BCOR MOHR

real rate of interest

creates equilibrium between the supply of savings and the demand for investment funds

a negative cash flow to stockholders indicates a firm

received more from selling stock than it paid out to shareholders

You borrow $200,000 from the bank to purchase a home. You agree to make payments at the end of each month for the next 30 years. If the annual interest rate on this loan is 6%, how much is your monthly payment?

$ 1,199.10

You need $75,000 in 10 years. If you can earn 0.57% per month, how much would you have to invest today?

$ 37,918

Assume you retire with $1 million. After you retire, you expect to live another 30 years. What level payment can you withdraw per year, if returns are 8%?

$ 88,827

You have 40 years to retirement. You will save $0 for the first 10 years, and then save $5,000 per year for the last 30 years. Your twin also has 40 years to retirement. He/She will save $5,000 per year for the first 10 years, and save $0 for the last 30 years. Assume annual return on investments is 12% for both strategies.

$1,422,130

You want to purchase a new condominium that costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment?

$1,736.25

Say you borrow $6,000 at 10 percent and agree to make equal annual end-of-year payments over 4 years. To find the size of the payments, the lender determines the amount of a 4-year annuity discounted at 10 percent that has a present value of $6,000

$1,892.82

Which has the highest future value in 3 years, if interest rates are 8%? A. $100 payments, 3 year ordinary annuity B. $100 payments, 3 year annuity due C. $200 lump sum received today D. $300 lump sum received in 3 years E. all answers produce the same future value

$100 payments, 3 year annuity due

If you invest $2,000 at the end of each year for the next 10 years, at a 6% annual interest rate, how much will you have at the end of the tenth year?

$26,361.59

What is the regular payment for a $10,000 loan for 3 years at 10% annual interest?

$4,021

You borrow $20,000 from the bank to purchase a new car. You agree to make payments at the end of each month for the next 4 years. If the annual interest rate on this loan is 9%, how much is your monthly payment?

$497.70

Suppose you want to buy a house 5 years from now, and you estimate that an initial down payment of $30,000 will be required at that time. To accumulate the $30,000, you will wish to make equal annual end-of-year deposits into an account paying annual interest of 6 percent.

$5,321.89

You are considering a perpetuity that pays an annual dividend of $1.50. If your desired return is 3%, how much would you be willing to pay?

$50.00

An investment offers a payout of $6,700 per year for 15 years. If you require an annual rate of return of 8%, what is the present value of the investment?

$57,348.51

If you save $3,000 per year for 40 years, earning 8% per year, how much will I have?

$777,170

Which has the highest future value in 3 years, if interest rates are 8%?

- Don't use a calculator $100 payments, 3 year annuity due

The ____________ the maturity of a bond and the __________ the coupon rate, the more sensitive the bond is to interest rate fluctuations .A.Longer, lower B.Longer, higher C.Shorter, lower D.Shorter, higher

.Longer, lower

eight years from now, you will be inheriting $100,000. What is this inheritance worth to you today if you can earn 7.2 percent interest, compounded quarterly?

0.072/4= 0.018 100,000/1.018^32=56,502.95

Five steps of capital budgeting

1) Proposal generation 2) Review and analysis 3) Decision making 4) Implementation 5) Follow-up

Healthy foods just paid its annual dividend of $1.3 a share. The firm recently announced that all future dividends will be increased by 5% annually. What is one share of this stock worth to you if you require rate of return of 15%?

1.3 × (1 + 5%) / (15% - 5%) = 13.65

Asset A has an expected return of 10%. the expected market return is 15% and the risk-free rate is 5%. What is Asset a's beta?

10% = 5% + beta × (15% - 5%) 5% = beta × 10% beta = 5% / 10% = 0.5

Ann Bates wishes to determine the number of years it will take for her initial $1,000 deposit, earning 8% annual interest, to grow to equal $2,500. Simply stated, at an 8% annual rate of interest, how many years, n, will it take for Ann's $1,000, PV, to grow to $2,500, FVn?

11.91

Suppose you are offered an investment that will allow you to double your money in 6 years. What is the implied rate of interest?

12.2%

The size of a company's tax bill is determined by the tax _______. Practice Laws Process Economics Code

Code

Alexander industries just had a very profitable year. the owner has decided to invest $225,000 of the profits in a venture that pays an 8% rate of return for fifteen years. how much more would the investment have been worth if the owner could have made 9% on this investment?

225,000x1.08^15=713,738.05 225,000x1.09^15=819,558.55 819,558.55-713,738.05=105,820.50

You want to purchase a new car and you are willing to pay $20,000. If you can invest at 10% per year and you currently have $15,000, how long will it be before you have enough money to pay cash for the car?

3.02 years

You are looking at an investment that will pay $1200 in 5 years if you invest $1000 today. What is the implied rate of interest?

3.7%

How long will it take to become a millionaire if you save $5,000 per year, starting next year, if your investment return is 9%?

34.2 years

Ray Noble purchased an investment four years ago for $1,250. Now it is worth $1,520. What compound annual rate of return has Ray earned on this investment?

5.01%

Rule of 72: How long would it take to double an investment returning 10% annually?

7.2 years

Jan Jacobs can borrow $2,000 to be repaid in equal annual end-of-year amounts of $514.14 for the next 5 years. She wants to find the interest rate on this loan.

8.99%

If the firm must earn at least 9% on its investments, what is the most it should pay for this opportunity?

=NPV

A $60,000 outlay for a new machine with a usable life of 15 years is called ________. A) capital expenditure B) financing expenditure C) replacement expenditure D) operating expenditure

A

A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________ when the stated rate of interest is less than the required return, and ________ when the stated rate of interest is equal to the required return. A) at a premium; at a discount; equal to the par value B) at a premium; equal to the par value; at a discount C) at a discount; at a premium; equal to the par value D) equal to the par value; at a premium; at a discount

A

The price at which an investor can purchase in the bond market is called the _____ price. A. asked B. coupon C. call D. face E. bid

A. Asked

Tangshan China Company's stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan's dividend growth rate assuming that dividends are expected to grow at a constant rate forever? A) 8% B) 9% C) 10% D) 11%

A

The ____________ the maturity of a bond and the __________ the coupon rate, the more sensitive the bond is to interest rate fluctuations. A)Longer, lower B)Longer, higher C)Shorter, lower D)Shorter, higher

A

Which of the following is true regarding bonds? A) The face value and coupon payments of a bond NEVER change B) Only the face value of a bond can change C) Only the coupon payments of a bond can change D) Both the coupon payments and face value of a bond can change

A

________ rate of interest is the actual rate charged by the supplier and paid by the demander of funds. A) Nominal B) Real C) Risk-free D) Inflationary

A

Which one of the following is the price that an investor pays to purchase an outstanding bond? A. Dirty price B. Face value C. Call price D. Bid price E. Clean price

A. Dirty Price

yield curve

A graphic depiction of the term structure of interest rates

You recently purchased a restaurant that had equal market and book values. The purchase included the building, fixtures, and inventory. Which one of the following would be most likely to cause the market value of the restaurant to fall below its book value? A sudden and unexpected increase in inflation The replacement of old menu items with more desirable products A pandemic that required restaurants to limit the number customers allowed inside Construction of new sidewalks and street lighting Addition of a movie theater and music venues nearby

A pandemic that required restaurants to limit the number customers allowed inside

Loan amortization schedule

A schedule of equal payments to repay a loan. It shows the allocation of each loan payment to interest and principal.

Net present value (NPV)

A sophisticated capital budgeting technique; found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital.

What is a mixed stream?

A stream of cash flow that is not an annuity because the payments are not equal.

Lamey Gardens has a dividend growth rate of 5.6 percent, a market price of $13.16 a share, and a required return of 14 percent. What is the amount o f the last dividend this company paid? A. $1.05 B. $1.55 C. $1.60 D. $1.15 E. $1.30

A. $1.05

This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now? A. $2.43 B. $2.51 C. $2.63 D. $2.87 E. $2.92

A. $2.43

Gamma Corp. is expected to pay the following dividends over the next four years: $7.50, $8.25, $15, and $1.80. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return is 14 percent, what is the current share price? A. $35.20 B. $31.06 C. $38.18 D. $32.30 E. $34.90

A. $35.20

KIT Kars stock currently sells for $54.10 per share and has a fixed 2.5 percent dividend growth rate. What was the amount of the last dividend paid if the required rate of return is 11 percent? A. $4.49 B. $3.57 C. $5.30 D. $4.15 E. $4.36

A. $4.49

Business Solutions is expected to pay its first annual dividend of $.84 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 2 percent per year. What is the value of this stock today, Year 0, at a required return of 14. 4 percent? A. $5.01 B. $8.09 C. $8.29 D. $7.03 E. $9.34

A. $5.01

What is the net present value of a project with the following cash flows if the discount rate is 15 percent? YR Cash Flow 0 -$48,100 1 15,600 2 28,900 3 15,200 A. -$2,687.98 B. -$1,618.48 C. $1,044.16 D. $1,035.24 E. $9,593.19

A. -$2,687.98

Blasco International has sales of $389,700 and costs of $413,210. The company has 120,000 shares outstanding. What is the price-sales ratio if the stock has a book value of $19.20 per share and a market value per share of $8.60? A. 2.65 B. 1.89 C. 2.23 D. 2.48 E. 2.37

A. 2.65

AB Builders has 15-year bonds outstanding with a face value of $1,000 and a market price of $974. The bonds pay interest annually and have a yield to maturity of 4.03 percent. What is the coupon rate? A. 3.80 percent B. 4.20 percent C. 4.25 percent D. 3.75 percent E. 3.95 percent

A. 3.80 percent

Which statement is true? A. From a legal perspective, preferred stock is a form of corporate equity. B. All classes of stock must have equal voting rights per share. C. Common shareholders elect the corporate directors while the preferred shareholders vote on mergers and acquisitions. D. Preferred dividends provide tax-free income to individual investors. E. Preferred shareholders prefer noncumulative dividends over cumulative dividends.

