Finance 3104

The​ long-run goal of the firm is toA. increase sales regularly. B. maximize shareholder wealth.C. hold large quantities of cash.D. maximize earnings per share. B. maximize shareholder wealth.
Maximizing shareholder wealth means maximizing theA. value of the​ firm’s assets. B. value of the​ firm’s cash.C. market value of the​ firm’s common stock.D. value of the​ firm’s profits. E. value of the​ firm’s investments. C. market value of the firm’s common stock
Advantages of the corporation include ​ A. transferability of ownership. B. unlimited liability.C. ability of the corporation to raise capital. D. double taxation of dividend income. E. A and C. F. A and B. E. a and c
Disadvantages of the partnership areA. expense of formation. B. lack of permanence. C. double taxation of income. D. unlimited liability. E. b and d.F. a and d. E. b and d
Which method listed below is NOT a method by which securities are distributed to final​ investors?A. Commission basisB. Privileged subscriptionC. Direct saleD. Negotiated purchaseE. ​Competitive-bid purchaseF. Upset Agreement F. Upset Agreement
Which of the following is generally NOT an advantage of private​ placements?A. Interest costsB. Financing flexibilityC. Reduced flotation costsD. Speed A. Interest Costs
Which of the following is generally not a disadvantage of private​ placements?A. Imposition of several restrictive covenants B. Speed C. Interest costsD. Possibility that the security may have to be registered some time in the future at the​ lender’s option B. Speed
What are the two major categories of flotation​ costs? ​I.​ Underwriters’ spreadII. Issuing CostsIII. CommisionsIV. TaxesA. I and IIB. II and IIIC. I and IIID. I and IV A. I and II
Flotation costs are the highest​ on:A. common stock.B. preferred stock.C. bonds.D. mutual funds and bonds. A. Common Stock
Identify the major reasons why underdeveloped countries remain underdeveloped.I. Underdeveloped countries lack natural resources.II. Underdeveloped countries lack effective financial market systems.III. Underdeveloped countries lack political stability.IV. Underdeveloped countries lack a labor force.A. Only IVB. II and IIIC. I and IID. I and IV B. II and III
What are profit​ margins? What are the different types of profit​ margins?A. The profit margins are the​ profits-to-sales relationships. Three types are cost profit​ margin, fixed profit​ margin, and net profit margin.B. The profit margins are the​ profits-to-sales relationships. Three types are gross profit​ margin, operating profit​ margin, and net profit margin.C. The profit margins are the​ profits-to-assets relationships. Three types are current profit​ margin, gross profit​ margin, and net profit margin.D. The profit margins are the​ profits-to-assets relationships. Three types are gross profit​ margin, operating profit​ margin, and net profit margin. B. The profit margins are the profits-to-sales relationships. Three types are gross profit margin, operating profit margin, and net profit margin
The purpose of doing a financial analysis is all of the following​ except:A. Restating accounting data in relative terms so that comparisons can be made with firms of different sizes and with the same firm over time.B. To identify some of the financial strengths and weaknesses of a company.C. To prepare GAAP financial statements.D. A and B only. D. A and B only
Which of the following might use financial ratios for the purposes​ stated?A. Firm managers to evaluate the​ firm’s performance.B. ​Credit-rating agencies to determine the​ firm’s creditworthiness.C. Major suppliers to decide whether or not to grant credit terms to a company.D. Investors to decide whether or not to invest in a company.E. Lenders to decide whether or not to make a loan to the company.F. All of the above. F. All of the above
Which differences in the accounting practices of firms limit the usefulness of financial​ ratios?A. Different firms choose different methods to depreciate their fixed assets. Differences such as these can make thecomputed ratios of different firms difficult to compare.B. Different firms choose different methods to allocate their inventory. Differences such as these can make thecomputed ratios of different firms difficult to compare.C. Different firms choose different methods to book revenues and expenses. Differences such as these can make thecomputed ratios of different firms difficult to compare.D. A and B only.E. ​A, B and C. D. A and B only
