FINA 5311 TAMUCC Chapter 2 - 14 Review

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? A. Coupon B. Face Value C. Discount D. Call Premium E. Yield

A. Coupon

The return earned in an average year over a multiyear period is called the ______ average return. A. arithmetic B. standard C. variant D. geometric E. real

A. arithmetic

Unsystematic risk: A. can be effectively eliminated by portfolio diversification B. is compensated for by the risk premium C. is measured by beta D. is measured by standard deviation E. is related to the overall economy

A. can be effectively eliminated by portfolio diversification

Which of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. income statement B. balance sheet C. statement of cash flows D. Tax reconciliation statement E. market value report

A. income statement

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the projects: A. incremental cash flows B. internal cash flows C. external cash flows D. erosion effects E. financing cash flows

A. incremental cash flows

Net present value: A. is the best method of analyzing mutually exclusive projects. B. is less useful than the internal rate of return when comparing different-sized projects. C. is the easiest method of evaluation for nonfinancial managers. D. cannot be applied when comparing mutually exclusive projects. E. is very similar in its methodology to the average accounting return

A. is the best method of analyzing mutually exclusive projects.

Assume the market rate of return is 10.1% and the risk-free rate of return is 3.2%. Lexant stock has 2% less systemic risk than the market and has an actual return of 10.2%. This stock: A. is underpriced B. is correctly priced C. will plot below the security market line D. will plot on the security market line E. will plot to the right of the overall market on a security market line graph

A. is underpriced

As the degree of financial leverage increases, the: A. probability a firm will encounter financial distress increases B. Amount of a firm's debt debt increases C. Less debt a firm as per dollar of total assets D. Number of outstanding shares of stock increases C. Accounts payable balance decreased

A. probability a firm will encounter financial distress increase

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

A. probability a firm will encounter financial distress increases

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule? A. project A only B. project B only C. both A and B D. neither A nor B E. Either, but not both projects

A. project A only

Assume that last year T-bills returned 2.8% while your investment in large-company stocks earned an average 7.6%. Which of the following terms refer to the difference between these two rates of return? A. risk premium B. geometric average return C. arithmetic average return D. standard deviation E. variance

A. risk premium

Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock. B. $1,200 paid to repair a machine last year C. $20,000 project that must be forfeited if another project is accepted D. $4,500 reduction in current show sales if a store commences selling sandals E. $1,800 increase in comic book sales if a store ceases selling puzzles

B. $1,200 paid to repair a machine last year

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following? A. 0 B. .5 C. 1.0 D. 1.5 E. 20

B. .5

Which one of the following bonds is the least sensitive to interest rate risk? A. 3-year; 4 % coupon B. 3-year; 6% coupon C. 5-year; 6% coupon D. 7-year; 6% coupon E. 7-year; 4% coupon

B. 3-year; 6% coupon

A supplier, who requires payment within 10 days, should be most concerned with which of the following ratios when granting credit? A. Current B. Cash C. Debt-equity D. Quick E. Total debt

B. Cash

The fact that a proposed project is analyzed based on the project's incremental cash flow is the assumption behind which of the following principles? A. Underlying value principle B. Stand-alone principle C. equivalent cost principle D. Salvage principle E. Fundamental principle

B. Stand-alone principle

Standard deviation is a measure of which one of the following? A. Average rate of return B. Volatility C. Probability D. Risk premium E. Real return

B. Volatility

Which one of these will increase a company's aftertax cost of debt? A. a decrease in the company's debt-equity ratio B. a decrease in the company's tax rate C. An increase in the credit rating of the company's bonds D. An increase in the company's beta E. A decrease in the market rate of interest

B. a decrease in the company's tax rate

The capital structure weights used in computing a company's weighted average cost of capital: A. are based on the book values of debt and equity B. are bared on the market values of the outstanding securities C. depend upon the financing obtained to fund each specific project D. remain constant over time unless new securities are issued or outstanding securities are redeemed E. are restricted to debt and common stock

B. are bared on the market values of the outstanding securities

Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following? A. simplifying B. compounding C. aggregating D. accumulating E. discounting

B. compounding

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called: A. growth analysis B. discounting C. accumulating D. compounding E. reducing

B. discounting

Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will: A. remain constant B. increase C. decrease D. equal $10,000 E. be greater than $10,000

B. increase

To convince investor to accept greater volatility, you must: A. decrease the risk premium B. increase the risk premium C. decrease the real return D. decrease the risk-free rate E. increase the risk-free rate

B. increase the risk premium

The weighted average cost of capital for a firm with debt is the: A. discount rate that the firm should apply to all of the project is undertakes B. rate of return a company must earn on its earning assets to maintain the current value of stock C. coupon rate the firm should expect to pay on its next bond issue D. minimum discount rate the firm should require on any new project E. rate of return debtholders should expect to earn on their investment in this firm

B. rate of return a company must earn on its earning assets to maintain the current value of stock

The excess return is computed as the: A. return on a security minus the inflation rate B. return on a risk security minus the risk-free rate C. risk premium on a risky security minus the risk-free rate D. risk-free rate plus the inflation rate E. risk-free rate minus the inflation rate

B. return on a risk security minus the risk-free rate

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which of the following is the best example of an incremental operating cash flow related to the wreath project? A. Storing supplies in the same space currently used for materials storage B. Utilizing the basket manager to oversee wreath production C. Hiring additional employees to handle the increased workload should the firm accept the wreath project D. Researching the market to determine if wreath sales might be profitable before deciding to proceed E. Planning on lower interest expense by assuming the proceeds of the wreath will be used to reduce the firm's currently outstanding debt.