A. From a legal perspective, preferred stock is a form of corporate equity.

A real rate of return is defined as a rate that has been adjusted for which one of the following? A. Inflation B. Interest rate risk C. Taxes D. Liquidity E. Default risk

A. Inflation

Which one of the following statements is correct? A. Preferred stock can be callable. B. Preferred stock generally has a stated liquidation value of $1,000 per share. C. Dividend payments to preferred shareholders are tax-deductible expenses for the issuing firm. D. Preferred dividends are generally variable in amount. E. Preferred shareholders receive preferential treatment over bondholders in a liquidation.

A. Preferred stock can be callable.

Which one of the following bonds is most apt to have the smallest liquidity premium? A. Treasury bill B. Corporate bond issued by a new firm C. Municipal bond issued by the State of New York D. Municipal bond issued by a rural city in Alaska E. Corporate bond issued by General Motors ( GM)

A. Treasury bill

A debenture is: A. an unsecured bond. B. a bearer form bond. C. a bond with a call provision. D. a bond with a sinking fund provision. E. a bond secured by a bl anket mortgage

A. an unsecured bond

The net present value: A. decreases as the required rate of return increases. B. is equal to the initial investment when the internal rate of return is equal to the required return. C. method of analysis cannot be applied to mutually exclusive projects. D. ignores cash flows that are distant in the future. E. is unaffected by the timing of an investment's cash flows.

A. decreases as the required rate of return increases.

The written agreement that contains the specific details related to a bond issue is called the bond: A.indenture. B. debenture. C. document. D. registration statement. E. issue paper.

A. indenture

The rate of return an investor earns on a bond prior to adjusting for inflation is called the: A. nominal rate. B. real rate. C. dirty rate. D. coupon rate. E. clean rate.

A. nominal rate

If Treasury bills are currently paying 2.84 percent and the inflation rate is 1.63 percent, what is the approximate real rate of interest? The exact real rate? A.1.21 percent; 1.19 percent B. 1.21 percent; 1.20 percent C. 1.20 percent; 1.21 percent D. 1.19 percent; 1.20 percent E. 1.19 percent; 1.21 percent

A.1.21 percent; 1.19 percent

What is the key difference between finance and accounting?

Accounting is accrual based and focuses on the past whereas finance is cash flow based and focuses on the future. Finance is used to compare projects.

Which one of the following accounts is the most liquid? Inventory Building Accounts Receivable Equipment Land

Accounts Receivable

An income statement prepared using GAAP will show revenue when it is: Received. Collected. Accrued. Matched. Produced.

Accrued

What do we care about in Finance regarding cash flows?

Amount, time, and risk

Perpetuity

An annuity with an infinite life, providing continual annual cash flow. PV = CF (cash flow) / r (annual rate)

flat yield curve

An expectation of moderating inflation offsets the requirement for a higher rate to compensate for tying up cash

Operating expenditure

An outlay of funds by the firm resulting in benefits received within 1 year.

Capital expenditure

An outlay of funds by the firm that is expected to produce benefits over a period of time greater than 1 year.

You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. the rate of return on both annuities is 8 percent. Which one of the following statements in correct given this information.

Annuity B has both higher present value and future value than Annuity A.

The Balance Sheet Identity is: The value of the Owners Equity The same as the Net Working Capital The Sum of all assets minus the liabilities Assets = Liabilities + Owners Equity Assets + Liabilities = Owners Equity

Assets = Liabilities + Owners Equity

Franklin Corporation just paid taxes of $152,000 on taxable income of $512,000. The marginal tax rate is 35% for the company. What is the average tax rate for the Franklin Corporation?

Average tax rate: total taxes paid divided by total taxable income.$152,000/$512,000=30%

If dividends are to remain constant at $3 and the required rate of return is 10%, using the dividend growth model, what is the stock's intrinsic value? A)$20 B)$30 C)Only the market can determine price D)Not enough information given

B

The key inputs to the valuation process include ________. A) returns and risk B) cash flow, cash flow timing, and risk C) cash flows and discount rate D) returns, discount rate, and risk

B

Which of the following is an advantage of NPV? A) It measures the risk exposure. B) It takes into account the time value of investors' money. C) It is highly sensitive to the discount rates. D) It measures how quickly a firm can breakeven.

B

Which of the following is true of outstanding shares? A) A firm cannot sell more shares than the outstanding shares mentioned in the charter. B) Authorized shares become outstanding shares when they are issued or sold to investors. C) Outstanding shares are indicated in a firm's corporate charter. D) Outstanding shares are the shares repurchased by the firm.

B

Why is NPV a better methodology for capital budget assessments than the payback method? A)NPV is more complex, showing that you understand math B)NPV accounts for time value of money C)NPV is easier to calculate D)NPV has been around longer

B

Why is interest expense not subtracted when calculating project cash flow? A)It would make the project too expensive B)It is already accounted for in the discount rate C)Some companies have no debt D)Dividends would have to be subtracted and that is too hard to do.

B

Why will a project with a positive NPV (if it turns out, in fact, to be positive) accomplish a financial manager's corporate objective? A)The project will be profitable every year B)The project will increase shareholder wealth C)The project will source (create) more cash flow than it uses D)Because my spreadsheet tells me so

B

Your firm has 10-year bonds with a 10% coupon rate. These bonds currently sell at par. Your marginal tax rate is 35%. What is your cost of debt? A)3.5% B)6.5% C)10.0% D)13.5%

B

Your firm issues debt with a YTM of 8%. Your estimated cost of equity is 12%. Your marginal tax rate is 25%. The Treasury department says you plan to finance with 50% debt and 50% equity in the future. What is your firm's WACC? A)8% B)9% C)10% D)12%

B

________ is the process of evaluating and selecting long-term investments that are consistent with a firm's goal of maximizing owners' wealth. A) Recapitalizing assets B) Capital budgeting C) Ratio analysis D) Securitization

B

________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds. A) Nominal B) Real C) Risk-free D) Inflationary

B

The payback method of analysis ignores which one of the following? A. Initial cost of an investment B. Arbitrary cutoff point C. Cash flow direction D. Time value of money E. Timing of each cash inflow

D. Time value of money

According to today's stock report, BL Lumber shares were up .14, the stock dividend yield is 2.6 percent, and the PE ratio is 9.8. What is the amount of the next annual dividend if yester day's closing price was $35.14? A. $.918 B. $.917 C. $.914 D. $.924 E. $9.31

B. $.917

JL Tools is a young start-up company. The company expects to pay its first dividend of $.20 a share in Year 6 with annual dividend increases of 1.5 percent thereafter. At a required return of 12 percent, what is the current share price? A. $1.77 B. $1.08 C. $1.23 D. $1.90 E. $2.13

B. $1.08

A particular stock sells for $43.20 share and provides a total return of 11.6 percent. The total return is evenly divided between the capital gains yield and the dividend yield. Assuming a constant dividend growth rate, what is the current dividend per share? A. $2.24 B. $2.37 C. $2.34 D. $2.51 E. $2.47

B. $2.37

River Rock, Inc., just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent? A. $23.60 B. $24.65 C. $25.08 D. $25.50 E. $26.90

B. $24.65

Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $.86 a share but all future dividends will be decreased by 3.5 percent annually. What is a share of this stock worth today at a required return of 17.8 percent? A. $3.06 B. $3.90 C. $3.41 D. $3.59 E. $3.95

B. $3.90

A bond has a par value of $1,000, a current yield of 6.25 percent, and semiannual interest payments. The bond quote is 100.8. What is the amount of each coupon payment? A. $63.00 B. $31.50 C. $37.50 D. $62.50 E. $31.25

B. $31.50

Arts and Crafts Warehouse wants to issue 15-year, zero-coupon bonds that yield 7.5 percent. What price should it charge for these bonds if the face value is $1,000? Assume semiannual compounding. A. $308.15 B. $331.40 C. $356.08 D. $362.14 E. $369.94

