BFIN Final (midterm questions)
What is considered a relevant cash flow for a project? a) A change in the Firm's overall future cash flows that comes about as a direct consequence of a decision to take on that project b) A cash flow for project evaluation consists of any and all changes in the firm's future cash flows with a project that are a direct consequence of taking on the project c) Capital gains from disposal d) Sunk cost e) Cannibalization of other projects
A, A change in the Firm's overall future cash flows that comes about as a direct consequence of a decision to take on that project
Which type of company analysis considers the inter-relationships between different cash flow components? a) Simulation Analysis b) Break-even Analysis c) Sensitivity Analysis d) Scenario analysis e) Cash flow analysis
A, Simulation Analysis
You have $500 today in an account yielding 10% annually. In one year, you will deposit another $500 which will also yield 10% annually. Assuming annual compounding, how much will you have in the account two years from today? (B-32; C-2) a) $1,175 b) $1,210 c) $1,155 d) $1,225 e) $2,500
$1,225
Tesla has a 2021 profit before tax of $10,000,000, a tax rate of 20%, and debt due in 2027 of $19,000,0000. Its depreciation and amortization for 2021 aggregates $3,000,000. What is its approximate cash flow in 2021? (B-20; C-40) a) $11,000,000 b) $10,000,000 c) $29,000,000 d) $2,000,000 e) $3,000,000
$11,000,000
You have a $400 annuity with a rate of 8% for 3 years. What should you pay for this annuity ? (B-35; C-5) a) $1,030.84 b) $1060.43 c) $1296.00 d) $1104.00 e) 1,222.00
$1296.00
You receive a perpetual cash flow of $3,000 every year at a rate of 12%. What is the value of this investment ? (B-33; C-3) a) $18,000 b) $24,000 c) $36,000 d) $25,000 e) $40,000
$25,000
You received a $100 bond as a gift. The bond will mature in 1 year and yields 6% annually. How much was paid for this bon d? (B-31; C-1) a) $92.32 b) $91.06 c) $94.34 d) $93.80 e) $1,000.00
$94.34
Which one of the following accounts is the most liquid? (B-44; C-14) a) Inventory b) Building c) Accounts Receivable d) Equipment e) Land
Accounts Receivable
What are bond yields are the combined effect of? (B-12; C-32) a) Inflation b) Rate risk c) Default risk d) Taxability e) All of the above
All of the above
Which of the following should a financial manager take into account when considering an opportunity? (B-48; C-18) a) How much cash they expect to receive b) When will they receive the funds c) How likely they are to receive the funds d) All of the above e) None of the above
All of the above
Protective covenants: (B-28; C-48) a) Apply to short-term debt issues but not to long-term debt issue b) Only apply to privately issued bonds c) Are a feature found only in government-issued bonds d) Only apply to bonds with a deferred call provision e) Are primarily designed to protect bondholders
Are primarily designed to protect bondholders
You purchase a run-down home in Albany for $25,000 and spend another $25,000 to repair it. Your total in-cost is $50,000. When the work is done, you place the home back on the market and find that it's worth $60,000. What is your NPV? a) Zero b) $10,000 c) $25,000 d) $50,000 e) $60,000
B, $10,000
Carlos "Cookie" Carrasco is looking to build a winter home on Margarita Island in his native Venezuela. The amount of money he will spend is $17 mn. He will finance the new home with $14 mn in borrowings at 7%, and the remainder with equity. If Mr. Carrasco calculates his weighted average cost of capital (WACC) at 15%, what would his cost of equity be? • a) 10.25% b) 9.24% c) 8.23% d) 7.22% e) 6.21%
B, 9.24%
An example of erosion when taking on a new project would be? a) Trustco Bank opening a branch in Guilderland next to a Bank of America branch b) Disney adding a new park in Shanghai which would erode or cannibalize Hong Kong Disney and Tokyo Disney revenues c) Tides at a beach moving sand to another location d) Home Depot purchasing a chain of hardware stores in a locale that it doesn't exist e) All of the above
B, Disney adding a new park in Shanghai which would erode or cannibalize Hong Kong Disney and Tokyo Disney revenues
What are some common pitfalls when looking at incremental cash flows? a) Not including sunk costs b)Including opportunity costs c) Including financing costs d) Not including side effects of doing the deal e) All of the above
B, Including opportunity costs
Which one of the following is the financial statement which shows the accounting value of a firm's equity as of a particular date? (B-41; C-11) a) Income statement b) Creditor statement c) Balance sheet d) Statement of cash flows e) Dividend statement