C Hiring additional employees to handle the increased workload should the firm accept the wreath project

Which of the following accounts is most liquid? A. Inventory B. Buildings C. Accounts Receivable D. Equipment E. Land

C. Accounts Receivable

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning at 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true? A. Barb will earn more interest in Year 1 than Andy will. B. Andy will earn more interest in Year 3 than Barb will. C. Barb will earn more interest in Year 2 than Andy. D. After five years, Andy and Bard will both have earned the same amount of interest. E. Andy will earn compound interest.

C. Barb will earn more interest in Year 2 than Andy.

Which one of the following relationships applies to par value bond? A. YTM>Current yield>Coupon Rate B. Coupon Rate>YTM>Current Yield C. Coupon Rate = Current Yield = YTM D. Coupon Rate < YTM < Current Yield E. Coupon Rate > Current Yield > YTM

C. Coupon Rate = Current Yield = YTM

The price sensitivity of a bond increases in response to a change in the market rate of interest as the: A. Coupon rate increases B. Time to maturity decreases C. Coupon rate decreases and the time to maturity increase D. Time to maturity and coupon rate both decrease E. Coupon rate and time to maturity both increase

C. Coupon rate decreases and the time to maturity increases

An increase in current liabilities will have which of the following effects, all else held constant? Assume all ratios have positive values. A. Increase the cash ratio B. Increase the net working capital to total assets ratio C. Decerase the quick ratio D. Decrease the cash coverage ratio E. Increase the current ratio

C. Decrease the quick ratio

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? A. Short-term; low coupon rate B. Short-term; high coupon rate C. Long-term; zero-coupon D. Long-term; low coupon rate E. Long-term; high coupon rate

C. Long-term; zero-coupon

Renee invested $2,000 six years ago at 4.5% interest. She spends all of her interest earnings immediately so she only received interest on her initial $2,000 investment. Which type of interest is she earning? A. Free interest B. Complex Interest C. Simple Interest D. Interest on Interest E. Compound interest

C. Simple interest

All else constant, a bond will sell at ____ when the coupon rate is _____ the YTM. A. a premium; less than B. a premium;equal to C. a discount; less than D. a discount; higher than E. par; less than

C. a discount; less than

The subjective approach to project analysis: A. is used only when a firm has an all-equity capital structure B. uses the WACC of firm x as the basis for the discount rate for a project under consideration by firm y C. assigns discount rate to projects based on the discretionof the senior managers of a firm D. allows mangers to randomly adjust the discount rate assigned to a project once the project's standard deviation has been determined E. applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.

C. assigns discount rate to projects based on the discretion of the senior managers of a firm.

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? A. income statement B. creditor's report C. balance sheet D. statement of cash flows E. dividend statement

C. balance sheet

A company's overall cost of equity is: A. generally less than its WACC given a debt-equity ratio of .5 B. unaffected by changes in the market risk premium C. directly related to the risk level of the firm D. generally less than the firm's aftertax cost of debt E. inversely related to changes in the level of inflation

C. directly related to the risk level of the firm

Which two methods of project analysis are the most biased towards short-term projects? A. net present value and internal rate of return B. internal rate of return and profitability index C. payback and discounted payback D. Net present value and discounted payback E. discounted payback and profitability index

C. payback and discounted payback

Which one of the following best describes the concept of erosion? A. expenses that have already been incurred and cannot be recovered B. change in net working capital related to implementing a new project C. the cash flows of a new project that come at the expense of a firm's existing cash flows D. the alternative that is forfeited when a fixed asset is utilized by a project E. the differences in a firm's cash flow with and without a particular project

C. the cash flows of a new project that come at the expense of a firm's existing cash flows

Which one of the following transactions occurs in the primary market? A. Purchase of 500 shares of GE stock from a current shareholder. B. Gift of 100 outstanding shares to a charitable organization C. Gift of 200 shares of stock by a mother to her daughter D. A purchase of newly issued stock from the issuer. E. IBM's purchase of GE stock from a dealer.

