FNAN 307 EXAM 2
Which of the following is not a reason that a rapidly growing firm would want low levels of debt - high growth firms will have volatile cash flows -a firm with high growth prospects will need to revisit the financial markets for financing multiple times - low levels of debt will allow them to have a large dividend payout ratio - the primary asset for high growth firms is intangible growth opportunities
- low levels of debt will allow them to have a large dividend payout ratio
Put options are worthless at maturity if the options strike price is ______________ than the current stock price
- lower
Which of the following is not a financial asset? - stock - machinery - home - bond
- machinery - home
For a pauyment of 4000 today, you can have the right to sell 100,000 euros for 1.25 at anytime in the next 90 days. in this instance 90 day is the - strike price - maturity - premium - option type
- maturity
Should management always try to increase sales as quickly as possible? - yes because as growth increases the firms market share and profits will rise as well - no because managers should try and grow profits as quickly as possible - yes because maximizing sales revenue is the top priority to management - no because rapid sales growth can put strain on the firms financial resources which can lead to bankruptcy
- no because rapid sales growth can put strain on the firms financial resources which can lead to bankruptcy
A firms sustainable growth rate can be expressed as the firms? - retention ratio times the firms beginning of period return on equity - dividend payout ratio ratio times the firms return on beginning of period equity - dividend payout ratio times the firms return on end of period equity - retention ratio times the firms return on end of period equity
- retention ratio times the firms beginning of period return on equity
In a _______________ a firm cuts the amount of time it must wait before selling securities to investors by having the sec approve the registration in advance of the securities issuance, which can be done up to two years after the approval - private placement - advanced placement - initial public offering - shelf registration
- shelf registration
The periodic repayment of principal associated with long-term debt is called a - sinking fund - coupon payment - payoff amount - maturity date
- sinking fund
Investment grade bonds are classified by what rating? - aaa only -bbb and higher - bb and higher - a and higher
-bbb and higher
If a firms dividend payout is equal to 20% what is the firms retention rate? 500% 10% 0% 80%
80%
If a firm wishes to minimize the risk and expected retun on an investment, then they should finance with _____________
equity
How do common stockholders receive an investment return? - coupon payment - dividends - price appreciation - interest payments
- dividends - price appreciation
Fixed claims are fixed as to: - dollar amount - dollar amount but not timing - dollar amount and timing - timing but not dollar amount
- dollar amount and timing
General motors wants to expand and open a new production plant in Kentucky, As a result, GM decides to take out a dollar dominated loan through Bank of America. This is an example of a ________________ transaction - black market - foreign market - international market - domestic market
- domestic market
In a single product company profitable pruning refers to the practice of - increasing new profit margins through more efficient operations - selling a division of the firm to generate additional cash - eliminating slow-paying customers or slow-turning inventory - elimination dividends until the company has become profitable
- eliminating slow-paying customers or slow-turning inventory
When selecting the maturity structure of debt securities, the minimum level of risk is achieved when the maturity of liabilities _________________ the maturity of assets
- equals
Which of the following are possible consequences of choosing an improper financing instrument? - excessive cost - inability to sell the instruments - undue risk - reduced sales revenue
- excessive cost - inability to sell the instruments - undue risk
True or false: IF a market is semistrong form efficient, it means that investors in that market cannot make money without having private information
- false
Financial leverage involves the use of ___________ instead of __________ - equity; fixed cost debt - fixed cost debt; equity - variable cost production methods; fixed cost production methods - fixed cost production methods; variable cost production methods
- fixed cost debt; equity
Futures contracts are similar to _____________ contracts except that the terms are standardized
- forward
Which of the following is not an assumption implicit in the calculation of the sustainable growth rate? - the company has a target dividend policy it washes to maintain - management is unable or unwilling to sell new equity and all equity increases only come from retained earnings - the company has a target capital structure it wishes to maintain - future growth will be similar to past growth
- future growth will be similar to past growth
In a multi segment firm how does profitable pruning benefit a firm whose actual sales growth exceeds its sustainable growth rate? - in generates cash directly by selling a division of the firm - it reduces sales growth by eliminating these sales associated with the discarded division - it increases the assets to equity ratio of the firm - it reduces the amount of dividend that a firm is srequired to pay