Why should you be careful when comparing a firm with industry​ norms?A. Accounting practices differ widely among firms. These differences can make the computed ratios of different firms difficult to compare.B. Many firms experience seasonal changes in their operations.C. An industry average is not necessarily a desirable target ratio or norm. You may wish to be in the top​ 10%.D. Sometimes it is difficult to identify the industry to which your firm​ belongs, so you must select your peers and construct your own norm.E. Published peer group or industry averages are only approximations.F. All of the above. F. All of the above
True or False:The expected​ benefits, or returns of most investments come in the form of cash flows. True
The additional compensation for assuming greater risk is​ called:A. standard deviation of return.B. nominal average return.C. real average return.D. risk premium. D. Risk Premium
Type of Risk:The CEO of a firm retires. Unsystematic risk
Type of Risk:The Federal Reserve announces that it will lower the interest rate to boost the economy. Systematic risk
Type of Risk:Production costs of a firm increase due to rising oil prices. Systematic risk
Type of Risk:A manufacturer loses a product liability suit. Unsystematic risk
Type of Risk:The inflation rate increases unexpectedly. Systematic risk
Type of Risk:A firm announces a decrease in its earnings forecast. Unsystematic risk
How many different securities must be owned to essentially diversify away unsystematic​ risk?A. 1B. 5C. 20D. 100 C. 20
A​ firm’s market risk can be estimated byA. estimating the required rate of return using the Capital Asset Pricing Model. B. estimating the beta coefficient of the characteristic line using the regression method.C. calculating the coefficient of variation of the​ firm’s stock returns.D. calculating the standard deviation of the​ firm’s stock returns. B. estimating the beta coefficient or the characteristic line using the regression method
How do debentures differ from mortgage bonds with regard to their​ risk?A. Debentures have a higher market value than mortgage bonds.B. Mortgage bonds require higher interest rate.C. The earning ability of the issuing corporation has a higher impact on the risk of debentures than it does on mortgage bonds.D. The duration of a debenture has a greater impact on its risk than the duration of a mortgage bond. C. The earning ability of the issuing corporation has a higher impact on the risk of debentures than it does on mortgage bonds
How would investors respond to the varying types of​ risk?A. Investors will be indifferent to perceived higher risk.B. Investors will hold the security for a longer period of time.C. Investors will require a higher yield for assuming higher risk.D. Investors will sell the security to realize the returns. C. Investors will require a higher yield for assuming higher risk
How does an investor receive a return from a zero or very low coupon​ bond?A. From the coupon payments. B. From the tax savings of the bonds.C. From the increase of the market interest rate.D. From the appreciation of the bonds. D. From the appreciation of the bonds
True or False:Since the bond pays little or no​ interest, the issuing company is unable to deduct the amortized interest over the life of the​ bond. False
Which of the following is not one of the important features of a​ bond? ​A. Dividend.B. Maturity.C. Coupon interest rate.D. Par value. A. Dividend
Which feature determines the cash flows associated with a​ bond?A. Maturity.B. Call provision.C. Coupon interest rate.D. Claims on assets and income. C. Coupon interest rate
When the market interest rate rises above the stated interest rate of a​ bond, the bondA. will sell at its par or stated value.B. will sell at a premium.C. will sell at a discount.D. will not sell because investors can receive a better return from the market. C. will sell at a discount
True or False:The opportunity cost represents the​ investor’s return on the​ next-best investment that is foregone should the project under consideration be accepted and thus must equal the​ investor’s required rate of​ return. True
When a firm raises funds by issuing a particular type of​ security, it incurs flotation costs that will​ _____ the​ firm’s cost of capital.A. decreaseB. eliminateC. not affectD. increase D. Increase
When firms operate in multiple industries for which the risk characteristics and financial structures vary significantly they shouldA. calculate divisional costs of capital for use in evaluating each​ division’s investment opportunities.Your answer is correct.B.try to adjust the capital structures used in each of the divisions such that the weighted average cost of capital in each is the same.C. use a company wide weighted average cost of capital because the divisional risk can be diversified away when the new investment is combined with other projects within the company as a whole.D. use a company wide weighted average cost of capital to evaluate all new investments so as to hold each operating division to the same standard. A. Calculate divisional costs of capital for use in evaluating each division’s investment opportunities