B. $331.40

Deltona Motors just issued 230,000 zero-coupon bonds. These bonds mature in 18 years, have a par value of $1,000, and have a yield to maturity of 5.9 percent. What is the approximate total amount of money the company raised from issuing these bonds? Assume semiannual compounding. A. $88.20 million B. $80.76 million C $75.14 million D. $62.08 million E. $91.84 million

B. $80.76 million

If your nominal rate of return is 14.38 percent and your real rate of return is 4.97 percent, what is the inflation rate? A. 8.47 percent B. 8.96 percent C. 9.44 percent D. 19.35 percent E. 19.92 percent

B. 8.96 percent

Which statement is correct? A. An underpriced security will plot below the security market line. B. A security with a beta of 1.54 will plot on the security market line if it is correctly priced. C. A portfolio with a beta of .93 will plot to the right of the overall market. D. A security with a beta of .99 will plot above the security market line if it is correctly priced. E. A risk-free security will plot at the origin

B. A security with a beta of 1.54 will plot on the security market lines it it is correctly priced

Which one of the following is the primary advantage of payback analysis? A. Incorporation of the time value of money concept B. Ease of use C. Research and development bias D. Arbitrary cutoff point E. Long-term bias

B. Ease of use

The relationship between nominal returns, real returns, and inflation is referred to as the: A. call premium. B. Fisher effect. C. conversion ratio. D. spread. E. current yield.

B. Fisher effect

Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds? A. Real rate B. Liquidity premium C. Interest rate risk premium D. Inflation premium E. Taxability premium

B. Liquidity premium

A semiannual 5.4 percent coupon bond currently sells for par value. What is the maturity on this bond? A. The bond must mature in one year. B. The bond could have any maturity date. C. The bond must be maturing today. D. The bond must mature in 10 years. E. The bond must be a perpetual security

B. The bond could have any maturity date.

An agent who buys and sells securities from inventory is called a: A. floor trader. B. dealer. C. commission broker. D. broker. E. floor broker.

B. dealer

The internal rate of return is the: A. discount rate that causes a project's aftertax income to equal zero. B. discount rate that results in a zero net present value for the project. C. discount rate that results in a net present value equal to the project's initial cost. D. rate of return required by the project's investors. E. project's current market rate of return.

B. discount rate that results in a zero net present value for the project.

When a bond's yield to maturity is less than the bond's coupon rate, the bond: A. had to be recently issued. B. is selling at a premium. C. has reached its maturity date. D. is priced at par. E. is selling at a discount.

B. is selling at a premium.

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis. A. annual B. semiannual C. quarterly D. monthly E. daily

B. semiannual

here 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. A. simultaneous B. straight C. proxy D. cumulative E. sequential

B. straight

The market-required rate of return on a bond that is held for its entire life is called the: A. coupon rate. B.yield to maturity. C. dirty yield. D. call premium. E. current yield.

B. yield to maturity

All else held constant, the present value of a bond increases when the: A. coupon rate decreases. B. yield to maturity decreases. C. current yield increases. D. time to maturity of a premium bond decreases. E. time to maturity of a zero-coupon bond increases.

B. yield to maturity decreases.

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? Income statement Creditor's statement Balance sheet Statement of cash flows Dividend statement

Balance sheet

A bond dealer sells at the _____ price and buys at the _____ price. A. clean; dirty B. dirty; clean C. bid; asked D. asked; bid E. asked; asked

D. asked; bid

Joe and Rich are both considering investing in a project that cost $25,500 and is expected to produce cash inflows of $15,800 in Year 1 and $15,300 in Year 2. Joe has a required return of 8.5 percent but rich demands a return of 12.5 percent. who, if either should accept this project?

Both joe and rich Joe: 15,800/ 1.085 + 15,300/ 1.085^2 = 27,559 Rich: 15,800/ 1.125 + 15,300/1.1252= 26,133

A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is ________. A) 7.2 percent B) 12 percent C) 12.4 percent D) 15 percent

C

A(n) ________ yield curve reflects lower expected future rates of interest. A) upward-sloping B) flat C) downward-sloping D) linear

C

Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________. A) par; premiumB) discount; par C) discount; premium D) coupon; premium

C

Common stockholders expect to earn a return by receiving ________. A) semiannual interest B) fixed periodic payments C) dividends D) annual interest

C

A(n) ________ yield curve reflects lower expected future rates of interest.A) upward-sloping B) flat C) downward-sloping D) linear

Downward sloping

In calculating the cost of common stock equity, ________. A) the use of the capital asset pricing model (CAPM) is often preferred, because the data required are more readily available B) the use of the CAPM is preferred, because it directly considers risk and the effect of inflation on the stock prices C) the use of the constant-growth valuation model is often preferred, because the data required are more readily available D) the use of the constant-growth valuation model is often preferred, because it has a stronger theoretical foundation

C

Village East expects to pay an annual dividend of $1.40 per share next year, and $1.68 per share for the following two years. After that, the company plans to increase the dividend by 3.4 percent annually. What is this stock's current value at a discount rate of 13.7 percent? A. $14.09 B. $17.28 C. $15.15 D. $16.08 E. $18.18

C. $15.15

The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions. A) internal rate of return B) sunk cost C) cost of capital D) risk-free rate

C

How do we measure shareholder wealth?

Market cap = market shares outstanding x price per share

Which of the following is an advantage for a firm to issue common stock over long-term debt? A) the cost of equity financing is less than the cost of debt financing B) the primary claim of equity holders on income and assets in the event of liquidation C) no maturity date on which the par value of the issue must be repaid D) the tax deductibility of dividends which lowers the cost of equity financing

C

Why is depreciation added back to after-tax profits when calculating cash flow? A)To increase profits B)Because it is a use of cash C)Because it was never a cash expense D)Because it is necessary to calculate dividends

C

Blue Water bonds have a face value of $1,000, a coupon rate of 6.5 percent, semiannual interest payments, an d mature in 11.5 years. What is the current price of these bonds if the yield to maturity is 6.36 percent? A. $979.20 B. $984.56 C. $1,011.30 D. $1,018.27 E. $1,020.00

C. $1,011.30

Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent? A. $11.91 B. $12.95 C. $12.16 D. $10.54 E. $13.07

C. $12.16

The common stock of Up-Towne Movers sells for $33 a share, has a rate of return of 11.4 percent, and a dividend growth rate of 2 percent annually. What was the amount of the last annual dividend paid? A. $2.58 B. $2.61 C. $3.04 D. $3.32 E. $3.10

C. $3.04

Toy Mart recently announced that it will pay annual dividends at the end of the next two years of $1.60 and $1.10 per share, respectively. Then, in Year 5 it plans to pay a final dividend of $13.50 a share before closing its doors permanently. At a required return of 13.5 percent, what should this stock sell for today? A. $3.24 B. $16.20 C. $9.43 D. $13.33 E. $12.70

C. $9.43

The 4.5 percent bond of JL Motors has a face value of $1,000, a maturity of 7 years, semiannual interest payments, and a yield to m aturity of 6.23 percent. What is the current market price of the bond? A. $945.08 B. $947.21 C. $903.05 D. $959.60 E. $912.40

C. $903.05

Last year, when the stock of Alpha Minerals was selling for $49.50 a share, the dividend yield was 3.4 percent. Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains a constant dividend growth rate of 2.2 percent? A. 6.13 percent B. 6.58 percent C. 6.40 percent D. 6.47 percent E. 6.38 percent

C. 6.40 percent

The next dividend payment by S&S will be $1.38 per share. The dividends are anticipated to maintain a 2.5 percent growth rate, forever. If the stock currently sells for $26.90 per share, what is the required return? A. 8.03 percent B. 7.82 percent C. 7.63 percent D. 8.74 percent E. 9.02 percent

C. 7.63 percent

A bond yielded a real rate of return of 3.87 percent for a time period when the inflation rate was 3.75 percent. What was the actual nominal rate of return? A. 87.58 percent B. 7.62 percent C. 7.77 percent D. 8.28 percent E. .36 percent

C. 7.77

Whitts BBQ would like to issue some 10-year, semiannual coupon bonds at par. Comparable bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its bonds? A. 9.00 percent B. 9.16 percent C. 9.50 percent D. 9.68 percent E. 10.00 percent

C. 9.50 percent

You own two bonds, each of which currently pays semiannual interest, has a coupon rate of 6 percent, a $1,000 face va lue, and 6 percent yields to maturity. Bond A has 12 years to maturity and Bond B has 4 years to maturity. If the market rate of interest rises unexpectedly to 7 percent, Bond _____ will be the most volatile with a price decrease of _____ percent. A. A; 5.73 B. A; 3.44 C. A; 8.03 D. B; 7.97 E. B; 4.51

C. A; 8.03

Which statement is true? A. Bonds are generally called at par value. B. A current list of all bondholders is maintained whenever a firm issues bearer bonds. C. An indenture is a contract between a bond's issuer and its holders. D. Collateralized bonds are called debentures. E. A bondholder has the right to determine when his or her bond is called.

