Review for Finance Final

Ross purchased a new commercial vehicle today for $25,000. The entire amount was financed using a five-year loan with a 4 percent interest rate (compounded monthly). How much will Ross owe on his vehicle loan after making payments for three years (i.e., when two years of payments remain)?

$10,602.44

Devine Linens (DL) must raise $14,000,000 to support future growth. If it raises the funds by issuing stock, DL must pay an investment banker 5 percent of the total amount issued plus $250,000 in other costs associated with the issue. What is the amount of stock that DL must issue to net $14,000,000 after flotation costs?

$15,000,000

Risk refers to the chance that no unfavorable event will occur.

False

A federal deficit occurs when _____.

the government's expenses are greater than its tax revenues

If the standard deviation of returns from an investment is zero, then:

there is no risk associated with the investment; that is, the investment is risk free, because there is only one possible payoff.

A firm should continue to invest in capital budgeting projects to the point where the marginal cost of capital (MCC) equals the marginal return (internal rate of return, IRR) generated by the last project that is purchased.

true

Any capital budgeting decision should depend solely on a project's forecasted cash flows and the firm's required rate of return. Such a decision should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects.

true

As compared to U.S banks, foreign banks are less regulated and have fewer restrictions concerning the types of business activities they can pursue. Therefore, foreign banks often engage in numerous aspects of multilayer financial deals.

true

Violet Solutions Ltd. has net sales of $850 million, variable operating costs of $475 million, and fixed operating costs including depreciation of $100 million. What is the net operating income of Violet Solutions?

$275 million

A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent. If you require a 14 percent rate of return, what is the current dividend (D0) on this stock?

$3

Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue of face value $1,000 to be put into effect. The issue has 10 years to maturity and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for five years. Then, interest payments will be resumed for the next five years. Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first five years will be paid. However, no interest will be paid on the deferred interest. If the required return is 20 percent, what should the bonds sell for in the market today?

$362.44

The book value per share of Topaz General Ltd. is $10 per share and the company has a total of 4 million shares. Calculate the total book value of common equity of the company.

$40 million

A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 8 percent, and if you require a 14 percent rate of return, how much should you be willing to pay for this stock? (Round intermediate calculations to two decimal places.)

$43.96

Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. What is the value of the investment today?

$44,260.91

Shaun is planning to invest $570 in a mutual fund at the end of each of the next eight years. If his opportunity cost rate is 6 percent compounded annually, how much will his investment be worth after the last annuity payment is made?

$5,642

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The face value of the bond is $1,000. The required simple rate of return on this debt has now risen to 16 percent. What is the current value of this bond?

$550

Determine the increase or decrease in cash for Rinky Supply Company for last year, given the following information. (Assume no other changes occurred during the past year.) ​ Dividend payment $25 Increase in accounts receivables $50 Increase in notes payable $30 Decrease in accounts payable $20 Increase in accrued wages and taxes $15 Increase in inventories $35 Addition to retained earnings $5

-$80

Assume that real risk-free rate (r*) = 1.00%; the maturity risk premium is found as MRP = 0.20% × (t - 1), where t = years to maturity; the default risk premium for AT&T bonds is found as DRP = 0.07% × (t - 1); the liquidity premium (LP) is 0.50 percent for AT&T bonds but zero for Treasury bonds; and inflation is expected to be 7 percent, 6 percent, and 5 percent during the next three years and then 4 percent thereafter. What is the difference in interest rates between 10-year AT&T bonds and 10-year Treasury bonds? (Round answer to two decimal places.)

1.13%

The net fixed assets of Auburn Media Ltd. is $850 million. The sales of the firm is $1,420 million. The firm's fixed assets turnover ratio is:

1.67 times

If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that the interest is paid once per year, the effective annual rate of the investment is _____.

11.5%

You are given the following data: r* = real risk-free rate 4% Constant inflation premium (IP) 7% Maturity risk premium (MRP) 1% Default risk premium for AAA bonds (DRP) 3% Liquidity premium for long-term Treasury bonds (T-bonds) (LP) 2% ​ Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the rate on long-term Treasury bonds is _____.

14%

J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. Ross' common stock currently sells for $40 per share. The firm recently paid a dividend equal to $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. If it issues new common stock, the firm will incur flotation costs equal to 7 percent. What is the firm's cost of retained earnings?

15.50%

Two years ago, Synergy Inc. issued a 15-year callable bond with a $1,000 face value and a 12 percent coupon rate of interest (paid semiannually). The bond cannot be called until five years after issue, at which time the call price will equal $1,120. Currently, the bond is selling for $989.What is the bond's yield to call (YTC).

