Finance 3313 Exam 1 Review
The present value of a $100 three year annuity due discounted at a rate of 10% is equal to ________.
$273.55.
In the statement of cash flows, retained earnings are handled through the adjustment of ________.
"Net Profits After Taxes" and "Dividends Paid" accounts.
EAR=
(1+r/m)^m -1
OCF=
(EBIT X (1-T)) + Depreciation)
The four key financial statements required by the SEC....
-Income statement -Balance Sheet -Statement of stockholder's equity -Statement of cash flows
Examples of Perpetuity:
-Preferred stock that pays the same dividend forever. -British consol bond. -Endowment that pays same amount forever.
Review Tax Problems from Chapter 2.
...
The cash flows from a bond can be viewed as two distinct cash flow streams which are;
A single sum equivalent to the par value received at maturity; an annuity of periodic interest payments.
Flat yield curve:
A yield curve that indicates that interest rates do not vary much at different maturities.
Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk?
A zero-coupon bond with 30 years until maturity.
What type of loan requires both principal and interest payments as you go by making equal payments each period?
Amortized loan.
Annuity due
An annuity for which the cash flow occurs at the beginning of each period.
Ordinary annuity
An annuity for which the cash flow occurs at the end of each period.
Normal yield curve:
An upward-sloping yield curve indicates that long-term interest rates are generally higher than short-term interest rates.
________ is a term used to describe the magnification of risk and return introduced through the use of fixed cost financing, such as preferred stock and debt.
financial leverage.
Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or repurchase stock are called cash flow from ________.
financing activities
If you take out a loan from a bank, you will be charged _______.
for both principal and interest.
Other things being equal, the more frequent the compounding period, the:
higher the effective annual interest rate.
Bearer bonds
illegal for U.S. citizens too own.
Which of the following represents a cash flow from operating activities?
increase or decrease in current liabilities.
Coupon rate:
interest rate paid as a percentage of par value.
Maturity:
length of time until the bond is redeemed.
At its most basic level, the function of financial intermediaries is to ______.
move money from lenders to borrowers and back again.
The government is typically a _________ of funds.
net demander.
Which of the following actions will INCREASE the present value of an investment?
Decrease the interest rate.
The ________ compensates the investor for the additional risk that the loan will not be repaid in full.
Default premium.
When you pay off the principal and all of the interest at one time at the maturity date of the loan, we call this a(n)_______.
Discount loan.
How do you calculate current yield?
Divide the annual interest payment by the current price.
A firm's operating cash flow (OCF) is defined as ________.
EBIT times one minus the tax rate plus depreciation
Total asset turnover=
Sales/Total assets.
The primary goal of the financial manger is to maximize what?
Shareholder wealth
A crisis in the financial sector often spills over into other industries because when finical institutions ______ borrowing activity in most other industries ______.
contract; slows down.
Which of the following is fixed (e.g., cannot change) for the life of a given bond?
coupon rate.
A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might ________.
decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios.
The cash flows from financing activities section of the statement of cash flows includes ________.
dividends paid.
Indenture:
document that provides details on the bond's features and covenants.
An interest rate that has been annualized using compound interest is termed the:
effective annual interest rate.
A market that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses is called a(n)...
efficient market.
Investment banks are institutions that...
engage in trading and market making activities.
Par value bond:
face value.
For the year ended December 31, 2014, a corporation had cash flow from operating activities of -4,000, and cash flow from financing activities of $9,000. The statement of cash flows would show a ________.
net increase of $3,000 in cash and marketable securities
As a key participant in financial transactions, individuals are...
net suppliers of funds because they save more money than they borrow.
________ measures the percentage of profit earned on each sales dollar before interest and taxes but after all costs and expenses.
operating profit margin.
In general, firms that are subject to a high degree of ________, relatively short production cycles, or both, tend to use shorter planning horizons.
operating uncertainty.
Capital losses will automatically be the case for bond investors who buy:
premium bonds.
The problem of motivating one party to act in the best interest of another party is known as the
principal - agent problem.
Present and prospective shareholders are mainly concerned with a firm's...
risk and return.
The primary concern of creditors when assessing the strength of firm is its...
short term liquidity.
A firm's annual stockholders' report ______.
summarizes and documents the firm's financial activities during the past year.
The current yield tends to overstate a bond's total return when the bond sells for a premium because:
the bond's price will decline each year.
Which of the following statements is FALSE?
APR is quoted on annual basis and interest can paid monthly but never daily.
What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?
The price of the bond increases.
Inflation in the United States has ________ since 1950.
Varied over time.
Convertible:
bond feature allowing conversion to a fixed number of shares of common equity.
Callable:
bond feature that gives the firm the right to force investor to sell the bond back to the firm.