- in generates cash directly by selling a division of the firm - it reduces sales growth by eliminating these sales associated with the discarded division
An increased in the volatility of an underlying asset will_______ the price of a call option and ___________ the price of a put option -decrease increase - decrease decrease - increase increase - increase decrease
- increase increase
One way that the financing decision affects the value of the firm is through the tax effect. The tax effect occurs because_________ - interest expense on debt reduces the among of taxes pain to the government - dividends reduce the among to taxes that must be paid to the government - dividends on equity are effectively taxed twice; once at the investor levels - the firms taxes increase the riskiness of the firm
- interest expense on debt reduces the among of taxes pain to the government
Which of the following is not a variable that a financial executive can alter when designing a financial instrument? - investors claims on a company assets i liquidation - investors right to anticipate in company decisions - investors expectations of futures company performance - investors claims on future cash flow
- investors expectations of futures company performance
A call provision gives the ___________ the ______________ to retire the bonds prior to maturity - investor: option - investor: obligation - issuing company: obligation - issuing company: option
- issuing company: option
a call provision is typically advangeous to the __________________ which is why bonds with such provisions contain_________________ coupon rates - investor; lower - investor; higher - issuing company; higher - issuing company lower
- issuing company; higher
a call provision is typically advantageous to the ______________ which is why bonds with such provisions contain ____________ coupon rates - investor ;lower - investor ; higher - issuing company; lower - issuing company; higher
- issuing company; higher
Which of the following is a reason why American firms seldom issue equity? - issuing new equity will dilute a firms earnings per share - retained earning and debt financing provide sufficient cash for a firms growth - managers often think that their company stock is over valued - issuing new equity will dilute a firms earnings per share - retained earning and debt financing provide sufficient cash for a firms growth
- issuing new equity will dilute a firms earnings per share - retained earning and debt financing provide sufficient cash for a firms growth - retained earning and debt financing provide sufficient cash for a firms growth
If a firms actual sales growth rate exceeds its sustainable growth rate _________________ however if the actual sales growth rate is lower than its sustainable growth rate __________________
- it will produce a cash deficit - it will produce a cash surplus
An American company with an account receivable denominated in foreign currency is said to be ___________ in the foreign currency. The American company can hedge this position by purchasing a ____________ option on the foreign currency - short put - long call - long put - short call
- long put
Which firm is a good candidate for high levels of debt? - low growth; highly profitable firms - startup firm with few physical assets - high growth; high technology firms
- low growth; highly profitable firms
High debt levels can lead managers, creditors, and owners to concentrate on their own interests rather than the interest of the firm. This leads to conflicts of interest among the different parties. What are the possible results form the conflicts of interest when debt levels are high? - management will increase the divided paid to shareholders - management uses excess capital to pay down debt at the expense of shareholders - management undervests in low risk products because the benefits accrue to creditors instead of shareholders - management overinvest in risky projects because downside is limited to shareholders
- management undervests in low risk products because the benefits accrue to creditors instead of shareholders - management overinvest in risky projects because downside is limited to shareholders
Which of the following are strategies that a firm can use when its actual growth rate in sales exceeds the sustainable growth rate in sales? Assume that there are longer term sustainable growth problems - increase the dividend payout rate - sell a cash cow - outsource some or all of production - increase prices - issue new equity
- outsource some or all of production - increase prices - issue new equity
A bonds coupon rate is the: - amount of money the bondholder will receive when the bond matures - percentage of par value that will be paid to investors every six months - percentage of par value that will be pain to investors every year - percentage of par value that will be paid to investors over the life of the bond
- percentage of par value that will be pain to investors every year
How is preferred stock similar to equity? - the amount of dividend received if paid fluctuates each year - preferred stock has no maturity date - preferred stock dividends do not have to be paid - preferred stockholder always have a voice in managerial decisions
- preferred stock has no maturity date - preferred stock dividends do not have to be paid
An efficient market is one in which prices adjust _____________-- to new information and current prices ____________________- reflect available information about the assets traded -rapidly partially - rapidly fully - slowly fully - slowly partially
- rapidly fully
How do publicly traded companies raise equity capital?