15.76%

The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the simple annual yield is 14 percent. From the given information, calculate the annual coupon rate on the bond.

17%

A corporate bond that yields 12 percent includes a risk-free rate of 7 percent and a default risk premium of 3 percent. The bond's maturity risk premium is _____.

2%

Treasury securities that mature in 6 years currently have an interest rate of 8.50 percent. Inflation is expected to be 5 percent in each of the next three years and 6 percent each year thereafter. The maturity risk premium is estimated to be 0.10% × (t - 1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest?

2.50%

Project A, which costs of $1,000 to purchase, will generate net cash inflows equal to $500 at the end of each of the next three years. The project's required rate of return is 10 percent. What are the project's internal rate of return (IRR) and modified internal rate of return (MIRR)?

23.4%; 18.3%

Which of the following is the yield of a bond that offers a risk-free rate of 4 percent and a risk premium of 2 percent?

6%

Daisy Inc.'s book value per share is $10, and its market-to-book ratio is 1.5. If its earnings per share is $2.5, calculate its price/earnings (P/E) ratio.

6.0

For Investment A, the probability of the return being 20 percent is 0.5, 10 percent is 0.4, and -10 percent is 0.1. Compute the standard deviation for the investment with the given information.

9.0%

SW Inc.'s preferred stock, which pays a $5.25 dividend each year, currently sells for $62.50. The company's marginal tax rate is 40 percent. When it issues preferred stock, SW normally incurs flotation costs equal to 8 percent. What is the cost of preferred stock, rps, that should be included in the computation of the SW Inc.'s weighted average cost of capital (WACC)?

9.13%

Which of the following portfolios would have no diversification benefits?

A portfolio consisting of two perfectly positively correlated stocks

Which of the following statements is true about capital budgeting analysis?

A project should be purchased if its net present value (NPV) is positive.

Which of the following statements is true of a term life insurance?

A term life insurance is a relatively short-term contract that provides financial protection for a temporary period.

Which of the following is true of the market segmentation theory?

According to the market segmentation theory, the slope of the yield curve depends on supply/demand conditions of a security in the long- and short-term markets.

Which of the following transactions will not affect the quick ratio of a company?

Accounts receivable collected

The next expected dividend for Stock P is $2.50, the current price of the stock is $32.50, and the firm is expected to grow at a constant rate of 4 percent per year forever. The risk free rate is 3 percent, the market risk premium is 5.5 percent, and the stock's beta is 1.2. Based on the given information, which of the following statements is correct?

An investor should buy this stock because its expected rate of return, 11.69 percent, is greater than its required rate of return, 9.6 percent.

Which of the following financial statements includes information about a firm's assets, equity, and liabilities at a specific point in time?

Balance sheet

Which of the following statements is true about commercial paper?

Commercial paper is issued at a discount.

Which of the following is an example of a noncash item reported in the income statement of a firm?

Depreciation

A bond's value will increase when interest rates increase.

False

A call provision gives bondholders the right to demand, or "call for," the repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

False

A capital budgeting project is acceptable if the firm's rate of return required is greater than the project's internal rate of return (IRR).

False

A common stock's par value is always equal to the market value of the stock on the last day of the fiscal year in which the stock is issued.

False

A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.

False

A firm can affect its beta risk by changing the composition of its assets and by modifying its use of debt financing, but external factors do not have any bearing on a firm's beta.

False

A firm undertakes stock repurchase only if the price of its stock is overvalued.

False

A firm's cost of external equity capital (cost of issuing new stock) is equal to the rate of return that stockholders demand (require) to invest in the firm's outstanding common stock.

False

A firm's net income reported on its income statement must equal the operating cash flows on the statement of cash flows.

False

A primary market is that segment of the financial markets where the instruments that are traded have original maturities equal to one year or less.

False

A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited liability for business, which limits personal losses to what the proprietor has invested in the company.

False

A stock's standard deviation indicates how the stock affects the riskiness of a diversified portfolio. Therefore, the standard deviation is a better measure of a stock's relevant risk than its beta coefficient, which measures total, or stand-alone, risk.

False

According to the convertibility provision, a common stock can be converted to a certain number of shares of preferred stock at the stated conversion price.

False

American depository receipts (ADRs) are foreign stocks listed on stock exchanges located outside the country where the firms are headquartered.

False

An over-the-counter (OTC) market is a physical exchange, much like the New York Stock Exchange, where securities dealers provide trading in unlisted securities.

