FIN 390-50
staggered board
the election of the board of directors is setup so that only 1/4 of the board is up for reelection each year
spread
the difference between the Bid and Ask prices
Owner's Equity
total assets - total liabilities
Which of the following are sources of cash?
- A decrease in accounts receivable - An increase in notes payable
Which one of the following best defines the variance of an investment's annual returns over a number of years?
The average squared difference between the actual returns and the arithmetic average return
What does the clean price for a bond represent?
The quoted price, which excludes interest accrued since the last coupon date.
When evaluating cost-cutting proposals, how are operating cash flows affected?
There is an additional depreciation deduction. The decrease in costs increases operating income.
True or false: A fixed payment loan is most common for consumers.
True
Standard deviation is a measure of which one of the following?
Volatility
A growing annuity has a(n) ____.
finite number of growing cash flows
Most equity shares of large firms in the U.S. trade on:
organized auction markets
By combining common-size and base year analysis, we eliminate the effect of the _____.
overall growth
The arithmetic average rate of return measures the ____.
return in an average year over a given period
Geometric averages are ______ arithmetic averages.
smaller than
discount an announcement or news item
we say that it has less of an impact on price because the market already factored it in.
Liquidity refers to the ease of changing _____.
assets to cash
Structured note
Based on financial securities, commodities, or currencies
A bond with exotic features is often called a _____ bond.
cat
cost of capital
is the minimum required return on a new investment.
Advantage of AAR
Is easy to compute. Needed information is usually available.
Which three of the following are most apt to create problems when comparing financial statements for multiple firms?
- Seasonality - Differing fiscal years - Differing accounting methods
Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds?
- Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. - Treasury bonds are issued by the US government while corporate bonds are issued by corporations. - Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer.
As a general rule, which of the following are true of debt and equity?
The maximum reward for owning debt is fixed Equity represents an ownership interest
market Interest rate fall
The price of the bond increase
What is the purpose of accounting profit break-even analysis?
To determine the level of sales at which profits are equal to zero.
If you wish to create a portfolio of stocks, what is the required minimum number of stocks?
You must invest in stocks of more than one corporation.
Most of the time, a floating-rate bond's coupon adjusts ____.
with a lag to some base rate
Another name for short-term financial management is ___ management.
working capital
The issuance costs of bonds and stocks are referred to as ______ costs.
flotation
A limitation of bond ratings is that they ____.
focus exclusively on default risk
The rules for depreciating assets for tax purposes are based upon provisions in the ___.
1986 Tax Reform Act
In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from ___ years.
2 to 30
During the financial crisis of 2008, the S&P 500 Index fell by _____ percent.
37
How frequently does continuous compounding occur?
Every instant
Which one of the following questions involves a capital structure decision?
How much debt should the firm incur to fund a project?
In recent years, U.S. accounting standards have become more closely tied to:
IFRS (International Financial Reporting Standards)
The operating cash flow for a project should exclude which one of the following?
Interest expense
the variance of a portfolio
Isn't generally a simple combination of the variances of the assets in the portfolio.
estimating operating cash flows using the tax shield approach
OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate
The formula for calculating the cost of equity capital that is based on the dividend discount model is:
RE = D1/P0 + g
Why does a bond's value fluctuate over time?
The coupon rate and par value are fixed, while market interest rates change
Which of the following are true about the amortization of a fixed payment loan?
The principal amount paid increases each period. The amount of interest paid decreases each period.
According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:
a target average accounting return
The ____ are rules describing how the corporation regulates its existence.
bylaws
The total dollar return is the sum of dividends and __________.
capital gains or losses
Noncash items do not affect _____.
cash flow
The five main areas of finance are
corporate finance, investments, financial institutions, international finance, and fintech
Networking Capital
current assets - current liabilities
An important advantage to a firm raising equity internally is not having to pay ___.
flotation costs
Which of the following is a conclusion that can be drawn regarding market efficiency from capital market history?
future market prices are hard to predict based on publicly available information
The SML approach requires estimates of the _____.
market risk premium beta coefficient
Most voting in large corporations is done by proxy because _____.
most small shareholders do not attend the annual meeting
A sole proprietorship is a business owned by ______ person(s).
one
Normally, the excess rate of return on risky assets is ___.
positive
In a corporation, the stockholders elect _____, who then select the managers.
the board of directors
Which of the following entities declares a dividend?
the board of directors
Crossover rate
the discount rate that makes the NPVs of two projects equal.
Which of the following are uses of cash?
- Decreases in accounts payable - Increases in inventory - Increases in property, plant and equipment
Enterprise value -EBITDA multiple
Enterprise Value / EBITDA
Which of the following are true?
Ideally, we should use market values in the WACC. Book values are often similar to market values for debt.
Which of the following is a fixed cost for a tire manufacturing business?
Manager's salary of $98,000/year Building rent of $10,000/month
The two most important stock markets in the United States are the New York Stock Exchange and ______.
NASADQ
Which of the following are reasons why NPV is considered a superior capital budgeting technique?
NPV considers time value of money. NPV considers all the cash flows.
Return on Assets
Net Income/Total Assets
Return on Equity (ROE)
Net Income/Total Equity (common stocks and retained earnings) profit margin * total assets turnover * equity multiplier
OCF using the bottom-up approach
OFC = net income + depreciation
All else constant, the dividend yield will increase if the stock price ____.
decreases The dividend yield is D/P, so when the denominator decreases, the ratio increases.
The value of a share of common stock in a corporation is _____ to the general rights of shareholders.
directly related
One method for estimating the cost of equity is based on the ______ model.
dividend growth
The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:
incremental cash flows.
The bonus depreciation in 2019 was _____ percent.
100
In the Ibbotson-Sinquefield studies, long-term corporate bonds have which of the following characteristics?
20-year maturities High quality
______ budgeting is the process of making and managing expenditures on long-term assets.
Capital
How is income defined?
Revenue minus expenses
Which of the following is commonly used to measure inflation?
The Consumer Price Index (CPI)
An annuity due is a series of payments that are made ____.
at the beginning of each period
Average Accounting Return (AAR)
average net income/average book value
Scenario analysis is defined as the:
determination of changes in NPV estimates when what-if questions are posed.
Financial Breakeven Point
is the sales level that results in a zero NPV
Long-term debt ratio
long term debt / (long term debt + total equity)
The term structure of interest rates examines the ____.
relationship between short-term and long-term interest rates
The Sharpe ratio measures ___.
reward to risk
For any given capital project proposal, the discount rate should be based on the:
risks associated with the use of the funds required by the project.
The owners of a corporation are called ______.
stockholders
The rate used to discount project cash flows is known as the ___.
required return discount rate cost of capital
The cost of capital is an appropriate name since a project must earn enough to pay those who ______ the capital.
supply
stand-alone principle
the assumption that evaluation of a project may be based on the project's incremental cash flows.
Bond ratings are based on the probability of default risk, which is the risk that ___.
the bond's issuer may not be able make all the required payments
When a project breaks even on an accounting basis, the cash flow for that period will equal _____.
the depreciation allowance for that period
Which of the following are important questions that must be asked when starting a firm?