C. An indenture is a contract between a bond's issuer and its holders.

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the: A. market yield. B. yield-to-call. C. bid-ask spread. D. current yield. E. bond premium.

C. Bid-ask spread

Which one of the following types of securities has the lowest priority in a bankruptcy proceeding? A. Convertible bond B. Senior debt C. Common stock D. Preferred stock E. Straight bond

C. Common Stock

A bond's annual interest divided by its face value is referred to as the: A. market rate. B. call rate. C. coupon rate. D. current yield. E. yield-to-maturity.

C. Coupon rate

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk? A. Taxability risk premium B. Default risk premium C. Interest rate risk premium D. Real rate of return E. Bond premium

C. Interest rate risk premium

Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value? A. Interest rate risk premium B. Inflation premium C. Liquidity premium D. Taxability premium E. Default risk premium

C. Liquidity premium

Companies can list their stock on which one of the following without having to meet listing requirements or filing financial statements with the SEC? A. NASDAQ Capital Market B. Over-the-Counter Bulletin Board C. Pink sheets D. NASDAQ Global Market E. NYSE

C. Pink sheets

Which one of the following indicates that a project is expected to create value for its owners? A. Profitability index less than 1.0 B. Payback period greater than the requirement C. Positive net present value D. Positive average accounting rate of return E. Internal rate of return that is less than the requirement

C. Positive net present value

What is the market called that facilitates the sale of shares between individual investors? A. Primary B. Proxy C. Secondary D. Inside E. Initial

C. Secondary

Which one of the following statements is correct? A. A longer payback period is preferred over a shorter payback period. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback period ignores the time value of money. D. The payback rule is biased in favor of long-term projects. E. The payback period considers the timing and amount of all of a project's cash flows.

C. The payback period ignores the time value of money.

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders? A. Callable B. Income C. Zero coupon D. Convertible E. Tax-free

C. Zero coupon

Bianchi Crafts has an operating cash flow of $4,267 and depreciation of $1,611. Current assets decreased by $1,356 while current liabilities decreased by $2,662, and net fixed assets decreased by $382 during the year. What is free cash flow for the year?

Change in NWC = −$1,356 − (−$2,662)Change in NWC = $1,306NCS = −$382 + 1,611NCS = $1,229FCF = CFA = $4,267 − 1,306 − 1,229F CF = $1,732

Gleason, Inc., elects its board of directors on a staggered basis using cumulative voting. This implies that: A. if there are two open seats, then the candidate with the highest number of votes and the candidate with the lowest number of votes will be selected. B. the candidates for the open seats are voted for in individual elections. C. all open positions are filled with one round of voting, assuming there are no tie votes. D. shareholders can accumulate their votes over multiple years and cast all those votes in one election. E. the firm's entire board of directors is elected annually in one combined election.

C. all open positions are filled with one round of voting, assuming there are no tie votes.

NASDAQ is best described as: A. a modern-day trading floor with locations in Chicago and London. B. an electronic communication networks C. an electronic network of securities dealers. D. an internet broker's market. E. a primary market.

C. an electronic network of securities dealers.

Dividends are best defined as: A. cash payments to shareholders. B. cash payments to either bondholders or shareholders. C. cash or stock payments to shareholders. D. cash or stock payments to either bondholders or shareholders. E. distributions of stock to current shareholders.

C. cash or stock payments to shareholders.

The net present value of an investment represents the difference between the investment's: A. cash inflows and outflows. B. cost and its net profit. C. cost and its market value. D. cash flows and its profits. E. assets and liabilities.

C. cost and its market value.

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a: A. note. B. bearer form bond. C. debenture. D. registered form bond. E. call protected bond.

C. debenture

Bond ratings classify bonds based on: A. liquidity, market, and default risk. B. liquidity, interest rate, and default risk. C. default risk only. D. interest rate, inflation rate, and default risk. E. default and liquidity risks.

C. default risk only.

Most trades on the NYSE are executed: A. by floor brokers on the exchange floor. B. independent brokers on the exchange floor. C. electronically. D. by designated market makers of the floor of the exchange. E. by dealers.

C. electronically.

The yield to maturity on a discount bond is: A. equal to both the coupon rate and the current yield. B. equal to the current yield but greater than the coupon rate. C. greater than both the current yield and the coupon rate. D. less than the current yield but greater than the coupon rate. E. less than both the current yield and the coupon rate.

C. greater than both the current yield and the coupon rate.

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities. A. face value B. market price C. maturity D. coupon rate E. issue date

C. maturity

Dividends are: A. payable at the discretion of a firm's president. B. treated as a tax-deductible expense of the issuing firm. C. paid out of after-tax profits. D. paid only to preferred stockholders. E only partially taxable to high-income individual shareholders

C. paid out of after-tax profits.

The primary purpose of protective covenants is to help: A. reduce interest rate risk. B. the issuer in case of default. C. protect bondholders from issuer actions. D. bondholders whose bonds are called. E. convert bearer bonds into registered form.

C. protect bondholders from issuer actions.

If an investment is producing a return that is equal to the required return, the investment's net present value will be: A. positive. B. greater than the project's initial investment. C. zero. D. equal to the project's net profit. E. less than, or equal to, zero.

C. zero.

A U.S. Treasury bond pays 3.05 percent interest. You are in the 28 percent marginal tax bracket. What is your after-tax yield on this bond? A. 3.05 percent B. 2.30 percent C.2.20 percent D. 2.11 percent E. 2.38 percent

C.2.20 percent

Riggs Company has current assets of $10,406, long-term debt of $4,780, and current liabilities of $9,822 at the beginning of the year. At year end, current assets are $11,318, long-term debt is $5,010, and current liabilities are $9,741. The firm paid $277 in interest and $320 in dividends during the year. What is the cash flow to creditors for the year?

CFC = $277 − ($5,010 − 4,780)CFC = $47

At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is the amount of the cash flow to creditors?

CFC = $6,430 − ($68,219 − 72,918) CFC = $11,129

Hinojosa Music has projected annual net income of $272,600, of which 28 percent will be distributed as dividends. The company will sell $75,000 worth of common stock. What will be the cash flow to stockholders if the tax rate is 21 percent?

CFS = .28($272,600) − $75,000 CFS = $1,328

The ABC Corporation has the following information. How much is the Cash Flow to Creditors? Earnings before interest & taxes 1,588 Depreciation 130 Beginning net fixed assets 1,650 Interest paid 150 Net new equity raised 450 Net new borrowing 110 Taxes 424

Cash Flow to Creditors = Interest Paid - Net New Borrowing Cash Flow to Creditors = $150 − 110 Cash Flow to Creditors = $40

At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital?

Change in NWC = ($122,418 − 103,718) − ($121,306 − 124,509) Change in NWC = $21,903

Western electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6%. The firm has 11,000 shares of $8 preferred stock outstanding at price of $48 a share. the outstanding debt has a total face value of $275,00 and currently sells for 104 percent of face. the yield to maturity on the debt is 8.81 percent. what is the firms weighted average cost of capital if the tax rate is 35%

Common stock: 21,000 × $61 = $1,281,000 Preferred stock: 11,000 × $48 = $528,000 Debt: 104% × $275,000 = $286,000 Total market value = $1,281,000 + 528,000 + 286,000 = $2,095,000 WACC = ($1,281,000/$2,095,000)(.156) + ($528,000/$2,095,000)($8/$48) + ($286,000/$2,095,000)(.0881)(1 -.35) = .1452, or 14.52 percent

What happens when interest is compounded more frequently than annually?

Compounding more frequently than once a year results in a higher effective interest rate because you are earning on interest on interest more frequently. The EAR is greater than the nominal rate.

Nominal (stated) annual rate

Contractual annual rate of interest charged by a lender or promised by a borrower.

Wes Motors has total assets of $98,300, net working capital of $11,300, owners' equity of $41,600, and long-term debt of $38,600. What is the value of the current assets?

