Finance Final-nm-292
A firms capital structure policy affects its weighted average cost of capital.
A ) True
According to the "trade-off theory," an increase in the costs of bankruptcy would lead firms to reduce the amount of debt in their capital structures.
A ) True
All else equal, short-term bonds have more reinvestment rate risk than do long-term bonds.
A ) True
Beta from the CAPM can be used to measure the market risk of a project.
A ) True
Convertible bond are bonds that may be converted (exchanged) into shares of common stock, at a fixed price, at the option of the bondholder.
A ) True
Signaling theory suggests firms should in normal times maintain reserve borrowing capacity that can be used if an especially good investment opportunity comes along.
A ) True
The before-tax cost of debt is the yield-to-maturity adjusted for flotation costs.
A ) True
The interest earned on most municipal bonds is exempt from federal taxes.
A ) True
The value of a bond is the present value of the future cash flows from the bond (consisting of the par value at maturity and all intervening coupon payments).
A ) True
The weighted average cost of capital for a given capital budget level is a weighted average of the marginal cost of each relevant capital component that makes up the firm's target capital structure.
A ) True
There is no tax effect to consider when calculating the component cost of preferred stock for capital budgeting purposes.
A ) True
If your firm has an unlimited capital budget, all projects are independent, and a project has a Net Present Value that is less than zero, which of the following are true?
A ) Your firm should not accept the project.
A portfolio is:
A ) a group of assets, such as stocks and bonds, held as a collective unit by an investor.
Corporations are allowed to use the shelf registration method if they:
A ) are rated investment grade and meet aggregate market stock value requirements. B ) have not recently violated SEC regulations. C ) have not recently defaulted on its debt.
The return earned in an average year over a multi-year period is called the _____ average return.
A ) arithmetic
The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset's:
A ) beta coefficient.
Corporate financial officers prefer to use book values when measuring debt ratios because:
A ) book values are more stable than market values. B ) debt covenant restrictions are usually expressed in book value terms. C ) rating agencies measure debt ratios in book values terms.
The target capital structure is affected by which of the following factors?
A ) business risk B ) the firm's tax position C ) financial flexibility considerations D ) managerial attitudes (conservatism or aggressiveness)
Unsystematic risk:
A ) can be effectively eliminated through portfolio diversification.
Variable costs:
A ) change as the quantity of output changes. B ) are zero when production is zero. C ) are exemplified by direct labor and raw materials.
What is the stated annual interest rate on a bond called?
A ) coupon interest rate
When information asymmetry exists (i.e. managers know more about the future prospects of the firm than investors) what does this imply for debt versus equity financing?
A ) debt financing is viewed as a favorable signal by investors B ) equity financing is viewed as a unfavorable signal by investors
Corporations try to create hybrid securities that look like equity but are called debt because:
A ) debt interest expense is tax deductible. B ) bankruptcy costs are eliminated or reduced.
Types of dilution include:
A ) dilution of percentage ownership B ) dilution of market share C ) dilution of book value and earnings per share
Which of the following statements are correct?
A ) diversifiable risk can be eliminated by proper diversification B ) market risk cannot be eliminated by proper diversification
Empirical evidence suggests that upon announcement of a new equity issue, current stock prices generally:
A ) drop, perhaps because the new issue reflects management's view that common stock is currently overvalued.
Estimating the optimal capital budget requires which of the following steps?
A ) estimate the WACC B ) adjust the WACC for the risk of various divisions of the firm C ) estimate relevant cash flows for each project and determine their risk relative to the average risk of the division D ) determine the NPV for all projects and choose all independent projects with positive NPVs and the mutually exclusive projects with the highest NPVs
The future value of an annuity due will:
A ) exceed the future value of an ordinary annuity (assuming all else equal).
The effective annual rate of interest is:
A ) greater than or equal to the nominal interest rate.
All else equal, ________ bonds have more reinvestment rate risk than ________ bonds.
A ) high-coupon; low-coupon
The future value of a single sum will:
A ) increase if the interest rate increases.
