return, the project must have a positive NPV. b. If Project A's IRR exceeds Project B's, then A must have the higher NPV. (depending on I; see graph below) c. If a project with conventional cash flows has an IRR less than the required rate of return, the project must have a positive NPV. d. If the NPV is negative, the IRR must also be negative. (IRR < I, NPV is negative, so IRR does not have to be negative value; also refer to #2 and #3 in this exercise) e. Both a and d.
If a project with normal cash flows has an IRR greater than the required rate of return, the project must have a positive NPV.
Which one of the following statements is CORRECT? a. The risk premium on a risk-free security is generally considered to be 1%. (Should be zero because it is risk-free) b. The expected rate of return on any security, given multiple states of the economy, must be positive. (May be negative if the negative return of one state of the economy outweighs the other states of economy) c. There is an inverse relationship between the level of risk and the risk premium given a risky security. (Should be positive liner relationship - higher risk and higher risk premium) d. If a risky security is correctly priced, its expected risk premium will be positive. e. If a risky security is priced correctly, it will have an expected return equal to the risk-free rate. (No! Depending on Beta value!)
If a risky security is correctly priced, its expected risk premium will be positive.
Assuming the net working capital is positive, what effect would the following actions have on a firm's current ratio? (1) Inventory is purchased....(a) with cash & (b) on credit (2) A supplier is paid......with cash
If inventory is purchased with cash, then there is no change in the current ratio if it was initially greater than 1.0. If inventory is purchased on credit, then there is a decrease in the current ratio if it was initially greater than 1.0. Reducing accounts payable with cash increases the current ratio if it was initially greater than 1.0.
Supposed the bond was issued at discount 20 years ago, what would happen to its bond price over time if its required rate of return (rd) remained unchanged?
Increase
Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?
Interest rate risk premium
________ interest is tax-exempt at the federal level.
Municipal bond
Which of the following statements is/are INCORRECT? a. With regards to NPV profile, both projects have the same NPV at the cross-over rate. b. NPV profile can tell which project has a shorter payback period. c. MIRR considers the time value of money. d. Multiple IRRs can occur when the signs of cash flows change more than once. e. NPV is positive when IRR is greater than the required rate of return.
NPV profile can tell which project has a shorter payback period
Bonds are primarily traded
OTC
When the YTM = Coupon Rate, the bond is sold at
Par
Which of the following statements is/are CORRECT? a. Payback provides an indicator of a project's liquidity. b. NPV and IRR always recommend the same project. c. NPV profile illustrates the positive relationship between a project's NPV and its required rate of return. (inverse relationship) d. Positive IRR always leads to a positive NPV. e. MIRR (Modified IRR) fails to account for cash flows after payback.
Payback provides an iindicator of a project's liquidity
If YTM < coupon rate, would the bond be sold at.....discount, premium, or par?
Premium
When evaluating a new project, firms should include in the projected cash flows all of the following factors EXCEPT:
Previous expenditures associated with a market test to determine the feasibility of the project that have been expensed for tax purposes.
Which of the following can be defined as a benefit-cost ratio?
Profitablity Index
Which of the following statements is CORRECT? a. Projects with "conventional" cash flows can have only one real IRR. b. Projects with "conventional" cash flows can have two or more real IRRs. c. Projects with "conventional" cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. d. The "multiple IRR problem" can arise if a project's cash flows are "conventional." e. Projects with "unconventional" cash flows are almost never encountered in the real world.
Projects with "conventional" cash flows can have only one real IRR
Troy Polamalu could not attend the last shareholders' meeting and thus he granted the authority to vote on his behalf to the managers of the firm. Which one of the following terms is used to describe the method by which Troy's shares were voted?
Proxy
Which of the following characteristics are most commonly associated with corporate bonds issued in the U.S.?
Registered form Semiannual coupon payment
Andrea is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Andrea conducting?
Sensitivity analysis
Capital budgeting includes the evaluation of which of the following?
Size, timing and risk of future cash flows.
Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT? a. All common stocks fall into one of three classes: A, B, and C. (Up to the firm to define number of classes of stocks, or "Letter" to define its stock, like stock E, F, or M) b. All firms have several classes of common stock. (not necessary) c. All common stocks, regardless of class, must have the same voting rights. (not necessary; for example, Google has two classes of stockholders with voting rights ratio 10:1) d. All common stock, regardless of class, must pay the same dividend. (not necessary) e. Some class or classes of common stock may be entitled to more votes per share than other classes.
Some class or classes of common stock may be entitled to more votes per share than other classes.
Supposed the bond was issued at par 20 years ago, what would happen to its bond price over time if its required rate of return (rd) remained unchanged?
