Homework vocab
If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?
.5
Which one of the following bonds is the least sensitive to interest rate risk? -3-year; 4 percent coupon -3-year; 6 percent coupon -5-year; 6 percent coupon -7-year; 6 percent coupon -7-year; 4 percent coupon
3-year; 6 percent coupon
The taxability risk premium compensates bondholders for which one of the following?
A bond's unfavorable tax status
best example of unsystematic risk?
A national decrease in consumer spending on entertainment
Which form of business would be the best choice if it were necessary to raise large amounts of capital?
Corporation
A firm's liquidity is measured with which one of the following ratios?
Current ratio
On the statement of cash flows, which one of the following is considered an operating activity?
Decrease in accounts payable
Which one of the following is a project cash inflow? Ignore any tax effects.
Decrease in inventory
Which one of the following accurately lists the three components of the DuPont identity?
Equity multiplier, net profit margin, and total asset turnover
Which one of the following applies to the dividend growth model?
Even if the dividend amount and growth rate remain constant, the value of a stock can vary.
The DuPont identity can be used to help managers answer which of the following questions related to a company's operations?
How many sales dollars are being generated per each dollar of assets? How many dollars of assets have been acquired per each dollar in shareholders' equity? How much net profit is being generated per dollar of sales?
Which of the following values will be equal to zero when a project is operating at the accounting break-even level of output?
IRR and net income
Which one of the following is least apt to help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes.
Increasing managers' base salaries
Which one of the following will decrease the net present value of a project? -Increasing the value of each of the project's discounted cash inflows -Moving each cash inflow forward one time period, such as from Year 3 to Year 2 -Decreasing the required discount rate -Increasing the project's initial cost at Time 0 -Increasing the amount of the final cash inflow
Increasing the project's initial cost at Time 0
Real rates are defined as nominal rates that have been adjusted for which of the following?
Inflation
Of the options listed below, which is the best example of systematic risk? Investors panic causing security prices around the globe to fall precipitously. A flood washes away a firm's warehouse. A city imposes an additional one percent sales tax on all products. A toymaker has to recall its top-selling toy. Corn prices increase due to increased demand for alternative fuels.
Investors panic causing security prices around the globe to fall precipitously.
Which of the following statements regarding unsystematic risk is accurate?
It can be effectively eliminated by portfolio diversification.
Which of the following statements is true of a portfolio's standard deviation?
It can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.
Which of the following statements regarding the cost of preferred stock is accurate?
It equals the dividend yield.
Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?
Liquidity
Which bond would you generally expect to have the highest yield?
Long-term, taxable junk bond
You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? -Short-term; low coupon -Short-term; high coupon -Long-term; zero coupon -Long-term; low coupon -Long-term; high coupon
Long-term; zero coupon
Which one of these statements related to growing annuities and perpetuities is correct?
The present value of a growing perpetuity will decrease if the discount rate is increased.
Assume the current market price of a bond exceeds its par value. Which one of these equations applies?
Yield to maturity < Coupon rate
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
a discount; less than
A ________ is the market's measure of systematic risk.
beta of 1
The dividend growth model:
requires the growth rate to be less than the required return.
The excess return is computed as the:
return on a risky security minus the risk-free rate.
An investor who owns a well-diversified portfolio would consider ________ to be irrelevant.
unsystematic risk
Which one of following is the rate at which a stock's price is expected to appreciate?
Capital gains yield
The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?
Opportunity cost
All else constant, if a firm decreases its operating costs, which one of the following will also decrease?
Price-earnings ratio
A business that is a legal entity separate from the owners, yet treated as a legal person, is called a(n):
corporation
Agency problems are most likely to be associated with:
corporations.
In response to a change in the market rate of interest, the price sensitivity of a bond increases as the:
coupon rate decreases and the time to maturity increases.
The most important reason to diversify a portfolio is to:
eliminate asset-specific risk.
You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the:
financial break-even point.
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.
A sole proprietorship:
has a limited life.
Mortgage lenders probably have the most interest in the ______ ratios.
long-term debt and times interest earned
Which one of the following is an example of a sunk cost? -$2,000 in lost sales because an item was out of stock -$2,000 paid last year to rent equipment -$2,000 project that must be forfeited if another project is accepted -$2,000 reduction in Product A revenue if a firm commences selling Product B -$2,000 increase in comic book sales if a store ceases selling puzzles
$2,000 paid last year to rent equipment
When evaluating two mutually exclusive projects, the final decision on which project to accept ultimately depends upon which one of the following?
Net present value
The Fisher effect is defined as the relationship between which of the following variables?
Real rates, inflation rates, and nominal rates
Valenica Corporation has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?
Right to share in company profits prior to other shareholders
A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes.
Sales price per unit
Which of the following statements best describes the principle of diversification?
Spreading an investment across many diverse assets will eliminate some of the total risk.
Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium? Diversified portfolio with returns similar to the overall market Stock with a beta of 1.24 Stock with a beta of .63 U.S. Treasury bill Portfolio with a beta of 1.12
Stock with a beta of 1.24
Reyes has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?
The stock has a negative capital gains yield.
Limited partners benefit from which of the primary advantages?
Their maximum loss cannot exceed the amount of their capital investment.
All other things beings equal, and assuming all ratios have positive values, an increase in current liabilities will:
decrease the quick ratio.
According to the statement of cash flows, an increase in inventory will ______ the cash flow from ______ activities.
decrease; operating
When evaluating any capital project proposal, the cost of capital:
depends upon how the funds raised for that project are going to be spent.
Assume a firm utilizes its WACC as the discount rate for every capital project it implements. Accordingly, the firm will tend to:
increase the average risk level of the company over time.
A partner in a firm knows that the maximum financial loss he or she will experience is the amount he or she invested in the firm. The partner is called a ______ partner.
limited
The slope of the security market line is the:
market risk premium.
Decisions made by financial managers should primarily focus on increasing the:
market value per share of outstanding stock.
Thornton Homes has multiple divisions which operate as separate lines of business and face risks unique to those lines. The firm uses its overall WACC as the discount rate to evaluate all proposed projects. Accordingly, each division within the firm will tend to:
prefer higher risk projects over lower risk projects.
The security market line intercepts the vertical axis at the:
risk-free rate.
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.
A firm owned by a single person who has unlimited liability for the firm's debt is called a:
sole proprietorship.
When determining a firm's weighted average cost of capital, the item with the least amount of impact is the:
standard deviation of the company's common stock.
A project has a net present value of zero. Given this information:
the project's cash inflows equal its cash outflows in current dollar terms.
An analyst wishes to estimate the amount of additional reward she will receive for investing in a risky asset rather than a risk-free asset. The minimum values she will need to know are:
the risky asset's beta the market risk premium