* How will you manage your everyday financial activities? * Where will you get the long-term financing to pay for your investment? * What long-term investments should you take on?
What is the definition of expected return?
It is the return that an investor expects to earn on a risky asset in the future.
Which of the following can be used to encourage managers to act in the best interests of shareholders?
Managerial compensation tied to performance Better prospects of promotion
What does historical data suggest about the nature of short-term and long-term interest rates?
Sometimes short-term rates are higher and sometimes long-term rates are higher.
Payback period tells the time it takes to break even in an ____ sense. Discounted payback period tells the time it takes to break even in an ______ or financial sense.
accounting economic
When analyzing a project, sunk costs ____ incremental cash outflows.
are not
The return earned in an average year over a multiyear period is called the _____ average return.
arithmetic
Operating cash flow is a function of _____.
earnings before interest and taxes depreciation taxes
The most well-known approach to company performance evaluation is the _____ method.
economic value added
True or false: The real rate of return will generally be higher than the nominal rate of return.
false
The information needed to compute the profit margin can be found on the ____.
income statement
In general, a corporate bond's coupon rate ____,
is fixed until the bond matures
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
One reason corporations use staggered boards is that _____.
it makes takeover attempts less likely to be successful
What will happen to the default risk premium during periods of economic uncertainty?
it will increase
Capital budgeting is concerned with planning and managing a firm's _____.
long-term investments
The standard deviation is the ______ of the variance.
square root
A projected IRR on a risky investment in the _____ percent range is not unusual.
10 to 20
Within the context of financial markets, complete the following equation:
Bid − Ask = Bid-Ask Spread
If you are forecasting a few decades in the future (as you might do for retirement planning) you should calculate the expected return using:
Blume's formula
________ is the process of paying off loans by regularly reducing the principal.
amortized
If a company has inventory, the quick ratio will always be ______ the current ratio.
less than
Other companies that specialize only in projects similar to the project your firm is considering are called ___.
pure play
Capital ______ weights can be interpreted just like portfolio weights.
structure
The cost of capital depends primarily on the ___ of funds.
use
To estimate the growth rate of a particular stock, we can ___.
use security analysts' forecasts use the historical dividend growth rate.
equation for enterprise value
Market value of stock + book value of liabilities − cash
Price Earnings Ratio
price per share/earnings per share
Times Interest Earned
EBIT/ interest expense
EBTIDA
EBTI + Depreciation and amortization
Which of the following are components used in the construction of the WACC?
Cost of debt Cost of common stock Cost of preferred stock
Which of the following are expected cash flows to investors in stocks?
Dividends Capital gains
dividend growth patterns
Dividends may grow at a constant rate.
When an asset is sold, there will be a tax savings if the ______ value exceeds the sales price.
book
To apply the dividend growth model to a particular stock, you need to assume that the firm's ___ will grow at a constant rate.
dividend
The two potential ways to make money as a stockholder are through ______ and capital appreciation.
dividends
The passage of the Tax Cuts and Jobs Act of 2017 was to make the federal corporate tax rate in the United States a _____ tax.
flat
The underlying key assumption, and oftentimes a key disadvantage, of the dividend growth model is that it assumes the dividend _____.
grows at a constant rate
The second lesson from studying capital market history is that risk is _____.
handsomely rewarded
A firm with higher operating leverage will have ______ fixed costs relative to a firm with low operating leverage.
high
Interest expenses incurred on debt financing are ______ when computing cash flows from a project.
ignored
The payback period can lead to incorrect decisions if it is used too literally because it ____.
ignores cash flows after the cutoff date
Dividends are the ______ component of the total return from investing in a stock.
income
A humped term structure of interest rates indicates that interest rates are expected to Blank______ as the time to maturity increases.
increase and then decline
Alpha
is the excess return an asset earns based on the level of risk taken.
The reason that interest rate risk is greater for Blank______ term bonds than for Blank______ term bonds is that the change in rates has a greater effect on the present value of the Blank______ than on the present value of the Blank______.
long; short; face value; coupon payments
Initial public offerings of stock occur in the ____ market.
primary
The contribution margin per unit will increase if ____.
the sales price per unit increases while the variable cost per unit decreases
Shareholders equity
total assets - total liabilities
Because of __________ and _________, interest rates are often quoted in many different ways.
tradition; legislation
Discounting is the opposite of compounding.
true
The three attributes of NPV are that it:
uses cash flows. discounts the cash flows properly. uses all the cash flows of a project.
risk
The systematic risk of a portfolio can be lowered by adding T-bills to the portfolio.
Which of the following are true about variable costs?
The variable cost per unit may remain constant as the number of units produced increases.
Which one of the following is true?
Under U.S. tax law, a corporation's interest payments are deductible for tax purposes.
two stage growth
dividend will grow at a rate of g1 for t years and then grow at a rate of g2 thereafter, forever.
The price of a share of common stock is equal to the present value of all expected future
dividends
In financial markets, debt and ______ securities are bought and sold.
equity
What is the equation for the capital asset pricing model?
expected return on security = Risk-free rate + Beta × (Return on market - Risk-free rate)
The basic approach to evaluating cash flow and NPV estimates involves asking _____.
what-if questions
If a project has multiple internal rates of return, which of the following methods should be used?
MIRR NPV
When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:
one vote per share held
Net working capital equals current assets ______ current liabilities.
minus
The basic present value equation underlies many of the _____.
most important ideas in corporate finance
The difference between a firm's current assets and its current liabilities is known as the _____.
net working capital
Degree of Operating Leverage (DOL)
is the percentage change in operating cash flow relative to the percentage change in quantity sold.
The federal government can raise money from financial markets to finance its deficits by ___.
issuing bonds
total assets turnover
Sales/Total Assets
A firm's mixture of debt and equity financing is the result of its ______ decisions.
capital structure
When calculating a firm's weighted average cost of capital, the capital structure weights:
are based on the market values of the outstanding securities.
Investment in net working capital arises when ___.
cash is kept for unexpected expenditures credit sales are made inventory is purchased
The internal rate of return is defined as the:
discount rate which causes the net present value of a project to equal zero.
The debt-equity ratio expresses the total debt divided by total equity, while the ____multiplier expresses the total assets divided by the total equity.
equity
True or false: The MIRR function eliminates multiple IRRs and should replace NPV.
false Reason: NPV is more versatile and also eliminates multiple rates of return.
An efficient market is one that fully reflects all available ______.
information
The change in variable costs that occurs when production is increased by one unit is referred to as the:
marginal cost
Preferred stock ___.
pays a constant dividend pays dividends in perpetuity
What is a nominal rate return?
the rate of return that has not been adjusted for inflation
Corporate managers care about the break-even point because it indicates the level _____.
to which sales can fall before a project will start losing money
The efficient markets hypothesis contends that _____ capital markets such as the NASDAQ are efficient.
well-organized
Corporations in other countries are often called:
-public limited companies -joint stock companies -limited liability company
Total Assets = Total Liabilities + Owner's Equity
...
Using the payback period rule will bias toward accepting which type of investment?
Short-term investment
Which one of the following categories of securities had the most volatile annual returns over the period 1926-2019?