Balance sheet
Which of the following ratios are considered market-based ratios? (B-50; C-20) a) P/E ratio b) P/BV ratio c) Profit margin d) Both a and b e) All of the above
Both a & b
Wells Fargo is charging you 1.5% per month on your credit card. What is your Annual Percentage Rate (APR)? (B-15; C-35) a) 1.5% b) 18.0% c) 3.0% d) 16.5% e) Can't calculate from information provided
18.0%
The process of planning and managing a firm's long-term investment is called: (B-45; C-15) a) Capital Budgeting b) Working Capital c) Profit Maximization d) Capital Structure e) Investing
Capital budgeting
Which company did we not review in detail in class? a) Bank of Princeton b) Coca Cola c) Peloton d) Citigroup e) All of the above
Citigroup
Interest earned on both the initial principal and the interest reinvested from the prior periods is called: (B-14; C-34) a) Free interest b) Dual interest c) Simple interest d) Interest on interest e) Compound interest
Compound interest
Which is an example of an interest only (I/O) security? (B-19; C-39) a) Corporate bond b) Municipal bond c) US Treasury bill d) Effective interest rate e) Amortizing security
Corporate bond
Which of the following forms of business organization is subject to double taxation? (B-46; C-16) a) Corporation b) Partnership c) Limited Partnership d) Sole Proprietorship e) Shareholders
Corporation
Which one is a financial leverage ratio? (B-49; C-19) a) Current ratio b) Profit margin c) Price to book value d) Debt to equity e) Inventory turnover
Debt to equity
A bonds coupon rate is equal to the annual interest divided by which one of the following? (B-27; C-47) a) Call Price b) Current Price c) Face Value d) Clean Price e) Yield to maturity
Face value
A Pfizer bond pays an 8% coupon rate on a bond provided that its return on equity (ROE) exceeds 8%. Which type of security is this? (B-25; C-45) a) Perpetual bond b) Equity c) Dividend d) Income bond e) Fixed coupon bond
Income bond
Which one of the following is a source of cash for a firm? (B-10; B-30) a) Increase in accounts receivable b) Increase in depreciation c) Decrease in accounts receivable d) Increase in common stock e) Increase in inventory
Increase in common stock
What is the real rate of interest? (B-21; C-41) a) Inflation b) Coupon rate you earn on a bond c) Capital yield less the dividend yield d) Interest rate less the inflation rate. e) Interest rate received on your bank deposit
Interest rate received on your bank deposit
A business partner whose potential financial loss in the partnership will not exceed his or her investm ent in that partnership is called: (B-5; C25) a) General partner b) Sole proprietor c) Limited partner d) Corporate shareholder e) Zero partner
Limited partner
Which best describes a secondary market? (B-17; C-37) a) Alibaba IPO b) Primary market c) Citigroup USD bond d) A delicatessen e) London Stock Exchange
London stock exchange
What is a normal yield curve? (B-36; C-6) a) Short term rates exceed long-term rates b) Inflation c) Nominal interest rate d) Long term rates exceed short term rates e) Downward sloping
Long term rates exceed short term rates
Which one of the following best describes the primary advantage of being a limited partner instead of a general partner? (B-7; C-27) a) Tax free income b) Active participation in the firm's activities c) Nominal potential financial loss d) Greater control over the business affairs of the partnership e) Maximum loss limited to the capital invested
Maximum loss limited to the capital invested
Which index is the best measure of the New York Stock Exchange?(B-40; C-10) a) Dow Jones Industrial Average b) MSCI World Index c) KBW Bank Index d) S&P 500 Index e) Russell 2000 Index
S&P 500 Index
Who is the primary regulator of the US securities markets? (B-22; C-42) a) Federal Reserve Board b) Chicago Board of Options Exchange c) Securities and Exchange Commission d) New York Stock Exchange e) Office of the Comptroller of the Currency
Securities and Exchange Commission
Technically, control of a firm ultimately rests with. . (B-47; C-17) a) CEO b) SEC c) Shareholders d) New York State Companies Registry e) CFO
Shareholders
Aaron Judge invested $2,000 six years ago at 4.5%. He spends his earnings as soon as he earns any interest so he only receives interest on his initial investment. Which type of interest is Mr. Judge earning this year? (B-16; C-36) a) Free interest b) Complex interest c) Simple interest d) Interest on interest e) Compound interest.