D. A purchase of newly issued stock from the issuer.

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? A. Dividend amount B. Number of future dividends, provided the total number of dividends is less than infinite C. Dividend growth rate D. Discount rate E. Both the discount rate and the dividend growth rate

D. Discount rate

DLQ Inc., bonds mature in 12 years and have a coupon rate of 6%. If the market rate of interest increases, then the: A. Coupon rate will also increase B. Current yield will decrease C. YTM will be less than the coupon rate D. Market price of the bond will decrease E. Coupon payment will increase

D. Market price of the bond will decrease

Which one of the following ratios is a measure of a firm's liquidity? A. Cash coverage ratio B. Profit margin C. Debt-equity ratio D. Quick Ratio E. NWC Turnover

D. Quick Ratio

The secondary market is best defined as the market: A. in which subordinated shares are issued and resold. B. Conducted solely by brokers C. dominated by dealers D. Where outstanding shares of stock are resold C. Where warrants are offered and sold.

D. Where outstanding shares of stock are resold.

Non-cash items refer to: A. fixed expenses B. inventory items purchases C. the ownership of intangible assets such as patents D. expenses that do not directly affect cash flows E. sales that are made using store credit

D. expenses that do not directly affect cash flows

The average compound return earned per year over a multiyear period is called the _____ average return A. arithmetic B. standard C. variant D. geometric E. real

D. geometric

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. In the second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in the rest of the second year is referred to as: A. free interest B. bonus income C. simple interest D. interest on interest E. present value interest

D. interest on interest

The present value of an investment's future cash flows divided by the initial cost of the investment is called: A. net present value B. internal rate of return C. average accounting return D. profitability index E. profile period

D. profitability index

Which one of the following types of stock is defined by the fact that no preferential treatment in respect toe their dividends or bankruptcy proceedings? A. Dual class B. Cumulative C. Non-cumulative D. Preferred E. Common

E. Common

The interest earned on both the initial principal and the interest reinvested from prior periods is called: A. free interest B. dual interest C. simple interest D. interest on interest E. Compound interest

E. Compound interest

The percentage of the next dollar you earn that must be paid in taxes is referred to as the ____ tax rate. A. mean B. residual C. total D. average E. marginal

E. Marginal

Project X has cash flows of $8,500, $8,000, $7,500 and $7,000 for Year 1 to 4 respectively. Project Y has cash flows of $7,000, $7,500, $8,000 and $8,500 for years 1 to 4. Which one of the following statements is true concerning these two projects given a positive discount rate? A. Both projects have the same future value at the end of year 4. B. Both projects have the same value at Time 0. C. Both projects are ordinary annuities D. Project Y has a higher present value than Project X E. Project X has both a higher present and higher future value than Project Y.

E. Project X has both a higher present and higher future value than Project Y

Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management? A. Negotiated settlement where each side is granted control over one of the open seats. B. Protracted legal battle over control of the board of directors C. Arbitrated settlement where the arbitrator determines who will be elected to the board D. Control of the board decided without your influence E. Proxy fight for control of the board

E. Proxy fight for control of the board

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of: A. Total assets B. Total equity C. Net Income D. Taxable income E. Sales

E. Sales

Which one of the of the following statements correctly defines a time value of money relationship? A. Time and future values are inversely related, all else held constant B. Interest rates and time are positively related, all else held constant C. An increase in a positive discount rate increases the present value D. An increase in time increases the future value given a zero rate of interest E. Time and present value are inversely related, all else held constant.

E. Time and present value are inversely related, all else held constant

On a common-size balance sheet, ll accounts for the current year are expressed as a percentage of: A. Sales for the period B. The base year sales C. Total equity for the base year. D. Total equity for the base year E. Total assets for the current year

E. Total assets for the current year

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? A. Alternative voting B. Cumulative voting C. Straight voting D. Indenture voting E. Voting by proxy

E. Voting by proxy

Which one of these equations applies to a bond that currently has a market price that exceeds par value? A. Market Value < Par Value B. YTM = Current Yield C. Market Value = Face Value D. Current Yield > Coupon Rate E. YTM < Coupon Rate

E. YTM < Coupon Rate

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called: A. required return B. zero-sum rate C. present value rate D. break-even rate E. crossover rate

E. crossover rate

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the: A. net present value period B. internal return period C. payback period D. discounted profitability period E. discounted payback period

E. discounted payback period

The aftertax cost of debt: A. varies inversely to changes in market interest rates B. will generally exceed the cost of equity if the relevant tax rate is zero C. will generally equal the cost of preferred if the tax rate is zero D. is unaffected by changes in the market rate of interest E. is highly dependent upon a company's tax rate

E. is highly dependent upon a company's tax rate

Which one of the following methods of analysis provides the best information of the benefit of project relative to the cost? A. net present value B. payback C. Internal rate of return D. Average accounting return E. Profitability index

E. profitability index

The discount rate assigned to an individual project should be based on: A. the company's overall weighted average cost of capital B. the actual sources of funding used for the project C. an average of the company's overall cost of capital for the past five years D. the current risk level of the overall firm E. the risks associated with the use of the funds required by the project

E. the risks associated with the use of the funds required by the project