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Finance Flashcards

Ch. 9

You have a workbook that contains sales data for different regional sales reps of a company. Which task is the least likely to be done while the worksheets are grouped? Enter specific values for the first sales rep
Your manager sent you a workbook that contains data validation rules. One rule specifies a maximum value of 15% with a warning alert. You try to enter 22% in that cell. What happens? Excel displays a message box informing you the value is above the maximum value and lets you chose to go ahead and enter that value or a different value
The function = FV(D10, D8,-D5) is entered in cell D12. Which cell is a dependent of cell D8? D12
If you want to display a portion of all three worksheets in a workbook, what should you do? Open two new workbook windows, arrange windows, and then click a different worksheet tab in each window
Cell B15 contains the formula =B14+B15. You created a: Reference Formula
A personal trainer stores how much weight each person can lift in several categories. Each week’s data are stored in a separate worksheet within the same workbook, and each workbook has an identical structure. Assume cell F5 contains the weight the first person can bench press. What function can identify that person’s highest amount bench-pressed in all worksheets? =MAX(‘Week1:Week4’!F5)
You want to create a hyperlink on the summary worksheet to a cell in the data worksheet within the same workbook. Which type of link do you create? Existing file or web page
You want to create a situation so that you can monitor the results of cell formulas on a different worksheet as you change data on another worksheet. You should create a: Watch window
You created several workbooks (Accounting, Finance, Management, and Marketing) in the same folder as the main workbook SchoolOfBusiness. What formula correctly links to cell D20 in the Fall 2018 worksheet within the Finance workbook? =”Finance[Fall 2018]”!D20
You want to restrict data entry to whole numbers greater than 100. What do you create to enforce this data-entry restriction? Validation criteria
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Finance Flashcards

Personal Finance Chapter 12

Stocks with price movements that tend to follow the business cycle are called Cyclical bonds
John Smith is in the 28 percent tax bracket. If he were to purchase a $1,000 municipal bond that had a stated interest rate of 6.9%, the taxable equivalent yield would be: 9.583%.
A company has a beta of 1.0; if the market goes down by 8%, the value of the company’s stock will likely decline 8%
The value of any investment is a function of the return it is expected to produce relative to the amount of perceived risk involved in the investment. True
If the current price of an investment increases, what effect does the price increase have on approximate yield? decrease yield
A beta of more than one would be expected of a speculative stock. True
The higher a stock’s beta, the riskier the stock. true
In most investments, there is a risk-return tradeoff. true
Which of the following statements about preferred stock is true? Dividends must generally be paid to preferred shareholders before dividends may be paid to common shareholders.
Security investors incur varying degrees of risk. Business risk is related to the potential success or failure of the firm.
Interest rate risk is greater for short-term bonds than for long-term bonds. False
Bonds can be used conservatively by investors seeking current income and aggressively by investors seeking capital gains. True
Bondholders will receive interest payments only after stockholders receive dividends. False
Junk bonds have higher risk and similar returns to investment grade bonds. False
Bonds are issued by corporations and federal, state, and local governments.
Risk and return are ____ related. Directly
A company with low financial risk has little to no long-term debt. True
To the issuing company, bonds are liabilities. True
Only the federal government issues zero coupon bonds. False
When cash dividends on stock are paid, but the stockholder has these dividends automatically reinvested, what are the federal income tax implications? Taxes must be paid in the year the dividends are paid at ordinary income tax rates.
A bond is priced at 89 8/32. What is its price? $892.50
The commonly cited price for a bond is usually its clean bond price. True
Net profit margin is a key measure of profitability that relates the net profits of a firm to its sales True
Publicly traded issues are only available to qualified investors. False
The ____ of a stock reflects stockholder confidence. price/earnings ratio
Which of the following types of bonds are unsecured? debenture bond
Suppose the EPS of Walmart stock is $2, and the current price per earnings ratio is 10. What is the current price of Walmart stock? $20
Investors typically welcome their bonds being called because of the generous call premium paid. False
The easiest way to invest in foreign stock is to purchase international mutual funds.
