Business Finance Final
The fundamental starting point of all the accounting statements is the ________.
Accounting identity
________ is the name given to the processes surrounding recognition of the principal-agent problem and ways to align agents with the interests of the principals.
Agency theory
Which of the following can lead to increased expected cash flow over time to the firm?
All of the above
When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise.
Annual percentage rates
A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________.
Annuity due
Accounting Identity is
Assets = Liabilities + Owner's Equity
The ________ of an asset or liability is its cost carried on the balance sheet.
Book value
Dividend models suggest that the value of a financial asset is determined by future cash flows. A problem arises, however, in that future cash flows may be difficult to predict as to ________ of these cash flows.
Both the timing and the amount
Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?
Callable bond
The means by which a company is financed refers to the firm's ________.
Capital structure
_______ is the typical title of the corporate executive charged with determining the best repayment structure for borrowed funds to ensure timely repayment and sufficient cash for daily operations.
Chief Financial Officer (CFO)
________ is simply the interest earned in subsequent periods on the interest earned in prior periods.
Compound interest
________ means that the percentage increase in the dividend is the same each year.
Constant growth
The ________ is the return that the bank or bondholder demands on new borrowing.
Cost of debt
The ________ is the interest rate printed on the bond.
Coupon rate
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.
Coupon rate; discount to
Which of the following actions will INCREASE the present value of an investment?
Decrease the interest rate
The ________ compensates the investor for the additional risk that the loan will not be repaid in full.
Default premium
To determine the present value of a future amount, one should ________ the future cash flows.
Discount
The ________ are quite dynamic in terms of processing trades and incorporating information in prices and thus are considered very efficient markets.
Equity markets
The holder of preferred stock is entitled to a constant dividend
Every period
Which of the following is the CORRECT formula for calculating the future value?
FV = PV × (1 + r)n
True or false? Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.
False
True or false? In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis.
False
True or false? The prices of goods and services tend to decrease over time because of inflation.
False
True or false? The profits for common stock owners come before payment to employees, suppliers, government, and creditors
False
True or false? The standard of one vote for each share cannot be altered.
False
True or false? When interest rates go up, bond prices go up.
False
Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.
Fixed income
Dividend models suggest that the value of a financial asset is determined by the ________ the owner is entitled to while holding the asset.
Future cash flows
Which of the following is NOT an example of an equity market transaction?
Grant contacts his broker and requests a purchase of IBM bonds
Which of the below is NOT a major component of interest rates?
Historical interest rates
________ is the area of finance concerned with the activities of buying and selling financial assets such as stocks and bonds.
Investments
A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.
Long term debt
The crossover rate is the discount rate where both projects have the same ________.
NPV
Which of the following identities is TRUE?
Net Capital Spending = Ending Net Fixed Assets - Depreciation
The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes. Next, interest expense is subtracted to find the taxable income for the period. Then the appropriate taxes are calculated and subtracted. We finally arrive at the ________, the so-called bottom line of the income statement.
Net income
The Fisher Effect involves which of the items below?
Nominal rate, the real rate, and inflation
Maximizing the market value of firm equity and which of the following are mutually exclusive?
None of the above
Net income is ________.
Not cash flow
To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.
Number of compounding periods per year
The ________ is the face value of the bond.
Par value
The ________ model answers one basic question: How soon will I recover my initial investment?
Payback period
A never-ending stream of equal periodic, end-of-the-period cash flows is called a/an
Perpetuity
The problem of motivating one party to act in the best interest of another party is known as the ________.
Principle-agent problem
In agency theory, the owners of the business are referred to as ________, and the managers are referred to as ________.
Principles; agents
Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?
Rd × (1 - Tc)
Sale of new common stock in the primary market is regulated by the ________, and a sale of used common on the secondary market is regulated by the ________.
SEC; SEC
The sale of "used" securities, where the financial asset is being traded from one individual to another and the proceeds do not go to the original issuer of the security, is said to take place in the ________ market.
Secondary
Most academic research supports markets as ________ efficient.
Semi strong form
In ________, current prices already reflect the price history and volume of the stock as well as all available public information.
Semi strong form efficient markets
"Junk" bonds are a street name for ________ grade bonds.
Speculative
Diversification is
Spreading out investments to reduce risk
Which of the following compensation packages is likely to work best for executive managers?
Stock options
Suppose you deposit money in a certificate of deposit (CD) at a bank. What is technically happening?
The bank is technically renting money from you with a promise to repay that money with interest.
MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE?
The coupon rate is greater than the yield to maturity.
Which of the following are issued with the shortest time to maturity?
Treasury bills
Which of the following investments is considered to be default risk-free?
Treasury bills
True or false? The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.
True
True or false? The most common shape for a yield curve is upward sloping.
True
True or false? The payback period method ignores the cash flow after the initial outflow has been recovered.
True
Financial markets can be classified by which of the following?
Type of asset traded
________ is the absence of knowledge of the outcome of an event before it happens.
Uncertainty
One of the key components to making financial decisions is to ________.
Understanding the timing and amount of cash flow
In capital budgeting, the ________ is the appropriate discount rate to use when calculating the NPV of an average risk project.
WACC
In ________, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market.
Weak form efficient markets
Capital budgeting is best defined by which of the following questions?
What business are we in?
Managing the firm's short-term financing activities is known as ________.
Working capital management
The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life.
Yield to Maturity
The ________ is a market derived interest rate used to discount the future cash flows of the bond.
Yield to maturity
Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________.
You will be able to buy more goods or services
The Security Market Line has ________.
a positive slope
Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments.
bills; bonds; notes
Bonds are different from stocks because ________.
bonds promise fixed payments for the length of their maturity
________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.
capital structure
The ________ is the regular interest payment of the bond.
coupon
Strong-form efficient markets theory proclaims that ________.
current prices reflect the price and volume history of the stock, all publicly available information, and all private information
Bonds are bought and sold in ________ markets.
debt
When a company borrows money from a bank or sells bonds, it is called
debt financing
Stocks are bought and sold in ________ markets.
equity
In the NPV model, all cash flows are stated ________.
in present value or current dollars, and the total inflow is "netted" against the initial outflow to see if the net amount is positive or negative
A beta of 1.0 is the beta of the ________, while a beta of 0.0 is the measure for a ________.
market; risk free security
The ________ is the expiration date of the bond.
maturity date
A basis point is ________.
one-hundredth of a percentage point
The sale of "new" securities, where the financial asset is being traded for the very first time, is said to take place in the ________ market.
primary
________ is risk that cannot be diversified away.
systematic risk
As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________.
the credit rating increases, the default risk decreases, and the required rate of return decreases
The movement of money from lender to borrower and back again is known as ________.
the cycle of money
Cash flow is ________.
the increase or decrease in cash for the period
The IRR is the discount rate that produces a zero NPV or the specific discount rate at which the present value of the cost equals ________.
the present value of the future benefits or cash inflows
The constant growth dividend model requires that
the return rate r is greater than the growth rate g of the dividend stream
The type of risk that can be diversified away is called ________
unsystemic
A more risky stock has a higher ________.
variance and standard deviation