Principles of Finance Exam 4

Global Exporters has total assets of $84,300, net working capital os $22,900, owner's equity of $38,600, and long-term debt of $23,900. What is the value of the current assets?

$44,700

Delfino's expects to pay an annual dividend of 1.50 per share next year. What is the anticipated dividend for year 5 if the firm increases its dividend by 2 percent annually?

1.50 * (1.02) ^4

A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is

15.6 percent

Worth While Entertainment has common stock with a beta of 1.46. The market risk premium is 9.1 percent and the risk-free rate is 4.6 percent. What is the expected return on this stock?

17.89

Berzett Industrial Products has both common and noncumulative preferred stock outstanding. The dividends on these stocks are 1.10 per quarter per share of common and 3.50 per quarter per share of preferred. The company has not paid any dividends for the past two quarters but is expected to pay dividends on both the common and the preferred stock next quarter. What is the minimum amount the firm must pay per share to its preferred stockholders next quarter if it plans to pay a common dividend?

3.50

Which of the following has the highest effective annual rate?

6 percent compounded monthly

Graphic Designs has 120,000 shares of cumulative preferred stock outstanding. Preferred shareholders are supposed to be paid 1.50 per quarter per share in dividends. However, the firm has encountered financial problems and has not paid any dividends for the past three quarters. How much will the firm have to pay per share of preferred next quarter if the firm also wishes to pay a common stock dividend?

6.00

A bond has a 1000 face value, a market price of 1045, and pays interest payments of 80 every year. What is the coupon rate?

8.00 percent

On which one of the following dates do dividends become a liability of the issuer for accounting purposes?

On the declaration date

Which one of the following is the correct formula for computing present value of 600 to be received in 6 years? The discount rate is 7 percent.

PV=$600/(1+0.07)^6

Which one of the following methods of analysis ignores the time value of money?

Payback

Which one of the following indicators offers the best assurance that a project will produce value for its owners?

Positive NPV

When you refer to a bond's coupon, you are referring to which of the following?

annual interest payment

When a bond's yield to maturity is less than the bond's coupon rate, the bond

is selling at a premium

A protective covenant

limits the actions of the borrower

The three basic sources of long-term funds for the business firm are

long-term debt, common stock, and preferred stock

Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is

long-term debt, preferred stock, common stock

Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns?

marginal tax rate

The goal of financial management is to

maximize shareholder wealth

Both projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project.

mutually exclusive

Which of the following is generally considered to be the best form of analysis, from a finance professional's viewpoint, if you have to select a single method to analyze a variety of investment opportunities?

net present value

Cash flow from assets is defined as

operating cash flow minus the change in net working capital minus net capital spending

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

Travis is buying a car and will finance it with a loan which requires monthly payments of 265 for the next 4 years. His car payments can be described by which of the following terms?

Annuity

The price of a stock at year 4 can be expressed as

D5/(R-g)

Which of the following is the correct formula for the future value of 500 invested today at 7 percent interest for 8 years?

FV=$500(1+0.07)^8

Which of the following is leverage that is concerned with the relationship between earnings before interest and taxes and earnings per share.

Financial

Which one of the following statements is correct?

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

Which of the following is the best example of unsystematic risk?

a warehouse fire

Which one of the following is included in net working capital?

accounts payable

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

average tax rate

Which of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?

beta coefficient

Which of the following is the equity risk arising from the daily operations of a firm?

business risk

Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's

capital structure

Dividends are best defined as

cash or stock payments to shareholders

Tom earned 120 in interest on his savings account last year. Tom has decided to leave the 120 in his account so that he can earn interest on the 120 this year. This process of earning interest on prior interest earnings is called

compounding

Which of the following is the rate of return a firm must earn on its investments in projects in order to maintain the market value of its stock?

cost of capital

The annual interest divided by the face value of a bond is referred to as the

coupon rate

Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?

cumulative preferred

Net working capital is defined as

current assets minus current liabilities

Which of the following defines the internal rate of return for a project?

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

Todd will be receiving a 10,000 bonus one year from now. The process of determining how much that bonus is worth today is called

discounting

Which of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

diversification

At the operating breakeven point, __________ equals zero

earnings before interest and taxes

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which of the following best describes the 16.5 percent rate?

expected return

What is the principal amount of a bond that is repaid at the end of the loan term called?

face value

Which of the following statements concerning financial leverage is correct?

financial leverage magnifies both profits and losses

Which one of the following is the equity risk arising from the capital structure selected by a firm?

financial risk

Discounted cash flow valuation is the process of discounting an investment's

future cash flows

Which of the following best describes a portfolio?

group of assets held by an investor

If shareholders are granted a preemptive right they will

have priority in the purchase of any newly issued shares

Sara is investing 1000 today. Which of the following will increase the future value of that amount?

increasing the interest rate

A corporation

is a legal entity separate from its owners

Firm A uses straight-line depreciation. Firm B uses MACRS deprecation. Both firms bought 60,000 worth of equipment last year. Both firms are in the 35 percent tax bracket. The operating cash flows for each firm are identical except for the deprecation effects. Given this, you know the

operating cash flow of Firm A is less than that of Firm B for year 2

A call provision grants the bond issuer the

option of repurchasing the bonds prior to maturity at a respecified price

Dividends are which of the following?

paid out of aftertax profits

Which of the following indicates that a project is expected to create value for its owners

positive net present value

Sue needs to invest 3626 today in order for her savings account to be worth 5000 six years from now. Which one of the following terms refers to the 3626?

present value

What is the primary purpose of bond covenants?

protect the lender

Limited liability companies are primarily designed to

provide limited liability while avoiding double taxation

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to

recoup its initial cost

Which one of the following situations is most apt to create an agency conflict?

rejecting a profitable project to protect employee jobs

Which of the following describes systematic risk?

risk that affects a large number of assets

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost?

sunk

The firm's optimal mix of debt and equity is called its

target capital structure

Debt is generally the least expensive source of capital. This is primarily due to

the tax deductibility of interest payments

Portfolio diversification eliminates which one of the following?

unsystematic risk

Which of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities?

weighted average cost of capital

Which of the following terms refers to a bond's rate of return that is required by the marketplace?

yield to maturity

If an investment is producing a return that is equal to the required return, the investment's net present value will be

zero