The standard deviation:
A ) is a stand-alone risk measure B ) provides an idea of how far above or below the expected value the actual value is likely to be
The coefficient of variation:
A ) is a stand-alone risk measure C ) shows the risk per unit of return
Different classes of stock usually are issued to:
A ) maintain ownership control by holding the class of stock with greater voting rights.
The risk premium for an individual security is computed by:
A ) multiplying the security's beta by the market risk premium.
Which of the following are hidden options in capital budgeting?
A ) option to expand. B ) timing option. C ) option to abandon.
When calculating the component cost of debt for capital budgeting purposes for profitable, tax-paying firms, the tax adjustment:
A ) reduces the component cost of debt
Which of the following are categories (classifications) of capital budgeting projects?
A ) replacement: maintenance of business or cost reduction B ) expansion: existing or new products C ) safety and/or environmental projects
NPV indicates a project is deemed desirable (acceptable) when:
A ) the NPV is greater than or equal to zero
The intercept point of the security market line is the rate of return which corresponds to:
A ) the risk-free rate of return.
A stock with a beta of zero would be expected to have a rate of return equal to:
A ) the risk-free rate.
Standard deviation measures _____ risk.
A ) total
Conflicts can arise between IRR and NPV if which of the following is true?
A ) when project size (or scale) differences exist B ) when timing differences exist
Sensitivity analysis provides information on:
A ) whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive. B ) the need for additional information as it tests each variable in isolation. B ) degree to which the net present value reacts to changes in a single variable.
Disregarding risk, if money has time value, the present value of a given sum:
A ) will be less than its future value
The rate of return earned on a bond if it is called before its maturity date is its:
A ) yield-to-call.
A partial amortization loan requires a final larger than usual payment that is called:
A BALLOON PAYMENT
Assume a project has normal cash flows (that is, the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?
B ) All else equal, a projects NPV increases as the cost of capital declines.
When evaluating potential projects, which of the following factors should be incorporated as part of a projects estimated cash flows?
B ) Any opportunity costs that are incurred if the project is undertaken. C ) Any externalities (both positive and negative) that are incurred if the project is
Which of the following is the best description of the relationship between present and future values?
B ) FV - PV = (interest earned)
A call provision gives the investor the right to force the issuer to buy the bonds back before maturity.
B ) False
As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS.
B ) False
In general, an increase in the corporate tax rate would cause firms to use less debt in their capital structures.
B ) False
The optimal capital structure simultaneously maximizes EPS and minimizes the WACC.
B ) False
There is virtually no link between capital budgeting and stock values.
B ) False
A company's bond rating is not affected by its financial performance and provisions in the bond contract.
B ) False - There is a strong correlation between a companys financial performance and its bond rating. Also, provisions in the contract (e.g., subordination, guarantee, sinking funds) materially affect the rating.
The present value of a perpetuity cannot be found since it is an annuity that goes on forever.
B ) False - the present value of a perpetuity is simply the payment divided by the discount rate
The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project.
B ) False.
Suppose all assumptions of the Independence Hypothesis of Capital Structure are true EXCEPT corporate interest payments are tax deductible. What does this imply for debt versus equity financing?
B ) Increasing the level of debt in the firm will increase the value of the firm.
________ projects are projects whose cash flows are not affected by the acceptance of other projects.
B ) Independent
Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be _________ the YTM with a call provision.
B ) Lower than.
What bonds are issued by state and local governments?
B ) Municipal bonds
Frank Lewis has a 30-year, $100,000 mortgage with a nominal interest rate of 10 percent and monthly compounding. Which of the following statements regarding his mortgage is most correct?
B ) The proportion of the monthly payment that represents interest will be lower for the last payment than for the first payment on the loan.
If your firm has an unlimited capital budget, all projects are independent, and a project has a Net Present Value of zero, which of the following are true?
B ) Your firm should accept the project.
If your firm has an unlimited capital budget, all projects are independent, and a project has a Net Present Value that is greater than zero, which of the following are true?
B ) Your firm should accept the project.
Technically speaking, a long-term corporate debt offering that features a specific attachment to corporate property is generally called:
B ) a bond.
An equity issue sold directly to the public is called:
B ) a general cash offer.
A cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected is called:
B ) a sunk cost.
