FIN 305 FINAL EXAM

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the:

market segmentation theory

The overall goal of the financial manager is to:

maximize shareholder wealth

The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a:

more accurate measure of the interest rate paid for monthly compounding.

The portion of a company's profits that are kept by the company rather than distributed to the stockholders as cash dividends is referred to as:

retained earnings

The most common type of business in the United States is the:

sole propretorship

A bond's current yield is defined as:

the bond's annual coupon rate divided by the bond's current market price.

The longer money can earn interest,

the greater the compounding effect

When computing the future value of an annuity, the higher the compound frequency

the higher the future value will be

Which of the following will increase the present value of an annuity

the interest rate decreases

Which of the following theories argues that individual investors and financial institutions have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred requires a higher interest rate?

Market segmentation theory

When calculating the weighted average cost of capital, weights are based on:

Market values

Which of these feature debt securities or instruments with maturities of one year or less

Money markets

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?

NPV

Which of these is the interest rate that is actually observed in financial markets?

Nominal interest rates

Which of the following is an example of aligning managers' personal interests with those of the owners?

Offer the managers an equity stake in the firm.

Regarding a bond's characteristics, which of the following is the principal loan amount that the borrower must repay?

Par or face value

We call the process of earning interest on both the original deposit and on the earlier interest payments

compounding

The practice generally known as double taxation is due to:

corporate incomes being taxed at the corporate level, then again at the shareholder level when corporate profits are paid out as dividends.

All of the following are types of financial institutions EXCEPT

fed reserve bank

All of the following are factors that affect nominal interest rates EXCEPT

foreign exchange

Maximizing owners' equity value means carefully considering all of the following EXCEPT:

how to best increase the firm's risk

Many people who want to start investing for their future want to start today, which implies an annuity stream that is paid at the beginning of the period. Beginning-of-period cash flows are referred to as:

annuities due

When interest rates are lower, borrowers can:

borrow more money

Loan amortization schedules show:

both the principal balance and interest paid per period

Which is true? Ratio analysis:

can provide useful information on a firm's current position and hint at future performance.

The most commonly accepted groups of asset classes include all of the following except:

Machinery and equipment (includes stocks, bonds, and real estate)

A perpetuity, a special form of annuity, pays cash flows

periodically forever

Which of these is the portion of total risk that is attributable to overall economic factors?

Market risk or Nondiversifiable risk

The present value of annuity payments made far into the future is:

worth very little today

Which of these is the expected or "implied" rate on a short-term security that will originate at some point in the future?

Forward rate

Which of the following statements is correct

-A flat yield curve occurs when the yield-to-maturity is virtually unaffected by the term-to-maturity. -Real interest rates are generally lower than nominal interest rates. -Liquidity risk is the risk that a security may be difficult to sell on short notice for its true value.

Which of these are basic approaches to minimizing the agency problem?

-Ignore the conflict of interest. -Monitor managers' actions. -Align managers' personal interest with those of the owners by making the managers owners.

Which of the following is considered a hybrid organization?

-S corporation -Limited liability partnership -Limited liability company -Limited partnership

Which of the following will increase the future value of an annuity?

-The number of periods increases. -The amount of the annuity increases. -The interest rate increases.

Financial management involves decisions about which of the following?

-Which projects to fund -How to minimize taxation -What type of capital should be raised

Time value of money concepts can be used by:

-individuals doing personal financial planning. -CFOs and CEOs to make business decisions. -investors calculating a return on an investment.

Which of these statements is true?

A high inventory turnover ratio or a low days' sales in inventory is a sign of good inventory management.

Which of the following can create ethical dilemmas between corporate managers and stockholders?

Agency relationship

Which of the following is a debt security whose payments originate from other loans, such as credit card debt, auto loans, and home equity loans?

Asset-backed securities

These individuals examine the firm's accounting systems and comment on whether financial statements fairly represent the firm's financial position.

Auditors

Which of these statements is false?

Bonds are always less risky than stocks

To compensate the bondholders for getting the bond called, the issuer pays which of the following?

Call premium

Which ratio measures a firm's ability to pay short-term obligations with its available cash and market securities?

Cash

Which of these is a measure of risk to reward earned by an investment over a specific period of time?

Coefficient of variation

Which of the following is NOT a money market instrument?

Corporate bonds

This is the set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control

Corporate governance

Agency problems exist in which forms of business ownership?

Corporation

Which of the following determines the dollar amount of interest paid to bondholders

Coupon rate

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

Credit quality risk

Which type of ratio measures the dollars of current assets available to pay each dollar of current liabilities?