False

As hostile takeovers are most likely to occur when a firm's stock is overvalued, the managers have a strong incentive to undervalue the firm's stock relative to its potential.

False

Bonds with higher liquidity must offer higher interest rates in the market, because such investments can be easily converted into cash on short notice at or near the amounts originally invested.

False

Dual listing of a stock leads to a decrease in the marketability of the stock.

False

During or near peaks of business activity, yield curves generally are either flat or downward sloping.

False

Economic risk is an unsystematic risk that can be diversified by the investors.

False

Eurobonds have a higher level of required disclosure than normally applies to bonds issued in domestic markets, particularly in the United States.

False

Financial managers should seek the combination of assets, liabilities, and capital that generate the largest expected projected income in the current accounting period.

False

Floating-rate bonds pay interest based on an inflation index, such as the consumer price index (CPI).

False

For a particular firm, depending on tax rates, flotation costs, and the attitude of investors, the cost of new common equity, re, can be less than, equal to, or greater than its before-tax cost of debt, rd.

False

If a bond's yield to maturity is less than its coupon rate, the bond should be selling at a discount; i.e., the bond's market price should be less than its face (maturity) value.

False

If a firm raises capital by selling new bonds, the buyer is called the "issuing firm" and the coupon rate is generally set equal to the firm's required rate.

False

If an individual investor uses the services of a broker to buy and sell stocks that are currently being traded in the stock market, the transaction is referred to as a primary market transaction.

False

If we view price-earnings (P/E) ratios as measures of payback, all else equal, higher earnings multipliers are better.

False

In a competitive marketplace, "good ethics" is a wonderful idea but an impractical standard, because there are simply too few benefits to be gained from maintaining high business ethics.

False

In general, long-term unsecured debts have lower interest rates (costs) than long-term secured debts for a particular firm.

False

Managers of firms that use alternative accounting techniques to inflate current earnings are likely to generate long-term benefits to the shareholders of the firm.

False

No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to effectively compete, even if those cost-increasing actions yield significant benefits to the firm.

False

Primary markets are exchanges with physical locations, whereas secondary markets are over-the-counter markets.

False

Short-term investments have higher maturity risks than long-term investments.

False

Suppose a firm is evaluating a capital budgeting project using the internal rate of return (IRR) technique. If the firm's required rate of return increases, the project's IRR will decrease.

False

Systematic risk is diversifiable, so it is an investment's relevant risk. Unsystematic risk is nondiversifiable risk and therefore not relevant.

False

The Securities and Exchange Commission (SEC) regulations are intended to ensure that investors receive fair disclosure of financial and nonfinancial information from privately held companies.

False

The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, whereas the income statement measures the financial position of the firm at a specific point in time.

False

The book values of shares of stock are always equal to their market values.

False

The cost of issuing preferred stock must be adjusted for taxes because preferred stock dividend payments represent a tax-deductible expense for the firm.

False

The internal rate of return (IRR) of a project that generates its largest cash flows in the early years of its life is more sensitive to changes in the firm's required rate of return than is the IRR of a project whose largest cash flows come later in life.

False

The international market for bonds has grown at a slower rate as compared to the international stock markets.

False

The main reason that the net present value (NPV) method is regarded as being conceptually superior to the internal rate of return (IRR) method for the purpose of evaluating mutually exclusive investments, is that mutually exclusive projects have multiple internal rates of return (IRRs).

False

The marginal cost of capital (MCC) is the weighted average cost of the last dollar of new capital that the firm raises. The MCC generally declines as greater amounts of a specific type of capital are raised during a given period.

False

The market portfolio contains only unsystematic risk, therefore the market risk premium represents the return that investors require to be compensated for taking an average amount of relevant, or unsystematic, risk.

False

The net present value (NPV) and internal rate of return (IRR) methods will always lead to the same investment decisions when mutually exclusive projects are being evaluated.

False

The present value of an uneven cash flow can be determined by using the annuity equations.

False

The provision of dual listing of stocks has defeated the efforts made to increase competition in the stock markets.

False

The real rate of interest is composed of a risk-free rate of interest plus the default risk premium and liquidity premium that reflects the riskiness of the security.

False

The values or accounting numbers that are reported on the balance sheet are the same as the market values of the assets.

False

To properly maximize the value of the firm, the financial manager should execute his or her duties independent of the cash flow decisions made by other senior managers.