- seasoned issue
Which of the following are steps in the process of selecting a proper financing instrument - decide how much capital is needed - determine the appropriate dividend rate or interest rate - select and design the instrument to be sold
- select and design the instrument to be sold - decide how much capital is needed
A put option conveys the right to ________________ the underlying asset. As a result, someone who owns a put will hope the underlying asset price ____________ - buy increase - sell increase - sell decrease - buy decrease
- sell decrease
An American company that generates a large account receivables denominated in euros. To offset this currency risk, the American company should ______________ - buy euros in the forward market - sell dollars in forward market - sell euros in the forward market
- sell euros in the forward market
Profitable pruning typically refers to the practice of -increasing net profit margins through more efficient operations - selling a division of a multi segment firm to generate additional cash - eliminating dividends until the company has become profitable - increasing gross profit margins by increasing price or reducing cost of goods sold
- selling a division of a multi segment firm to generate additional cash
secured credit is a form of ____________ credit backed by _________________ - senior ; collateral - subordinated; collateral - senior ;a promise - subordinated; a promise
- senior ; collateral
a firm has an after tax intrest rate of 5% and debt to equity ration of 1. If the firm has a return on invested capital of 10% what is the return on equity to the firm?
- 15% .10+(.10-.05)1.0
True or false: when investors can borrow their own and ignoring taxes firm value will increase with the amount of debt
- false
There is a general agreement that the purpose of the firms financing decision should be to increase ________ - market share - revenues - firm value - profits
- firm value
A bond is known as a ______________ security - variable income - fixed income - derivative - hybrid
- fixed income
Bankruptcy cost are _____________ when the firms assets are predominately ___________- - lower; tangible assets - higher; intangible assets - lower; intangible assets -higher; tangible assets
- lower; tangible assets - higher; intangible assets
A firm can avoid SEC registration in a - private placement - initial public offering - shelf registration
- private placement
Which of the following are correct? - a company's financing strategy should focus entirely on the present needs of the company ignoring future considerations - some companies especially smaller firms, may be unable or unwilling to sell stock - a firms financing choice today may impact their ability to raise money in the future - a company's financing strategy should be compatible with how the firm intends to mange growth
- some companies especially smaller firms, may be unable or unwilling to sell stock - a firms financing choice today may impact their ability to raise money in the future - a company's financing strategy should be compatible with how the firm intends to mange growth
Which of the following is not another name for a junk bond? - speculative - high-yield - below-investment-grade - stable return
- stable return
What is the critical value for the times interest earned ration - .5 -.0 -1.0 -2.0
-1.0
Suppose a firms net income is equal to 200 million. if the firm pays a dividend of 60 million to shareholder what is the firm retention rate or R for the year? - 70% -30% -0% -333%
- 70% 140M/200M
Which of the following are examples of indirect costs of financing when debt levels are high - a competitor starts a price war - lawyer fees for bankruptcy filings are high - suppliers withhold trade credit - employees leave to work at other firms - sales fall due to lost customers
- a competitor starts a price war - suppliers withhold trade credit - employees leave to work at other firms - sales fall due to lost customers
Why is the range of possible ROE's a responsible measure of risk? - a larger range of possible outcomes means there is a greater chance of bankruptcy - a larger range of possible outcomes means the form has lower leverage - a larger range of possible outcomes means greater uncertainty about the company's ROE - a larger range of possible outcomes means there is more certainty regarding how well the firm will preform
- a larger range of possible outcomes means greater uncertainty about the company's ROE - a larger range of possible outcomes means there is a greater chance of bankruptcy
When debt levels are low the primary consequence of adding additional debt is ____________ when debt levels are high, the primary consequence of additional debt is ___________
- a tax shield; an increase in distress cost
Which of the following is an example of a protective covenant? -a lower limit on a firms debt to equity ratio - an upper limit on a firm debt to equity ratio - a lower limit on a firms current ratio - an upper limit on a firms current ratio