Simple interest
The sources and uses of cash over a period of time are reflected on the: (B-9; C-29) a) Income statement b) Balance sheet c) Tax reconciliation statement d) Statement of cash flow e) Statement of operating position
Statement of cash flow
Noncash items refer to: (B-1; C-21) a) Accrued expenses b) Inventory items purchased using credit c) The ownership of intangible assets such as patents d) Expenses which do not directly affect net cash flows e) Sales which are made using store credit
The ownership of intangible assets such as patents
What is the best definition of corporate finance? (B-38; C-8) a) Capital structure b) Capital budgeting c) Financial decisions and how they impact the value of a company d) Working capital e) Time value of money
Time value of money
The process of determining the present value of future cash flows in order to know their worth today is referred to as: (B-29; C-49) a) Compound interest valuation b) Interest on interest computation c) Discounted cash flow valuation d) Present value interest factoring e) Complex factoring
Discounted cash flow valuation
Bank of Princeton's balance sheet shows current assets of $6,300, fixed assets of $32,000, total long-term liabilities of $16,200 and total equity of $18,100. What is Bank of Princeton's current ratio? (B-30; C-50) a) 0.64x b) 1.98x c) 1.58x d) 2.74x e) 6.66x
1.58x
You are offered a rate of 8% compounded monthly. What is your effective annual rate? (B-34; C-4) a) 8.30% b) 8.60% c) 8.15% d) 8.78% e) 8.88%
8.60%
Which is the best definition of an annuity? a) A cash flow stream which arises when the stream of consistent cash flows continues forever b) Preferred shares c) A cash flow stream where a fixed amount is received every year d) Effective annual rate e) A perpetuity
A cash flow stream where a fixed amount is received every year
What is the best definition of a derivative in the context of securities markets? (B-24; C-44) a) The degree to which an asset or security can be bought or sold in the market without affecting its price b) Buying or selling a stock at the current market price c) Financial decisions and their impact on the value of a company d) A security where the value is based on the value of another security e) Convertible preferred security
A security where the value is based on the value of another security
What is the difference between an investment's market value and cost? a) Internal Rate of Return (IRR) b) Net Present Value (NPV) c) Capital budgeting process d) Discounted Cash Flow (DCF) e) All of the above
B, Net Present Value (NPV)
As a financial manager, what will you do with an investment if its Net Present Value (NPV) is negative? a) Estimate the cash flows of the business b) Reject the investment c) Accept the investment d) Be agnostic with the investment e) None of the above
B, Reject the investment
Which represents the total return on common stock? (B-37; C-7) a) Capital gains yield b) Interest yield c) Dividend yield d) Both a and b e) None of the above
Both a and b
What does a market dealer do? (B-18; C-38) a) Broker b) Acts on behalf of customers c) Manages NASDAQ d) Buys and sells for its own account e) Only provides bid pricing
Buys and sells for its own account
Tom "Tom Terrific" Seaver is looking to eliminate unsystematic risk in his portfolio which comprises 2 mm shares of Tesla. What is the best way he can go about doing that? • a) Buy more of the same security b) Diversify with shares of other automobile companies c) Diversify with shares in multiple industries d) Buy puts on the shares of Tesla e) Call his professor
C, Diversify with shares in multiple industries
If a company in in violation of a financial covenant, and is precluded from accessing funding to undertake a positive NPV project, what type of situation what kind of capital rationing would this be considered? a) Soft rationing b) Bankruptcy c) Hard rationing d) S#@t out of luck e) FTX Company
C, Hard rationing
Which investment technique yields the same result as Net Present Value (NPV)? a) Payback Rule b) Discounted Payback Period c) Internal Rate of Return d) Average Accounting Return e) Profitability Index