Current liabilities = $98,300 - 38,600 - 41,600 = $18,100 Current assets = $11,300 + 18,100 = $29,400

The ________ is the discount rate that equates the present value of the cash inflows with the initial investment. A) payback period B) net present value C) cost of capital D) internal rate of return

D

Which of the following should financial managers consider when making decisions ? A)Expected dividends B)Expected dividend growth C)Risk D)All of the above

D

Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority? A. Straight B. Cumulative C. Consent-form D. Proxy E. In absentia

D. Proxy

Which one of the following bonds is the most sensitive to changes in market interest rates? A. 5-year, zero coupon B. 5-year, 5 percent coupon C. 5-year, 8 percent coupon D. 10-year, zero coupon E. 10-year, 5 percent coupon

D. The longer the maturity, lower the coupon, more sensitive to changes in market interest rates.

A company needs to raise $22 million and plans to issue 2 0-year bonds for this purpose. The required rate of return is7.6 percent in the current market. The company has two issue alternatives: a 7.6 percent coupon and a zero-coupon bond. The company's tax rate is 34 percent. At bond maturity, how much will the company need to pay to its bondholders if it issues the coupon bonds? What if it issues the zeros? Assume semiannual compounding for both bond issues. (For simplicity's sake, assume the company can issue a partial bond.) A. $21.407 million; $102.12 million B. $23.672 million; $97.795.51 million C. $22.836 million; $102.12 million D. $22.836 million; $97.795 million E. $23.672 million; $102.12 million

D. $22.836 million; $97.795 million

TMS just paid an annual dividend of $2.84 per share on its stock. The dividends are expected to grow at a constant rate of 1.85 percent per year. If investors require a rate of return of 10.4 percent, what will be the stock price be in Year 11? A. $41.71 B. $40.64 C. $35.75 D. $41.39 E. $42.57

D. $41.39

A $1,000 face value bond currently has a yield to maturity of 8.22 percent. The bond matures in five years and pays interest semiannually. The coupon rate is7.5 percent. What is the current price of this bond? A. $948.01 B. $989.60 C. $1,005.26 D. $970.96 E. $1,010.13

D. $970.96

Which one of the following bonds is the most sensitive to changes in market interest rates? A. 5-year, zero coupon B. 5-year, 5 percent coupon C. 5-year, 8 percent coupon D. 10-year, zero coupon E. 10-year, 5 percent coupon

D. 10-year, zero coupon

One year ago, you purchased a $1,000 face value bond for a clean price of $980. The bond currently has seven years remaining until maturity, pays a coupon payment of $45 every six months, and has a yield to maturity of 6.87 percent. What is the percentage change in the bond price over the past year? A. -6.24 percent B. -14.70 percent C. 15.48 percent D. 13.96 percent E. 6.61 percent

D. 13.96 percent

Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in: A. 5-year, 7 percent coupon bonds. B. 20-year, 6 percent coupon bonds. C. 20-year, zero coupon bonds. D. 2-year, 7 percent coupon bonds. E. 3-year, zero coupon bonds.

D. 2-year, 7 percent coupon bonds.

A bond has a coupon rate of 5.65 percent, a face value of $1,000, semiannual payments, and sells at par. The current yield is _____ percent and the effective annual yield is _____ percent. A. 5.73; 5.81 B. 5.73; 5.65 C. 5.73; 5.73 D. 5.65; 5.73 E. 5.65; 5.81

D. 5.65; 5.73

The Toy Chest will pay an annual dividend of $2.64 per share next year and currently sells for $48.30 a share based on a market rate of return of 11.67 percent. What is the capital gains yield? A. 7.35 percent B 7.78 percent C. 9.23 percent D. 6.20 percent E. 4.49 percent

D. 6.20 percent

The common stock of Sweet Treats has a total return of 11.62 percent, a stock price of $48.20, and recently paid an annual dividend of $2.38. What is the capital gains rate if the company maintains a constant dividend? A. 8.34 percent B. 16.56 percent C. 11.17 percent D. 6.68 percent E. 4.59 percent

D. 6.68 percent

A six-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield to maturity of 9.19 percent. What is the coupon rate? A. 4.50 percent B. 4.60 percent C. 6.00 percent D. 9.00 percent E. 9.20 percent

D. 9.00 percent

This morning, Jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment. The bond that Jeff found must have been which one of the following? A. Debenture B. Note C. Registered-form bond D. Bearer-form bond E. Callable bond

D. Bearer-form bond

A person who executes customer orders to buy and sell securities on the floor of the NYSE is called a: A. supplemental liquid ity provider (SLP). B. designated market maker (DMM). C. runner. D. Floor broker. E. market maker.

D. Floor broker.

The term structure of interest rates is primarily based on which three of the following? I. Interest rate risk premium II. Real rate of interest III. Default risk premium IV. Inflation premium V. Liquidity premium A. I, II, and V B. I, III, and V C. II, III, and IV D. I, II, and IV E. II, IV, and V

D. I, II, and IV

Which one of the following statements is correct? A. The net present value is a measure of profits expressed in today's dollars. B. The net present value is positive when the required return exceeds the internal rate of return. C. If the initial cost of a project is increased, the net present value of that project will also increase. D. If the internal rate of return equals the required return, the net present value will equal zero. E. Net present value is equal to an investment's cash inflows discounted to today's dollars.

D. If the internal rate of return equals the required return, the net present value will equal zero.

Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be: A. subject to a sinking fund provision. B. a debenture. C. a "fallen angel." D. call protected. E. unrated.

D. call protected

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be: A. upward sloping. B. flat. C. humped. D. downward sloping. E. double-humped.

D. downward sloping.

Which of the following statements are correct? A. the NPV is a measure of profits expressed in todays dollars B. The NPV is positive when the required return exceeds the internal rate of return. C. If the initial cost of a project is increased, the NPV of that project will also increase. D. If the internal rate of return equals the required return, the NPV will equal zero. E. NPV is equal to an investment's cash inflows discounted to today's dollars.

D. if the internal rate of return equals the required return, the NPV will equal zero

Any person who owns a license to trade on the NYSE is called a: A. dealer. B. floor trader. C. DMM. D. member. E. proxy.

D. member

Three components to maximizing shareholder wealth

Dividends, investment, and financing.

A $1,000 face value bond is currently quoted at 100.8. The bond pays semiannual payments of $22.50 each and matures in six years. What is the coupon rate? A. 2.72 percent B. 2.85 percent C. 4.46 percent D 2.25 percent E. 4.50 percent

E. 4.50 percent

Russell Foods pays a fixed annual dividend of $2.28 a share. At a required return of 11.5 percent, the stock is valued at $43.20 a share. What is the dividend growth rate at this price? A. 5.99 percent B. 5.28 percent C. 6.12 percent D. 5.37 percent E. 6.22 percent

E. 6.22 percent

The price at which a dealer will purchase a bond is referred to as the _____ price. A. asked B. face C. call D. put E. bid

E. Bid

Which one of the following is the quoted price of a bond? A. Par value B. Discount price C. Face value D. Dirty price E. Clean price

E. Clean price

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? A. Interest rate risk premium B. Inflation premium C. Liquidity premium D. Taxability premium E. Default risk premium

E. Default risk premium

What is the principal amount of a bond that is repaid at the end of the loan term called? A. Coupon B. Market price C. Accrued price D. Dirty price E.Face value

E. Face Value

Which one of the following will increase the current value of a stock? A. Decrease in the dividend growth rate B. Increase in the required return C. Increase in the market rate of return D. Decrease in the expected dividend for next year E. Increase in the capital gains yield

E. Increase in the capital gains yield

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? A. Payback B. Profitability index C. Accounting rate of return D. Internal rate of return E. Net present value

E. Net present value

The term structure of interest rates represents the relationship between which of the following? A. Nominal rates on risk-free and risky bonds B. Real rates on risk-free and risky bonds C. Nominal and real rates on default-free, pure discount bonds D. Market and coupon rates on default-free, pure discount bonds E. Nominal rates on default-free, pure discount bonds and time to maturity

E. Nominal rates on default-free, pure discount bonds and time to maturity

Which one of the following indicators offers the best assurance that a project will produce value for its owners? A. PI equal to zero B. Negative rate of return C. Positive AAR D. Positive IRR E. Positive NPV

E. Positive NPV

Newly issued securities are sold to investors in which one of the following markets? A. Proxy B. Stated value C. Inside D. Secondary E. Primary

E. Primary

A broker is an agent who: A. trades on the floor of an exchange for himself or herself. B. buys and sells from inventory. C. offers new securities for sale to dealers only. D. is ready to buy or sell at any time. E. brings buyers and sellers together.

E. brings buyers and sellers together.

The inflation premium: A. increases the real return. B. is inversely related to the time to maturity. C. remains constant over time. D. rewards investors for accepting interest rate risk. E. compensates investors for expected price increases.

E. compensates investors for expected price increases.

Net present value involves discounting an investment's: A. assets. B. future profits. C. liabilities. D. costs. E. future cash flows.

E. future cash flows.

If shareholders are granted a preemptive right they will: A. be given the choice of receiving dividends either in cash or in additional shares of stock. B. be paid dividends prior to the preferred shareholders during the preemptive period. C. be entitled to two votes per share of stock. D. be able to choose the timing and amount of any future dividends. E. have priority in t he purchase of any newly issued shares.

E. have priority in t he purchase of any newly issued shares.

The R in the Fisher effect formula represents the: A. current yield. B. real return. C. coupon rate. D. inflation rate. E. nominal return.

E. nominal return.

A call provision grants the bond issuer the: A. right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds. B. option to exchange the bonds for equity securities. C. right to automatically extend the bond's maturity date. D. right to repurchase the bonds on the open market prior to maturity. E. option of repurchasing the bonds prior to maturit y at a prespecified price.