It is so difficult to find an exceptionally profitable project because ​A. ​R&D is very expensive and time consuming.B. it rarely exists.C. competition is brisk and will push down prices and profits.D. most companies do not have the skill to discover one. C. Competition is brisk and will push down prices and profits
True or False:The search for new profitable projects is so important because without the flow of new projects and ideas most firms cannot grow and even survive for​ long. True
If Ford introduces a new auto​ line, might some of the cash flows from that new car line be diverted from existing product​ lines? A. If Ford introduces a new auto line that might compete with the​ firm’s existing product​ lines, then​ new-product sales achieved at the cost of losing sales of existing product lines should also be considered as a benefit in​ capital-budgeting analysis.B. If Ford introduces a new auto line that might compete with the​ firm’s existing product​ lines, this is called a synergistic effect.C. If Ford introduces a new auto line that might compete with the​ firm’s existing product​ lines, then​ new-product sales achieved at the cost of losing sales of existing product lines are considered as sunk costs that should be excluded in​ capital-budgeting analysis. D. If Ford introduces a new auto line that might compete with the​ firm’s existing product​ lines, then only the incremental sales the new line brings to the company should be considered in determining the free cash flows in​ capital-budgeting analysis. D. If Ford introduces a new auto line that might compete with the firm’s existing product lines, then only the incremental sales the new line brings to the company should be considered in determining the free cash flows in capital-budgeting analysis
Which of the following is an example of an option to delay a​ project? ​A. The option to enter into the foreign markets.B. The option to increase production if the new product launches successfully. C. The option to wait for one year to open a restaurant.D. The option to shut down a mining operation due to the depletion of the ore reserves. C. The option to wait for one year to open a restaurant.
Which of the following is an example of an option to expand a​ project? ​A. The option to shut down a mining operation due to the depletion of the ore reserves.B. The option to increase production if the new product launches successfully. C. The option to wait for one year to open a restaurant.D. The option to refinance at a lower rate to prepay the home mortgage. B. The option to increase production if the new product launches successfully
The​ project’s ________________, which is a​ project’s risk ignoring the fact that much of this risk will be diversified away as the project is combined with the​ firm’s other projects. standing alone risk
The​ project’s___________________ which is the amount of risk that the project contributes to the firm as a whole. contribution-to-firm risk
The​ project’s____________________ which is the risk of the project from the viewpoint of a​ well-diversified shareholder. systematic risk
True or False:Because much of a​ project’s risk is diversified away within the​ firm, the project standing alone risk is an appropriate measure of the meaningful level of risk of a​ capital-budgeting project. False
True or False:Combining operating and financial leverage magnifies variations in earnings per share in response to changes in​ sales. True
If a​ firm’s operating and financial leverage are such that a 10 percent change in sales revenue produced a 20 percent change in​ EBIT, and a 10 percent change in EBIT led to a 20 percent change in earnings per​ share, what percentage change in earnings would you expect should revenues decline by 25​ percent?If sales revenues will decline by 25​ percent, what percentage change in earnings would you​ expect?A. -50%B. ​+100%C. ​+50%D. -100% D. -100%
The optimal capital structure refers to a capital structure thatA. is comprised of​ 99.9% equity capital.B. will minimize the composite cost of a​ firm’s capital for raising a given amount of funds.C. is comprised of​ 99.9% debt capital.D. will minimize the​ firm’s common stock price. B. will minimize the composite cost of a firm’s capital for raising a given amount of funds
It is important for managers of corporations to act ethically​ ___________.A. because ethical behavior is its own justificationB. because it is important for a business to be trusted by​ investors, customer and the public if it is to succeedC. because business managers must answer to a higher authorityD. because a violation of ethics will be punished by the law B. because it is important for a business to be trusted by investors, customer and the public if it is to succeed