Small-company stocks
________ financial statements provide for comparison of firms that differ in size.
Standardized
In the long run, ________ are variable.
all costs
trading at a discount
the market value of the bond is less than
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
Dividend growth Sales growth
What is the expected return on a security with beta of 1?
The expected return on the market.
What does a current ratio of 1.2 mean?
The firm has $1.20 in current assets for every $1 in current liabilities.
According to the CAPM, which of the following events would affect the return on a risky asset?
A change in the yield on T-bills A strengthening of the country's currency Federal reserve actions that affect the economy
Which of the following is a perpetuity?
A constant stream of cash flows forever
Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?
- There will be a tax savings if the book value exceeds the sales price. - Taxes are based on the difference between the book value and the sales price. - Book value represents the purchase price minus the accumulated depreciation.
The risk-free asset has a beta of _____.
0.00
Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return?
Risk premium
Sharpe Ratio
calculated as the risk premium of the asset divided by the standard deviation.
A firm's overall cost of capital will include both its cost of ____ capital and equity capital.
debt
The cost of ______ can be observed because it is the interest rate the firm must pay on new loans.
debt
A firm's aftertax cost of debt will increase if there is a(n):
decrease in the company's tax rate.
You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing purchase prices, annual maintenance costs, and life spans. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the:
lowest equivalent annual cost.
Some important characteristics of the normal distribution are that it is:
symmetrical bell-shaped
Which of the following correctly describes the relationship between depreciation, income, taxes, and investment cash flows?
As depreciation expense increases, net income and taxes will decrease, while cash flows will increase.
NASDAQ has which of these features?
Computer network of securities dealers Multiple market maker system
Which of the following is true about a growing annuity?
The cash flows grow at a constant rate. The cash flows grow for a finite period.
Payback method
This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively.
To find current ratio, you need to find current assets first
...
By definition, what is the beta of the average asset equal to?
1
Preferred shares have a stated liquidating value, typically $_____ per share.
100
Convertible bond
Can be exchanged for shares of stock
Which one of the following is a project cash inflow? Ignore any tax effects.
Decrease in inventory
Receivables Turnover
Sales / Accounts Receivable
________ measures total risk, and ________ measures systematic risk.
Standard deviation; beta
APR
The interest rate per period multiplied by the number of periods in the year.
True or false: Interest earned on Treasury notes and bonds is taxable
True
weighted average cost of capital formula can be written as:
[S/(S + B)] × RS + [B/(S + B)] × RB × (1 − Tc)
The NYSE differs from the Nasdaq primarily because the NYSE has _____.
a physical location an auction market specialists
The calculation of a portfolio beta is similar to the calculation of _____.
a portfolio's expected return
straight voting
a procedure in which a shareholder may cast all votes for each member of the board of directors 50 percent plus one share
A ______ corporation is for profit, and has the legal attributes of accountability, transparency, and purpose.
benefit
Future value is the Blank______ value of an investment at some time in the future.
cash
The statement of cash flow explains changes in _____.
cash and equivalents
The ______ rate is the rate at which the NPVs of two projects are equal.
crossover
Average returns can be calculated using
geometric or arithmetic average.
Longer-term bonds have _____ interest rate sensitivity because a ______ portion of a bond's value comes from the face amount.
greater larger
Whenever Blank______ information is available, it should be used instead of accounting data.
market
enterprise value
market + Debt - cash
Market to Book Ratio
market value per share/book value per share
Operating cash flow
operating cash flow + networking capital + net capital spending
Quick Ratio
(Current Assets - Inventory) / Current Liabilities
Which of the following is true about interest rate risk?
- All else equal, the lower the coupon rate, the greater the interest rate risk. - All else equal, the longer the time to maturity, the greater the interest rate risk.
traditional financial ratio categories
- Profitability ratios - Asset management ratios - Market value ratios - liquidity ratio - financial leverage ratio
Days' Sales in Receivables
365/receivables turnover
Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?
A decrease in the firm's beta
stand-alone principle
According to the _________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm."
In large firms, financial activity is usually associated with which top officer?
Chief financial officer (CFO)
What information do we need to determine the value of stock using the zero-growth model?
Discount rate Annual dividend amount
What are the two factors that impact whether managers will act in the best interest of stockholders?
How closely management goals align with stockholder goals and the way managers are compensated
Which of the following payment methods amortizes a loan?
Interest plus fixed amount Fixed payments that result in a zero loan balance
Intrinsic values
Intrinsic values reflect the reality of of what an asset is currently worth in the market. Accounting numbers, since they are based on historical values, are often poor reflections of reality.
Which one of the following does not affect ROE according to the DuPont identity?
Investor sentiment
The _____ ______ approach is the use of a WACC that is unique to a particular project, based on companies in similar lines of business.
Pure Play
Which of the following methods for calculating the cost of equity ignores risk?
The dividend growth model
Which of the following variables is not required to calculate the expected return on a risky asset?
The rate of inflation
From the stockholders' perspective, what is the primary purpose of awarding stock options to managers?
To increase shareholders' wealth
sales per share
Total Sales / Shares Outstanding
In a graph with output on the x-axis and dollar amount (for costs and revenues) on the y-axis, what will be the shapes of variable and fixed costs?
Variable costs will be upward sloping while fixed costs will be parallel to the x-axis
Changes in the net working capital requirements:
can affect the cash flows of a project every year of the project's life.
Dividends paid to common stockholders ______ be deducted from the payer's taxable income for tax purposes.
cannot
Deciding which long-term investment a firm should make is a ______ decision.
capital budgeting
Gutierrez Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as:
capital rationing.
he total of cash flow to creditors and cash flow to stockholders is called _____.
cash flow from assets
A zero-growth model for stock valuation is distinguished by a ____.
constant dividend amount
Some of the cash flow generated by a firm goes back to the financial markets in the form of ______.
dividends and debt payments
Cash flow to stockholders equals:
dividends paid minus net new equity raised
A _____ in the size of the first cash inflow will decrease the payback period, all else held constant.
increase
If the tax rate increases, the value of the depreciation tax shield will ______.
increase
With cost-cutting proposals, when costs decrease, operating cash flows _____
increase
In reality, most firms cover the equity portion of their capital spending with ___.
internally generated cash flow
Suppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate?
r = (1000/100)(1/10) - 1
Projects that have the same risk are said to be in the same _____.
risk class
The point at which the NPV profile crosses the vertical axis is the:
sum of the cash flows of the project
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 _____.
when economic conditions change quickly
If a security's expected return is equal to the expected return on the market, its beta must be ____.
1
Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period?
Discounted payback period
A firm has a target debt-equity ratio of .5, but it plans to finance a new project with all debt. What debt-equity ratio should be used when calculating the project's flotation costs?
0.5 Reason: When calculating flotation costs, the target debt-equity ratio should be used.
Which of the following positions generally report to the chief financial officer (CFO)?
Controller Treasurer
Operating Cash Flow
EBIT + Depreciation - Taxes
Market valuations
Market valuations reflect the reality of what an asset is currently worth in the market. Accounting numbers, since they are based on historical values, are often poor reflections of reality.