Risk in a revenue-producing project can best be adjusted for by:
B ) adjusting the discount rate upward for increasing risk.
An annuity whose payments occur at the end of each period is called:
B ) an ordinary annuity.
The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied (interest-on-interest) is called:
B ) compounding
If a coupon bond is selling at par, its current yield:
B ) equals its yield to maturity.
Last month you introduced a new product to the market. Consumer demand has been overwhelming and it appears that strong demand will exist over the long-term. Given this situation, management should consider the option to:
B ) expand.
The net cash flows attributable to an investment project which represent the change in the firm's total cash flow that occurs as a direct result of accepting the project are called:
B ) incremental cash flows
Suppose you know that your firm is facing relatively poor prospects but needs new capital. If you also know that investors do not have this information, signaling theory would predict that you would:
B ) issue equity to share the burden of decreased equity returns between old and new shareholders.
The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-free asset is referred to as the:
B ) market risk premium.
Financial economists prefer to use market values when measuring debt ratios because:
B ) market values are a better reflection of current value than historical value.
The present value break-even point is superior to the accounting break-even point because:
B ) present value break-even covers the economic opportunity costs of the investment.
Capital _________ is the term that means the size of the capital budget is constrained.
B ) rationing
If a firm retires or extinguishes a debt issue before maturity, the specific amount they pay is:
B ) the call price.
The investment timing decision relates to:
B ) the decision as to when a project should be started.
Retained earnings are:
B ) the difference between the net income earned and the dividends paid.
The optimal capital structure from the Tradeoff Theory is the mix of debt and equity where:
B ) the firm's value is at a maximum. C ) the firm's weighted average cost of capital is at a minimum.
A rights offering is:
B ) the issuing of an option directly to the existing shareholders to acquire stock.
A stock with a beta of one would be expected to have a rate of return equal to:
B ) the market return.
The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the:
B ) the return on the particular project examined.
Not paying the dividends on a cumulative preferred issue may result in:
B ) voting rights are granted to preferred stockholders if preferred dividends are in arrears. C ) no payment of dividends to common shareholders.
The majority of the benefits from portfolio diversification can generally be achieved with only _____ diverse securities.
C ) 30-40
1Suppose all assumptions of the Independence Hypothesis of Capital Structure are true EXCEPT corporate interest payments are tax deductible and bankruptcy costs do exist. What does this imply for debt versus equity financing?
C ) A change in the level of debt in the firm can result in the value of the firm going up or down depending on how much debt the firm has initially.
Which of the following is NOT considered a capital component for the purpose of calculating the weighted average cost of capital (WACC) as it applies to capital budgeting?
C ) Accounts payable and accruals.
A company is considering a new project. The companys CFO plans to calculate the projects NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the companys cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows?
C ) Any opportunity costs associated with the project.
___________ occurs when the introduction of a new product causes sales of existing products to decline.
C ) Cannibalization
From the information below, select the optimal capital structure for Minnow Entertainment Company.
C ) Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
_________ is the return on the best alternative use of an asset, or the highest return that will not be earned if funds are invested in a particular project.
C ) Opportunity cost
Which of the following does not affect a firm's business risk?
C ) The degree of financial leverage.
A registration statement is effective on the 20th day after filing unless:
C ) a letter of comment suggesting changes is issued by the SEC.
The sales level that results in a project's net income exactly equaling zero is called the _____ break-even.
C ) accounting
If a shareholder or investor wants to acquire new stock under a rights plant they must:
C ) acquire the correct rights per share desired, then turn the rights and the total subscription price into the subscription agent.
In the present-value break-even the EAC is used to:
C ) allocate the initial investment at its opportunity cost over the life of the project.
A table showing precisely how a loan will be repaid which gives the required payment each due date and a breakdown of interest versus principal is:
C ) an amortization schedule
Which one of the following is an example of unsystematic risk?
C ) an oil tanker runs aground and spills its cargo
Risk can be analyzed:
C ) both on a stand-alone and portfolio basis.
A well-diversified portfolio has little to none:
C ) company specific risk.
If a long-term debt instrument is perpetual, it is called a(n):
C ) consol.
Bonds issued by corporations that are exposed to default risk are called:
C ) corporate bonds.