True or False:The​ Sarbane-Oxley Act, or​ SOX, is aimed at controlling insider trading by members of Congress. False
If a CEO names his or her friends an family to the board of directors and then pays them quite a bit above the​ norm, this would be an example of the​ _______.A majority voting featureB. agency problemC. proxy fightsD. preemptive right B. agency problem
Which of the following would be considered to be a primary market​ transaction?A. Texas Instruments repurchasing some its own stock from an investor.B. An investor purchasing Paypal stock on Nasdaq.C. An investor selling Ford stock on the NYSE.D. A new issue of stock by Transport Solar. D. A new issue of stock by Transport Solar
True or False:A basis point is equal to one​ one-hundredth of a percentage point. True
The higher the discount​ rate, the greater the importance of the early cash flows. True
A debenture is an unsecured​ long-term debt instrument. True
The detailed legal agreement between a​ bond’s issuer and its trustees that describes the​ bonds, the rights of the bondholders and the issuing firm is called the​ _____.A. indentureB. call provisionC. covenantD. collateral agreement A. indenture
Which of the following gives the bond issuer the right to redeem or repurchase a bond issue before its maturity​ date?​A. Floating rate.B. The priority of claims.C. The call provision.D. Convertibility. C. The call provision
If a bond with a​ $1,000 par​ value, 20 years to​ maturity, and a coupon interest rate of​ 10% was selling for​ $800, then the yield to maturity on that bond​ is:A. cannot be determined.B. is greater than​ 10%.C. is less than​ 10%.D. is​ 10%. B. is greater than 10%
When the required rate of return on a bond is less than the​ bond’s coupon interest​ rate, the bondA. will sell at a premium over par. B. will sell at a discount from par.C. will sell at par value.D. may sell at either a discount or a premium. A. will sell at a premium over par
True or False:Trident Capital has a bond with a​ $1,000 par​ value, an annual coupon interest rate of​ 7% that is paid​ semiannually, and a remaining term of 12 years. The annual market yield on similar bonds is​ 5%. This bond will sell at a discount from par. False
True or False:The more years to​ maturity, the more sensitive the price of a bond will be to changes in market interest rates. True
True or False:How much the value of a bond changes as a result of interest rate changes depends on both the​ bond’s time to maturity and its pattern of cash flows. True
If the market price of a bond​ decreases, then:A. the coupon rate increases. B. the yield to maturity increases. C. the yield to maturity decreases. D. none of the above. B. the yield to maturity increases
If current market interest rates​ drop, what will happen to the value of any bonds that are​ outstanding? A. It will rise.B. It will fall.C. There is no connection between current market interest rates and the value of outstanding bonds. D. It will remain unchanged. A. It will rise
If current market interest rates​ rise, what will happen to the value any bonds that are​ outstanding?A. It will fall.B. It will remain unchanged. C. It will rise.D. There is no connection between current market interest rates and the value of outstanding bonds. A. It will fall.
Tranis Corporation sold an issue of​ 20-year, $1,000 par value bonds to the public that carry a​ 10.00% coupon​ rate, payable semiannually. It is now 10 years​ later, and the current market rate of interest is​ 8.00%. If interest rates remain at​ 8.00% until​ Tranis’ bonds​ mature, what will happen to the value of the bonds over​ time? A. The bonds will sell at a discount and fall in value until maturity. B. The bonds will sell at a premium and rise in value until maturity.C. The bonds will sell at a premium and decline in value until maturity. D. The bonds will sell at a discount and rise in value until maturity. C. The bonds will sell at a premium and decline in value until maturity
Examine the following statements. Which of them is true regarding​ bonds? A. If market interest rates​ change, long-term bonds will fluctuate more in value than​ short-term bonds. B. Bond prices move in the same direction as market interest rates. C. If market interest rates are higher than a​ bond’s coupon interest​ rate, then the bond will sell above its par value. D. ​Long-term bonds are less risky than​ short-term bonds. E. None of the above. A. If market interest rates change, long-term bonds will fluctuate more in value than short-term bonds.