Total capitalization equals total equity plus total:
long-term debt
Noncash items are expenses that directly affect _____ but do not directly affect ______.
net income; cash flow
Using the top-down approach, OCF is calculated by subtracting costs and _____ from sales.
taxes
The systematic risk principle argues that the market does not reward risks _____.
that are borne unnecessarily
In the Ibbotson-Sinquefield study, the U.S. small-company common stock portfolio corresponds to the bottom fifth, in terms of market value, of stocks traded on ____.
the New York Stock Exchange
Blume's formula combines _____.
the arithmetic average return and the geometric average return
capital budgeting
the process of planning and managing a firm's long-term investments
The degree of interest rate risk depends on ____.
the sensitivity of the bond's price to interest rate changes
What is the total number of inputs that change while doing sensitivity analysis?
1
debt equity ratio
1 - total debt ratio= equity total debt ration / equity= debt equity ratio . . total liabilities/total owners' equity
Which of the following methods can be used to calculate present value?
An algebraic formula A time value of money table A financial calculator
If the risk free rate is 1%, what will happen to the prices of assets X and Y in an efficient market?
Asset Y's price will rise and Asset X's price will fall
What will the shapes of total revenue and total costs be on a graph that depicts number of units on the x-axis and dollar amount (revenues and cost) on the y-axis?
Both the total revenue and total cost curves will slope upward.
True or false: The cost of debt on the market value basis is typically much higher than the cost of debt on the book value basis.
False
Inventory Turnover
cost of goods sold/ ending inventory
When voting for the board of directors, the number of votes a shareholder is entitled to is usually _____vote per share held.
one
Which of the following should be valued using a perpetuity formula?
- Preferred stock - Cash flows from a product whose sales are expected to remain constant forever - A consol (bond that pays interest only and does not mature)
The cash flow identity reflects the fact that:
- a firm generates cash through its various activities. - cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm. - cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders.
Which three of the following are common shapes for the term structure of interest rates?
Downward sloping Humped Upward sloping
A contribution margin of $35 means that ____.
each sale of an additional unit will contribute $35 toward paying fixed costs
A benchmark PE ratio can be determined using:
the PEs of similar companies a company's own historical PEs
The net present value of a project will increase if:
the aftertax salvage value of the fixed assets increases.
beta coefficient
the amount of systematic risk present in a particular risky asset relative to that in an average asset.
What is an uncertain or risky return?
It is the portion of return that depends on information that is currently unknown.
A balance sheet reflects a firm's Blank______ value on a particular date.
accounting
______ are frequently used to encourage key managers to maximize the value of the firm's stock.
Stock options
What is the intercept of the security market line (SML)?
The risk-free rate
Which of the following are usually included in a bond's indenture?
The total amount of bonds issued The repayment arrangements
What is the main goal of financial management?
To maximize current value per share of existing stock
one way in which financial managers use a common-size balance sheet?
To track changes in a firm's capital structure
The U.S. government borrows money by issuing:
Treasury notes Treasury bonds Treasury bills
True or false: The major difference between Western financial practices and Islamic law is that Islamic law does not permit charging or paying interest.
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
True or false: Ultimately, we are more interested in cash flow than accounting income.
True
In an efficient market:
all investments are zero NPV investments assets are priced at the present value of their future cash flows
It is argued that, left to themselves, managers would tend to maximize the amount of resources over which they have control or, more generally, ________ power or wealth.
corporate
The minimum required return on a new project when its risk is similar to that of projects the firm currently owns is known as the _____.
cost of capital
Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:
cost of debt.
Current Ratio
current assets/ current liabilities
NPV ______ cash flows properly.
discounts
Preferred stock has preference over common stock in the _____.
distribution of corporate assets payment of dividends
A times interest earned (TIE) ratio of 3.5 times means a firm has _____ that is(are) 3.5 times greater than the firm's interest expense.
earnings before interest and taxes
When developing cash flows for capital budgeting, it is _____ to overlook important items.
easy
capital gain yield
finding the difference between the ending stock price and the initial stock price and dividing it by the initial stock price
A firm owned by two or more people who each have unlimited liability for all of the firm's debts is called a:
general partnership.
The probability of an outcome being more than three standard deviations away from the mean in a normal distribution is approximately ___ percent.
less than 1
When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum.
lump sum
The price-earnings (PE) ratio is a ______ ratio.
market value
book value per share
(Total owners equity) total book value of equity/ outstanding shares
Which of the following show why a corporation is the most important form of business?
* A corporation is a separate legal entity with the ability to acquire and exchange property. * Corporations can sue and be sued. * Corporations can enter into contracts.
cash ratio formula
Cash / Current Liabilities
______ are the prime source of information about a firm's financial health.
Financial statements
Why is it important for accounting standards to become more comparable across countries?
Increasing globalization of business makes it necessary to understand financial reporting by firms that follow other accounting standards.
Which of the following are features of common stock?
It generally has voting rights. It has no special preference in receiving dividends. It has no special preference in bankruptcy.
unsystematic risk
It is a risk that affects a single asset or a small group of assets.
Which of the following equations correctly relates OCF to sales volume?
OCF = (P − v) × Q − FC
noncumulative preferred stock
Preferred stock on which the right to receive dividends is lost for any period when dividends are not declared.
Which of the following statements is true in the context of comparing accounting profit and present value break-even point?
Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect.
Which of the following are considered stakeholders in a company?
Suppliers Employees Government customers
possible financial goals for a company?
Survive avoid bankruptcy Beat the competition maximize sales minimize cost maximize profit maintain steady earnings growth
Which type of risk is unaffected by adding securities to a portfolio?
Systematic risk
Which one of the following types of risk is not reduced by diversification?
Systematic, or market risk Systematic risk is also called nondiversifiable risk or market risk
Which is the largest security market in the world in terms of trading volume?
The U.S. Treasuries market
The capital structure of Pendekanti Products is 58 percent common stock, 2 percent preferred stock, and 40 percent debt. The firm maintains a dividend payout ratio of 24 percent, has a beta of 1.08, and has an income tax rate of 21 percent. Given this information, which one of the following statements is accurate?
The cost of equity is unaffected by a change in the company's tax rate.
Operating Leverage
The degree to which a firm or project relies on fixed costs
compound interest
With compound interest, you earn interest on interest as well as interest on the principal.
zero coupon bond
a bound that makes no coupon payments and is thus initially priced at a deep discount
If a firm has multiple projects, each project should be discounted using:
a discount rate that commensurates with the project's risk.
Proxy Voting
a grant of authority by a shareholder allowing another individual to vote his or her shares
The internal rate of return is a function of ____
a project's cash flows
The WACC is the weighted average of the cost of equity and the _____.
aftertax cost of debt
The depreciation tax shield is best defined as the:
amount of tax that is saved because of the depreciation expense.