The present value of a single sum to be received in the future:
C ) decreases as the interest rate (discount rate) increases
The present value of a sum due in the future:
C ) decreases as the years to receipt increases
Preferred stock has both a tax advantage and a tax disadvantage. These two are:
C ) dividends are not a tax-deductible expense but are 70% exempt from corporate taxation.
The present value of an annuity due will:
C ) exceed the present value of an ordinary annuity (assuming all else equal).
The price at which investors are indifferent between buying or selling a security is called the:
C ) fair (equilibrium) value.
The cost of new common stock (external equity) is generally higher than the cost of retained earnings (internal equity) because of:
C ) flotation costs. -- Retained earnings do not incur flotation costs, while new common stock does. Thus, the cost of new common stock is higher than the cost of retained earnings. There is no tax effect when computing the cost of equity.
High beta projects are projects with _________ risk and should be evaluated using a _______ cost of equity capital.
C ) high; high
Including the option to expand in your project analysis will tend to:
C ) increase the net present value of a project.
If a bond is selling for a premium, this implies that the bonds yield to maturity:
C ) is less than its coupon rate
Bonds below BBB or Baa are called:
C ) junk bonds.
All else equal, __________ bonds have more interest rate risk than ________ bonds.
C ) long-term; short-term
If a debenture is subordinated, it:
C ) must give preference to the specified creditor in the event of default.
Opportunities to respond to changing circumstances giving mangers the opportunity to influence a projects outcome are often called _________.
C ) real options
_________ is the risk that a decline in interest rates will lead to a decline in income from a bond portfolio.
C ) reinvestment rate risk
IRR indicates a project is deemed desirable (acceptable) when:
C ) the IRR is greater than or equal to the risk-adjusted cost of capital
Since retained earnings are generated by the firm:
C ) the funds have a positive cost that is less than new equity issues.
The written agreement between a corporation and the bondholders' representative is called:
C ) the indenture.
The six components that make up the total costs of new issues are:
C ) the spread; other direct expenses such as filing fees; indirect expenses such as management time; abnormal returns; underpricing and the Green Shoe option.
If cumulative voting is permitted:
C ) the total number of votes a shareholder has can be calculated as the number of shares owned times the number of directors to be elected.
All else equal, the contribution margin must increase as:
C ) the variable cost per unit declines.
The rate of return earned on a bond if it is held until maturity is its:
C ) yield-to-maturity.
Suppose you believe that the Trade-off Theory of capital structure is true. Which of the following is true?
D ) Cannot be determined with given information
Business risk is concerned with the operations of the firm. Which of the following is not associated with or not a part of business risk?
D ) Changes in required returns due to financing decisions.
Which of the following is not normally an example of the services offered by investment bankers?
D ) Offering checking accounts to corporations
Which of the following investment opportunities would yield the highest return?
D ) Quoted annual rate of 6% with monthly compounding. - if the quoted interest rate is the same, the investment with the most frequently compounding during the year will have the largest effective annual rate of interest
___________ is a technique in which "bad" and "good" sets of financial circumstances are compared with a most likely, or base-case, situation.
D ) Scenario analysis
Corporations typically have the right to repurchase a debt issue prior to maturity at a fixed price, but only after some number of years have passed. Such debt is said to feature:
D ) a deferred call.
A bond that pays no annual interest but is sold at a discount below the par value is called:
D ) a zero coupon bond.
A loan that is repaid in equal payments over its life with each payment including a portion of interest and principal is
D ) an amortized loan
A long-term contract under which a borrower agrees to make payments of interest and principal on specific dates is called a:
D ) bond.
Which one of the following is most likely a variable cost?
D ) direct labor costs
The process of finding the present value of a cash flow or a series of cash flows is called:
D ) discounting.
The __________ is the true interest rate earned over a one-year period. It is the actual change expected over the one-year period.
D ) effective annual interest rate
Comparisons of investment alternatives with different compounding periods should be made based on the:
D ) effective annual interest rate.
The NPV calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the:
D ) firms cost of capital.
The expected return on a portfolio:
D ) is limited by the returns on the individual securities within the portfolio.