Examine the following statements. Which of them is true regarding​ bonds? A. ​Long-term bonds have less interest rate risk than do​ short-term bonds. B. Bond prices move in the same direction as market interest rates. C. If market interest rate is above a​ bond’s coupon interest​ rate, then the bond will sell below its par value. D. As a bond approaches​ maturity, the market value of a bond will become more volatile. C. If market interest rate is above a bond’s coupon interest rate, then the bond will sell below its par value
Examine the following statements. Which of them is true regarding​ bonds? A. If market interest rates are higher than a​ bond’s coupon interest​ rate, then the bond will sell above its par value. B. As the maturity date of a bond​ approaches, the market value of a bond will become more volatile. C. The market value of a bond moves in the opposite direction of market interest rates.D. ​Long-term bonds are less risky than​ short-term bonds.E. None of the above. C. The market value of a bond moves in the opposite direction of market interest rates
If​ you, as an​ investor, are looking for capital​ gains, which type of bond should you​ purchase?A. Bonds with short maturity dates when interest rates are expected to rise.B. Bonds with distant maturity dates when interest rates are expected to rise.C. Bonds with short maturity dates when interest rates are expected to decline.D. Bonds with distant maturity dates when interest rates are expected to decline. D. Bonds with distant maturity dates when interest rates are expected to decline
Examine the following statements. Which of them is true regarding​ bonds? A. As the maturity date of a bond​ approaches, the market value of a bond will become more volatile. B. If market interest rates are below a​ bond’s coupon interest​ rate, then the bond will sell above its par value. C. Bond prices move in the same direction as market interest rates. D. ​Long-term bonds have less interest rate risk than do​ short-term bonds. B. If market interest rates are below a bond’s coupon interest rate, then the bond will sell above its par value
True or False:If a bond is selling at a​ discount, then its coupon rate is lower than the market interest rate. B. True
True or False:A Eurobonds is a bond issued in a country different from the one in whose currency the bond is denominated. B. True
As an​ investor, you expect a larger expected return on common stock than on bonds​ because:A. you have no legal right to receive dividends.B. you bear greater risk.C. in the event of​ liquidation, you are only entitled to receive any cash that is left after all creditors are paid. D. All of the above. D. All of the above
You are considering buying some stock in Colony Transport. Which of the following is an example of systematic or market​ risk? A. Risk resulting from a general decline in the stock market.B. Risk resulting from a news release that an officer at Colony had been stealing from clients.C. Risk resulting from an impending lawsuit against Colony. D. Risk resulting from a truck owned by Colony getting in an accident. A. Risk resulting from a general decline in the stock market
You are considering investing in Disney. Which of the following is an example of diversifiable​ risk? A. Risk resulting from uncertainty regarding a possible strike against Disney.B. Risk resulting from interest rates decreasing.C. Risk resulting from an expected recession.D. Risk resulting from the possibility of a stock market crash. A. Risk resulting from uncertainty regarding a possible strike against Disney
The beta of a stock is the slope​ of:A. the security market line or SML.B. the arbitrage pricing line. C. the line of best fit for a plot of the​ company’s returns against the returns of the market portfolio for the same period.D. the characteristic line for a plot of returns on the​ S&P 500​ (or market​ portfolio) versus returns on​ short-term Treasury bills. C. the line of best fit for a plot of the company’s returns against the returns of the market portfolio for the same period
Which of the following is NOT an example of market risk or systematic​ risk? A. Management riskB. InflationC. RecessionD. Interest rate risk A. Management Risk
Which of the following has a beta of​ zero? A. The marketB. A​ risk-free assetC. A​ high-risk assetD. Both A and B B. A risk-free asset
The security market line​ (SML) relates risk to​ return, for a given set of market conditions. If you expect inflation to​ increase, which of the following would expect to occur all else being held​ constant? A. The SML line would shift up but maintain the same slope.B. The market risk premium would increase. C. Beta would increase.D. The slope of the SML would increase. A. The SML line would shift up but maintain the same slope