E. option of repurchasing the bonds prior to maturity at a prespecified price.

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: A. produce a positive annual cash flow. B. produce a positive cash flow from assets. C. offset its fixed expenses. D. offset its total expenses. E. recoup its initial cost.

E. recoup its initial cost.

An upward-sloping term structure of interest rates indicates: A. the real rate of return is lower for short-term bonds than for long-term bonds. B. there is an in direct relationship between real interest rates and time to maturity. C. there is an indirect relationship between nominal interest rates and time to maturity. D. the nominal rate is declining as the real rate rises as the time to maturity increases. E. the nominal rate is increasing even though the real rate is constant as the time to maturity increases.

E. the nominal rate is increasing even though the real rate is constant as the time to maturity increases.

An unexpected decrease in market interest rates will cause a: A. coupon bond's current yield to increase. B. zero coupon bond's price to decrease. C. fixed-rate bond's coupon rate to decrease. D. zero coupon bond's current yield to decrease. E.coupon bond's yield to maturity to decrease.

E.coupon bond's yield to maturity to decrease.

Herrera Corporation has total sales of $3,110,400 and costs of $2,776,000. Depreciation is $258,000 and the tax rate is 21 percent. The firm is all-equity financed. What is the operating cash flow?

EBIT = $3,110,400 − 2,776,000 − 258,000EBIT = $76,400Tax = $76,400(.21)Tax = $16,044OCF = $76,400 + 258,000 − 16,044 OCF = $318,356

What is the benefit of an annuity due over an ordinary annuity?

Each payment in an annuity due comes one year earlier than it would in an ordinary annuity, which means that each payment can earn an extra year's worth of interest. Future value of an annuity due > future value of an ordinary annuity.

Which one of the following describes a noncash item? Fixed expenses Inventory items purchased using credit Ownership of intangible assets such as patents Expenses that do not consume cash Sales that are made using store credit

Expenses that do not consume cash

$1000 always

FV of a bond

Net working capital represents current assets plus current liabilities. True or False

False

If someone pays less than the maximum amount for an investment today, their rate of return will be...

Greater than the opportunity cost.

The present value of an Annuity due is always ________ than the present value of an ordinary annuity. Why?

Greater. Because the cash flow of the annuity due occurs at the beginning of the period rather than at the end.

How to accept or reject a project based on NPV

If NPV is greater than $0, accept it. If it is less than or equal to $0, reject it.

How to accept or reject a project based on PI

If PI is greater than 1.0, accept it. If it is less than 1.0, reject it.

What is the main advantage and disadvantage of leverage?

If sales increase a little, profit increases a lot. However, if sales decrease a little, profit decreases a lot.

How to decide on a project using IRR

If the IRR is greater than the cost of capital, accept the project. If it is less than the cost of capital, reject the project.

What do you do with a sunk cost?

Ignore it! It should not be included in a project's incremental cash flows because it has already been spent.

An equity owner of McKissick and Khan Consulting, LLC earned $145,000 in taxable income from the firm. Based on the tax table below, how much will the owner owe in income taxes? Ignore any standard or itemized deductions. $ 0 − 9,875. 10% 9,875 − 40,125 12% 40,125 − 85,525. 22% 85,525 − 163,300 24%

Income Tax = [($9,875 − 0) × 10%] + [($40,125 − 9,875) × 12%] + [($85,525 − 40,125) × 22%] + [($145,000 − 85,525) × 24%] = $28,879.50

Based on the tax table below, what is the average tax rate for a sole proprietor with taxable income of $155,000? Ignore any standard or itemized deductions. Taxable Income Tax Rate $ 0 − 9,875. 10% 9,875 − 40,125 12% 40,125 − 85,525. 22% 85,525 − 163,300 24%

Income Tax = [($9,875 − 0) × 10%] + [($40,125 − 9,875) × 12%] + [($85,525 − 40,125) × 22%] + [($155,000 − 85,525) × 24%] = $31,279.50Average tax rate = $31,279.50/$155,000 Average tax rate = .2018, or 20.18%

Which one of the following financial statements summarizes a firm's revenue and expenses during a period of time? Income statement Balance sheet Statement of cash flows Tax reconciliation statement Market value report

Income statement

When making payments on a loan, the amount of each payment going towards the principal _________ with time, and the amount of each payment going towards interest ___________.

Increases, decreases

When making payments on a loan, the amount of each payment going towards the principal _________ with time, and the amount of each payment going towards interest ___________. A.Increases, decreases B.Increases, increases C.Decreases, increases D.Decreases, decreases

Increases, decreases

What types of cash flows do we consider when making decisions?

Incremental cash flows

A project's relevant cash flows consist of:

Initial investment, operating cash flows, and terminal cash flow.

Internal Rate of Return (IRR)

The discount rate that equates the NPV of an investment opportunity with $0 (because the present value of cash inflows equals the initial investment); it is the rate of return that the firm will earn if it invests in the project and receives the given cash inflows.

Compound Interest

Interest that is earned on a given deposit and has become part of the principal at the end of a specified period.

Which one of the following is classified as a current asset? Accounts payable Patent Inventory Notes payable Office furniture

Inventory

People expected rates to decline in the future because they expected inflation to decline. What Kind of Yield Curve

Inverted yield curve

Continuous compounding

Involves the compounding of interest an infinite number of times per year at intervals of microseconds.

What does Economic value added (EVA) determine?

It determines whether a project earns a pure economic profit-a profit above and beyond the normal competitive rate of return in a line of business.

When discounting a future value, the _________ often the compounding, the higher the present value. When calculating a future value, the _________ often the compounding, the higher the future value. A.More, less B.More, more C.Less, less D.Less, more

Less, more

When discounting a future value, the _________ the rate used, the higher the present value. When calculating a future value, the _________ the rate used, the higher the future value. A.Higher, lower B.Higher, higher C.Lower, higher D.Lower, lower

Lower, higher

_________ tax rate is the amount of tax payable on the next dollar earned. Average Extra Marginal Weighted Planned

Marginal

What are the most common measures for determining whether to accept a project? What is the measure used solely for ranking?

Most common: IRR and NPV Ranking: PI

Rule of 72 and Rule of 115

Multiply N * I to get result Rule of 72 doubles. - 8 years @ 9% doubles money - 18 years @ 4% doubles money Rule of 115 triples. - 23 years @ 5% triples money

# of years*2 (if semi-annual)

NPER for a bond

If IRR and NPV are in conflict, which method should you use?

NPV

Calculate NPV

NPV = Present value of cash inflows - Initial investment

Ryu and Fowler Attorneys has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital?

NWC = $4,900 − 3,200 − 1,400 NWC = $300

The balance sheet of Perez Printing shows $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. How much net working capital does the company have?

NWC = $680 + 210 + 80 − 250 NWC = $720

The balance sheet of XYZ Company is shown below. What is the Net Working Capital for the company? Current assets $300 Current liabilities $240 Net fixed assets 1,500 Long-term debt 700 Owners' equity 860 Total assets $1,800 Total liabilities and equity $1,800

Net Working Capital = Current Assets - Current Liabilities Net Working Capital = $300 − $240 Net Working Capital = $60

What is the Net Working Capital for Capella Corporation? Current assets 300 Current liabilities 110 Net fixed assets 1,200 Long-term debt 500 Shareholders' equity 890 Total assets 1,500 Total liabilities and shareholders' equity 1,500

Net Working Capital = Current Assets − Current Liabilities Net Working Capital = $300 − $110 = $190

Barnett Saddlery had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending?

Net capital spending = $209,411 − 218,470 + 42,822 Net capital spending = $33,763

The Somerville Corporation has cost of goods sold of $11,518, interest expense of $315, dividends of $420, depreciation of $811, and a change in retained earnings of $296. What is the taxable income given a tax rate of 21 percent?

Net income = $296 + 420 Net income = $716 Taxable income = $716/(1 − .21) Taxable income = $906.33

Lewis & Price Corporation paid $700 in dividends and $320 in interest this past year. Common stock remained constant at $6,800 and retained earnings decreased by $180. What is the net income for the year?

Net income = $700 − 180 Net income = $520

Cookies by Casey has sales of $487,000 with costs of $263,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 21 percent. What is the net income?

Net income = ($487,000 − 263,000 − 26,000 − 42,000)(1 − .21) Net income = $123,240

At the beginning of the year, Smidovec Plumbing had current liabilities of $15,932 and total debt of $68,847. By year end, current liabilities were $13,870 and total debt was $72,415. What is the amount of net new borrowing for the year?

Net new borrowing = ($72,415 − 13,870) − ($68,847 − 15,932) Net new borrowing = $5,630

Which one of the following statements concerning net working capital is correct? Net working capital increases when inventory is purchased with cash. Net working capital may be a negative value. Total assets must increase if net working capital increases. Net working capital excludes inventory. Net working capital is the amount of cash a firm currently has available for spending.