Rule 144A provides the framework for the issuance of private securities to qualified institutional investors. To buy private securities, institutional investors:
D ) must be willing to hold a less liquid security and have $100 million under management.
With a bond, what generally represents the amount of money the issuer promises to repay on the maturity date?
D ) par value
The point where a project produces a rate of return equal to the required return is known as the:
D ) present value break-even point.
The amount of loan a person or firm borrows from a lender is the:
D ) principal.
The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings. This prohibition is an example of a(n):
D ) restrictive covenant.
The discount rate that applies to a particular risky stream of income is called the:
D ) risk-adjusted discount rate.
The linear relation between an asset's expected return and its beta coefficient is the:
D ) security market line.
To ascertain whether the accuracy of the variable cost estimate for a project will have much effect on the final outcome of the project, you should probably conduct _____ analysis.
D ) sensitivity
Which one of the following is a correct ranking of securities based on their volatility over the past 80 years or so? Rank from highest to lowest.
D ) small company stocks, large company stocks, long-term corporate bonds
For a portfolio, the weighted average of the expected returns for the individual assets in the portfolio with the weights equal to the fraction of the total portfolio funds invested in each asset is called the:
D ) the portfolio expected return
Empirical evidence suggests that new equity issues are generally:
D ) underpriced, in part, to counteract the winner's curse.
Simulation analysis is based on assigning a _____ and analyzing the results.
D ) wide range of values to multiple variables simultaneously
The type of analysis that is most dependent upon the use of a computer is _____ analysis.
E ) simulation
The principle of diversification tells us that:
E ) spreading an investment across many diverse assets will eliminate some of the risk.
It is not possible to use a discounted cash flow model to value a firm if it does not pay dividends
FALSE
The PV of a perpetuity cannot be found since it is an annuity that goes on forever
FALSE
Which of the following are advantages of the corporate form of business ownership?
I. Limited liability for firm debt, III. Ability to raise capital, IV. Unlimited firm life
Which of the following statements are correct concerning the accounting break-even point?
I. The net income is equal to zero at the accounting break-even point. II. The net present value is equal to zero at the accounting break-even point.
Fixed costs:
I. are variable over long periods of time. II. must be paid even if production is halted. III. are generally affected by the amount of fixed assets owned by a firm.
The standard deviation on small company stocks:
I. is greater than the standard deviation on large company stocks. III. had an average value of about 33% over the past 80 years or so.
Which of the following statements concerning the standard deviation are correct?
II. The standard deviation is a measure of volatility. III. The higher the standard deviation, the less certain the rate of return in any one given year. IV. The higher the standard deviation, the higher the expected return.
Which of the following statements concerning variable costs is (are) correct?
II. Variable costs are equal to zero when production is equal to zero.
Which of the following accounts are included in shareholders' equity?
II. retained earnings III. capital surplus
The present value (future value) of an uneven cash flow stream is the sum of the present values (future values) of each of the individual cash flows.
TRUE
The articles of incorporation:
The corporate document that sets forth the business purpose of a firm AND c. Set forth the number of shares of stock can be issued
The present value of an annuity decreases as the interest rate (discount rate) increases.
True
When making financial decisions related to assets, you should:
a. Always consider market values
Which of the following are all components of the statement of cash flows?
a. Cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities
Which of the following help convince managers to work in the best interest of the stockholders?
a. Compensation based on the value of the stock b. Stock option plans c. Threat of a proxy fight
A business created as a distinct legal entity composed of one or more individuals or entities is called a:
a. Corporation
The green shoe option is used to:
a. Cover oversubscription b. Cover excess demand
Unsecured corporate debt is called:
a. DEBENTURE
A firm's sustainable growth rate in sales directly depends on its:
a. Debt-to-equity ratio b. Profit margin c. Dividend policy d. Asset efficiency
Assets are listed on the balance sheet in order of:
a. Decreasing liquidity
The effective annual rate of interest is always equal to the nominal interest rate.
a. FALSE
The present value of an ordinary annuity will exceed the present value of an annuity due (assuming all else equal).
a. FALSE
A sinking fund provision in a bond contract gives the issuer the right to redeem the bonds under specific terms prior to the normal maturity date.
a. FALSE - A sinking fund provision requires that issuer to retire a portion of the bond issue each year. A call provision gives the issuer the right to redeem the bonds under specific terms prior to the normal maturity date.
