Corpate finance final
Which of the following methods for calculating the cost of equity ignores risk? Multiple choice question. The CAPM Yield to maturity The dividend growth model
the dividend growth model
decisions made by financial managers should primarily focus on increasing the:
market value per share of outstanding stock
A business that is a legal entity separate from the owners, yet treated as a legal person, is called a(n):
corporation
Which of the following is classified as a current asset
Inventory
One reason corporations use staggered boards is that _____.
It makes takeover attempts less likely to be successful.
Haley won a lottery and will receive $1000 each year for the next 30 years the current value of these winnings are called
Present value
Common stock as no special preference either in receiving _______ or in bankruptcy.
dividends
Shareholders typically have the right to share proportionally in ____- paid.
dividends
The return an investor in a security receives is ______ the cost of the security to the company that issued it. Multiple choice question. greater than equal to less than unrelated to
equal to
The underlying key assumption, and oftentimes a key disadvantage, of the dividend growth model is that it assumes the dividend _____. Multiple choice question. grows at a constant rate grows at a stair-step rate is constant
grows at a constant rate
Most voting in large corporations is done by proxy because _____
most small shareholders do not attend the annual meeting
a common size income statement is a accountung statement that expresses as a percentage of:
sales
Financial managers should primarily focus on the interests of :
shareholders
Are personally responsible for 100% of the firms debts
Both general partners and sole proprietors
According to the average accounting return rule, a project is acceptable if its average accounting return exceeds _____.
a target average accounting return
which one of the following is a source of cash ?
acquisition of debt
WACC is used to discount ______.
cash flows
The controller, rather than the treasurer is typically responsible for which one o the following functions?
processing cost reports
A ____ is the grant of authority by a shareholder to someone else to vote his or her shares.
proxy
Preferred stock has preference over common stock in the _____. Multiple select question. -number of votes given -payment of dividends -portfolios of individual investors -distribution of corporate assets
-payment of dividends -distribution of corporate assets
Assume you were investing $100 today in a savings account which one of the following terms refers to the total value of investment one year from now
Future volume
A sole proprietorship
Requires the owner to be personally responsible for all the companies debts
In addition to CAPM, the cost of equity can be determined using the dividend growth model and the _____ approach. Multiple choice question. adjusting GAAP SML
SML
mortgage lenders probably have the most interest in the ______ ratios.
long term debt and times interest earned
The Sarbanes Oxley Act 2002 holds a public a company's ____ responsible for the accuracy of the company's financial statements.
managers
MNO preferred stock pays a dividend of $2 per year and has a price of $20. If MNO's tax rate is 21 percent, the required rate of return on its preferred stock is found by which formula? Multiple choice question. $20/.21 $2/$20 $20 - $2 $2/.21
$2/$20
Including preferred stock in the WACC adds the term: Multiple choice question. [P/(E + D)] × RP (P/V) × RP (V/P) × RP
(P/V) × RP
Which of the following are components used in the construction of the WACC? Multiple select question. Cost of debt Cost of common stock Cost of preferred stock Cost of accounts payable
>cost of common stock>cost of debt>cost of preferred stock
____ are personally responsible for 100 percent of the firm's debts.
Both general partners and sole Proprietors
The most well-known approach to company performance evaluation is the _____ method
EVA economic value added
which one of the following accurately lists the three components of Dupont Identity ?
Equity multiplier, net profit margin, and total asset turnover
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ____ ratios.
Profitability
which one of the following is a correct formula for computing the return on equity?
ROA x Equity multiplier
The most acceptable method of a value in the financial statements is to compare the companies current financial:
Ratios to the companies historical ratios
A partner in film knows thst the maximum financial loss he or she will experience is the amount he or she invested in the firm. The partner is called a _____ partner.
limited
The coding system established by the U.S government to classify companies by the nature of their business operations is known as the:
standard industrial classification codes
Is a company required to pay preferred dividends?
No; the company may differ dividends on preferred stock; however, they cannot pay dividends to come in shareholders until preferred dividends are paid.
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as
Profitability ratios
What can we say about the dividends paid to common and preferred stockholders? Multiple select question. Dividends to preferred stockholders are fixed. Dividends are guaranteed for both preferred and common stockholders. Preferred stock dividends change every year based on the earnings of the firm. Dividends to common stockholders are not fixed.
Dividends to common stockholders are not fixed..Dividends to preferred stockholders are fixed.
In which way(s) is preferred stock like a bond? Multiple select question. -Preferred stock dividends are tax deductible for the issuer, like interest on bonds. -Preferred shareholders receive a stated value if the firm liquidates, like bondholders. -Some preferred stock has credit ratings, like bonds. -Preferred dividends, like interest, must be paid lest the firm be in default. -Preferred shareholders receive a stated dividend, similar to interest on a bond. -Preferred stock sometimes has a sinking fund, giving it a set maturity like bonds.