An organization must prepare ______ and bylaws when forming a corporation.
articles of incorporation
The ROE equals the net profit margin multiplied by the total ____ turnover multiplied by the equity multiplier.
asset
To be considered good, projected cash flows should _____ actual cash flows.
be close to
Side effects from investing in a project refer to cash flows from _____.
beneficial spillover effects erosion effects
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____.
dealer
A firm's bond rating sheds light on its _________ risk.
default
The possibility that errors in projected cash flows will lead to incorrect decisions is known as _____.
estimation risk forecasting risk
For all practical purposes, it is easier to _____.
increase operating leverage than to decrease it
Cash flow to stockholders is dividends paid _____net new equity raised.
minus
With the use of the ______ approach to estimating WACC, the firm's WACC may change through time as economic conditions change.
subjective
Which formula will you enter into a spreadsheet cell to determine how long it will take $40 to grow to $240 at an interest rate of 6.53% compounded annually?
=NPER(0.0653,0,−40,240)
What is a premium bond?
A bond that sells for more than face value
Which costs are included in the numerator of the accounting profit break-even point equation?
Fixed costs Depreciation
The ______ rate of return is the difference between risky returns and risk-free returns.
excess
The price of a share of common stock is equal to the present value of all ______ future dividends.
expected
Present Value
is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect.
The Ibbotson-Sinquefield data presents returns from 1925 to the recent past for:
large cap stocks small cap stocks US T-bills
When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in _____.
scenario analysis asking what-if questions
In simulation analysis, a combination of _____ analysis and _____ analysis is used.
scenario; sensitivity
Capital Rationing
the situation that exists if a firm has positive NPV projects but cannot find the necessary financing
What does a balance sheet reflect about a firm?
Accounting value on a specific date
What is a bond's current yield?
Current yield = Annual coupon payment/Current price
When a corporation is formed, it is granted which of the following rights?
The ability to issue stock State citizenship for jurisdictional purposes Legal powers to sue
The liability of a shareholder in a corporation is limited to which of these?
The amount the shareholder invested in the corporation
Erosion
The cash flows of a new project that come at the expense of a firm's existing projects is called
You are considering a project with conventional cash flows, an IRR of 13.28 percent, a PI of 1.16, an NPV of $1,408, and a payback period of 2.76 years. Which one of the following statements is correct given this information?
The discount rate used in computing the net present value was less than 13.28 percent.
market Interest rate rise
The price of the bond decrease
According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?
The risk-free rate of return
True or false: Some projects, such as mines, have cash outflows followed by cash inflows, which are then followed by cash outflows, giving the project multiple rates of return.
True Reason: Whenever subsequent cash flows are both negative and positive, multiple internal rates of return will occur.
Arrange investments in ascending order from lowest historical risk premium at the top to highest historical risk premium at the bottom.
U.S. Treasury bills Long-term U.S. government bonds Large-company stocks Small-company stocks
Profitability index
Which one of the following methods of analysis provides the best information on the benefits to be received from a project per dollar invested?
primary market
a market in which new issues of securities are offered to the public
The profitability index is calculated by dividing the PV of the _________ cash flows by the initial investment.
future
When discounting the cash flows of a project at the WACC to estimate NPV, we need to find an alternative in the financial markets that is _____ as the given project.
in the same risk class
The point at which the NPV profile crosses the horizontal axis is the:
internal rate of return
variable costs
is equal to the quantity of output times the cost per unit of output.
According to the basic IRR rule, we should _____.
reject a project if the IRR is less than the required return
If an all-equity firm discounts a project's cash flows with the firm's overall weighted average cost of capital even though the project's beta is less than the firm's overall beta, it is possible that the project might be _____.
rejected, when it should be accepted
The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.
suggests accepting
When the stock being valued does not pay dividends,
the dividend growth model can still be used.
The portfolio weight is _____.
the percentage of the total value that is invested in an asset
For a well-diversified portfolio, the Blank______ risk is negligible.
unsystematic diversifiable unique
The cost of capital depends on the _____ of funds, not the _____ of funds.
use; source
Stock prices fluctuate from day to day because of _____.
information flow
Capital Budgeting
the decision-making process for accepting and rejecting projects.
The Fisher effect decomposes the nominal rate into:
the inflation rate and the real rate
Efficient financial markets fluctuate continuously because:
the markets are continually reacting to new information
capital structure
the mixture of debt and equity maintained by a firm
True or false: There is only one way to quote interest rates.
False
Identify the three main sources of cash flows over the life of a typical project.
- Net cash flows from sales and expenses over the life of the project. - Cash outflows from investment in plant and equipment at the inception of the project - Net cash flows from salvage value at the end of the project
A positive NPV exists when the market value of a project exceeds its cost. Unfortunately, most of the time the market value of a project _____.
cannot be observed
Which of the following are fixed costs?
cost of equipment rent on a production facility
floating rate bonds
coupon payments are adjustable
A firm with a market-to-book ratio that is greater than 1 is said to have ______ value for shareholders.
created
receivable turnover
credit sales / accounts receivable
designated market maker
NYSE members who act as dealers in particular stocks. Formerly known as "specialists"
Which of the following are true?
Common stocks may experience negative returns. T-bills sometimes outperform common stocks.
When analyzing a project, scenario analysis is best suited to accomplishing which one of the following?
Identifying the potential range of reasonable outcomes
By definition, which one of the following must equal zero at the cash break-even point?
Operating cash flow
Calculating the present value of a future cash flow to determine its value today is called _____.
discounted cash flow valuation
If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.
(1+r)
Cash Coverage Ratio
(EBIT + Depreciation) / Interest
accounting profit break-even point
(Fixed costs + Depreciation)/Contribution margin
Including preferred stock in the WACC adds the term:
(P/V) × RP
The basic NPV investment rule is:
- Accept a project if the NPV is greater than zero - If the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference - Reject a project if its NPV is less than zero
The use of financial leverage can:
- Increase the chance of financial distress and business failure. - Increase the potential reward for investors. - Greatly magnify both gains and losses.
How is investing in U.S. Treasury bonds different from investing in corporate bonds?
- Interest from U.S. Treasuries is exempt from taxes at the state level but corporate interest is not. - Treasury issues have no default risk.
What are some reasons why the bond market is so big?
- Many corporations have multiple bond issues outstanding. - Federal government borrowing activity in the bond market is enormous. - Various state and local governments also participate in the bond market.
Which of the following are ways to amortize a loan?
- Pay principal and interest every period in a fixed payment. - Pay the interest each period plus some fixed amount of the principal.
Which of the following are true about a partial amortization loan?
- The monthly payment is based on a longer amortization period than the maturity of the loan. - The monthly payments do not fully pay off the loan by the end of the loan period. - The amortization period is longer than the loan period. - The borrower makes a large balloon payment at the end of the loan period.
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.
Assets can be described as items that _____.
- a firm owns - provide market value to the firm - generate revenue
A corporate bond's yield to maturity ____.
- changes over time - can be greater than, equal to, or less than the bond's coupon rate
steps involved in the discounted payback period
- discount the cash flows using the discount rate - add the discount cash flows - accept if the discount payback period is less than some prespecified number of years
The possible goal of profit maximization:
-can be achieved by cost-cutting -would probably be the most commonly sighted goal for a business
Operating cash flow is the cash flow generated by business activities, excluding financing, capital spending, or changes in net working capital.