Common stockholders are entitled to a prorated share of a company’s earnings only after all of the firm’s other obligations have been met. True
A characteristic of defensive stocks is price stability in economic decline.
Municipal bonds can be attractive investments, despite their lower interest rate, since their interest income is exempt from federal income tax. True
The higher the tax bracket you are in, the more attractive the purchase of municipal bonds becomes. True
Stocks with betas of less than 1.0 will have relatively stable prices. True
Which of the following is an advantage of owning growth stocks? High potential for capital gains
Stock dividends are taxed at long-term capital gains rates. False
Assume you’re contemplating the purchase of a $1,000, 6% annual coupon income bond with 5 years remaining to maturity and that the bond currently is trading at $950. The approximate yield to maturity on this bond will be 7.2%
Bonds provide for investment return primarily in the form of growth. False
A convertible bond is usually a debenture in corporate market.
The Smith family owns 200 shares of Elta stock. The company declared a 5% stock dividend. The Smiths now own 210 shares
Interest rate risk is greater for stocks than for bonds. False
An example of event risk would be corporate takeover
Common stockholders are considered to be the residual owners of the company. True
A bond selling below par value is selling at a discount
Bond return can include both interest and capital gains. True
Bonds issued by subdivisions of the U.S. government but not guaranteed by the government are called agency bonds
____ stocks are purchased as a gamble rather than because they have a proven history of good performance. speculative
All treasury bonds issued today are noncallable. True
A bond with a yield to maturity that equaled or exceeded an investor’s desired rate of return is considered an attractive investment. True
Earnings per share can be defined as the return earned on behalf of each share of common and preferred stock, calculated by dividing all earnings by the total number of shares outstanding. False
Which of the following types of risk affect owners of fixed income securities more than owners of equity securities purchasing power risk
Assume you’re contemplating the purchase of a $1,000, 5% annual coupon income bond with 10 years remaining to maturity and that the bond currently is trading at $925. The approximate yield to maturity on this bond will be 6.0%
The approximate yield to maturity of a bond is greater than the stated rate of interest when purchased at discount
You would expect more growth with the preferred stock you own than with the common stock in your portfolio. False
All securities involve risk of some kind. True
Common stocks pay a guaranteed dividend each year. False
Income stocks are similar to bonds in that they pay annual interest to owners. False
From an equityholder’s perspective, the firm’s overall profitability is measured by return on equity
Changes in the value of securities due to social, political, or economic factors are referred to as market risk. True
Which of the following would be a DISadvantageof owning an income stock? Lower growth potential
One of the more appealing features of a common stock is that stock investments offer ownership with a limited liability.
____ risk results from the behavior of investors in the securities market Market
The returns you expect from securities are income and growth. True
If Wristwatch Arm Corporation (WAC) has the book values of assets of $10 million, liabilities of $5 million, and preferred stock of $1 million, the book value of its stock is $6 million. False
Advantages of a dividend reinvestment plan can include -stock sold at a discount.-free of brokerage commissions.
Cash dividends on common stock are most often paid quarterly
Your convertible bond has a conversion ratio of 15. The current market price of the common stock is $50/share. The conversion value of this bond is $750
A lower expected return will mean a higher risk will have to be accepted. False
The minimum rate of return you would like to receive in compensation for the amount of risk you have assumed is the Required rate of return
Convertible preferred stock can be exchanged for common stock. True
TIPS are appropriate for investors who are conservative and concerned about inflation. True
To most stockholders, the main advantages of common stock investment are attractive returns and active trading.
There is an inverse relationship between bond prices and market interest rates. True
Stocks with high betas will have low price volatility. False
Typically, the best time to invest in the stock market is when the market is very volatile. False
A bond is issued at $1,000 par value during a time in which interest rates for similar bonds were 8%. Today, new bonds with similar creditworthiness are issued at 10%. Which of the following is most likely to be true about the bond? It is currently selling at a discount.
When evaluating a stock as a possible investment, one must consider the current market price.the expected capital gain.the expected dividend income.one’s investment goals.