False

Unlike bonds issued in the United States, which are bearer bonds, Eurobonds are typically issued as registered bonds

False

Which of the following factors will lead to an increase in interest rates?

Federal deficit

Which of the following statements is true about federal funds?

Federal funds are used by banks to meet the reserve requirements of the Federal Reserve.

Which of the following ratios recognizes that many firms lease rather than buy a long-term asset?

Fixed charge coverage ratio

Which of the following is true of founders' shares?

Founders' shares are stocks owned by the creators of a company that have sole voting rights but generally pay out only restricted (if any) dividends for a specified number of years.

Which of the following statements is true about the beta of a portfolio?

If the beta of a stock is three, the stock's relevant risk is three times as volatile as the market portfolio.

Which of the following financial statements summarizes the revenue generated and the expenses incurred by a firm during the accounting period?

Income statement

Which of the following statements about the various types of risks is true?

Inflation risk is a systematic risk.

Which of the following statements about the various kinds of risks is correct?

Interest rate risk is a systematic risk, hence it should be rewarded by the market.

Which of the following statements describes a liquidity premium?

It is a premium that is added to the rate on a security if the security cannot be converted to cash on short notice at a price that is close to the original cost.

Which of the following is true of the greater concentration of ownership in non-U.S. firms than in U.S. firms?

It permits greater monitoring and control by individuals or groups than the more dispersed ownership structures of U.S. firms.

Which of the following is the only risk that is relevant to a rational, diversified investor, because it cannot be eliminated or reduced through diversification?

Market risk

If a firm discovers a ranking conflict exists after evaluating two mutually exclusive capital budgeting projects using the net present value (NPV) technique and the internal rate of return (IRR) technique, which of the following capital budgeting techniques should it use to ensure the correct value-maximizing decision is made?

Net present value (NPV)

Which of the following mathematical expressions computes the net worth of a firm?

Net worth = Total assets minus total liabilities

Which of the following is true of federal deficit?

Other things held constant, the larger the federal deficit, the higher the level of interest rates on borrowings.

Which of the following is true of financial services provided by persons working in banks, insurance companies, and brokerage firms?

Persons working in banks, insurance companies, and brokerage firms help individuals and companies determine how to invest money to achieve their financial goals.

Marvelous Manufacturing (MM) generated the following information for its capital budgeting manager: ​ Capital Structure Project Cost IRR Type of Capital Proportion W $65,000 15% Debt 30% X 70,000 13 Common equity 70 Y 75,000 12 Z 70,000 11 ​ MM's weighted average cost of capital (WACC) is 12 percent if the firm does not have to issue new common equity; if new common equity is needed, its WACC is 16 percent. If MM expects to generate $70,000 in retained earnings this year, which project(s) should be purchased? Assume that the projects are independent and indivisible.

Projects W and X should be purchased.

What action would the management take if it wants to gain more ownership control of the firm?

Repurchase shares of common stock

Which of the following financial statements is included in the annual reports of a company?

Statement of cash flows

Which of the following is a correct statement about the discounted payback period (DPB) technique that is used to evaluate capital budgeting projects?

The DPB method considers the time value of money.

The 11 "titles" in the Sarbanes-Oxley Act of 2002 establish standards for accountability and responsibility in reporting financial information for publicly-traded corporations. Which of the following activities does the act provide that a corporation must abide by?

The corporation must provide additional information about the procedures used to construct and report financial statements.

Which of the following is a reason the modified internal rate of return (MIRR) measure is a better indicator of a project's true profitability than the internal rate of return (IRR) measure?

The modified internal rate of return (MIRR) assumes that the project's cash flows are reinvested at the firm's required rate of return, which is a better assumption than the IRR assumption that the cash flows are reinvested at its IRR.

Which of the following statements is correct?

The net present value (NPV) technique provides an indication of the dollar benefit (on a present value basis) to the firm's shareholders of purchasing a capital budgeting project.

Suppose a capital budgeting project generates its largest cash flows in the early years of its life (i.e., up front) rather than near the end of its life. In this situation. Which of the following statements about the project must be correct?

The net present value of the project is not as sensitive to changes in the firm's required rate of return as the net present value of a project that generates large cash flows later in its life.

The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value falls from 8 percent to 7 percent. Which of the following is true of the value of the bond?

The value of the bond at 7 percent is $508.34.

Everything else the same, if the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a one-year Treasury bond (T-bond)?

The yield on the 10-year bond is less than the yield on a one-year bond.

Industrial groups are organizations comprised of companies in different industries with common ownership interests, which include firms necessary to sell and manufacture products.

