Principles of Finance Final

True or False: Over-the-counter markets include all security markets, with the exception of organized exchanges.

True

True or False: Shareholder wealth maximization means maximizing the price of the existing common stock

True

True or False: The risk-return trade-off is seen in many areas of finance

True

True or False: The term structure of the interest rates usually indicates that longer terms to maturity have higher expected returns

True

True or False: Variation is the rate of return of an investment is a measure of the riskiness of that investment

True

True or False: a liquidity-risk premium is the additional return required by investors for securities that cannot quickly be converted into cash at a reasonably predictable price.

True

True or False: a stock with a beta of 1 has systematic or market risk equal to the "typical" stock in the marketplace

True

True or False: the root cause of agency problems is conflicts of interest

True

true or false: a bond with a par vale of $1,000 is listed in the Wall Street journal at a price of 100.50. The bond is selling for 1,005.

True

true or false: bondholders and preferred stockholders can be viewed as creditors, whereas the common stockholders are the true owners of the firm.

True

true or false: long-term bonds have greater interest rate not than shorter-term bonds

True

true or false: npv is the most theoretically correct capital budgeting decision tool examined in the text.

True

true or false: the par vale of a corporate bond indicates the payment that the issuer promises to make to the bondholder at maturity

True

true or false: the the net present value of a project is zero, then the profitability index will equal one.

True

true or false: the yield to maturity is the discount rate that equates the present value of the interest and principal payments with the current market price of the bond.

True

true or false: to evaluate or compare investment proposals, we must adjust the value of all cash flows to a common data.

True

two considerations that cause a corporation's cost of capital to be different than its investors required returns are

corporate taxes and flotations costs

true or false: the internal rate of return is the discount rate that equates the present value of the project's future free cash flows with the projects initial outlay.

true

true or false: when using a financial calculator, cash outflows generally have to be entered as negative numbers, because a financial calculator sees money "leaving your hands"

true

Capital Budgeting is concerned with

what long-term investments a firm should undertake

What is the market rate?

- The rate of interest demanded by creditors to compensate them for risks associated with holding the bonds - The interest rate that investors are demanding for debt that has a similar maturity and risk - defined as the rate of interest, on a loan or investment, which is commonly available on the market for that product, defined the cost of benefit of the tool. For a loan, the market rate is the average rate of interest that will be charged to the receiver from a variety of providers. To the investor, the market rate is the average rate of interest gained from all or a certain set of investment vehicles which are available on the open market. These create the market rate of interest definition as a whole.

During the period 1990 to 2017, the average yield on 3-month U.S. Treasury bills was 2.78%, the average inflation rate was 2.48%, the average yield on 30-year Treasury bonds was 5.22%, and the average return on 30-year Aaa-rated corporate bonds was 6.08%. The real risk-free short term interest rate is

0.30%

When evaluating an investment project, which if the following best describes the financial information needed by the decision maker?

After-tax incremental cash flows to the company as a whole

put the following in order of their claim on assets of a firm, starting with the LAST to have a claim: A. subordinated debentures B. Debentures (unsubordinated) C. Common Stock D. Preferred Stock

C, D, A, E

Over the period 1926 to 2017, the standard deviation of returns has been the greatest for which of the following?

Common stocks

Of the following different types of securities, which is typically considered most risky?

Common stocks of small companies

True or False: A rational investor will always prefer an investment with a lower standard deviation of returns, because such investments are less risky

False

True or False: Investors expect to receive the highest returns from government-issued securities because the government will not default on securities that it has issues.

False

timelines are used for simple time value of money problems, but cannot be used for more complex problems.

False

true or false: A company with a AAA bond rating will require a higher interest rte on its bonds that a company with a lesser BBB bond rating.

False

true or false: historically price appreciation, or capital gains yield, has accounted for a greater portion of returns on common stocks than dividend payments

False

Which of the following is an example of both a capital market and a primary market transaction?

Ford Motor Company sells a new issue of common stock to raise funds through a public offering

When the yield curve is inverted, short-term interest rates are ____________ long-term interest rates

Higher than

ethical behavior

Is essential in business because unethical behavior destroys trust and business relationships

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

Purchase a variety of securities; i.e., diversify

An inverted yield curve is often interpreted as a precursor to a:

Recession

Money-market transactions include which of the following?

Securities that have a maturity of less than one year

General Motors raises money by selling a new issue of common stock. This transaction occurs in

The capital market

Assume that an investor is offered a choice of risk-free government bond or a high-rush corporate stock. Further assume that the expected return is the same for both. According to one of the axioms of finance, what finance would be chosen?

The government bond

You can buy a $50 savings bond today for $25 and redeem the bond in 10 years for its full face value of $50. You could also put your money in a money market account that pays 7% interest per year. Which option is better, assuming they are of equal risk?

The savings bond is better because it earns a higher interest rate.

If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the least risky investment?

U.S. Treasury Bills

A typical measure for the risk-free rate of return is the

U.S. Treasury bill rate

Cabell Corp. bonds pay an annual coupon rate of 10%. If investors' required rate of return is now 12% on these bonds, they will be priced at

a discount par value

In August 2004, Google first sold its common stock to the public at $85 per share and raised $1.76 billion. This is an example of

a primary market transaction

The principle of risk-return trade-off means that

a rational investor will only take on higher risk if he expects a higher return.

5 Major Principles that form the foundations of Finance

a. cash flow is what matters b. money has a time value c. risk requires a reward d. market prices are generally right e. conflicts of interest cause agency problems

Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid. What is the name of this feature?

cumulative

A significant disadvantage of the payback period is that it

does not properly consider the time value of money

the cost of retained earnings is less that the cost of new common stock because

flotation costs are incurred when new stock issued

The five basic principles of finance include all of the following EXCEPT

incremental profits determine value

The real rate of return is the return earned above the

inflation risk premium

The present value of the expected future cash flows of an asset represents the asset's

intrinsic value

The yield to maturity on a bond

is the required rate of return on the bond

The primary goal of a publicly owned corporation is to

maximize shareholder wealth

what is investor's required rate of return?

minimum rate of return necessary to attract an investor to purchase/hold a security

A basis point is equal to

one hundredth of one percent

As interest rates and consequently investors' required rates of return, change over time the ______________ of outstanding bonds will change as a result.

price

an interdependent project should be accepted if it

produces a net present value that is greater than or equal to zero

The capital asset pricing model

provides a risk-return trade-off in which risk is measured in terms of beta

What is beta?

relationship between investments return sand the market's returns

which of the following is true of a zero coupon bond?

the bond makes no coupon payments

Determining the best way to raise money to fund a firms long-term investments is called

the capital structure decision

the internal rate of return is

the discount rate that equates the present value of the cash inflows with the present value of the cash outflows

Assuming two investments have equal lives, a high discount rate tends to favor

the investment with large cash flow early

Beta is a statistical measure of

the relationship between an investment's returns and the market return

What is the risk-free rate?

the theoretical rate of return of an investment with no risk of financial loss. One interpretation is that the risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time. - risk-free rate = expected return - risk premium

true or false: If the interest rate is positive, then the future value of an annuity de will be greater than the future value of an ordinary annuity

true

true or false: a rational investor would prefer to receive 1,200 today rather than $100 per month for 12 months.

true

true or false: the cost of debt increases relative to the investors' required return due to flotation costs. but decreases relative to the investors required return due to the tax deductibility of interest

true