Bondholders have no equity in the issuing firm. True
Event risk occurs when something substantial happens to a company that has an immediate impact on its financial condition. True
An investment is acceptable if the expected rate of return is greater than the desired rate of return. True
Stocks of companies that have experienced—and are expected to continue experiencing—higher rates of growth in operations and earnings are called growth stock
John and Mary Smith own 500 shares of ABE stock. After the company pays a 6 percent stock dividend, John and Mary will own 530 shares of ABE stock. True
A callable bond may be retired by the issuer prior to maturity. True
Bond prices and market interest rates are ____ related. Inversely
Preferred stockholders have no equity in the issuing firm. False
When a bond is sold between coupon payment dates, the buyer pays the seller for the accrued interest. True
Zero coupon bonds are issued by federal agencies.municipalities.corporations.
A high inflation rate would result in a high degree of purchasing power risk
Dividend reinvestment plans should be avoided because of their relatively high cost. False
Anderson, Inc. has $10 million liabilities, $12 million preferred stock, 8 million shares of common stock outstanding, and $45 million in total assets. The book value per share of common stock is: . $2.88 per share.
A stock’s beta is an indication of how responsive the stock is to changes in the overall stock market. True
U-Need-This has $12 million liabilities, $12 million preferred stock, 10 million shares of common stock outstanding, and $39 million in total assets. The book value per share of common stock is: . $1.50 per share.
Common stock owners must receive dividends before preferred stockholders. False
Corporate ownership is evidenced by stock
Price fluctuations of defensive stocks are usually contrary to movements in the business cycle. True
The risk-free rate of return is often measured by the return on U.S. Treasury bills. true
Which of the following is most likely to occur immediately following the announcement that the rating on a corporate bond has been lowered to junk status? The price of the bond will decline.
Sunshine Mining Bonds have a $1,000 face value, pay $95 annual interest, and are currently quoted at $1,302.50. The coupon rate of interest is: 9.500%.
Treasury notes, bills, and bonds represent loans to the federal government. True
In which of the following types of investment is the most liquidity risk? Land
Advantages of common stock investments include -potential for high return-liquidity.
Bond prices are impacted by both the direction and magnitude of market interest rate changes. True
Only the shares of the strongest, most stable, and safe-return companies can be called blue-chip stocks
Capital appreciation of an investment is a form of current income. False
Historically, the long-term performance of stock outstrips that of bonds. True
A company’s $1,000 bond has a 7.5% interest rate and is currently selling for $820. The current yield is: 9.15%
Companies with a great deal of long-term debt would rate fairly high in ____ risk. Financial
A bond with an S&P rating of BBB is considered investment-grade. True
If you buy a zero coupon bond, you will receive no cash from the corporation until the bond matures. True
Low price/earnings ratios indicate limited or low investor confidence. True
Market risk considers the possibility that the firm may fail. False
A discount bond has a market value above par value. False
You received a cash dividend from your stock investment this year. This is taxable income. True
Dividend income and stock appreciation represent the elements of total return for a stock investment. True
Market risk is often measured using beta
Dividend reinvestment plans provide shareholders with cash so that they can invest in similar stocks. False
A bond may sell at par value.below par value.above par value.
Purchasing power risk is of most concern during economic recession. False
The yields on municipal bonds are usually higher than the returns available from fully taxable issues. False
The callable feature of a bond protects the issuer when market interest rates are falling. True
Positive aspects about bonds do NOT include high long-run return
Compound interest is a very important concept when evaluating the return on an investment you plan to hold for a long time. True
Interest on corporate bonds is paid semiannually. True
Growth stocks generally pay little or nothing in dividends. True
Bonds rated AA by S&P and Aa by Moody’s are considered very safe bonds. True
Income stocks are purchased with the expectation of high capital gains upon their resale. False
At the time you buy a convertible bond, you will know the number of stock shares for which it can be exchanged. True
When market interest rates rise, bond prices will fall
Earnings per share (EPS) tell the stockholder the amount of dividend to be paid. False
The best returns in the stock market will be achieved by remaining fully invested.