C, Internal Rate of Return
Which type of company analysis only allows for one variable to change? a) Simulation Analysis b) Break-even Analysis c) Sensitivity Analysis d) Scenario analysis e) Cash flow analysis
C, Sensitivity Analysis
What is the best definition of an opportunity cost? a) Sunk cost b) Erosion c) The most valuable investment alternative given up if a particular investment is undertaken d) Net working capital e) Cost to prepare pro forma financial statements
C, The most valuable investment alternative given up if a particular investment is undertaken
What does an individual financial statement measure on its own? a) How much a firm can borrow b) Share price of a firm c) Close to nothing d) Fed Funds rate e) The non-performing loan ratio
Close to nothing
Net working capital is defined as: (B-42; C-12) a) Total liabilities minus shareholders' equity b) Current liabilities minus shareholders' equity c) Fixed assets minus long-term liabilities d) Total assets minus total liabilities e) Current assets minus current liabilities
Current assets minus current liabilities
The Flushing Queens Brewery is 70% funded with debt at an after-tax cost of 9%, while the cost of equity is 12%. What is the Flushing Queens Brewery weighted average cost of capital (WACC)? • a) 9.0% b) 12.0% c) 10.5% d) 9.9% e) 0.0%
D, 9.9%
How is return on investment (ROI) of an equity security calculated? a) It cannot be calculated b) Adding the dividend to a company's share price c) Adding the dividend yield to the coupon rate d) Adding the capital gain percentage to the dividend yield e) All of the above
D, Adding the capital gain percentage to the dividend yield
How is return volatility on a security measured? a) Variance and standard deviation b) Normal distribution c) Bell curve d) a, b, and c e) None of the above
D, a, b, and c
How is the cost of equity calculated? a) Dividend Growth model approach b) Security Market Line approach c) Bloomberg terminal d) a, b, and c e) None of the above
D, a, b, and c
Brandon Nimmo has a $10,000,000 portfolio, of which $500,000 is in bond, $3,000,000 is in alternative investments, and the remainder in equities. What is his equity portfolio weight? • a) 5% b) 30% c) 100% d) 0.5% e) 65%
E, 65%
Mike Piazza is asking you to tell him about the Capital Asset Pricing Model (CAPM). What will you tell him? • a) CAPM shows the expected return for a particular asset b) CAPM incorporates the pure time value of money c) CAPM explains the reward for bearing systematic risk d) CAPM alerts you to the amount of systematic risk of a particular security e) All of the above
E, All of the above
Steve "Uncle Stevie" Cohen is speaking to Sandy Alderson about "efficient capital markets theory". Uncle Stevie would be correct if he stated the following about "efficient capital markets": a) A market in which a security trades is priced efficiently b) Based on available information, there is no reason that the current share price is too high or too low c) Although market inefficiencies may exist, they are relatively small and uncommon d) The theory is nonsense and is just taught so professors can sell textbooks e) All of the above
E, All of the above
What are pro forma financial statements? a) Financial statement projecting future years operations b) Working capital summaries c) Changes to working capital d) The three components of a cash flow statement e) All of the above
E, All of the above
Which of the following is a true statement about "operating leverage"? a) The greater the degree of operating leverage, the greater the potential for forecasting risk b) Suggests that a business is capital intensive c) The degree to which a business relies on fixed costs d) Small errors in operating leverage can magnify problems in forecasting e) All of the above
E, All of the above