Studies almost unanimously show that you cannot make an abnormal profit in the U.S. market by using inside information
a. FALSE - Most studies show that the strong-form efficient market hypothesis does not hold, so abnormal profits can be made by those who possess inside information.
If a debt issue is callable, the call price is generally________ par
a. Greater than
All else equal, the earnings per share will:
a. Increase as net income increases
Since the implementation of Sarbanes-Oxley, the cost of going public in the US has
a. Increased
Which of the following statements concerning the income statement is true?
a. It measures accounting performance over a specific period of time b. It determines after-tax income of the firm c. It includes deferred taxes d. It treats interest as an expense d. Depreciation reduces both the pretax income and the net income
A business entity operated and taxed like a partnership, but with limited liability for owners, is called a:
a. Limited liability company
Which of the following are disadvantages of a partnership?
a. Limited life of the firm b. Personal liability for firm debt d. Lack of ability to transfer partnership interest
Earnings per share is equal to:
a. Net income divided by the total number of shares outstanding
To calculate sustainable growth rate without using return on equity, the analyst needs the:
a. Profit margin b. Payout ratio c. Debt-to-equity ratio d. Total asset turnover
Depreciation:
a. Represents allocations of the costs of assets over their useful lives b. Is referred to as a noncash charge c. Applies to tangible assets
The price of a stock is the present value of all expected future dividends, discounted at the investor's required return
a. TRUE
Cash flow to stockholders must be positive when:
a. The dividends paid exceed the net new equity raised
P/E ratios are reflections of:
a. The firms growth prospects b. The firms risk
Which one of the following statements is correct concerning corporations?
a. The largest firms are usually corporations
Which one of the following statements concerning a sole proprietorship is correct?
a. The life of a firm is limited to life span of the owner
The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the:
a. Treasurer
_____ refers to the cash flow that results from the firm's ongoing, normal business activities:
a. cash flow from operating activities
A major disadvantage of the payback period is that it:
a. ignores cash flows beyond the payback period. b. does not directly account for the time value of money.
The sustainable growth rate:
a. is normally higher than the internal growth rate.
Financial deficits are created when:
a. profits and retained earnings are less than the capital-spending requirement.
A group of investment bankers who pool their efforts to underwrite a security are known as a(n):
a. syndicate
Shares of stock that have been repurchased by the corporation are called:
a. treasury stock.
If a bond is selling for a discount (the market price is less than the par value), the yield-to-maturity must be smaller than the coupon rate.
b) False
The financial statement showing a firm's accounting value on a particular date is the:
b. Balance sheet
Which one of the following statements is correct?
b. Both sole proprietorships and partnerships are taxed in similar fashion
A supplier, who requires payment within ten days, is most concerned with which one of the following ratios when granting credit?
b. Cash
Which one of the following is a capital budgeting decision?
b. Deciding whether or not to open a new store
In a limited partnership:
b. Each limited partners liability is limited to the amount he put into the partnership
Insider trading is:
b. Illegal
The primary goal of financial management is to:
b. Maximize the current value per share of the existing stock
The percentage of sales method:
b. Separates accounts that vary with sales and those that do not vary with sales c. Allows analysts to calculate how much financing the firm will need to support the predicted sales level
A business owned by a single individual is called a:
b. Sole proprietorship
The long-term debts of a firm are liabilities:
b. That do not come due for at least 12 months
Which one of the following statements is correct concerning the organizational structure of a corporation?
b. The chief executive officer reports to the board of directors
According to generally accepted accounting principles (GAAP), revenue is recognized as income when:
b. The transaction is complete and the goods or services are delivered
Under the _____ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _____ method, the underwriter does not purchase the shares but merely acts as an agent.
b. firm commitment; best efforts
Book value:
b. is based on historical cost
A shareholder who has rights is:
c. Able to exercise their rights or sell them
A current asset is:
c. An item currently owned by the firm that will convert to cash within the next 12 months
The owners of a limited liability company prefer:
c. Being taxed personally on all business income
Which one of the following business types is best suited to raising large amounts of capital?