Stays at 1000
The primary goal of financial management is to maximize________ for a corporation?
Stock price
There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as __________ voting.
Striaght
Which of the following statements is CORRECT? a. The NPV method assumes that cash flows will be reinvested at the required return, while the IRR method assumes reinvestment at the IRR. b. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. c. The NPV method assumes that cash flows will be reinvested at the required return, while the IRR method assumes reinvestment at the risk-free rate. d. The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. e. The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
The NPV method assumes that cash flows will be reinvested at the required return, while the IRR method assumes reinvestment at the IRR
What is a relationship between the PV of bond (bond's price) and interest rate? (Based on the semi-annually compounding)
The bond price and interest rate have an inverse relationship.
Which of the following factors could explain why JuJu Smith-Schuster Energy had a negative net cash flow from operations last year, even though the cash on its balance sheet increased?
The company sold a new issue of bonds.
Which of the following statements is CORRECT? a. The constant growth model takes into consideration the capital gains earned on a stock. b. It is impossible to use the constant growth model to estimate stock value if the growth rate is negative. c. Two firms with the same expected dividend and growth rate must also have the same stock price. d. Stockholders have the highest priority claim in a bankruptcy proceeding. e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
The constant growth model takes into consideration the capital gains earned on a stock.
Which of the following statements is CORRECT? a. All common stocks fall into one of three classes: A, B, and C. b. All firms have several classes of common stock. c. The constant growth model takes into consideration the capital gains that investors expect to earn on a stock. d. If two stocks have the same required return and the same price, the two stocks must have the same dividend yield
The constant growth model takes into consideration the capital gains that investors expect to earn on a stock.
You are analyzing the value of an investment by calculating the present value of its expected cash flows. Which of the following would cause the investment to look better?
The discount rate decreases.
In recent years, Smith Inc. has greatly increased its current ratio. At the same time, the quick ratio has fallen. What has happened? Has the liquidity of the company improved?
The firm has increased inventory relative to other current assets; therefore, assuming current liability levels remain mostly unchanged, liquidity has potentially decreased.
A company is considering a new project. The CFO plans to calculate the project's NPV by first estimating the relevant cash flows for each year of the project's life (the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company's WACC. Which of the following factors should the CFO INCLUDE IN THE CASH FLOWS when estimating the relevant cash flows?
The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project's life
A company is considering a new project. The CFO plans to calculate the project's NPV by first estimating the relevant cash flows for each year of the project's life (the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company's WACC. Which of the following factors should the CFO INCLUDE IN THE CASH FLOWS when estimating the relevant cash flows?
The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project's life.
Explain why the marginal tax rate, rather than the average tax rate, is used when computing the cash flows from a proposed new project.
The marginal tax rate is used because that is the tax rate that will apply to the incremental taxable income generated by the new project.
Which of the following should a company consider when it is estimating the cash flows for use in analyzing a proposed project?
The new project is expected to reduce sales of the company's existing products by 5%.
Consider a portfolio comprised of four risky securities. Assume the economy has three states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?
The portfolio expected rate of return must be the same for each economic state.
Which of the following statements is/are CORRECT? a. The stock with a beta value of 1 has the market rate of return. b. Beta measures a stock's diversifiable risk. (nondiversifiable risk) c. Adding more stocks will reduce the portfolio's systematic risk. (No! Systematic risk remains constant regardless of number of securities held in a portfolio.) d. Both a and c are correct.
The stock with a beta value of 1 has the market rate of return
________ have NO default risk.
Treasury Securities
All else equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its bonds with a sinking fund.
True
Copyright is defined as an intangible fixed asset.
True
Other things being equal, the present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
True
The more frequently the interest payments are compounded, the larger the future value of $1 for a given time period.
True
Which of the following statements is CORRECT? a. Since depreciation is not a cash expense, it plays no role in capital budgeting. (Depreciation will impact Operating Cash Flows) b. Under MACRS depreciation, firms write off assets slower than they would under straight line depreciation, and as a result projects' forecasted NPVs are normally lower than they would be if straight line depreciation were used for tax purposes. (MACRS will be written off faster in early life thus the large tax shield benefit will be added to operating cash flows in early life. Accordingly, NPV will be higher than it would be if straight line depreciation is used) c. Under MACRS depreciation, firms can write off assets faster than they could under straight line depreciation, and as a result projects' forecasted NPVs are normally lower than they would be if straight line depreciation were used for tax purposes. (see b above) d. Under MACRS depreciation, firms can write off assets faster than they could under straight line depreciation, and as a result projects' forecasted NPVs are normally higher than they would be if straight line depreciation had to be used for tax purposes.
