lecture preps corp 1: fin
The price-sales ratio is especially useful when analyzing firms that have:
negative earnings.
Which one of the following statements related to dividend policy is correct?
Dividend policy focuses on the timing of dividend payments
Green Roof Motels has more cash on hand than its operations require. Thus, it has decided to pay out some of its earnings in the form of cash to its shareholders. What are these payments to shareholders called?
Dividends
Which one of these identifies the relationship between the return on assets and the return on equity?
DuPont identity
Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the uniform auction price for each of those shares. Which one of the following terms best describes this underwriting?
Dutch auction
Mobile Units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 shares were purchased in accordance with which one of the following?
Green Shoe provision
Which bond would you generally expect to have the highest yield?
Long-term, taxable junk bond
Which one of the following states that the value of a company is unrelated to the company's capital structure?
M&M Proposition I, no tax
Which one of the following states that the cost of equity capital is directly and proportionally related to capital structure?
M&M Proposition II
Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?
Net present value
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
Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers?
Pillar system
Which one of the following is classified as a tangible fixed asset?
Production equipment
Which one of the following are you most apt to estimate first as you begin the process of preparing pro forma statements?
Projected sales
Which one of these is indicative of a short-term restrictive financial policy?
Purchasing inventory on an as-needed basis
Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the company is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called?
Rights offer
What is a seasoned equity offering?
Sale of newly issued equity shares by a publicly owned company
Which one of the following involves a payment in shares that increases the number of shares a shareholder owns but also decreases the value per share?
Stock dividend
HJ Corporation has excess cash and has opted to buy some of its outstanding shares. What is this process of buying called?
Stock repurchase
Which one of the following does not affect the total equity of a company but does increase the number of shares outstanding?
Stock split
The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?
Tax due on the current salvage value of that asset
Which one of the following statements related to WACC is correct for a company that uses debt in its capital structure?
The WACC would most likely decrease if the firm replaced its preferred stock with debt.
Which one of the following is correct in relation to pro forma statements?
The addition to retained earnings is equal to net income less cash dividends.
Which one of the following best describes the concept of erosion?
The cash flows of a new project that come at the expense of a firm's existing cash flows
Which one of the following statements correctly defines a time value of money relationship?
Time and present value are inversely related, all else held constant.
An increase in which of the following must increase the return on equity, all else constant?
Total asset turnover and debt-equity ratio
Which one of the following statements is a correct reflection of the U.S. financial markets for the period 1926-2016?
U.S. Treasury bills had an annual return in excess of 10 percent in three or more years.
Which one of the following is the primary determinant of a firm's cost of capital?
Use of the funds raised
Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as:
accounts receivable financing
The length of time between the sale of inventory and the collection of the payment for that sale is called the
accounts receivable period
The depreciation tax shield is best defined as the:
amount of tax that is saved because of the depreciation expense.
Changes in the net working capital requirements:
can affect the cash flows of a project every year of the project's life.
The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are:
capacity, character, collateral, capital, and conditions.
Geoff Industries offers its credit customers a two percent discount if they pay within ten days. This discount is referred to as a ____ discount.
cash
Central Supply paid off an accounts payable for a toboggan it had purchased on credit three weeks ago. The time period between today and the day Central Supply will receive cash from the sale of this toboggan is called the:
cash cycle
The common stock of Dayton Dry Goods has historically had a low dividend yield that is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to as the _____ effect.
clientele
Town Hardware sells goods on credit with payment due 30 days after purchase. If payment is not received by the 30th day, the store mails a friendly reminder to the customer. If payment is not received by the 45th day, the store calls the customer and requests payment and also stops offering credit to that customer. These procedures are referred to as the store's:
collection policy
The interest earned on both the initial principal and the interest reinvested from prior periods is called:
compound interest
When utilizing the percentage of sales approach, managers:
consider the current production capacity level.
Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the:
cost of debt.
All else equal, the market value of a stock will tend to decrease by roughly the aftertax value of the dividend on the:
ex-dividend date.
The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the:
gross spread
A syndicate can best be defined as a:
group of underwriters sharing the risk of selling a new issue of securities
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:
have multiple rates of return.
Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:
increase
Depreciation for a tax-paying firm:
increases expenses and lowers taxes.
Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:
interest on interest
The operating cycle is equal to the
inventory period plus the accounts receivable period.
A company's pretax cost of debt:
is based on the current yield to maturity of the company's outstanding bonds.
Taylor Supply has made an agreement with its bank that allows it to borrow up to $10,000 at any time over the next year. This arrangement is called a(n):
line of credit
The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate.
marginal
DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:
market price of the bond will decrease.
The sustainable growth rate of a firm is best described as the _____ growth rate achievable _____.
maximum; excluding any external equity financing while maintaining a constant debt-equity ratio
The internal growth rate of a firm is best described as the ____ growth rate achievable _____.
maximum; excluding external financing of any kind
If a stock portfolio is well diversified, then the portfolio variance:
may be less than the variance of the least risky stock in the portfolio.
An amortized loan:
may have equal or increasing amounts applied to the principal from each loan payment.
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:
mutually exclusive.
The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the:
operating cycle
Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the:
present value
National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:
priced the same as a $1 perpetuity.
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.
profitability
The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:
protective covenants.
Phil's Print Shop grants its customers the right to pay for their print jobs within 30 days of the ROG. Thus, the customers' credit period begins when they:
receive their print jobs
The portion of net income that a firm reinvests in itself is called the:
retention ratio.
You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient.
semistrong
The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:
spread.
The principle of diversification tells us that:
spreading an investment across many diverse assets will eliminate some of the total risk.
The weighted average cost of capital for a company is least dependent upon the:
standard deviation of the company's common stock.
The pure time value of money is known as the:
term structure of interest rates
Brown's Hardware offers a discount of two percent on their commercial accounts if payment is received within ten days. Otherwise, payment is due within 30 days. This credit offering is referred to as the:
terms of sale
The plowback ratio is:
the percentage of net income available to the firm to fund future growth.
If a project has a net present value equal to zero, then:
the project earns a return exactly equal to the discount rate.
The proposition that a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called:
the static theory of capital structure.
Standard deviation measures which type of risk?
total risk
Executive Tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is serving as a(n):
underwriter
When constructing a pro forma statement, net working capital generally:
varies proportionally with sales.
The value of a firm is maximized when the:
weighted average cost of capital is minimized.
The average of a company's cost of equity, cost of preferred, and aftertax cost of debt that is weighted based on the company's capital structure is called the:
weighted average cost of capital.
The expected return on a stock given various states of the economy is equal to the:
weighted average of the returns for each economic state.
The secondary market is best defined as the market:
where outstanding shares of stock are resold.
Which one of the following is an example of a sunk cost?
$1,200 paid to repair a machine last year
You want to have $30,000 saved 5 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 3.5 percent rather than 2.5 percent on your savings? Today's deposit is the only deposit you will make to this savings account.
$1,256.43
The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 1.2 percent to the company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $63,000 and projected cash inflows of $19,000 in Year 1, $34,000 in Year 2, and $28,000 in Year 3. The firm uses 33 percent debt and 67 percent common stock as its capital structure. The company's cost of equity is 13.8 percent while the aftertax cost of debt for the firm is 5.7 percent. What is the projected net present value of the new project?
$618
You are comparing two annuities that offer regular payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?
Annuity B has a smaller present value than annuity A.
exam #2
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Which one of these will increase a company's aftertax cost of debt?
A decrease in the company's tax rate
Which one of the following statements is correct concerning market efficiency?
A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.
Which one of the following statements related to annuities and perpetuities is correct?
A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.
Which one of the following is a current liability?
Account payable to a supplier that is due next week
Which one of the following accounts is the most liquid?
Accounts receivable
Which one of the following is the equity risk that is most related to the daily operations of a firm?
Business risk
Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?
Common
What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?
Constant-growth model
A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith Inc. What is the return that these individuals require on this investment called?
Cost of equity
Which one of the following is a characteristic of a just-in-time inventory system?
High level of dependence on supplier performance
A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?
Callable
Which one of following is the rate at which a stock's price is expected to appreciate?
Capital gains yield
Assume that RSF is a wholly owned subsidiary of the Rolled Steel Company. RSF provides credit financing solely for large ticket items purchased from the Rolled Steel Company. Which one of the following terms describes RSF?