...
Equity Multiplier
1 + debt equity ratio
difference between debt and equity?
1- Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy 2- A corporation's interest payments on debt are tax deductible, but the dividends it pays to equity holders are not 3- Equity represents ownership interest while debt does not
The Tax Cuts and Jobs Act of 2017 set the corporate tax rate to be ______ regardless of the level of taxable income.
21%
The probability of an outcome being within ± one standard deviation of the mean in a normal distribution is approximately ___ percent.
68
The probability of an outcome being within ± two standard deviations of the mean in a normal distribution is approximately ____ percent.
95
A project with financing type cash flows is typified by a project that has which one of the following characteristics?
A cash inflow at Time 0
Which of the following is true?
A company can deduct interest paid on debt when computing taxable income.
What is a sunk cost?
A cost incurred in the past that is irrelevant to the capital investment decision process.
Which of the following is the simplest form of loan?
A pure discount loan
If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?
An efficient market reaction
sources of cash
An increase in notes payable A decrease in accounts receivable
Which of these are required to calculate the current value of a bond?
Applicable market rate Time remaining to maturity Par/ face value Coupon rate
Assets A and B each have an expected return of 10 percent. Asset A has a standard deviation of 12 percent while Asset B has a standard deviation of 13 percent. Which asset would a rational investor choose?
Asset A Reason: A is better as it offers the same return at a lower level of risk.
How can a positive relationship between the expected return on a security and its beta be justified?
Because the difference between the return on the market and the risk-free rate is likely to be positive
The internal rate of return is the rate that makes NPV = 0. Because Capital's IRR is equal to its required rate, the NPV must be zero.
Capital Corp is considering a project whose internal rate of return is 14%. If Capital's required return is 14%, the project's NPV is
Which of the following are considered relevant cash flows?
Cash flows from erosion effects Cash flows from beneficial spillover effects Cash flows from opportunity costs
Which of the following are reasons why it is more difficult to value common stock than it is to value bonds?
Common stock cash flows are not known in advance The life of a common stock is essentially forever. The rate of return required by the market is not easily observed.
Which of the following processes can be used to calculate future value for multiple cash flows?
Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then add them up
Ingraham Stoneworks has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return?
Condensing the firm's cash inflows into fewer years without lowering the total dollar amount of those inflows
Which of the following defines the contribution margin per unit? Ignore taxes.
Contribution Margin per Unit = Sales price - Variable cost per unit
Which of the following are tax-deductible to the firm?
Coupon interest paid on bonds
What is net working capital?
Current assets minus current liabilities
equation for the degree of operating leverage
DOL = 1 + FC/OCF
What can we say about the dividends paid to common and preferred stockholders?
Dividends to preferred stockholders are fixed. Dividends to common stockholders are not fixed.
Sigma Corporation consists of two divisions: A and B. Division A is riskier than Division B. If Sigma Corporation uses the firm's overall WACC to evaluate both Divisions' projects, which Division will probably not receive enough resources to fund all of its potentially profitable projects?
Division B
The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.
DuPont
stated value
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? $7 preferred
True or false: The APR is always the same as the EAR.
False
Which type of amortization is most commonly used in the real world for mortgages and car loans?
Fixed payment
Which of the following are examples of variable costs for a car manufacturer?
Freight costs The cost of steel Labor costs
Which of the following are examples of fixed costs for a car repair shop performing oil changes and other repairs?
Insurance for the shop Salary for the shop manager Monthly rent for the shop
supplemental liquidity providers
Investment firms that are active participants in stocks assigned to them. Their job is to make a one-sided market. They trade purely for their own accounts.
portfolio's standard deviation
It can be less than the standard deviation of the least risky security in the portfolio.
In the context of capital budgeting, what does sensitivity analysis do?
It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.
Strong form efficiency
It implies that all information of every kind is reflected in stock prices.
What does the security market line depict?
It is a graphical depiction of the capital asset pricing model. It shows the relationship between expected return and beta.
What is a real rate of return?
It is a rate of return that has been adjusted for inflation.
If a security's expected return is equal to the risk-free rate of return, and the market-risk premium is greater than zero, what can you conclude about the value of the security's beta based on CAPM?
It is equal to 0.
While making capital budgeting decisions, which of the following sentence is true regarding the initial investment of net working capital?
It is expected to be recovered by the end of the project's life.
Which of the following statements is accurate regarding the dividend growth model?
It is only as reliable as the estimated rate of growth.
Semistrong form efficiency
It is the most controversial, and all public information is reflected in the stock price.
As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?
It may eventually be almost totally eliminated. It is likely to decrease.
Weak form efficiency
It suggests that, at a minimum, the current price of a stock reflects the stock's own past prices.
six factors used to determine the yield on a bond
Liquidity Default risk Taxability Real rate of return Expected future inflation Interest rate risk
Which one of the following statements is correct based on the period 1926-2019?
Long-term government bonds had more volatile annual returns than did the long-term corporate bonds.
most important source of risk from owning bonds
Market interest rate fluctuations
Which one of the following best states the primary goal of financial management?
Maximize the current value per share
Accelerated Cost Recovery System (ACRS)
Method for claiming tax deductions for certain property purchased before 1987 in which it was possible to claim greater deductions in the early years of ownership, gradually reducing the amount deducted in each year of useful life.
floor brokers
NYSE members who execute customer buy and sell orders
profitability index
Net Present Value / Investment Required The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
By definition, which one of the following must equal zero at the accounting break-even point?
Net income
Organized auction markets include:
New York Stock Exchange
Is a company required to pay preferred dividends?
No; the company may defer dividends on preferred stock; however they can not pay dividends to common shareholders until preferred dividends are paid.
Tax shield approach
OCF = (Sales − Costs) × (1 − Tax rate) + Depreciation × Tax rate
operating cash flows using the top-down approach
OCF = Sales - Costs - Taxes
Suppose Price per Unit is $6, variable cost per unit is $2, fixed costs are $400 and the depreciation allowance per year is $500. The relationship between operating cash flow (OCF) and sales volume (Q) can be expressed as:
OCF = −400 + 4*Q
Put bond
Owner can force issuer to repay prior to maturity at a stated price
How is ownership transferred in a corporation?
Ownership is transferred by gifting or selling shares of stock.
The formula for valuing a constant growth stock is _____.
P0 = D1/(R − g)
Price earnings to growth ratio
PE ratio / growth rate (%)
Which two methods of project analysis are the most biased towards short-term projects?
Payback and discounted payback
cumulative preferred stock
Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid.
Which of the following are correct spreadsheet functions?
Present value = PV(rate,nper,pmt,fv) Discount rate = RATE(nper,pmt,pv,fv) Future value = FV(rate,nper,pmt,pv)
CAT bond
Protects insurance companies from natural disasters
What are the two major forms of long-term debt?
Public issue and privately placed
What is the required return on a stock (RE), according to the constant dividend growth model, if the growth rate (g) is zero?
RE = D1/P0
The formula for the required return from the SML is:
RE = Rf + B(RM − Rf)
profit margin
ROE/ total assets * equity multiplier . . net income / sales
Which of the following is a variable cost in the short run?
