business finance chapter 1

Which of the following is a perpetuity?

a constat stream of cash flows forever

he Sarbanes-Oxley Act requires corporate officers to:

be responsible for errors in the annual report and confirm the validity of the financial statments

______ budgeting is the process of planning and managing a firm's long-term assets.

capital

future value is the ___ value of an investent at some time in the future

cash

True or false: If you invest for two periods at an interest rate of r, then your money will grow th (1 + r) per dollar invested.

false

Which of the following variables is NOT required to calculate the value of a bond?

original issue price of bond

The entire principal of an interest-only loan is the:

original loan amount

A business without separate legal authority formed by two or more people is known as a _____.

partnership

which of the following is not one of the basic areas of finance investments international finance financial institutions corporate finance personal finance

personal finance

Because of __________ and _________, interest rates are often quoted in many different ways.

tradition; legislation

True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.

true

the owners of a corp are called

shareholders

ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?

$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years.

Which of the following is the formula for the future value of an annuity factor?

((1+r)t−1r)

Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?

(1+quoted rate/m)m - 1

Which of the following are true of bonds?

-They are issued by both corporations and governments -They are normally interest-only loans

Which of the following processes can be used to calculate the future value of multiple cash flows?

Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then sum them

Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12% compounded quarterly to an EAR?

EFFECT(0.12,4)

Which of the following is the multi-period formula for compounding a present value into a future value?

FV = PV×(1 + r)t

With typical interest-only loans, the entire principal is:

repaid at some point in the future

When one owner or creditor sells to another, the transaction takes place in the _________ market

secondary

Which of the following are the primary as well as easy ways used to perform financial calculations today?

spreadsheet functions and financial calculator

Corporations in other countries are often called: Limited liability company Public limited companies Joint stock companies

Limited liability company Public limited companies Joint stock companies

_______ ______ can be used to encourage managers to maximize the value of the stock.

stock options

Who elects the board of directors, and ultimately maintains control of the firm?

stockholders

A corporation receives cash from financial markets by selling ______ and ______.

stocks and bonds

A shareholder's liability is limited to which of these?

the amount the shareholder invested in the corporation

For a given time period (t) and interest rate (r), the present value factor is _______ the future value factor. (Select all that apply.)

the reciprocal of 1 divided by

True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1+r)2 per dollar invested.

true

True or false: The annuity present value of an amount C is calculated as C multiplied by {1-[1/(1+r)t]}r1-[1/(1+r)t]r.

true

True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.

true

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley? Tyco

tyco, worldcom, enron

Business finance is broadly concerned with which of the following (select all that apply)?

which long term investment to make and how to finance long term investments

Is profit maximization the primary objective of a business?

No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.

FV=____x(1+r)t

PV

Which of the following terms apply to a bond?

Par value Coupon rate Time to maturity

Which one of these is an important mechanism used by unhappy stockholders to replace current management? Proxy fight

Proxy fight

What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?

The interest rate in your calculator is entered as a whole number while in the spreadsheet function it is entered as a decimal.

What four variables are required to calculate the value of a bond?

Time remaining to maturity Coupon rate Yield to maturity Par value

What is a corporate bond's yield to maturity (YTM)?

YTM is the prevailing market interest rate for bonds with similar features. YTM is the expected return for an investor who buys the bond today and holds it to maturity.

A bond's coupon payment is:

a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

In large firms, financial activity is usually associated with which top officer? Chief management consultant Rationale: The chief financial officer oversees a firm's financial activities. Vice president of production Rationale: The chief financial officer oversees a firm's financial activities. Vice president for marketing Rationale: The chief financial officer oversees a firm's financial activities. Chief financial officer

cheif financial officer

The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.

compounding

Which of the following positions generally report to the chief financial officer (CFO)? Director of marketing Rationale: Marketing is not a financing activity. Both the controller and the treasurer report to the CFO. Controller Rationale: Both the treasurer and the controller report to the CFO. Chief executive officer (CEO) Rationale: The CFO reports to the CEO. Both the treasurer and the controller report to the CFO. Treasurer Rationale: Both the treasurer and the controller report to the CFO.

controller and treasurer

The Sarbanes-Oxley Act is intended to strengthen protection against:

corporate accounting fraud and financial malpractice

the federal government taxes which of the following

corprate earnings and shareholder dividends

Which of the following are reasons that the corporation is the most important form of business?

corps can be sued and sue, corps can enter contracts, coprs are seperate legal entities,

A bond's Blank\ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholder

coupons

Which of these topics is not of especial interest to a financial manager?

debt

When interest rates in the market rise, we can expect the price of bonds to ____.

decrease

Calculating the present value of a future cash flow to determine its worth today is commonly called ___________ valuation.

discounted cash flow (DCF)

One step in calculating an EAR is to Blank the quoted rate by the number of times that the interest is compounded.

divide

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.

effective

True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.

false

True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.

false

True or false: With interest-only loans, the principle is never repaid.

false

Which of the following is not a way to amortize a loan?

fixed interest payments only

When calculating annuity present values using a financial calculator, t amount is left blank

fv

A partnership in which partners share in gains or losses, and carry unlimited liability for all partnership debts, is called a: limited liability partnership general partnership propietorship corporation

general partnership

According to the textbook, which of the following is not one of the three main questions to be addressed if you wanted to start your own business? Where will long-term financing be obtained to pay for investments? Rationale: Capital structure decisions How many employees will I need? What long-term investments should be made? Rationale: Capital budgeting decisions How will everyday financial activities be handled? Rationale: Working capital management

how many employees will I need

When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ____.

increases

when are corporate profits taxed

individuals pay taxes on corporate dividends and corporations pay taxes on corporate profits

A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons.

legal

An ordinary annuity consists of a(n) ________ stream of cash flows for a fixed period of time

level

Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts.

limited

What type of partnership involves both general and limited partners to run the business?

limited partnership

In a limited partnership, a limited partner's liability for business debts is ______.

limited to their cash contribution to the partnership

In a shareholder-manager relationship, who is the agent?

managers

The formula for the ______ value interest factor of an annuity is: [1- 1/(1+r)τ]/r.

present

Amortization is the process of paying off loans by regularly reducing the _________.

principal

If you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a _______________ .

pure discount loan

When finding the present or future value of an annuity using a financial calculator, the ______ ______ should be entered as a percentage

interest rate

Which of the following are true of a sole proprietorship?

it is one of the simplist types of business to form and a proprietorship has a limited life

Capital budgeting is concerned with making and managing expenditures on _____. current liabilities long term assets current assets long term liabilities

long term assets

The annuity present value factor equals one Blank the present value factor all divided by the discount rate.

minus

Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?

1,4400

Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?

1.21

If you invest at a rate of r for Blank 1Blank 1 2, Correct Unavailable periods, under compounding, your investment will grow to (1+r)2 per dollar invested.

2

Which of the following is the correct Excel function to calculate the present value of $300 due in 5 years at a discount rate of 10%?

=PV(0.10,5,0,-300)

The relationship between stockholders and management can best be described as a(n) ______ relationship.

agency

The conflict of interest between an agent and a principal is called a(n)

agency problem

What three subjects is the financial manager concerned with? working capital management designing new products capital budgeting capital structure

all but designing new products

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?

angency problem

The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.

annuity Rationale: Both the amount and the timing of the cash flows must be the same in order for this to be an annuity. These cash flows do not occur at equal intervals (week, month, year).

To find the total bond value, add the present value of the amount paid at maturity to the _____ of the annual coupon payments.

annuity present value

An organization must prepare ______ and bylaws when forming a corporation.

articles of incorporation