c. Corporation
A business formed by two or more individuals who each have unlimited liability for business debts is called a:
c. General partnership
On its one year ago balance sheet, Sherman Books had retained earnings equal to $510 million. On its current year balance sheet, retained earnings were also equal to $510 million. Which statement is most correct?
c. If the companys net income in the current year was $200 million, dividends paid must have also equaled $200 million
Common stockholders equity (net worth):
c. Is the capital supplied by common stockholders; it is the residual book value of the firm after all claims other than the ownership clam of common stockholders are satisfied.
When you are making a financial decision, the most relevant tax rate is the _____rate:
c. Marginal
________refers to the difference between a firm's current assets and its current liabilities
c. net working capital
The cash flow to creditors includes the cash:
c. outflow when interest is paid on outstanding debt
A conflict of interest between the stockholders and management of a firm is called:
c. the agency problem
Your _________ tax rate is the total taxes you pay dividend by your taxable income
d. Average
The process of planning and managing a firm's long-term investments is called:
d. Capital budgeting
Cash flow to stockholders is defined as:
d. Cash dividends plus repurchases of equity minus new equity financing
Which form of business structure face the greatest agency problems?
d. Corporation
Which type of business organization has all the respective rights and privileges of a legal person?
d. Corporation
Noncash items refer to:
d. Expenses charged against revenues that do not directly affect cash flow
Based on historical experience, which of the following best describes the "pecking order" of long-term financing strategy in the US?
d. Internal financing first, long-term borrowing, new common equity last.
One of the reasons why cash flow analysis is popular is because:
d. It is difficult to manipulate, or spin the cash flows
Land Land Land, Inc. has a current ratio of 2.0. The average current ratio for the firm's industry is 2.5.
d. LLL is less liquid than the average firm in the industry - smaller current ratio means less liquidity
A(n)______ asset is one which can be quickly converted into cash without significant loss in value.
d. Liquid
The bylaws:
d. Mandate the procedure for electing corporate directors
An increase in total assets:
d. Must be offset by an equal increase in liabilities and shareholders equity
The division of profits and losses among the members of a partnership is formalized in the:
d. Partnership agreement
Ratios that measure how efficiently a firm's management uses its assets and equity to generate bottom line net income are known as _____ ratios.
d. Profitability
The Sarbanes Oxley Act of 2002 is intended to:
d. Protect investors from corporate abuses
From the corporate perspective, Callable bonds may have value over the non-callable bonds because:
d. The corporation has the option to call the bond if interest rates fall
Agency costs refer to:
d. The costs of any conflicts of interest between stockholders and management
Which one of the following statements concerning a sole proprietorship is correct?
d. The owner of a sole proprietorship may be forced to sell his personal assets to pay company debts
Financial planning, when properly executed:
d. helps ensure that proper financing is in place to support the desired level of growth.
Liquidity is:
d. valuable to a firm even though liquid assets tend to be less profitable to own
The financial ratio days' sales in inventory is measured as:
e. 365 days divided by the inventory turnover
You are offered an investment with a quoted annual interest rate of 8% with quarterly compounding of interest. What is your effective annual interest rate?
e. 8.24
The mixture of debt and equity used by a firm to finance its operations is called:
e. Capital structure
Market value ratios:
e. Give an indication of what investors think of the firms performance and future prospects - market value ratios include the stock price that reflects the value investors place on the company
Which one of the following best describes the primary advantage of being a limited partner rather than a general partner?
e. Liability for firm debts limited to capital invested
A stakeholder is:
e. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm
Which of the following statements best describes what would be expected to happen as you randomly add stocks to your portfolio?
o Adding more stocks to your portfolio reduces the portfolios company-specific risk.
__________ have control of the firm since they have the right to elect a firms directors.
o Common stockholders - Bondholders (creditors) and preferred stockholders generally have no voting rights.
