# Finance exam 3 concept questions

 Under what conditions must a distinction be made between money to be received today and money to be received in the future? When idle money can earn a positive return Time value of money considers which of the following item(s) that change the value of money? Interest In determining the future value of a single amount, one must consider the present value at a given interest rate and time. An annuity may best be defined as a series of consecutive payments of equal amounts. You are to receive \$12,000 at the end of five years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today? Present value of \$1 You are to receive \$12,000 at the end of each of five years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today? Present value of an annuity of \$1 As the interest rate increases, the present value decreases. If you were to put \$1,000 in the bank at 6% interest each year for the next 10 years, which table would you use to find the ending balance in your account? Future value of an annuity of \$1 Babe Ruth Jr. has agreed to play for the Cleveland Indians for \$3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today’s dollars? Present value of an annuity Football player Walter Johnson signs a contract calling for payments of \$250,000 per year, which begins 10 years from now and then continue for five more years after that. To find the value of this contract today, which table or tables should you use? The present value of an annuity of \$1 and the present value of \$1 A dollar today is worth more than a dollar to be received in the future because the dollar can be invested today and earn interest. Valuation of financial assets requires knowledge of future cash flows and an appropriate discount rate. The market allocates capital to companies based on all of these options are true. In a general sense, the value of any asset is the present value of the cash flows expected to be received from the asset. Which of the following financial assets is likely to have the highest required rate of return based on risk? Common stock Which of the following is not one of the components included in the required rate of return on a bond? Market yield If the inflation premium for a bond goes up, the sales price of the bond goes down. Preferred stock has all but which of the following characteristics? The same binding contractual obligation as debt. The value of a common stock is based on its value of future benefits to the holder. A common stock that pays a constant dividend can be valued as if it were preferred stock. If a company’s stock price (P0) goes up, and nothing else changes, Ke (the required rate of return) should go down. Each project should be judged against None of these options are true. Financial capital does not include working capital. The overall weighted average cost of capital is used instead of costs for individual sources of funds because the use of the cost for specific sources of capital would make investment decisions inconsistent, and investments funded by low-cost debt would have an advantage over other investments. If a firm’s bonds are currently yielding 6% in the marketplace, why would the firm’s cost of debt be lower? Interest is tax-deductible, so tax savings are considered. The after-tax cost of preferred stock to the issuing corporation is the same as the before-tax cost. For many firms, the cheapest and most important source of equity capital is in the form of retained earnings. The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of the existence of flotation costs. Within the capital asset pricing model beta measures the volatility of an individual stock relative to a stock market index. A firm’s cost of financing, in an overall sense, is equal to its all of these options are true. The pre-tax cost of debt for a new issue of debt is determined by the yield to maturity of outstanding or comparable bonds. Flotation cost is the cost of issuing new stock. Why is the cost of debt normally lower than the cost of preferred stock? Interest on debt is tax deductible. A firm’s debt-to-equity ratio varies at times because All of these are accurate statements. Retained earnings has a cost associated with it because there is an opportunity cost associated with stockholder funds. The weighted average cost of capital is used as a discount rate because as long as the cost of capital is earned, the common stock value of the firm will be maintained.
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