Characteristics of corporate bonds include -interest paid semi-annually -issued in $1,000 denominations -sinking funds are common
The returns you expect from securities are income and growth True
Julie Johnson is in the 35 percent tax bracket. If she were to purchase a $1,000 municipal bond that had a stated interest rate of 6.5%, the fully taxable equivalent yield would be 10.00%
Which of the following is a characteristic of Treasury inflation-indexed bonds? The par value of the bond is indexed for inflation
Which of the following bond ratings would be for junk bonds? BB
The relevant sale or invoice price of a bond to the buyer is its dirty price
Net profit margin is a key measure of profitability that relates the net profits of a firm to its sales. True
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Finance Flashcards

Personal Finance: Chapter 1-Ivy Tech Anderson

Compound Interest earning interest on interest
The phrase “Cover your assets” refers to purchasing adequate levels of insurance
One recent survey showed that more than _______ of working Americans have less than $10,000 saved for retirement. 50%
The decision regarding how many children to have has enormous financial implications
Planning for the passage of your wealth to your heirs upon your death is known as estate planning
After you have evaluated your current financial position the second step in the personal financial planning process is to establish some realistic goals
Short-term financial goals can be accomplished in one year or less
A good financial plan should maximize after-tax income
The behavioral tendency to consider previous costs or cash outlays when making a decision about whether to incur additional costs is called The sunk cost effect
The phrase “Don’t put all your eggs in one basket” illustrates the financial principle of Diversification
Which of these statements about retirement is most accurate about families between the ages of 32 and 61? The median family in this group has only $5,000 saved in a retirement account
The first step in making a smart purchase is to determine whether it is a need or a want
The concept of paying yourself first involves Setting aside your savings before making other expenditures
The key factor that typically determines your eventual salary is Educational attainment
The decision regarding what career path to select is __________ financial planning An important step in
Most career experts advise that you should begin looking for a job: About one year before you graduate
Which of these is an example of an intermediate -term goal for a person that is 22 years old Saving for a down payment on a house you intend to buy in 8 years.
Financial problems can be a major cause of Marital problems
A financial plan can help you Prepare for unexpected events
One basic principle in finance is that money Has a time value
When we plan for the future we need to consider the impact of inflation since it: erodes the purchasing power of our income
The ability to rapidly convert an asset into cash without significant loss of value is known as: Liquidity
Most financial planners will advise you to have at least __________ in liquid assets to cover emergency expenditures. 3 to 6 months living expenses
What financial strategies should you develop as a result of studying personal financial​ planning? Use insurance to cover your assets.Minimize your tax payments.Manage unplanned events.Save for retirement.Invest intelligently.Accumulate wealth for special goals
What financial problems might you avoid as a result of studying personal financial​ planning? a. Manage unplanned events so that you can avoid the problem​ of: going to the​ coin-operated laundry because your washer is beyond repair and you have no emergency funds for buying a new one.
b. Accumulate wealth for special goals so that you can avoid the problem​ of: never taking that trip to Australia that you once promised yourself.
c. Save for retirement so that you can avoid the problem​ of: having to work during your​ “golden years” or having to sell your home because you can no longer afford it.
d. Use insurance to cover your assets so that you can avoid the problem​ of: driving a car with a badly dented fender because you​ couldn’t afford the repair bill.
e. Invest intelligently so that you can avoid the problem​ of: choosing poor investment advisors and investment products
f. Minimize your tax payments so that you can avoid the problem​ of: paying more taxes than necessary on your income or your investments.
“Since the​ accumulation-of-wealth stage extends into the​ mid-50s, financing the cost of education could remain important to me should I choose to continue my education or for the education of others who are important to me​ (spouse, child,​ etc.). It is not until Stage​ 2: Approaching Retirement​ – The Golden Years that the goal of educating children is usually accomplished. During Stage​ 3: The Retirement​ Years, estate planning issues are​ significant, and leaving part of my estate to fund education for my grandchildren could become​ important.” True
What are the reasons why college seniors returning to campus for the fall semester should have a​ résumé already​ prepared? Starting your job search immediately conveys to employers that you are organized and serious about employment..Many companies begin recruiting in the fall. The hectic fall schedule will likely prevent you from immediately preparing a​ résumé.