-Preferred shareholders receive a stated value if the firm liquidates, like bondholders. -Some preferred stock has credit ratings, like bonds. -Preferred shareholders receive a stated dividend, similar to interest on a bond. -Preferred stock sometimes has a sinking fund, giving it a set maturity like bonds.
The relationship between the return on assets in the return on equity is identified by the
Dupont identity
The cost of capital depends on the _____ of funds, not the _____ of funds. Multiple choice question. source; use use; source use; inflation
use, source
One of the disadvantages of using historical returns to estimate the market risk premium is that the past may not be a good guide to the future _____. Multiple choice question. when economic conditions are relatively stable ever when economic conditions change quickly
when economic conditions change quickly
The growth rate of dividends can be found using _____. Multiple select question. the perpetuity model historical dividend growth rates security analysts' forecasts the capital asset pricing model
• Security analysts' forecasts• Historical dividend growth rates
Which of the following are features of common stock? Multiple select question. -It has no special preference in bankruptcy. -It receives dividends every quarter. -It receives interest semi-annually. -It generally has voting rights. -It has no special preference in receiving dividends.
-It generally has voting rights; - It has no special preference in bankruptcy; -It has no special preference in receiving dividends
Which of the following is usually a right of common shareholders?
-voting rights -the right to a porpotional share of dividends paid
Preferred shares have a stated liquidating value, typically $_____ per share.
100
agency problems are most likely to be associated with:
Corporations
which one of the following best states the primary goal of financial management ?
Maximize the current value per share
WinWin Corporation has five board members, and each shareholder gets one vote per share. The company uses a straight board voting procedure. How does this arrangement affect minority shareholders?
No minority shareholder would have enough votes to win any seat on the board.
If preferred dividends are _____ and are not paid in a given year, they will be carried forward as an arrearage.
cumulative
Suppose Bob owns 20 shares and Vikki owns 30 shares in Good Company, and there are five members of the board of directors. Under which voting arrangement can Bob assure himself of a board member that represents his interests?
cumulative voting
a Firm's liquidity is measured with which one of the following ratios?
current ratio
A firm's overall cost of capital will include both its cost of and equity capital.
debt
The cost of ---- can be observed because it is the interest rate the firm must pay on new loans.
debt
lFinding a firm's overall cost of equity is (straightforward/difficut).
difficult
The value of a share of common stock in a corporation is _____ to the general rights of shareholders.
directly related
which one of the following is a disadvantage of the corporate form of business?
distribution profits may expierence double taxation
A is a payment by a corporation to shareholders, made in either cash or stock.
dividend
The relationship between the return on asset and return on equity is identified by the:
dupont identity
True or false: Cumulative voting means board members are elected one at a time, with each shareholder casting his or her allotted votes for each seat on the board. True false question.
false
The cash coverage ration directly measures the ability of a company to meet its obligation to pay :
interest to lender
One common reason for having two classes of common stock with different voting rights is _____.
it is easier for insiders such as founding families to maintain control of the company
Preferred shareholders receive a stated value if the firm liquidates, _______ (like/unlike) bondholders.
like
The most appropriate weights to use in the WACC are the ______ weights. Multiple choice question. book value market value government mandated salvage value
market value
When voting for the board of directors, the number of votes a shareholder is entitled to is usually ____ vote per share held.
one
The rate used to discount project cash flows is known as the ___. Multiple select question. market rate required return discount rate cost of capital
required of return. cost of capital. and discount rate
A project should only be accepted if its return is above what is ___. Multiple choice question. required by investors mandated by law socially acceptable company policy
required. by investors
ratios that measure a firm's liquidity are nkown as _____ ratios.
short term solvency
A firm owned by a singke person who has unlimited liability for the firm's debt is called a
sole proprietorship
Using the SML approach, what is the expected return on a stock if its beta is equal to zero? Multiple choice question. Zero The return on the market minus the risk-free rate The risk-free rate The market-risk premium
the risk free rate
Economic value added (EVA) is a means of evaluating corporate performance. True false question.
true
The cost of capital depends primarily on the (use/source) of funds.
use
Colin invested $5000.05 years ago and earns 6% interest annually by leaving his interest earnings in the account he increases the amount of interest he earns each year. His investment is best described as benefiting from
Compounding
A business that is a legal entity separate from the owners yet treated as a legal person is called a
Corporation
In a _____ board, only a fraction of the directorships are up for election at any one time.
staggered
True or false: With more than one class of common stock, it is easier for insiders such as founding families to maintain control of the company.
true
To estimate the growth rate of a particular stock, we can ___. Multiple select question. use the average bank's annual CD rate use security analysts' forecasts use the historical dividend growth rate. use the average market dividend yield
use security analysts' forecasts use the historical dividend growth rate.