Under MACRS depreciation, firms can write off assets faster than they could under straight line depreciation, and as a result projects' forecasted NPVs are normally higher than they would be if straight line depreciation had to be used for tax purposes.
What is the best use for these common-size statements?
Using these percentage values rather than nominal dollar values facilitates comparisons between firms of different size or business type.
_______ cannot be sold at par or at a premium.
Zero Coupon Bonds
A PROXY is
a ballot cast by one person on behalf of another
If a firm has an agency problem that is reflected in a poor performing stock for a long period of time, then the firm may become a target of _________________.
a takeover
Which of the following statements is CORRECT? a. An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality. b. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits of the bank's other offices to decline. c. The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV. d. Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not. e. The identification of an externality can never lead to an increase in the calculated NPV.
b. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits of the bank's other offices to decline
Which of the following statements is/are CORRECT? a. An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality. b. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits of the bank's other offices to decline. c. The externality always yields a negative NPV. d. The identification of an externality has often led to an increase in the calculated NPV. e. Both b and c are correct
b. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits of the bank's other offices to decline.
Which of the following statements is/are INCORRECT? a. All else equal, if a bond's yield to maturity increases, its price will fall. b. The firm is likely to call a bond for early redemption when the bond is downgraded. c. All else equal, a 20-year bond has higher interest rate risk than 5-year bond. d. Both a and b are incorrect. e. Both b and c are incorrect.
b. The firm is likely to call a bond for early redemption when the bond is downgraded
Cash flow to creditors is equal to
beginning long-term debt minus ending long-term debt plus interest paid.
Annual coupon payment
coupon rate * Face value
3. Which of the following statements is CORRECT? a. An asset that is sold for less than its book value at the end of a project's life will generate a loss for the firm, hence the terminal cash flow will be negative. (MV< BV, sale at loss provides tax credit so cash flow is larger than sale price) b. Only incremental cash flows are relevant in project analysis, and the proper incremental cash flows are the reported accounting profits, which form the best basis for investor and managerial decisions. (It should focus cash flows not accounting profits) c. It is unrealistic to think that increases in net operating working capital required at the start of an expansion project can be recovered at the project's completion. Working capital is almost always used up in operations. Thus, cash flows associated with working capital are included only at the start of a project's life. (Changes in net working capital are considered as cash outflows then total net working capital will be fully recovered when the project is completed) d. If equipment is expected to be sold for more than its book value at the end of a project's life, this will result in a profit. Then, despite taxes on this profit, the end-of-project cash flow will be greater than if the asset had been sold at book value. e. Changes in net working capital refer to changes in current assets and current liabilities, not long-term assets and liabilities, hence they are not considered in a capital budgeting analysis. (fixed assets are definitely included in the budgeting analysis....initial cost and depreciation and depreciation tax shield are all included)
d. If equipment is expected to be sold for more than its book value at the end of a project's life, this will result in a profit. Then, despite taxes on this profit, the end-of-project cash flow will be greater than if the asset had been sold at book value.
Inflation, recession, and high interest rates are economic events that are best characterized as being which of the following:
factors associated with market risk.
Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:
had to decrease
If shareholders are granted a preemptive right they will
have priority in the purchase of any newly issued shares.
Sensitivity analysis
helps identify the variable within a project that presents the greatest forecasting risk.
The Sarbanes-Oxley Act of 2002 has___________.
made officers of publicly traded firms personally responsible for the firm's financial statements
What is the primary goal for managing a firm?
maximizing stock price is the primary goal of financial manager.
Which is more important from a finance perspective—net income or operating cash flow? What is the difference between these two values?
operating cash flow is more important because it reveals the actual net amount of cash generated or used by a firm's daily operations The difference between net income and operating cash flow - an adjustment of depreciation and other noncash expenses plus the interest paid.
What is capital structure?
to proportion of financial capital funded by various sources, like cash, long debt or/and equity
STRAIGHT VOTING
voting in which a shareholder may cast all votes for each member of the board of directors. The directors are elected one at a time
CUMULATIVE VOTING
voting in which each shareholder is entitled to one vote per share times the number of directors to be elected
primary market
where a firm sells NEWLY issued securities (bonds or stocks) to raise capital.
secondary market
where transactions traded (buy or sell) among investors. A firm will NOT receive any capital from secondary market.
Last year, ABC Inc. had $150,000 in current assets and $80,000 in current liabilities. These values are referred to as the firm's__________.
working capital
What are the three most basic decisions managers must make?
•capital budgeting decision •financing decision •working capital management decision