Captive finance company
Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?
Cash inflow in the final year of the project
Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?
Default risk
Which one of the following is most directly affected by the level of systematic risk in a security?
Expected rate of return
Float is defined as the:
Difference between book cash and bank cash
A decrease in which of the following will increase the current value of a stock according to the dividend growth model?
Discount rate
Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?
Discounted cash flow valuation
Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?
Efficient capital market
Which one of the following accurately describes the three parts of the DuPont identity?
Equity multiplier, 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.
Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?
Hiring additional employees to handle the increased workload should the firm accept the wreath project
Which one of the following will decrease the net present value of a project?
Increasing the project's initial cost at time zero
Real rates are defined as nominal rates that have been adjusted for which of the following?
Inflation
JLK is a partnership that was formed two years ago and has been extremely successful thus far. The owners have decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called?
Initial public offerin
Which one of the following is an expense for accounting purposes but is not an operating cash flow for financial purposes?
Interest expense
Westover Mills reduced its taxes last year by $210 by increasing its interest expense by $1,000. Which one of the following terms is used to describe this tax savings?
Interest tax shield
Which one of the following is an example of systematic risk?
Investors panic causing security prices around the globe to fall precipitously
Which term relates to the cash flow that results from a company's ongoing, normal business activities?
Operating cash flow
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
Security market line
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?
Selling fewer hot dogs because hamburgers were added to the menu
RB Enterprises (RBE) received an unexpected phone call from a competitor offering all of its assets to RBE at a bargain basement price. While RBE had not anticipated purchasing these assets, the opportunity was too good to pass up. This illustrates which one of the following needs to hold cash?
Speculative
Which one of the following statements concerning interest rates is correct?
The effective annual rate equals the annual percentage rate when interest is compounded annually.
What is the information content effect?
The financial market's reaction to a change in the amount of a company's dividend
Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.
The information was expected.
Which one of the following statements is correct concerning the cash cycle?
The longer the cash cycle, the more likely a company will need external financing
Which one of these statements is correct?
The optimal capital structure maximizes shareholder value.
This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct?
The present value of this investment is equal to $1,000.
A project has a net present value of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in current dollar terms.
Business Aid is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called?
Venture capital
Standard deviation is a measure of which one of the following?
Volatility
You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?
Voting by proxy
Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?
Weak
United Foods declared a dividend of $.62 a share on Thursday, October 16. The dividend will be paid on Monday, November 10, to shareholders of record on Friday, October 31. Which one of the following is the ex-dividend date?
Wednesday, October 29
Which one of the following statements related to loan interest rates is correct?
When comparing loans you should compare the effective annual rates.
M&M Proposition I with no tax supports the argument that:
a company's debt-equity ratio is completely irrelevant.
Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:
a decrease in all stock values.
Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate.
annual percentage
The interest rate that is most commonly quoted by a lender is referred to as the:
annual percentage rate.
Pro forma statements:
are projections, not guarantees.
The _____ tax rate is equal to total taxes divided by total taxable income.
average
Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?
beta
A company's current cost of capital is based on:
both the returns currently required by its debtholders and stockholders.
Sam just opened a savings account paying 3.5 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this, Sam:
could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.
Net working capital is defined as:
current assets minus current liabilities
A firm's external financing need is met by:
debt or equity.
The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs.
direct bankruptcy
Steve just computed the present value of a $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the:
discount rate
The internal rate of return is defined as the:
discount rate which causes the net present value of a project to equal zero.
The process of determining the present value of future cash flows in order to know their value today is referred to as:
discounted cash flow valuation
The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate.
effective annual
An ordinary annuity is best defined as:
equal payments paid at the end of regular intervals over a stated time period.
You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?
expected return
Relationships determined from a company's financial information and used for comparison purposes are known as:
financial ratios
You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?
future value
The average compound return earned per year over a multiyear period is called the _____ average return.
geometric
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.
Evidence seems to support the view that studying public information to identify mispriced stocks is:
ineffective
The length of time a firm must wait to recoup the money it has invested in a project is called the:
payback period.
GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?
sunk
The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.
systematic risk principle
The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:
yield to maturity.
An account into which funds are deposited only in an amount equal to the value of the checks presented for payment that day is called a _____ account.
zero-balance