Jared invested $100.02 years ago at 8% interest. The first year, he earned eight dollar interest on his $100 investment he reinvested the eight dollars. The second year he carried $8.64 interest on is $108 investment. The extra $.64 he earned in interest the second year is referred to as:
Interest on interest
Which one of the following is true?Under U.S. tax law, all company interest payments are taxable to the company. Under U.S. tax law, a corporation's interest payments are deductible for tax purposes.
Under U.S. tax law, a corporation's interest payments are tax deductible
he WACC is the weighted average of the cost of equity and the _____.
aftertax cost of debt
The book value of a firm is
based on historical transactions
Matthews Company has two classes of common stock, and each share represents the same proportion of ownership in the company. Class A has 2 votes for each share. Class B has one vote per share. Which class is more valuable?
class A
Which of the following is true? Multiple choice question. A company can deduct interest paid on debt when computing taxable income. A company cannot deduct interest paid on debt when computing taxable income. A company can deduct dividends paid to shareholders when computing taxable income.
economic value added
A firm's cost of debt can be ___. Multiple select question. obtained by checking yields on publicly traded bonds estimated easier than its cost of equity calculated using the dividend growth model obtained by talking to investment bankers
estimated easier than its cost of equityobtained by talking to investment bankersobtained by checking yields on publicly traded bonds.
Which of the following entities declares a dividend?
The board of directors
Activities of a firm that require the spending of cash are known as
uses of cash
Usually, the treasurer of a Corporation reports directly to the:
vice president of finance
What does WACC stand for?
weighted average cost of capital
A common size income statement is an accounting statement that expresses all the firms expenses as a percentage of:
Sales
Dusty Corporation has an issue of preferred stock that pays a dividend of 7 percent of its state value, which is $100. Which of the following would be a commonly used name for that preferred stock? Multiple choice question.
$7 preferred
The formula for the required return from the SML is: Multiple choice question. RE = Rf − B(RM − Rf) RE = Rf + B/(RM − Rf) RE = Rf + B(RM − Rf)
RE = Rf + B(RM − Rf)
Activities of a firm that require the spending of cash are known as
Uses of cash
One vote per share held
When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:
determining the number of shares of stock to issue is an example of a ____ decision
capital structure
Which of the following is a current liability: A loan payable to the bank in four years, an invoice payable to the supplier in 45 days, and amount due from a customer in 90 days, a note payable to a lender in 18 months
An invoice payable to a supplier in 45 days
Which of the following are tax-deductible to the firm? Multiple choice question. Dividends paid on common stock Coupon interest paid on bonds Principal amounts paid on debt Dividends paid on preferred stock
Coupon interest paid on bonds
relationship determined from a company's financial information and used for comparison purposes known as:
financial ratios
B = the market value of a firm's debt S = the market value of that same firm's equity RB = the before-tax yield on the firm's debt TC = the corporate tax rate RS = the cost of equity Given the definitions above, the weighted average cost of capital formula can be written as:
[S/(S + B)] × RS + [B/(S + B)] × RB × (1 − Tc)
which one of the following is a source of cash?
decrease in inventory
One method for estimating the cost of equity is based on the ______ model. Multiple choice question. dividend growth prime growth prime and LIBOR average bond plus equity premium
dividend growth
Preferred stock ___. Multiple select question. does not pay dividends has a fixed maturity pays dividends in perpetuity pays a constant dividend
pays dividends in perpetuitypays a constant dividend
A stock with dividend priority over common stock is called a _____ stock.
preferred
The most acceptable method of evaluating the financial statements is to company's current financial:
ratios to the company's historical ratios
Mota Motors has eight directors on its board, two of whom go up for election each year. This is an example of a:
staggered board
With voting, the directors are elected one at a time and the only way to guarantee a seat is to own 50 percent plus one share.
straight voting
Capital weights can be interpreted just like portfolio weights.
structure
The SML approach requires estimates of the _____.
the beta coefficientthe market risk premium
Finding a firm's overall cost of equity is difficult because _____. Multiple choice question. it extensively requires the use of differential equations the federal government refuses to disclose equity costs unless the firm is in the real estate sector there is no way of directly observing the return that the firm's equity investors require on their investment there is no way to estimate it
there is no way of directly observing the return that the firm's equity investors require on their investment
True or false: It can be advantageous to have a staggered board because it provides "institutional memory."
true
True or false: The return an investor in a security receives is equal to the cost of the security to the company that issued it.
true
