Finance Final
Which of the following statements regarding a 30 year monthly payment amortized mortgage with a semiannual interest rate of 10% is correct?
A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
Which of the following statements is correct?
A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
If you are a strict risk minimizer, you would choose stock ___ if it is to be held in isolation and stock ___ if it is to be held as part of a well diversified portfolio. A: St. Dev.- 20% and beta 0.59 B: St. Dev.-10% and beta 0.61 C: St. Dev.- 12% and beta 1.29
B:A
Which of the following items is NOT normally considered to be a current asset?
Bonds
Jane has a portfolio of 20 average stocks and Dick has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is correct?
Dicks portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Janes portfolio, but the required (and expected) returns will be the same on both portfolios.
Which of the following is a primary market transaction?
IBM issues 2,000,000 shares of new stock and sells them to the public through an investment broker.
Which of the following statements is correct?
One defect of the IRR method is that it assumes that the cash flows to be received from a project reinvested at the IRR itself, and that assumption is often not valid.
Which of the following is correct?
One drawback of the payback criterion is that this method does not take account of the cash flows beyond the payback period.
Supposed Tapley Inc. uses a WACC of 8% for below average risk projects, 10% for average risk projects and __% for below average risk projects. Which of the following independent projects should Tapley accept assuming that the company uses the NPV method when choosing the project.
Project B, which has a below average risk and an IRR of -8.5%.
Companies can issue different classes of common stock. Which of the following statements regarding classes is correct?
Some class or classes of common stock are entitled to more votes per share than other classes.
Which of the following statements is correct?
The balance sheet gives us a picture of the financial position at a point in time.
Which of the following statements is correct?
The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.
Which of the following factors should be included in the cash flows used to estimate a projects NPV?
The end of project recovery of any additional net operating working capital required to operate the project
Which of the following statements is correct? Assume that the project being considered with one outflow followed by a series of inflows.
To find a projects IRR, we must solve the discount rate that causes the PV of the inflows to equal the PV of the projects cost.
You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:
a secondary market transaction
Inflation, recession and high interest rates are economic events that are best characterized as being:
among the factors that are responsible for market risk.
Which of the following statements is correct?
capital market instruments include both long term debt and common stocks
The primary operating goal of a publicly owned firm interested in serving its stockholders should be to:
maximize the stock price per share over the long run, which is the stocks intrinsic value.
Which of the following bank accounts has the lowest effective annual return?
An account that pays 7% nominal interest with monthly compounding.
Assume the risk-free rate is 6%, and the market risk premium is 5%. Given this information, which of the following statements is correct?
An index fund with beta = 1.0 should have a required return of 11%.
Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is correct?
The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
Which of the following is NOT a relevant cash flow and thus should NOT be reflected in the analysis of a capital budgeting analysis?
sunk costs that have been expensed for tax purposes.
Other things held constant, which of the following actions would increase the amount of cash on a companies balance sheet?
the company issues new common stock
Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?
Adding more such stocks will reduce the portfolios unsystematic, or diversifiable risk.
The relative risk of a proposed project is best accounted for by which of the following procedures?
Adjusting the discount rate upward if the project is judged to have above-average risk.
Which of the following items cannot be found on a firms balance sheet under current liabilities?
Cost of goods sold (COGS)
Which of the following statements is correct?
If a companies tax rate increases but the YTM on its noncallable bonds remains the same, the after tax cost of its debt will fall.
Rowell company spent $3 million two years ago to build a plant for a new project, so the building is available for sale or for a new project. Rowell owns the building free and clean and there is no mortgage on it. Which of the following statements is correct?
If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.
Which of the following statements is correct?
If you formed a portfolio that consisted of all stocks with a betas less than 1.0, which is about half of all stocks, the portfolio itself would have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio, and that portfolio would have less risk than a portfolio that consisted of all stocks in the market.
Which of the following investments would have the lowest present value? Assume that the effective annual rate for investments is the same and is greater than zero.
Investment D pays $2,500 at the end of 10 years. (just one payment)
A firm wants to strengthen its financial position. Which of the following actions would INCREASE its current ratio?
Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
Which of the following statements is CORRECT?
It is generally more expensive to form a corporation than a proprietorship because, with a corporation, extensive legal documents are required.
Which of the following statements is CORRECT?
One of the advantages of incorporating your business is that you will not become subject to the firm's liabilities in the event of bankruptcy
An increase in an investor is considering buying one of two 10 year, $1000 face value, noncallable bonds; bond A has a 7% annual coupon, while bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, and the YTM is expected to remain constant for the next 10 years. Which of the following statements is correct?
One year from now, bond A's price will be higher than it is today.
Which of the following rules is correct for capital budgeting analysis?
Only incremental cash flows, which are the cash flows that would result if a project is accepted, are relevant when making accept/reject decisions for capital budgeting projects.
Which of the following statements is correct? Assume the project being considered has normal cash flows with one outflow followed by a series of inflows.
The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
Which of the following statements is correct?
To implement the corporate valuation model, we discount projected free cash flows to the COST OF EQUITY CAPITAL.
Money markets are markets for:
short term debt securities such as Treasury bills and commercial paper
which of the following mechanisms would be most likely to help motivate managers to act in the best interest of shareholders?
increase in the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.