- an upper limit on a firm debt to equity ratio - a lower limit on a firms current ratio
Which of the following is a potential long-run consequence of issuing too much debt - and inability to raise equity capital at a reasonable price - an inability to raise equity capital at all - an inability to reduce the dividend payout ratio on existing equity - an inability to pursue attractive investment opportunities
- and inability to raise equity capital at a reasonable price - an inability to raise equity capital at all - an inability to pursue attractive investment opportunities
If an manger believes that her firm will be extremely profitable in the immediate future she will prefer to issue____________. By the same token the market cognizant of the managers intentions, will react unfavorably if the firm tries to issue_______________ - debt; equity - equity; equity - debt; debt - equity; debt
- debt; equity
The idea of market signaling suggests that __________ is the preferred source of financing. The concept of flexibility favors______ financing - debt; equity - equity; equity - debt; debt - equity; equity
- debt; equity
Which of the following are costs associated with financial distress? - direct bankruptcy - conflicts of interest - indirect bankruptcy - dilution of shareholders
- direct bankruptcy - conflicts of interest - indirect bankruptcy
Although most investors think of bonds is very sage investments, they often ignore the impact of - future inflation - a future recession - default - a reduction in coupon payments
- future inflation
Which of the following is not a phase in the life cycle of a firm? - growth phase - decline phase - going public phase - maturity phase - startup phase
- going public phase
Which of the following is not a reason that a firm with low growth prospects would want to maximize reliance on debt and use the proceeds to repurchase equity - increasing the use of debt increases managerial incentives - high debt levels create a tax shield - repurchasing equity sends a positive signal to the market - high levels of debt will increase the firms financial flexibility
- high levels of debt will increase the firms financial flexibility
Which of the following describes how the financing decision can impact managerial incentives? - higher debt levels reduce managerial incentive to work harder - higher equity levels create more access to employee stock option - higher debt levels reduce managers incentives to waste money on frivolous or self-indulging projects - higher equity levels lead to increased focus on creating shareholders value
- higher debt levels reduce managers incentives to waste money on frivolous or self-indulging projects
Which of the following describes how the financing decision can impact managerial incentives? - higher debt levels reduce managerial incentive to work harder - higher equity levels create more access to employee stock options - higher equity levels lead to increased focus on creating shareholder value - higher debt levels reduce managers incentives to waste money on frivolous or self-indulging projects
- higher debt levels reduce managers incentives to waste money on frivolous or self-indulging projects
Leverage _____________ financial performance when things are going well, and _______________ performance when things are going poorly - diminishes; improves - improves; diminishes - diminishes ;diminishes - improves; improves
- improves; diminishes
Expected return to shareholders ____________ as financial leverage increases - increase - change randomly - decrease - stay constant
- increase
Which of the following is not an option that management can take when its sustainable growth rate exceeds actual growth rate? - return the money to shareholders - accumulate excess cash within the firm - purchase growth by buying a rapidly growing firm - increase prices on all of its products
- increase prices on all of its products
When a private company requires more capital, the management of the company can decide to raise capital from the public. This can be done by selling the company's common shares to the public through?
- initial public offering
If firms follow the pecking order approach to financing what is the order of financing options that the firm will follow (most preferred to least preferred)
- internal sources of financing - debt financing - equity financing
A call is worthless at maturity if the price of the underlying asset is - greater than the call option strike price -greater than the put option strike price - less than the put options strike price - less than the call option strike price
- less than the call option strike price
In theory managers of a firm will want to issue equity when it thinks equity prices are too high and repurchase shares when it thinks prices are too low. This practice is an example of ___________ - a conflict of interest - an illegal practice - market signaling -information asymmetry
- market signaling
Do law and regulations constrain the types of financial instruments that a firm can sell in the securities markets?