When comparing two different investment opportunities the investor should always choose the investment that minimizes the total amount of taxes paid. False
Being financially secure involves balancing what you earn with What you spend
Suppose you have just​ retired, have accumulated many luxury goods over the​ years, still owe a mortgage on your​ home, still have unpaid travel expenses on your credit​ cards, and have helped your adult children financially. Your spouse has recently passed​ away, and you miss​ his/her contribution to the household income. Which step in the personal financial planning process have you​ neglected? Review your​ progress, reevaluate, and revise your plan
The term that considers having money readily available when you need it is the concept of liquidity
After retirement​ starts, which aspect of financial planning becomes​ imperative? Estate Planning
During which stage of the financial life cycle do many people make their biggest​ investment, the purchase of a​ home? Stage​ 1: wealth accumulation
What is the main factor in determining your potential income​ level? Education and skills that you have attained
A study conducted by the Society for Human Research Management found what percent of U.S. companies run credit background checks on potential employees. 47%
All else being​ equal, an increase in inflation will cause investors to require a higher rate of return on an asset. True
In Chapter​ 1, Principle 3 espouses the time value of money. Why is this principle so important to financial​ planning? The principle shows us how inflation impacts our money over time.The principle shows us how important time and interest rates are to the accumulation of wealth.The principle allows us to determine how much money we will need to achieve our future goals.The principle helps us determine our savings needs​ today, in order to meet our future retirement goals.
Which of the following falls under the category of mind​ games, financial​ personality, and your​ money? Mental accountingThe sunk cost effectViewing your tax refund as​ “mad money”
A solid understanding of personal finance will help you understand the importance of planning for your financial future.allow you to take advantage of changes in the economy.enable you to protect yourself from an incompetent investment advisor.give you the ability to make intelligent investments.
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Finance Flashcards

corporate finance

share of ______ are units of ownership interest, or equity, in a corporation common stock
the _______ is the financial market in which securities are initially issued primary market
what is the principal – agent problem? when an agent does not maximize the utility of the principal
which of the following features of a corporation is LEAST accurate? earnings from a corporation are taxed only once
a limited liability company is essentially a limited partnership without a general partner
how do the shareholders of most corporations exercise their control of that corporation? by electing members of a board of directors
in most corporations, to whom does the chief financial officer report? the board of directors
which of the following is a major duty of the financial manager -to make investment decisions-to make financing decisions-to manage cash flow from operating activities
cash is a current asset
accounts payable is a current liability
a 30-yr old mortgage loan is a long-term liability
T or F: agency costs are fees paid by the management of a corporation to compensate any investor that feels it has suffered a loss due to agency problems F
T or F: partnerships are the most common type of business in the world F
t or F: the balance sheet shows the assets, liabilities, and stockholders equity of a firm over a given length of time F
the corporate controller is generally responsible for which one of these functions? tax reporting
a firms capital structure refers to the firms proportions of financing from current and long term debt and equity
for a firm to create value it must create more cash flow than it uses
the ultimate control of a corportation lies in the hands of the corporate: stock holders
a proxy fight occurs when: a group solicits voting rights to replace the board of directions
the basic regulatory framework for the public trading of securities in the US was provided by the: securities act of 1933 and the securities exchange act of 1934
US corporate taxes switch to a constant flat rate once the average tax reaches 35 percent
operating cash flow is defined as EBIT+ Depreciation – Taxes
earnings per share will increase when depreciation decreases
assuming the numbers of shares outstanding remains constant, an increase in dividends per share will reduce the addition to retained earnings
book value is based on historical cost
if you sell an asset, you are most apt to receive which value for that asset market value
all else held constant, the earnings per share will decrease as the number of shares outstanding increase
according to the generally accepted accounting principles, costs are matched with revenues
when you are making a financial decision, the most relevant tax rate is the ___ rate marginal
assets are listed on the balance sheet in order of decreasing liquidity