Net working capital may be a negative value.

Do we ever use paybreak period in Finance?

No

normal yield curve

No change is expected in inflation. The requirement for a higher rate to compensate for tying up cash for a longer term shows through

lower, higher

When discounting a future value, the ____ the rate used, the higher the present value. When calculating a future value, the ____ the rate used, the higher the future value

the risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.1 and an expected return of 13.1 percent. Stock B has a beta of 0.86 and an expected return of 11.4 percent. are these stocks correctly priced?

No, stock a is overpriced and stock be in underpriced E(RA) = .037 + 1.1(.123 -.037) = .1316, or 13.16 percent E(RB) = .037 + .86(.123 -.037) = .1110, or 11.10 percent Stock A is overpriced because its expected return lies below the security market line. Stock B is underpriced because its expected return lies above the security market line.

________ rate of interest is the actual rate charged by the supplier and paid by the demander of funds. A) Nominal B) Real C) Risk-free D) Inflationary

Nominal

What amount of businesses should be sole proprietors?

None

Running Gear has sales of $316,000, depreciation of $47,200, interest expense of $41,400, costs of $148,200, and taxes of $16,632. The firm has net capital spending of $36,400 and a decrease in net working capital of $14,300. What is the cash flow from assets for the year?

OCF = $316,000 − 148,200 − 16,632OCF = $151,168CFA = $151,168 − 36,400 − (−$14,300) CFA = $129,068

When considering Net Working Capital, a project will generally need all of the following, except: Some cash on hand to pay any expenses that arise. An initial investment in inventories and accounts receivables. Some financing in the form of accounts payable. A balance that represents the investment in net working capital. Only long-term assets to get the project started.

Only long-term assets to get the project started.

The ABC Corporation has the following information. How much is the Operating Cash Flow? Earnings before interest & taxes 1,588 Depreciation 130 Beginning net fixed assets 1,650 Net new equity raised 450 Taxes 424

Operating Cash flow = EBIT + Depreciation − Taxes Operating Cash flow = $1,588 + 130 − 424 Operating Cash flow = $1,294

This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. you require a 12 percent rate of return and the dividend increases at 3.5% annually. What will your capital gain be in dollars on this stock if you sell it three years from now?

P0= 1.9/ (12%-3.5%)= 22.35 P3= 22.35 x 1.035^3 = 24.78 capital gain= 24.78-22.35= $2.43

When ranking projects, which method should you always use?

PI

(coupon interest rate*FV)/2 [only divide by 2 if semi-annual]

PMT for a bond

either trying to find this, so use =PV, or will be given and make it negative in excel

PV for a bond

YTM=coupon

Par

inverted yield curve

People expected rates to decline in the future because they expected inflation to decline

***Financial concept used to amortize a loan

Present value of annuity

Mutually exclusive projects

Projects that compete with one another, so that the acceptance of one eliminates from further consideration all other projects that serve a similar function.

Regulatory required projects

Projects that simply must be done to comply with laws or regulations and the only alternative is to exit the market or business.

Independent projects

Projects whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.

less, more

When discounting a future value, the ____often the compounding, the higher the present value. When calculating a future value, the _____ often the compounding, the higher the future value.

YTM or rate of return; divide by 2 if semi-annual

RATE for bond

Risk Adjusted Discount Rates

Rates of return that must be earned on a given project to compensate the firm's owners adequately—that is, to maintain or improve the firm's share price.

Risk-adjusted discount rates

Rates of return that must be earned on a given project to compensate the firm's owners adequately—that is, to maintain or improve the firm's share price.

________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds. A) Nominal B) Real C) Risk-free D) Inflationary

Real

The first thing reported on an income statement would usually be: Depreciation Financing expenses Interest paid Taxes paid Revenues.

Revenues

Find amount of interest earned over a certain amount of time.

Subtract the beginning value of the investment account from the ending value.

What is terminal cash flow?

Terminal cash flow is the cash flow resulting from termination and liquidation of a project at the end of its economic life.

How is the Economic value added (EVA) approach different from NPV?

The EVA approach is similar to NPV, however, it subtracts from those cash flows a charge that is designed to capture the return that the firm's investors demand on the project.

longer, lower

The _____ the maturity of a bond and the______ the coupon rate, the more sensitive the bond is to interest rate fluctuations

Incremental cash flows

The additional cash flows—outflows or inflows—expected to result from a proposed capital expenditure.

What is terminal cash flow?

The after-tax nonoperating cash flow occurring in the final year of a project. It is usually attributable to liquidation of the project.

What is Net working capital?

The amount by which a firm's current assets exceed its current liabilities.

Principal

The amount of money on which interest is paid.

What is an annuity?

The annual payments are the same every year. Example: bonds.

Effective (true) annual rate (EAR)

The annual rate of interest actually paid or earned.

Ordinary Annuity

The cash flow occurs at the end of each period. You do not pay an amount at "Year 0," the payments start at the end of "Year 1."

Annuity Due

The cash flows occurs at the beginning of each period. You pay an amount at "Year 0" or right away. Instead of at the end of Year 1.

Loan Amortization

The determination of the equal periodic loan payments necessary to provide a lender with a specified interest return and to repay the loan principal over a specified period.

Calculate change in net working capital

The difference between a change in current assets and a change in current liabilities.

What is the difference between nominal and effective rates?

The effective annual rate reflects the effects of compounding frequency, whereas the nominal annual rate does not.

What is the relationship between compounding frequency and nominal and effective annual rates?

The effective rates of interest rise relative to the stated nominal rate with increasing compounding frequency.

Accept-reject approach

The evaluation of capital expenditure proposals to determine whether they meet the firm's minimum acceptance criterion. This criteria can change from year to year.

Which of the following is true regarding a bond? A.The face value and coupon payments of a bond NEVER change B.Only the face value of a bond can change C.Only the coupon payments of a bond can change D.Both the face value and coupon payments of a bond can change

The face value and coupon payments of a bond NEVER change

Capital rationing

The financial situation in which a firm has only a fixed number of dollars available for capital expenditures, and numerous projects compete for these dollars. That fixed number can be subject to revision, but the limits are real whether internally or externally applied

Unlimited funds

The financial situation in which a firm is able to accept all independent projects that provide an acceptable return. Truly only exists in theory.

What are operating cash flows?

The incremental after-tax cash inflows resulting from implementation of a project during its life.

You are comparing three investments, all of which pay $100 a month and have a interest rate of 8 percent. one is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. which one of the following statements is correct given these three investment options?

The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due

Capital budgeting

The process of evaluating and selecting long-term investments that are consistent with the firm's goal of maximizing owner wealth.

Discounting cash flows

The process of finding present values; the inverse of compounding interest.

Ranking approach

The ranking of capital expenditure projects on the basis of some predetermined measure, such as the rate of return. This may be necessary even with projects that meet financial acceptance due to some other constraint.

What is initial investment?

The relevant cash outflow for a proposed project at time zero.

What is book value?

The strict accounting value of an asset, calculated by subtracting its accumulated depreciation from its installed cost.

Do financial managers rely on present or future values more often for decision making and why?

They rely on present values because they make decisions at the beginning of projects.

Which are the hardest cash flows to predict?

Those associated with a completely new product or business because there is no track record.

Present Value of an Annuity

Time value concept/calc used in amortizing a loan is..?

True or False: effective rate > nominal rate whenever compounding occurs more than once per year

True

What are common size financial statements?

Turns all numbers into percentages.

What country currently recieves the most FDI?

U.S.

When do you use NPV vs. PI?

Use NPV when funds/capital are unlimited, use PI when funds/capital are limited.

increases, decreases

When making payments on a loan, the amount of each payment going towards the principal ________ with time, and the amount of each payment going towards interest _________

B. $100 payments, 3 year annuity due

Which has the highest future value in 3 years, if interest rates are 8%? A. $100 payments, 3 year ordinary annuity B. $100 payments, 3 year annuity due C. $200 lump sum received today D. $300 lump sum received in 3 years E. all answers produce the same future value

A. The face value and coupon payments of a bond NEVER change

Which of the following is true regarding a bond? A. The face value and coupon payments of a bond NEVER change B. Only the face value of a bond can change C. Only the coupon payments of a bond can change D. Both the face value and coupon payments of a bond can change

premium

YTM<coupon interest rate

bond trades at par

YTM=coupon interest rate

discount

YTM>coupon interest rate

corporate bond

a long-term debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms.

What statement is true?

all else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

discount rate

annual rate of return is referred to as

A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________ when the stated rate of interest is less than the required return, and ________ when the stated rate of interest is equal to the required return. A) at a premium; at a discount; equal to the par value B) at a premium; equal to the par value; at a discount C) at a discount; at a premium; equal to the par value D) equal to the par value; at a premium; at a discount

at a premium; at a discount; equal to the par value

Total income taxes divided by total taxable income equals the ______ tax rate. deductible average total residual marginal

average

The book value of a firm is: equivalent to the firm's market value minus its liabilities. a financial, rather than an accounting, valuation. generally greater than the market value when fixed assets are included. based on historical transactions. adjusted to the market value whenever the market value exceeds the stated book value.

based on historical transactions.