The market risk premium is measured​ by:A. ​T-bill rate.B. market return less​ risk-free rate.C. standard deviation.D. beta. B. market return less risk-free rate
True or False:The security market line can be graphically represented by a line that connects the​ risk-free rate and the expected return on the market portfolio. True
True or False:If investors became more risk​ averse, the slope of the Security Market Line drop​ (that is, it would become less​ steep). False
If you invest a sum of money at​ 8% compounded​ annually, how long will it take for it to​ double? ​(Select the best choice​ below.)A. 5.4 yearsB. 4 yearsC. 9 yearsD. 11 years C. 9 years
If you put​ $1,000 in a savings account that yields an​ 7% annual rate of interest that is compounded​ weekly, how much would that be worth in 25 weeks​ (round to the nearest​ dollar)? A. ​$1,043B. ​$1,025C. ​$1,040D. ​$1,034 D. ​$1,034
True or False:Assuming that an amount is compounded for more than one year and is also compounded more than once a year​ (for example, compounded​ monthly) the EAR will always be greater than the APR. True
True or FalseAll else​ constant, you should be indifferent between receiving​ $7,500 today or receiving a​ $600 perpetuity when the discount rate is​ 8% annually. True
Why is the​ acid-test or quick ratio considered to be a more refined measure of​ liquidity? A. It measures how quickly cash and other liquid assets flow through the company.B. It is a quicker calculation to make.C. Inventory is not included in the numerator of the​ acid-test or quick ratio because inventory is generally the least liquid of the​ firm’s current assets. D. Cash is the most liquid current asset. C. Inventory is not included in the numerator of the acid-test or quick ratio because inventory is generally the least liquid of the firm’s current assets
The Walker Corporation has current assets of​ $15,000, inventories of​ $7,000, and a current ratio of 2.5. What is the Walker​ Corporation’s quick or acid test​ ratio? A. 2.14B. 0.74C. 0.86D. 1.33 D. 1.33
What will happen to the return on equity if the total asset turnover ratio​ decreases? A. It will​ change, but in an indeterminate way. B. It will not change.C. It will decrease. D. It will increase. C. It will decrease
Looking at an income​ statement, sales​ revenue, minus cost of goods sold and operating​ expenses, is equal to which of the​ following?A. Net Profit.B. Retained earnings.C. Net income available to preferred shareholders.D. EBIT. D. EBIT
Which of the following streams of income is not impacted or affected by how a firm is financed or raises​ money, that​ is, whether it uses debt or​ equity?A. Net profit after tax but before dividendsB. Operating incomeC. Income before taxD. Net working capital B. Operating income
Which of the following is not included when computing earnings before taxes or​ EBT?A. Depreciation expenseB. DividendsC. Cost of goods soldD. Marketing expenses B. Dividends
Your firm has the following income statement​ items: sales of​ $25000; income tax of​ $2,500; operating expenses of​ $3,800; cost of goods sold of​ $13,000; and interest expense of​ $2,000. What is the amount of the​ firm’s EBIT? A. ​$5,700B. ​$6,200C. ​$8,200D. ​$3,700 C. $8,200
In looking at Chacko​ Inc.’s income statement you find the​ following: sales of​ $52,000,000; income tax of​ $1,880,000; operating expenses of​ $9,000,000; cost of goods sold of​ $36,000,000; and interest expense of​ $800,000. Given this​ information, calculate Chacko​ Inc.’s gross profit margin.Chacko​ Inc.’s gross profit margin is A. ​8.3%.B. ​13.5%.C. ​69.2%.D. ​30.8%. D. 30.8%
We use which two terms​ interchangeably? A. Earnings before interest and taxes​ (EBIT) and operating income.B. Income after financing activities and operating income.C. Gross profit and earnings before interest and taxes​ (EBIT).D. Income from capital gains and operating income. A. Earnings before interest and taxes (EBIT) and operating income
The gross profit margin will increase when which of the following​ decreases: A. depreciation expense B. interest expense C. cost of goods sold D. both A and B C. cost of goods sold
Any time the profitability index on a project is greater than​ 1, A. the IRR will be higher than the required rate of return.B. the present value of future cash flows will exceed the​ project’s initial outlay.C. the NPV will also be positive.D. All of the above. D. All of the above
If the IRR on a project is exactly equal to the​ project’s required rate of​ return, then:A. the NPV will be exactly equal the​ project’s initial investment.B. the NPV equals zero.C. The​ project’s profitability index will be exactly equal to 0.D. the​ project’s NPV will be exactly equal to 1. B. the NPV equals zero

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