according to generally accepted accounting principles (GAAP), revenue is recognized as income when: the transaction is complete and the goods or services are delivered
the cash flow of the firm must be equal to: cash flow to stockholders plus cash flow to creditors
is fixed asset a current asset? no
projected future financial statements are pro forma statements
ratios that measure a firms ability to pay its bills over the short run without undue stress are known as liquidity measures
the current ratio is measured as current assets divided by current liabilities
the quick ratio is measured as current assests minus inventory divided by current liabilities
ratios that measure a firms financial leverage are known as _____ ratios long-term solvency
the debt-equity ratio is measured as total debt divided by total equity
the equity multiplier is measured as total assets divided by total equity
ratios that measure how efficiently a firm uses its assets to generate sales are known as_____ ratios asset management
the financial ratio days’ sales in inventory is measured as 365 days divided by the inventory turnover
the amount that investors are willing to pay for each dollar of annual earnings is price-earnings ratio
an increase in which of the following accounts increases a firms current ratio without affecting its quick ratio inventory
a captial intensity ratio of 1.03 means a firm has a 1.03 in total assets for every $1 in sales
if a firm decreases its operating costs, all else contant, then the: price-earnings ratio will decrease
enterprise value is based on the market value of interest bearing debt plus the market value of equity minus cash
the return on equity can be calculated as ROA x Equity multiplier
which of the following depicts a correct relationship? Dividend payout ratio= 1- retention ratio
which statement expresses all accounts as a percentage of a total assets common-size balance sheet
which one of these equations expresses the balance sheet stock holders equity = assets- liabilities
which of these accounts is classified as a current asset on the balance sheet inventory
on the balance sheet, deferred taxes are classified as a long term liability
financial statement summarizing a firms accounting performances over a period of time is the income statement
non cash items refer to expenses charged against revenues that do not directly affect cash flow
for a firm with long-term debt, net income is equal to dividends + addition to retained earnings
which term defines the tax rate that applies to the next dollar of taxable income earned marginal
the cash flow resulting from a firm’s ongoing, normla business activities is referred to as the operating cash flow
which of these terms refers to the firms interest payments less any net new borrowing cash flow to creditors
a firms dividend payments less any net new equity raised is referred to as the firms cash flow to stock holders
which of the following is a non-cash item depreciaition
an increase in total assets: must be offset by an equal increase in liabilities and stock holders equity
which asset is generally the most liquid cash and then accts. rec.
the corporate treasurer oversees which of the following areas? financial planning
a business formed by two or more individiuals who each have unlimited personal libabitly for allt he firms debts is called general partnership
the understanding of the work and cash to be contributed to a partnership by each member of that partnership is formalized in the partnership agreement
a business created as a distinct legal entity is called a corporation
which corporate document sets forth the number of members on the original board of directors articles of incorportation
the rules by which the corp. govern themselves are called by laws
a business entity operated and taxed like a partnership, but with limitied liability for the owners is called a limitied liability company
the primary goald of a financial mamagement is to maxamize current dividens per share of existing stock
agency costs refer to the costs of any conflicts of interest between stockholders and management
a stake holder is a person or entitiy other than a stockholder or creditor who potentially has a financial interest in the firm
one intent of the sarbanes oxley act of 2002 is to protect investors from corporate abuses
the treasurer and controller of a corp report to the chief finacnial officer
insider trading is prohibited by the securities exchange act of 1934
Which statement expresses all accounts as a percentage of total assets common-size balance sheet
The equity multiplier is measured as total assets divided by total equity
The total asset turnover ratio measures the amount of: sales generated by every $1 in total assets.
The financial ratio measured as net income divided by sales is known as the firm’s: profit margin.
The measure of net income returned from every dollar invested in total assets is the: return on assets.
The financial ratio that measures the accounting profit per dollar of book equity isreferred to as the: return on equity.
The amount that investors are willing to pay for each dollar of annual earnings isreflected in the: price-earnings ratio.
The external funds needed (EFN) equation projects the addition to retained earnings as: PM × Projected sales × (1 – d).