True

Mortgage bonds are backed by assets of the issuing firm, whereas debentures are not.

True

A bond with a $100 annual interest payment and $1,000 face value with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%.

True

A financial manager's task is to make decisions concerning the acquisition and use of funds for the greatest benefit of the firm.

True

A probability distribution consists of a listing of all possible outcomes, or events, with the chance of occurrence assigned to each.

True

A simple approach to trend analysis is to construct graphs.

True

A stock might be quite risky if held by itself, but if much of this total (stand-alone) risk can be eliminated through diversification, then its relevant risk—that is, its contribution to the portfolio's risk—is much smaller than its total risk.

True

A stock's beta coefficient measures the tendency of its returns to move with the returns on the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta greater than 1.0.

True

Although common stock represents a riskier investment to an individual than bonds, bonds represent a riskier method of financing to a corporation than common stock.

True

An investment carries an interest rate of 8 percent compounded annually. When using the time value of money functions of a financial calculator, the interest rate is entered as 8, whereas it is entered as 0.08 when using a spreadsheet to make the time value of money calculations.

True

Because the value of a firm's stock depends on the after-tax cash flows it generates during its life, after-tax component costs of capital (i.e., the after-tax cost of debt) are used when computing a firm's weighted average cost of capital (WACC).

True

Changes in stock prices occur because investors change the rates of return they require to invest in stocks and/or the expectations about the cash flows associated with stocks change.

True

Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased. By forecasting the needs for capital assets in advance, a firm will have an opportunity to purchase and install assets before they are needed.

True

Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located.

True

Even if a firm obtains all of its common equity financing from retained earnings, its marginal cost of capital (MCC) schedule could still increase if very large amounts of new capital are raised.

True

Everything else equal, as a country increases its borrowing to finance its foreign trade deficit, interest rates will be driven up.

True

Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment.

True

Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash flows denominated in the parent company's home currency.

True

Firms with the most profitable investment opportunities are willing and able to pay the most for capital, so they tend to attract it away from less efficient firms or from those whose products are not in demand.

True

Floating-rate debt is advantageous to investors because the interest rate earned on the debt increases when market rates rise.

True

If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase will generally be greater than the increase in rates in the long-term market.

True

In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken over by companies with policies that are more aligned with stockholder interests.

True

In general, the role of a financial manager is to plan for the acquisition and use of funds so as to maximize the value of the firm.

True

In the United States, sales of new stocks and bonds are regulated by the Securities and Exchange Commission (SEC).

True

Most foreign financial institutions are allowed to engage in nonbanking (nonfinancial) business activities, whereas the nonbanking activities of U.S. intermediaries have been severely restricted until recently.

True

One advantage to using the traditional payback period technique is that it provides a rough measure of a project's liquidity and risk.

True

Other things held constant, a risk-averse investor requires a higher return to invest in securities with higher risks, which means they will pay lower prices for such investments.

True

Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction to interest rate movements. For example, if interest rates rise, bond prices fall.

True

Restrictive covenants are designed to protect both the bondholder and the issuer even though they might constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.

True

Risk is indicated by variability of returns, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.

True

Suppose a firm is evaluating a capital budgeting project using the net present value (NPV) technique. If the firm's required rate of return increases, the project's NPV will decrease.

True

Suppose you have information that a recession is ending and the economy is about to enter a boom. If your firm must borrow money, it should probably issue long-term rather than short-term debt.

True

The balance sheet includes historical values that can impact the validity of a firm's financial ratios.

True

The corporate charter is a document filed with the secretary of the state in which a firm is incorporated that provides information about the corporation, including its name, address, directors, and amount of capital stock.

True

The effective annual rate (rEAR) considers the effect of compounding, whereas annual percentage rate (APR) does not consider the effect of compounding.

True

The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.

True

The net present value (NPV) method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the internal rate of return (IRR) method implies that the firm has the opportunity to reinvest at the project's IRR.

True

The standard deviation is calculated as the weighted average of all the deviations of possible returns from the expected value, and it indicates how far above or below the expected value the actual value is expected to be.

True

The trade-through rule states that a stock trade should be executed at the best price that is available in all of the stock markets.

True

The two main purposes of post-audit are to improve forecasts and to improve operations

True

There exists an internal rate of return (IRR) solution for each time the direction of cash flows associated with a project is interrupted, that is, each time outflows change to inflows.

True

Two stocks can be combined to form a portfolio that is risk free (i.e., has no risk) if the stocks are perfectly negatively correlated (r = −1.0) with each other.