An example of a primary market transaction is buying 100 shares of Wal-Mart stock from your uncle.
o False
In principle, the same intrinsic value for a stock should be found whether you use the corporate value model (based on expected free cash flow) or the dividend discount model (based on expected dividends). However, the model estimates are very sensitive to the inputs used which often leads to different valuations in practice.
o TRUE
Stock A has a beta of 1.0 and Stock B has a beta of 0.8. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)
o The expected return on Stock A will be greater than that on Stock B.
•A stock's dividend is expected to grow at a constant rate of 5 percent a year. Which of the following statements is most correct?
o The stock's price one year from now is expected to be 5 percent higher.
Which one of the following types of securities has tended to produce the lowest real rate of return over the past 80 years or so?
o U.S. Treasury bills
The systematic risk of the market is measured by
o a beta of 1.0.
If investment return is stated in dollars, to make a decision regarding return adequacy you also need to know:
o both the scale of investment and the timing of the return
All else constant, the accounting break-even level of sales will decrease when the:
o depreciation expense decreases
The average compound return earned per year over a multi-year period is called the _____ average return.
o geometric
Sunk costs include any cost that:
o has previously been incurred and cannot be changed.
•An initial public offering (IPO):
o occurs when a companys stock is offered to the public for the first time.
In order to make a decision with a decision tree:
o one starts farthest out in time to make the first decision.
The excess return required from a risky asset over that required from a risk-free asset is called the: ALSO o The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:
o risk premium
On average, over the past 80 years or so:
o the risk premium on long-term corporate bonds has exceeded the risk premium on long-term government bonds.
proxy fight
10. If a group other than management solicits the authority to vote shares to replace management, a _____ is said to occur.
Sensitivity analysis
10. __________ is a technique in which key variables are changed one at a time and the resulting changes in the NPV are observed. AKA C ) changing the value of a single variable and computing the resulting change in the current value of a project.
opportunity cost. C ) the opportunity cost rate
50. The most valuable investment given up if an alternative investment is chosen is a(n): 23. The rate of return on the best available investment of equal risk is called:
When examining the EBITDA ratio, lower numbers are:
<LOOK UP ANSWER> a. Considered good --- NO b. Considered mediocre c. Considered poor d. Indifferent to higher numbers e. It is impossible to garner information from this ratio
The risk premium is computed by ______ the average return for the investment.
<NEED TO LOOK UP! Module 9 #7> C ) subtracting the average return on the U.S. Treasury bill from
Which one of the following is a correct statement concerning risk premium?
<NEED TO LOOK UP! Module 9 A# 9-10> A ) The greater the volatility of returns, the greater the risk premium.
Which of the following statements is incorrect?
<NEED TO LOOK UP> a. The slope of the security market line is measured by beta. b. Two securities with the same stand-alone risk can have different betas. c. Company-specific risk can be diversified away. d. The market risk premium is affected by attitudes about risk. e. Higher beta stocks have a higher required return - NO
Sensitivity analysis evaluates the NPV with respect to
<NEED TO LOOK UP> a. changes in the underlying assumptions. b. one variable changing while holding the others constant c. different economic conditions d. all of the above e. none of the above - NO
_____ is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities
<NEED TO LOOK UP> o Operating cash flow - NO o Capital spending o Net working capital o Cash flow from operations o Cash flow to creditors
Which of the following is likely to encourage a company to use more debt in its capital structure?
A ) A decrease in the variability of sales. B ) An increase in the liquidity of the firm's assets. C ) A decrease in the company's degree of operating leverage.
Which of the following will increase a companys retained earnings break point?
A ) An increase in its net income.
Which of the following factors is likely to encourage a corporation to increase the proportion of debt in its capital structure?
A ) An increase in the corporate tax rate.
What is a measure of market risk which is the extent to which the returns on a stock move with the market?
A ) Beta
When evaluating a new project, the firm should consider all of the following factors:
A ) Changes in net operating working capital attributable to the project. C ) Current rental income of a building owned by the firm if it is not used for this project. D ) The decline in sales of an existing product directly attributable to this project.
_________ are effects of a project on cash flows in other parts of the firm.
A ) Externalities
The post-audit is used to:
A ) Improve cash flow forecasts. B ) Stimulate management to improve operations and bring results into line with forecasts.
•What bond are issued by the Federal government and have no default risk?
A ) Treasury bonds