- no, but firms are subject to full disclosure requirements
What form of financing is structured as a limited partnership with a specifies duration of usually 10 years - seasoned issue - private equity - initial public offering
- private equity
Modigliani and Millers capital irrelevance proposition states that, when cash flows are constant ___________- is irrelevant to the value of the firm - the risk of the firm - the business environment - the financing decision - the investment decision
- the financing decision
Which of the following is not a variable that is used in the black-Scholes option pricing formula? - the options stock price - the options time to maturity - the current interest rate - the futures value of the underlying asset
- the futures value of the underlying asset
Identify the expected cost of bankruptcy - the probability bankruptcy will occur times the cost incurred when it does - the product of probability bankruptcy will occurs and the share capital of a company - the cost incurred when bankruptcy occurs divided by the probability of bankruptcy - the cost incurred when it bankruptcy occurs
- the probability bankruptcy will occur times the cost incurred when it does
Which of the following is not a problem associated with issuing new equity? - capital markets may be nonexistent in come countries - the return from an equity investment are typically lower than a bond investment - new shareholders are typically minority shareholders who cannot influence strategy - it is difficult to attract venture capital without which it is difficult to issue new equity
- the return from an equity investment are typically lower than a bond investment
Which of the following is an advantage of using interest rate swaps? - they allow a company to manage currency risk - they allow a company to lengthen the maturity of their debt - they allow a company to exchange interest rate risk without retiring current debt
- they allow a company to exchange interest rate risk without retiring current debt
In a forward market, the price is set _______________ nut exchange occurs _____________ - today today - today in the future - in the future today - in the future in the future
- today in the future
On average new equity has been a _____________ of cash to American companies over the last decade meaning they______________
- use : repurchase more stock than they issue
In theory a firms capital structure is irrelevant because investors in the firm can choose the degree of leverage for their investment by ______________ this act is known as ___________leverage - using debt to purchase some of the firms stock; instant - using debt to purchase some of the firms stock; homemade - using dividends to purchase additional shares; instant - using dividends to purchase additional shares; homemade
- using debt to purchase some of the firms stock; homemade
Markets are ____________ efficient if current prices only reflect all information about pass prices - semi-strong form - strong form - peek form - weak form
- weak form
can shareholders exercises control over a company's affair? - yes by electing the board of directors - no stocks are a residual income security - no stock are a fixed income security - yes by hiring managers
- yes by electing the board of directors
Can a investor in a semi-strong form efficient market earn above average returns without private information? - yes, by taking an above-average amount of risk - yes, by diligently studying past price information - no, because stock prices will already reflect all publically available information
- yes, by taking an above-average amount of risk
A firm has EBIT of million and a times intrest earned ratio of 6.0. How much EBIT fall febroe the coverage ratio drops to 1.0 - 80.7% - 75.0% - 66.7% -83.3%
-83.3% 150M/6.0=25M then (25M-150M)/150M
Futures contracts are similar to __________ contracts except that the terms are standardized
-forward
Which of the following is not a waay a firm cna increase its sustainable growth rate? - increase asset turnover - increase the profit margin - increase leverage - introduce a new product or service
Introduce a new product or service
A firms sustainable growth rate is?
The maximum rate at which the companys sales can increase without deplating financial resources
Which of the following is a contingent claim? - derivatives - bonds - stocks
- derivatives
who are a bonds protective covenants designed to protect? - the issuing company - bondholders - managers - shareholders
- bondholders
How can outsourcing help a firm whose actual sales growth exceeds its sustainable growth rate? - by reducing a firms long tern dividend payout ratio - outsourcing can reduce the firm actual sales growth rate - by eliminating the assets needs to perform the outsourced activity - by increasing the firms leverage through an increased use of debt
- by eliminating the assets needs to perform the outsourced activity
How can profitable pruning in a single product company help a firm whose actual sales growth exceeds its sustainable growth rate? - by reducing retention rate - by freeing up cash - by reducing the dividend payout rate - by reducing sales
- by freeing up cash - by reducing sales
How can increasing the price of a firms products help a firm whose actual sales growth exceeds it sustainable growth rate? - by raising price, total sales revenue will decline which will reduce the rate of sales growth - by raising price earnings will increase which will increase the firms sustainable growth rate - by raising price asset turnover will increase which will increase the firms sustainable growth rate - by raising price the sustainable growth rate will increase if there is a decease in the profit margin