True

Zero coupon bonds are offered at substantial discounts below their par values.

True

Which of the following statements about diversification is correct?

When two perfectly positively correlated stocks with the same risk are combined, the portfolio risk is equal to the risk associated with the individual stocks.

If a German company sells its stock in the United States, it is termed as a(n) _____.

Yankee stock

If the net present value (NPV) of a project is positive,:

accepting the project will increase the value of the firm.

When a corporation wants to raise funds by issuing new stocks or bonds, it generally uses the services of _____.

an investment banker

The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded _____.

annually

Pelican Corporation is planning to invest $12,000 at the beginning of each of the next eight years. This form of cash flow pattern is known as a(n) _____.

annuity due

Assume Danny is considering combining two investments to form a portfolio, and he is very concerned with the risk that will result from the combination. If he wants to attain the greatest effect from diversification, he would prefer that the assets _____.

are negatively related

Under normal circumstances, the weighted average cost of capital (WACC) is used as the firm's required rate of return because:

as long as the firm's investments earn returns greater than its WACC, the value of the firm will not decrease.

During periods of _____, the general tendency is toward higher interest rates.

inflation

The Sarbanes-Oxley Act of 2002 requires the chief executive officer of a publicly-traded corporation to _____.

certify financial reports that are submitted to the Securities and Exchange Commission

In capital budgeting analyses, the primary difference between the traditional payback period (PB) technique and the discounted payback period (DPB) technique is that the DPB:

considers the time value of money.

A convertible preferred stock can be exchanged for a certain number of shares of common stock at the _____.

conversion price

A(n) _____ bond can be exchanged for shares of equity at the owner's (bondholder's) discretion.

convertible

Because a bond's rating serves as an indicator of its default risk, the rating has a direct, measurable influence on the firm's:

cost of using such debt and thus the bond's interest rate.

Financial services refer to functions provided by organizations that _____.

deal with the management of money

When the economy is expanding too quickly and the Federal Reserve (Fed) wants to control future growth in the economy, the Fed will:

decrease the money supply.

The principal value of a bond generally is written on the outside cover of the debt contract, so it is sometimes called the:

face value

If Standard & Poor's ratings of a firm's bonds is below BBB, the _____.

firm will find it difficult to find potential investors when issuing new bonds

The net present value (NPV) of a project is negative when the discount rate used is:

greater than the project's internal rate of return (IRR).

A foreign trade deficit occurs when a country's _____.

imports are greater than its exports

The expected rate of return of an investment _____.

is the mean value of the probability distribution of possible outcomes

The traditional payback period technique that is used in capital budgeting analyses:

is the simplest and oldest formal method used to evaluate capital budgeting projects.

If a project's net present value (NPV) is positive,:

it is an acceptable investment.

If a capital budgeting project has a negative net present value (NPV),

its discounted payback period (DPB) is greater than the project's economic life.

A firm obtains the funds needed to pay its current bills primarily from its:

liquid assets.

Securities that can be easily converted into cash on short notice at a price that is close to the original cost generally have a:

low liquidity premium

A firm should continue to invest in capital budgeting projects until its marginal cost of capital is equal to the:

marginal return (internal rate of return, IRR) generated by the last project purchased.

Industrial groups that exist in foreign countries are _____.

organizations that tie together all the functions of production and sales from start to finish

The preferred dividend is generally stated as a percentage of the preferred stock's _____.

per share par value

If a bond's yield to maturity exceeds its coupon rate, the bond's:

price must be less than its par value

The internal rate of return (IRR) technique assumes that cash flows are reinvested at the _____.

project's internal rate of return (IRR)

If a firm's existing quick ratio is 1.2, and all other variables remain unchanged, the quick ratio can be increased by:

receiving interest income.

A stock with a dual listing is _____.

registered to be traded in more than one stock market

The difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky asset is known as the _____.

risk premium

An investor who wants to purchase previously issued shares of stock from another investor would trade in the _____.

secondary market

If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be:

selling at a premium; i.e., the bond's market price should be greater than its face value.

A(n) _____ is a provision that facilitates the orderly retirement of a bond issue.

sinking fund

A project's terminal value is the _____.

sum of the future values of the cash inflows compounded at the firm's required rate of return

When evaluating multiple independent projects, a firm will reach the same conclusions about the acceptability of each project using either the net present value (NPV) technique or the internal rate of return (IRR) technique.

true

The risk that is limited to a particular firm is also known as _____.

unsystematic risk