Raw materials used in production. (wage & laborers)
variables required to calculate the value of a bond
Remaining life of bond Coupon rate Market yield
In the Ibbotson study, the large-company common stock portfolio is based on the ____.
S&P 500 Index
In addition to CAPM, the cost of equity can be determined using the dividend growth model and the _____ approach.
SML (security market line)
The aim of the act known as Blank______ is to protect investors from corporate abuse.
SOX
In addition to the importance of finance for marketing, accounting, and management careers, finance is also now considered a Blank______ discipline, especially at the graduate level.
STEM
Which one of the following is a primary market transaction?
Sale of a new share of stock from a corporation to an individual investor
What is the difference between scenario analysis and sensitivity analysis?
Scenario analysis considers a combination of factors for each scenario while sensitivity analysis focuses on only one variable at a time.
Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?
Sensitivity
What are three important features of Treasury notes and bonds?
Taxable Highly liquid Default-free
EAR
The interest rate stated as though it were compounded once per year.
Which one of the following will be used in the best-case analysis of a proposed project?
The lowest variable cost per unit that can reasonably be expected
What is the slope of the security market line (SML)?
The market-risk premium
Among the three main sources of cash flow, which source of cash flow is the most important and also the most difficult to forecast?
The operating cash flows from net sales over the life of the project
Using the SML approach, what is the expected return on a stock if its beta is equal to zero?
The risk-free rate
What are the two components of the market risk premium?
The risk-free rate The expected return on the market
standard deviation of a portfolio
The standard deviation of a portfolio is less than or equal to the weighted average of the standard deviations of the assets in the portfolio.
Which of the following are needed to describe the distribution of stock returns?
The standard deviation of returns The mean return
What are the two components of unexpected return (U) in the total return equation?
The systematic portion The unsystematic portion
Indenture
The written agreement between the corporation and the lender detailing the terms of the debt issue
Which of the following are weaknesses of the payback method?
Time value of money principles are ignored. The cutoff date is arbitrary. Cash flows received after the payback period are ignored.
What is the equation for total return as a function of expected and unexpected returns?
Total return = Expected return + Unexpected return
How is the average income tax rate computed?
Total tax bill/Total taxable income
Economic value added (EVA) is a means of evaluating corporate performance.
True
The Ibbotson-Sinquefield data shows that ___.
U.S. T-bills had the lowest risk or variability long-term corporate bonds had less risk or variability than stocks
What does WACC stand for?
Weighted average cost of capital
Cumulative voting
a procedure in which a shareholder may cast all votes for one member of the board of directors Cumulative voting means that each shareholder may distribute votes however he or she wishes. If there are four seats on the board and the shareholder owns 20 shares, he or she can cast 80 votes for one board member.
The PI rule for an independent project is to ______ the project if the PI is greater than 1.
accpet
The best way to include flotation costs is to ___.
add them to the initial investment
Cash flows should always be considered on a(n) ___________ basis.
aftertax
Percentage returns are more convenient than dollar returns because they ____.
apply to any amount invested
From a managerial perspective, highly uncertain projects can be dealt with by keeping the degree of operating leverage _____.
as low as possible
A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____.
base year; base amount
Opportunity costs are ____.
benefits lost due to taking on a particular project
Some risk adjustment to a firm's WACC for projects of differing risk, even if it is subjective, is probably _____.
better than no risk adjustment
A firm will start generating positive accounting profits _____.
beyond the break-even sales point
On the balance sheet, assets are listed at their _____ value.
book
OCF is calculated as net income plus depreciation using the _____ approach.
bottom-up
Secondary markets in sukuk are extremely illiquid because most sukuk are:
bought and held to maturity
Flotation costs are costs incurred to ____.
bring new security issues to the market
A person who brings buyers and sellers together is called a(n) ______.
broker
Capital ______ is the decision-making process for accepting and rejecting projects.
budgeting
When combining common-size and common-base year analysis, the effect of overall growth in assets can be eliminated by first forming the:
common-size statements
The average return on the stock market can be used to ___.
compare stock returns with the returns on other securities
The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called ____
compounding
The ______ can be interpreted as the capital gains yield.
constant growth rate
The _______ is the most important form, in terms of size, of business organization in the United States.
corporation
The increase in the number of stocks in a portfolio results in a(n) _____ in the average standard deviation of annual portfolio
decline
dividend yield
defined as the annual dividend amount divided by the beginning stock price.
The more debt a firm has, the greater its:
degree of financial leverage
NPV
difference between an investment's market value and its cost
Finding a firm's overall cost of equity is
difficult
Incremental cash flows come about as a(n) ________ consequence of taking a project under consideration.
direct
The _____ rate is the rate used to calculate the present value of the future cash flows.
discount
The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:
discounted payback period.
Net Income
dividends + retained earnings
dividends per share
dividends/shares outstanding or common stock
The total dollar return on a stock is the sum of the ____ and the _____.
dividends; capital gains
fixed costs
do not change during a specified time period.
A common-base year financial statement presents items relative to a certain base, which is the _____.
dollar amount of each item during a common base year
An annuity _____ is an annuity for which the cash flows occur at the beginning of each period.
due
The matching principle of GAAP requires revenues be matched with _____.
expenses
In an efficient market, firms should expect to receive ______ value for securities they sell.
fair
True or false: Projects should always be discounted at the firm's overall cost of capital.
false
True or false: Systematic risk will impact all securities in every portfolio equally.
false
True or false: The inflation premium will be higher if the rate of inflation is low.
false
When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal.
false
Costs that do not change in the short run arise because of ______.
fixed commitments
The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times, respectively. Explaining the upward trend in the inventory turnover ratio requires:
further investigation
The average compound return earned per year over a multiyear period is called the _____ average return.
geometric
As the degree of sensitivity of a project to a single variable rises, the:
greater is the importance of accurately predicting the value of that variable.
The value of a firm is the function of its ______ rate and its _______ rate.
growth discount
Sunk costs are costs that ____.
have already occurred and are not affected by accepting or rejecting a project
In general, the arithmetic average return is probably too _____ (low/high) for longer periods and the geometric average is probably too _____ (low/high) for shorter periods.
high; low
Given the same APR, more frequent compounding results in _____.
higher EARs
The growth rate of dividends can be found using _____.
historical dividend growth rates security analysts' forecasts
An efficient market is one in which any change in available information will be reflected in the company's stock price ___.
immediately
An increase in depreciation expense will ____ cash flows from operations.
increase
As a practical matter, it is easier to ____ operating leverage than it is to ____ it.
increase decrease
The expected return on the market will increase if the risk-free rate _________ or if the market risk premium _____.
increases; increases
A(n) ______ project does not rely on the acceptance or rejection of another project.
independent
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
The present value of all cash flows (after the initial investment) is divided by the ______ to calculate the profitability index.
initial investment
The most common way to repay a loan is to pay:
interest plus a fixed principal amount every period.
Scenario Analysis
involves estimating the best-case, worst-case, and base-case cash flows and calculating the corresponding NPVs.