A corporation ________.
can use different depreciation methods for tax and financial reporting purposes.
How is EPS calculated?
By dividing the period's total earnings available for the firm's common stockholders by the number of shares of common stock outstanding.
_________ is simply the interest earned in subsequent periods on the interest earned in prior periods.
Compound interest.
ndicate the three bond features or bond types will allow the firm to pay a lower coupon rate.
Convertible, mortgage, and senior.
Inventory turnover=
Cost of goods sold/Inventory.
What type of analysis involves the comparison of different firms financial ratios at the same point in time?
Cross sectional.
Quick (acid-test) ratio=
Current Assets - Inventory/Current Liabilities.
Current Ratio=
Current Assets/Current Liabilities.
The 2 basic measures of liquidity are _______.
Current and quick ratios.
Net working capital is calculated by taking the difference between:
Current assets and current liabilities.
An increase in accounts receivable balance provides an increase in cash flow.
False.
Business firms are permitted to systematically charge a portion of the market value of fixed assets as depreciation against annual revenues.
False.
Given positive equal annual cash flows and a positive interest rate, the present value of an annuity will be greater than the sum of the cash flows.
False.
If interest rates are positive, then discounting increases the future value of an investment while compounding reduces the present value of an investment.
False.
The income statement of a firm shows the value of its assets and liabilities over a specified period of time.
False.
The primary goal of any company should be to maximize current period profit.
False.
Which of the following is a forum in which suppliers and demanders of funds can transact business directly?
Financial Markets.
Given a set future value, which will contribute to a lower present value?
Higher discount rate.
________ relationship between a bond's price and it's interest rate.
Inverse.
Which of the following is true of a secondary market?
It is a market in which preowned securities are traded.
Two categories of ratios that should be utilized to assess a firm's true liquidity are the ________.
Liquidity and active ratios.
Which of the following values would interest a shareholder most?
Market value of equity.
The number of periods for a consumer loan is equal to the ___________.
Number of years times compounding periods per year.
Which of the following would be considered an advantage of the sole proprietorship form of organization?
Profits taxed at only one level.
Which of the following is a limitation of ratio analysis?
Ratios that reveal large deviations from the norm merely indicate the possibility of a problem.
Which of the following statements best describes the real interest rate?
Real interest rates can be negative, zero, or positive.
Ratios provide a _____ measure of a company's performance and condition.
Relative.
The federal regulatory body governing the sale and listing of securities is called the ______.
SEC.
Where does a "convertible bond" get its name?
The option of converting into shares of common stock.
Which of the following factors will change when interest rates change?
The present value of a bond's payments.
The form of business organization in the United States that has the greatest amount of capital is _________.
The publicly traded corporation.
Which of the following is NOT true with regard to an amortization table?
The remaining principal balance at the end of a payment period is equal to the beginning of the period principal less the total payment.
Liquidity preference theory:
Theory suggesting that long-term rates are generally higher than short-term rates because investors perceive short-term investments to be more liquid and less risky than long-term investments. Borrowers must offer higher rates on long-term bonds.
Market segmentation theory
Theory suggesting that the market for loans is segmented on the basis of maturity and that the supply of and demand for loans within each segment determine its prevailing interest rate; the slope of the yield curve is determined by the general relationship between the prevailing rates in each market segment.
Expectations theory:
Theory that the yield curve reflects investor expectations about the future interest rates; an expectation of rising interest rates results in an upward-sloping yield curve, and an expectation of declining rates results in a downward-sloping yield curve.
Debt Ratio=
Total Liabilities/Total Assets.
Consider a two year investment: Given a constant and positive interest rate, the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding).
True.
Depreciation deductions, like any other business expenses, reduce the income that a firm reports on its income statement.
True.
Given a time period, and interest rate, and a future value, a person could solve for a present value.
True.
Previously issued securities are traded among investors in the secondary markets.
True.
ROE is equal to ROA when the firm has no debt
True.
The aggregate hunches of many people with money at stake are likely to be more accurate than the opinion of disinterested experts.
True.
The separation of ownership and management is one distinctive feature of corporations.
True.
Inverted yield curve:
a downward-slopping yield curve indicates that short-term interest rates are generally higher than long-term interest rates.
Banks cover the costs of the service they provide primarily via:
an interest rate differential.
The primary purpose in preparing a cash budget is ________.
to estimate a firm's short-term cash requirements.
Debenture:
unsecured bond.
Which of the following represents a way of coping with uncertainty in a cash budget?
using scenario analysis, or "what if" approach, to analyze cash flows under a variety of circumstances
The money market is a market...
which brings together suppliers and demanders of short term funds.
The discount rate that makes the present value of a bond's payments equal to its price is termed the:
yield to maturity.