- by raising price, total sales revenue will decline which will reduce the rate of sales growth
How can a firm increase equity without issuing additional stock? - there is no way to increase equity without issuing additional stock - by reinvesting earnings back into firm - by increasing the divided payout rate - by issuing publically traded debt
- by reinvesting earnings back into firm
To determine if the firm can safely carry additional debt, the firm should compare the company's forecasted operating cash flows to the annual financial burden imposed by the debt. Which of the following are appropriate ways to do this - calculate several coverage ratios - construct pro forma financial forecasts, augmented with sensitivity analysis and stimulations - compare the firms coverage ratios to the average converge ratio for a firm in the S&P 500 - determine if the revenues of the firm will be reduced by the new debt
- calculate several coverage ratios - construct pro forma financial forecasts, augmented with sensitivity analysis and stimulations
Which for the following is not a common type of swap? - currency - common stock - interest rate
- common stock
Highest return to lowest return from 1928 to 2013
- common stock - long term government bonds - inflation
Beasley inc has preferred stock outstanding. IF management in Beasley does not pay a preferred stock dividend in a given year, the missed dividends must be paid in full before it can pay dividends to common stockholders. In this case Beasley preferred stock is - cumulative -high-yield -low-risk
- cumulative
Increasing which of the following will not increase a firms return on equity - profit margin - asset turnover - current ratio - assets-to-equity ratio
- current ratio
Preferred stock has characteristics of which two investments? - derivatives and equity - debt and derivatives - debt and equity
- debt and equity
A bonds par value is - the amount of money that the bond holders will receive every six months until the bond matures - the amount of money the bondholder will receive when the bond matures - the amount of money that the bondholder will receive every year until the bond matures - the date when the bond stops making payment to investors
- the amount of money the bondholder will receive when the bond matures
Which of the following are consequences of operating leverage? - more operating income is needed to cover fixed financial costs - the amount of profits after the breakeven point is reached increases - the risk of the firm is reduced - the amount of sales needed to breakeven increases
- the amount of profits after the breakeven point is reached increases - the amount of sales needed to breakeven increases
All of the following are needed to effectively hedge a foreign currency except - the amount and timing of the foreign cash flow must be known in advanced - the foreign exchange markets must be efficient - the foreign currency must trade in the financial markets
- the foreign exchange markets must be efficient
Annual tax savings from having debt financing is equal to __________ - the product of the tax rate and the interest expense - the product of the amount of debt financing is the interest rate - the ratio of interest expense to pre-tax profits - the sum of interest expense and principal payments on the debt
- the product of the tax rate and the interest expense
In 2018 a firms sales were 90,000 EBIT was 60,000 net income was 25,000 and dividends were 10,000 if the firm had 200,000 in total equity at the beginning of 2018 using beginning of period equity what was the firms return on equity for the year? -12.5% -27.78% -11.63% -40%
-12.5% 25,000/200,000
Emily purchased a stock for 45$ on January 1 of 2016. If she sold the stock for 49 on December 31,2016 and the stock paid a dividend of 2 on December 30,2016 what is her annual return for the year from her investment? -11.8 -13.3 -8.9 -12.2
-13.3 (2+(49-45))/45
Emily purchased a stock for 45$ on January 1 of 2016. If she sold the stock for 49 on December 31,2016 and the stock paid a dividend of 2 on December 30,2016 what is her annual return for the year from her investment? -8.9 -12.2 -11.8 -13.3
-13.3 *(2+(49-45))/45
Emily purchased a stock for 45$ on January 1 of 2016. If she sold the stock for 49 on December 31,2016 and the stock paid a dividend of 2 on December 30,2016 what is her annual income for the year in her investment? -4 -6 -51 -2
-6 *2+(49-45)
Emily purchased a stock for 45$ on January 1 of 2016. If she sold the stock for 49 on December 31,2016 and the stock paid a dividend of 2 on December 30,2016 what was the percentage c -ange iin share price during the year? - 8.5 -13.3 -8.2 -8.9
-8.9 (49-45)/45
Which of the following is not a reason why executives need to understand how to use s=derivatives for risk management? - the market for derivatives is huge -derivatives provide an opportunity to speculate on future prices - most large companies use derivatives - misuse of derivatives can be dangerous and mangers need to understand them to use them efficiently
-derivatives provide an opportunity to speculate on future prices
a call provision is typically advantageous to the ________________ which is why bonds with such provisions contain_______________ coupon rates -issuing company: lower -issuing company: higher -investor: higher -investor :lower
-issuing company: higher