Current

Which of these ratios measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets?

Debt management ratios

Which of the following is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments?

Default risk

Which of these formalizes an agreement between two parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future?

Derivative security

Not all cash a company generates will be returned to the investors. Which of the following will NOT reduce the amount of capital returned to the investors?

Dividends

Which of these money market instruments are short-term funds transferred between financial institutions, usually for no more than one day?

Federal funds

This subarea of finance helps facilitate the capital flows between investors and companies

Financial Institutions and markets

This subarea of finance looks at firm decisions in acquiring and utilizing cash received from investors or from retained earnings.

Financial Management

This is a general term for securities like stocks, bonds, and other assets that represent ownership in a cash flow

Financial asset

Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification

Firm specific risk

Which of these markets trade currencies for immediate or for some future stated delivery?

Foreign exchange markets

Which of these statements is true?

In general, the higher the total asset turnover and the lower the capital intensity ratio, the more efficient the overall asset management of the firm will be.

Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder?

Indenture

Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on stock market for the first time. We usually refer to these first-time issues as which of the following?

Initial public offerings

The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect?

Interest rate for compounding

Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

Interest rate risk

Which ratio measures the number of dollars of sales produced per dollar of inventory?

Inventory turnover

These individuals follow a firm, conduct their own evaluations of the company's business activities, and report to the investment community

Investment analysts

These individuals help firms access capital markets and advise managers about how to interact with those capital markets

Investment bankers

In the United States, which of these financial institutions arrange most primary market transactions for businesses?

Investment banks

This subarea of finance involves methods and techniques to make appropriate decisions about what kinds of securities to own, which firms' securities to buy, and how to be paid back in the form that the investor wishes.

Investments

Which of these statements answers why bonds are known as fixed income securities

Investors know how much they will receive in interest payments.

Which of the following bonds carry significant risk that the issuer will not make current or future payments?

Junk bonds

Which of the following refer to ratios that measure the relationship between a firm's liquid (or current) assets and its current liabilities?

Liquidity

Which of these provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds?

Primary markets

Which of these refers to something that has not been released to the public, but is known by few individuals, likely company insiders?

Privately held info

This type of business organization is entirely legally independent from its owners.

Public Corporation

Which type of ratio measures a firm's ability to pay off short-term obligations without relying on inventory sales?

Quick or acid test

Which of these is the interest rate that would exist on a default-free security if no inflation were expected?

Real interest rate

Which of these does NOT perform vital functions to securities markets of all sorts by channeling funds from those with surplus funds to those with shortages of funds?

Secondary markets

This type of business organization is relatively easy to start, and it is subject to much lighter regulatory and paperwork burden than other business forms.

Sole Proprietorship

The U.S. Treasury Bill/Bond is universally regarded as the world's only risk-free investment. T/F?

TRUE

The cost of capital represents a "hurdle rate" that a project must overcome before it can generate value to the company. T/F?

TRUE

Which of these statements is true?

The age of a firm's fixed assets will affect the fixed asset turnover ratio level

Which of the following will decrease the present value of an annuity?

The discount rate increases

Which of these statements is true?

The higher the default risk, the higher the interest rate that security buyers will demand.

How are future values affected by changes in interest rates

The higher the interest rate, the larger the future value will be.

Which statement is true?

The larger the standard deviation, the higher the total risk.

How are present values affected by changes in interest rates?

The lower the interest rate, the larger the present value will be

Which of the following statements is correct?

To interpret financial ratios, users should analyze the performance of the firm over time and the performance of the firm against one or more companies in the same industry.

Which of the following is defined as the volatility of an investment, which includes firm specific risk as well as market risk?

Total risk

Which of the following issues Treasury Inflation Protected Securities (TIPS)?

US Treasury

Which of the following is NOT a capital market instrument

US Treasury bills

According to this theory of term structure of interest rates, at any given point in time, the yield curve reflects the market's current expectations of future short-term rates

Unbiased expectations theory

The process of figuring out how much an amount that you expect to receive in the future is worth today is called:

discounting

A dollar paid (or received) in the future is:

not worth as much as a dollar paid (or received) today.

As individual legal entities, corporations assume liability for their own debts, so the shareholders hold:

only limited liability

The Rule of 72 is a simple mathematical approximation for

the number of years required to double an investment

The real interest rate is:

the rate that a security would pay if no inflation were expected over its holding period.

People borrow money because they expect:

their purchases to give them the satisfaction in the future that compensates them for the interest payments charged on the loan.

The biggest disadvantage of the sole proprietorship is:

unlimited liability