The app store needs to raise $2.8million for expansion. The firm wants to raise this money by selling 20-year, zero-coupon bonds with a par value of $1,000. The market yield on similar bonds is 6.49 percent. how many bonds must the company sell to raise the money it needs? assume semiannual compounding.

bond price= $1,000 / [1+(0.649/2)]^40 = 278.77 number of bonds= 2,800,000/278.77= 10,044 bonds

when rates go up

bond prices go down

The cash flow that is available for distribution to a corporation's creditors and stockholders is called the: operating cash flow. net capital spending. net working capital. cash flow from assets. cash flow to stockholders.

cash flow from assets.

Cash flow from assets equals: The same as the Net Working Capital cash flow to creditors + cash flow to stockholders cash flow to creditors − cash flow to stockholders cash flow to creditors × cash flow to stockholders cash flow to creditors / cash flow to stockholders

cash flow to creditors + cash flow to stockholders

The cash flow related to interest payments less any net new borrowing is called the: operating cash flow. capital spending cash flow. net working capital. cash flow from assets. cash flow to creditors.

cash flow to creditors.

The key inputs to the valuation process include ________.A) returns and risk B) cash flow, cash flow timing, and risk C) cash flows and discount rate D) returns, discount rate, and risk

cash flow, cash flow timing, and risk

Net working capital is defined as: total liabilities minus shareholders' equity. current liabilities minus shareholders' equity. fixed assets minus long-term liabilities. current assets minus current liabilities. total assets minus total liabilities.

current assets minus current liabilities.

A _________ __________ is one that has a life of less than one year, meaning they must be paid within the year. current liability owners equity fixed asset total asset liquid equity

current liability

A bond has a yield to maturity of 9.38 percent, a coupon of 7.5 percent paid semiannually, a $1,000 face value, and a maturity date 21 years from today, what is the current yield?

current yield= (7.5% x $1,000)/ present value (828.81)

perpetuity

is an annuity with an infinite life, providing continual annual cash flow

bonds

debt issued by companies or the government; fixed promise to pay; lower rate of return

YTM > coupon rate

discount

The annual rate of return is referred to as the ________. A) discount rate B) marginal rate C) risk-free rate D) marginal cost

discount rate

Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________. A) par; premium B) discount; par C) discount; premium D) coupon; premium

discount; premium

Cash flow to stockholders is defined as: the total amount of interest and dividends paid during the past year. the change in total equity over the past year. cash flow from assets plus the cash flow to creditors. operating cash flow minus the cash flow to creditors. dividend payments less net new equity raised

dividend payments less net new equity raised.

An expectation of moderating inflation offsets the requirement for a higher rate to compensate for tying up cash. What Kind of Yield Curve

flat yield curve

Cash flow from assets is also known as the firm's: capital structure. equity structure. hidden cash flow. free cash flow. historical cash flow.

free cash flow.

you are scheduled to receive $7,500 in two years. When you receive it, you will invest it at 4.5 percent per year. how much will your investment be worth ten years from now?

future value= $7,500 x (1.045)(10-2) =$10,665.75

What would increase the current value of a stock?

increase in the capital gains yield

The present value of a lump sum future amount

increases as the interest rate decreases.

For a firm that must pay income taxes, depreciation expense: increases expenses and lowers taxes. increases the net fixed assets as shown on the balance sheet. reduces both the net fixed assets and the costs of a firm. is a noncash expense that increases the net income. decreases net fixed assets, net income, and operating cash flows.

increases expenses and lowers taxes.

A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, and after-tax cost of debt of 5.2 percent, and a tax rate of 35 percent. Given this, which one of the following will increase the firms weighted average cost of capital.

increasing the firms beta

a project has expected cash inflows, starting with Year 1, of 4900, $1,200, $1,500, and finally in year 4, $2,000. The profitability index is 1.11 and the discount rate is 12 percent. What is the initial cost of the project.

initial cost = 3,692.71

cash flow to creditors decreases when:

interest rates on debt decline cashflow to creditors = interest paid - net new borrowing

Laura owns 6,700 shares of GP Global stock worth $92,460. The firm has 15,000 shares outstanding. Each share is entitled to one vote under the straight voting policy of the firm. The next election is in four months at which time four directors are up for election. how much more must Laura invest in this firm to guarantee her election to the board.

investment needed= [(15,200/2)+1-6,700]x ($92,460/6,700)= 11,053.80

continuous compounding

involves the compounding of interest an infinite number of times per year at intervals of microseconds

corporate bond

is a long-term debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms

annuity

is a stream of equal periodic cash flows, over a specified time period. These cash flows can be inflows of returns earned on investments or outflows of funds invested to earn future returns

Ordinary (Deferred) Annuity

is an annuity for which the cash flow occurs at the end of each period

annuity due

is an annuity for which the cash flow occurs at the beginning of each period

Net capital spending: is equal to ending net fixed assets minus beginning net fixed assets. is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense. reflects the net changes in total assets over a stated period of time. is equivalent to the cash flow from assets minus the operating cash flow minus the change in net working capital. is equal to the net change in the current accounts.

is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.

compound interest

is interest that is earned on a given deposit and has become part of the principal at the end of a specified period

par value

is the amount borrowed by the company and the amount owed to the bond holder on the maturity date

principal

is the amount of money on which interest is paid

effective (true) annual rate [ear]

is the annual rate of interest actually paid or earned

interest rate risk

is the chance that interest rates will change and thereby change the required return and bond value

yield to maturity

is the compound annual rate of return earned on a debt security purchased on a given day and held to maturity

nominal (stated) annual rate

is the contractual annual rate of interest charged by a lender or promised by a borrower

nominal (stated) annual rate

is the contractual annual rate of interest charged by a lender or promised by a borrower.

present value

is the current dollar value of a future amount the amount of money that would have to be invested today at a given interest rate over a specified period to equal the future amount

coupon interest rate

is the percentage of a bond's par value that will be paid annually, typically in two equal semiannual payments, as interest

discounting cash flows

is the process of finding present values; the inverse of compounding interest

yield to maturity (YTM)

is the rate of return that investors earn if they buy a bond at a specific price and hold it until maturity.

term structure of interest rates

is the relationship between the maturity and rate of return for bonds with similar levels of risk

future value

is the value at a given future date of an amount placed on deposit today and earning interest at a specified rate. Found by applying compound interest over a specified period of time

The ______ tax rate is the percentage of the last dollar you earned that must be paid in taxes. marginal residual total average standard

marginal

The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate. A) effective B) nominal C) discounted D) continuous

nominal

No change is expected in inflation. The requirement for a higher rate to compensate for tying up cash for a longer term shows through. What Kind of Yield Curve

normal yield curve

The market value

of an asset tends to provide a better guide to the actual worth of that asset than does the book value.

The cash flow that results from a company's ongoing, normal business activities is called: operating cash flow. capital spending. net working capital. cash flow from assets. cash flow to creditor.

operating cash flow.

par value

or face value, is the amount borrowed by the company and the amount owed to the bond holder on the maturity date

An annuity with an infinite life is called a(n) ________. A) perpetuity B) primia C) option D) deep discount

perpetuity

the rich get richer

persistence of wealth

YTM < Coupon

premium

The amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount is called ________. A) future value B) present value C) future value of an annuity D) compounded value

present value

As the degree of financial leverage increases, the: probability a firm will encounter financial distress increases. amount of a firm's total debt decreases. less debt a firm has per dollar of total assets. number of outstanding shares of stock increases. accounts payable balance decreases.

probability a firm will encounter financial distress increases.

which one of the following statements is accurate for a levered firm?

reduction in the risk level of a firm will tend to decrease the firm's WACC

Shareholders' equity: is referred to as a firm's financial leverage. is equal to total assets plus total liabilities. represents the residual value of a firm. includes patents, preferred stock, and common stock. decreases whenever new shares of stock are issued

represents the residual value of a firm.

The expected return on a security is not affected by the:

security's unique risk.

Jessica invested $2,000 today in an investment that pay 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested.

she could have the same future value and invest less than 2,000 initially if she could earn more than 6.5 percent interest

time value of money

single most important finance concept

effective (true) annual rate (EAR)

the annual rate of interest actually paid or earned.

cash flow, cash flow timing, and risk

the key inputs to the valuation process include:

if the demand for bonds issued by a particular issuer increases, how will this affect the price and the yield of these bonds?

the price of the bond will increase but the yield will decrease. bond price is negatively related with the yield. As demand increase, bond price will increase, thus yield decreases.

single amount (lump sum), annuity, mixed stream

three basic patterns of cash flow

an annuity due; interest will compound for an additional period

will an annuity due or ordinary annuity always be greater and why?