The WACC is the minimum return a company needs to earn to satisfy _____.
its stockholders its bondholders
A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons.
legal
If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be ____.
less than 1
Since ________ and ownership are separated, a corporation's life is unlimited.
management
The most appropriate weights to use in the WACC are the ______ weights.
market value
Given a well-diversified stock portfolio, the variance of the portfolio:
may be less than the variance of the least risky stock in the portfolio.
Net present value (NPV)
measure of how much value is created or added today by undertaking an investment.
Most investments involve _____ cash flows.
multiple
With nonconventional cash flows, there is a possibility that more than one discount rate will make the NPV of an investment zero. This is called the _____ rates of return problem.
multiple
When applying two-stage growth, in the second stage, g2 _____.
must be less than R
There is a(n) ______ relationship between market interest rates and bond values.
negative
Addition to Retained Earnings
net income - cash dividends
earnings per share
net income / shares outstanding or common stock
Total sales
net income/ profit margin
Accounts receivable and accounts payable are not an issue with project cash flow estimation unless changes in ______________ are overlooked.
net working capital
current assets
networking capital + current liabilities
Systematic risk will ____ when securities are added to a portfolio.
not change
The IRR rule can lead to bad decisions when cash flows are _____ or projects are mutually exclusive.
not conventional
The default risk premium refers to the extra compensation demanded by investors for the possibility that the issuer might ____.
not make all the promised payments
to determine the value of a bond at a particular point in time
number of periods remaining until maturity the face value the coupon market interest rate
A firm's cost of debt can be ___.
obtained by talking to investment bankers estimated easier than its cost of equity obtained by checking yields on publicly traded bonds
Studying market history can reward us by demonstrating that _____.
on average, investors will earn a reward for bearing risk the greater the potential reward is, the greater the risk
The year 2008 was _____.
one of the worst years for stock market investors in U.S. history
The constant growth formula calculates the stock price:
one year prior (year t) to the first dividend payment (Dt +1)
The goal of the for-profit business is to maximize _____ equity.
owners
Payments in a partial amortization loan are based on the amortization period, not the loan period. The remaining balance is then:
paid off in a lump sum bullet payment.
The loan balance on _____ amortization loans declines so slowly because the payments are mostly interest.
partial
The payments in a Blank______ amortization loan are NOT based on the life of the loan.
partial
The amount of time needed for the cash flows from an investment to pay for its initial cost is the _____ period.
payback
Once cash flows have been estimated, which of the following investment criteria can be applied to them?
payback period NPV IRR
Variance is measured in ___, while standard deviation is measured in ___.
percent squared; percent
The security market line (SML) shows that the relationship between a security's expected return and its beta is ______.
positive
For a project with conventional cash flows, the NPV is ______ if the required return is less than the IRR, and it is ______ if the required return is greater than the IRR.
positive, negative
A stock with dividend priority over common stock is called a Blank______ stock.
preferred
In capital budgeting, the net ______ determines the value of a project to the company.
present value
If we know the interest rate is 10 percent per year and the money is invested for 10 years, then we can use the _____ to find the present value.
present value factor
price sales ratio
price per share/sales per share DuPont: stock price/ (sales/shares)
To prepare _____ financial statements, we need estimates of quantities such as unit sales, the selling price per unit, the variable cost per unit, and total fixed costs.
pro forma
The IRR rule can lead to bad decisions when _____ or _____.
projects are mutually exclusive cash flows are not conventional
Historically, the real return on Treasury bills has been _____.
quite low
If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the ____ rate.
real
Opportunity costs are classified as ______ costs in project analysis.
relevant
The first step in estimating cash flow is to determine the _________ cash flows.
relevant
A fixed cost is a cost that _____.
remains constant as the level of business activity changes
With interest-only loans that are not perpetuities, the entire principal is _____.
repaid at some point in the future
A project should only be accepted if its return is above what is ___.
required by investors
Internal rate of return (IRR) must be compared to the ________ in order to determine the acceptability of a project.
required return
The discount rate is also called the rate of
return
The SML is very important because it tells us the "going rate" for bearing _____ in the economy.
risk
To use a present value of an annuity table to find the present value of an annuity factor, search the Blank______ for the number of periods and the Blank______ for the rate.
row; column
Net Income
sales * profit margin
When using _______________ all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable.
sensitivity analysis
Interest earned on the original principal amount invested is called _____.
simple interest
When dealing with the history of capital market returns, an average stock market return is useful because it ___.
simplifies detailed market data is the best estimate of any one year's stock market return during the specified period
The Ibbotson-Sinquefield data show that over the long-term, ___.
small-company stocks had the highest risk level small-company stocks generated the highest average return T-bills, which had the lowest risk, generated the lowest return
A ______ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm.
stakeholder
The APR is also called the Blank______ rate and it differs from the EAR.
stated
An official accounting statement that helps to explain the change in cash and cash equivalents is called the _____.
statement of cash flows
To estimate the expected return on a risky asset, we need to know the ___.
stock's beta risk-free rate market risk premium
The main reason for considering nonconstant growth in dividends is to allow for _____ growth rates over _____.
supernormal; some finite length of time
When an investor is diversified only ________ risk matters.
systematic
percentage returns
tell how much was received for each dollar invested, so they can be applied to any initial investment amount.
coupon rate
the annual coupon divided by the face value of a bond $120 regular interest payments/ $1000 face or par value = .12 or 12%
The geometric average rate of return is approximately equal to ___.
the arithmetic mean minus half of the variance
The dividend yield is determined by dividing the expected dividend (D1) by _____.
the current price (P0)
Capital rationing exists when a company has identified positive NPV projects but can't find _____.
the necessary financing
To determine whether an investment has a positive NPV, you can compare the expected return on that new investment to what the financial market offers on an investment with _____.
the same beta
hard rationing
the situation that occurs when a business cannot raise financing for a project under any circumstances
soft rationing
the situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting
The standard deviation is ___.
the square root of the variance
Finding a firm's overall cost of equity is difficult because _____.
there is no way of directly observing the return that the firm's equity investors require on their investment
If a firm uses its overall cost of capital to discount cash flows from higher risk projects, it will accept ______ projects.
too many high-risk
Total Equity
total assets - total liabilities
Total Debt Ratio
total liabilities/total assets (total liability and equity)
credit sales
total sales * percent credit sales
A benefit corporation is for profit, and has the legal attributes of accountability, _____, and purpose.
transparency
Given the same rate of interest, more money can be earned with compound interest than with simple interest.
true
True or false: IRR approach may lead to incorrect decisions in comparison of two mutually exclusive projects.
true
True or false: It can be advantageous to have a staggered board because it provides "institutional memory."
true
True or false: The existence of traders attempting to beat the market is a necessary precondition for markets to become efficient.
true
True or false: The price you actually pay to purchase a bond will generally exceed the clean price.
true
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
True or false: When a business does hard rationing, the firm's DCF analysis breaks down.
true Reason: When a business does hard rationing, the firm's DCF analysis breaks down and the best course of action is ambiguous.
The computation of equivalent annual costs is useful when comparing projects with _____ lives.
unequal
Three special case patterns of dividend growth include _____.
zero growth constant growth nonconstant growth