Which statement is true regarding the Internal Rate of Return (IRR)? • a) It is the most important alternative to Net Present Value b) The IRR is a single rate of return which summarizes the merits of the project c) It is the discount rate which makes the Net Present Value of an investment equate to zero d) An investment is acceptable if its IRR exceeds the required return e) All of the above
E, All of the above
Which one of these set forth the common set of standards and procedures by which audited financial statements are prepared? (B- 43; C-13) a) The Matching Principle b) The Cash Flow Identity c) Generally Accepted Accounting Principles d) Financial Accounting Reporting Principles e) Standard Accounting Value Guidelines
Generally accepted accounting principles
Which of the following accounts are always included in working capital m anagement? (B-6; C-26) I. Accounts Payable II. Accounts Receivable III. Fixed Assets IV. Inventory a) I and II only b) I and III only c) II and IV only d) I, II, and IV only e) II, III, and IV only
I and II only
Which of the following are current assets? (B-2; C-22) I. Cash II. Trademark III. Accounts Receivable IV. Notes Payable a) II and III only b) I and III only c) I, II, and IV only d) I, III, and IV only e) II, III, and IV only
I and III only
Which of the following represent cash outflows from a corporation? (B-8; C-28) I. Issuance of Securities II. Payment of dividends III. New loan proceeds IV. Payment of government taxes a) I and III only b) II and IV only c) I and IV only d) I, II, and IV only e) II, III, and IV only
II and IV only
Which of the following are included in current liabilities? (B-3; C-23) I. Note payable to a supplier in 13 months II. Amount due from a customer last week III. Account payable to a supplier that is due next week IV. Loan payable to the bank in 10 months a) I and III only b) III and IV only c) I, II, and III only d) I, III, and IV only e) I, II, III, and IV
III and IV only
Which two cash flows are received by a typical bond? (B-26; C-46) a) Dividends and interest b) Share sale and principal at maturity c) Dividends and share sale d) Interest and principal at maturity e) None of the above
Interest and principal at maturity
What does the phrase inversely proportional mean when it comes to bonds? (B-13; C-33) a) Inverted yield curve b) Normal yield curve c) Interest rates increasing, bond values increasing d) Term structure of interest rates e) Interest rates declining, bond values increasing
Interest rates declining, bond values increasing
Who is the current US Federal Reserve Board Chairman? a) Anthony Blinken b) Jerome Powell c) Janet Yellen d) Kamala Harris e) Hank Paulsen
Jerome Powell
Which one of the following statem ents concerning net working capital is correct? (B-4; C-24) a) Net working capital increases when inventory is purchased with cash b) Net working capital excludes inventory c) Total assets must increase if net working capital increases d) Net working capital may be a negative value e) Net working capital is the amount of cash a firm currently has available for spending
Net working capital may be a negative value
Which best explains a sukuk? a) Fixed coupon paid until maturity, and lump sum returned at maturity b) Fixed coupon paying bond with no maturity c) A debt security which promises one payment in the future d) Non-interest paying security e) None of the above
Non-interest paying security
Which is a measure of a company's liquidity? (B-11; C-31) a) Price to earnings ratio b) Inventory days c) Quick ratio d) Times interest earned e) Return on assets
Quick ratio
What does your professor think of the Dividend Discount Model/Gordon Growth Model? (B-39; C-9) a) Calls it a Future Value calculation b) Says it measures the downward sloping yield curve c) Thinks it never provides anything close to the correct answer due to the number of assumptions d) Feels it can always get to the correct answer e) Cannot get to any answer if the company doesn't pay a dividend
Thinks it never provides anything close to the correct answer due to the number of assumptions
Which security has a "residual claim" on a company's cash flows? (B-23; C-43) a) Equity b) Preferred shares c) Treasury bond d) Subordinated debt e) Senior debt.
Treasury bond