Which one of the following is a liquidity ratio? quick ratio
Puffy’s Pastries generates five cents of net income for every $1 in equity. Thus, Puffy’shas _______ of 5 percent. a return on equity
If stockholders want to know how much profit the firm is making on their entireinvestment in that firm, the stockholders should refer to the: return on equity.
Which one of the following sets of ratios would generally be of the most interest tostockholders? return on equity and price-earnings ratio
The DuPont identity can be computed as Profit margin × (1 / Capital intensity) × (1 + Debt-equity ratio)
Enterprise value is based on the: market value of interest bearing debt plus the market value of equity minus cash.
The equity multiplier measures: financial leverage
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Finance Flashcards

Finance 3000 Chapter 8

When valuing a stock using the constant-growth model, D1 represents the the next expected annual dividend
the dividend yield is defined as next year’s expected dividend divided by the current market price per share.
the capital gains yield equals which one of the following dividend growth rate
which one of the following types of securities has the lowest priority in a bankruptcy proceeding common stock
Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are three open seats in the current election and Mary casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting? cumulative
There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as _____ voting straight
Kate could not attend the last shareholders’ meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority? proxy
dividends are best defined as cash or stock payments to shareholders
Which type of stock pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred? cumulative preferred
Newly issued securities are sold to investors in which one of the following markets? primary
what is the market called that facilitates the sale of shares between individual investors secondary
an agent who buyers and sells securities from inventory is called a dealer
a broker is an agent who brings buyers and sellers together
any person who owns a license to trade on the NYSE is called a member
a person who executes customer orders to buy and sell securities on the floor of the NYSE is called a floor broker
A DMM is an NYSE member who functions as a dealer for a limited number of securities
supplemental liquidity providers trade securities on behlaf of their own accounts
most trades on the NYSE are executed electronically
the stream of customer instructions to buy and sell securities is called the order flow
the specific location on the floor of an exchange where a particular security is traded is called a post
Inside quotes are defined as the: lowest asked and highest bid offers.
which one of the following will increase the current value of a stock increase the capital gains yield
the price of a stock at year 4 can be expressed as D5/(i-g)
Delfino’s expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for Year 5 if the firm increases its dividend by 2 percent annually? 1.50*(1.02)^4
the required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant percent per year dividend yield+capital gains yield
Sugar Cookies will pay an annual dividend of $1.23 a share next year. The firm expects to increase this dividend by 8 percent per year the following four years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for Year 7? (1.23)(1.08)^4(1.02)^2
the dividend yield on a stock will increase if the stock price decreases
whoch one of the following must equal zero if a firm pays a constant annual dividend capital gains yield
the constant growth model can be used to value the stock of firms that have which types of dividends dividends that are either constant or change annually at a constant rate
Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following? stock with a constant growth dividend
which statement is true From a legal perspective, preferred stock is a form of corporate equity.
which of the following statements is correct preferred stock can be callable
is shareholders are granted a preemptive right they will have priority in the purchase of any newly issued shares
on which one of the following dates do dividends become a liability of the issuer for accounting purposes on the date the board declares a dividend
dividends are Paid out of aftertax profits
to be a member of the NYSE you must own a trading license
which one of the following players on the floor of the NYSE is obligated to maintain a two-sided, orderly market for a limited number of securities designated market maker
the NYSE is in the business of attracting order flow.
in November 2013 the NYSE was acquired by Intercontinental Exchange
NASDAQ is best described as an electronic network of securities dealers.
Which one of the following features applies to NASDAQ but not the NYSE multiple market maker system
Triad common stock is selling for $27.80 a share and has a dividend yield of 2.8 percent. What is the dividend amount? .78
The Glass Ceiling paid an annual dividend of $1.64 per share last year and just announced that future dividends will increase by 1.3 percent annually. What is the amount of the expected dividend in Year 6? 1.77
Breakfast Hut pays a constant annual dividend of $1.39 per share. How much are you willing to pay for one share if you require a rate of return of 14.6 percent? 9.52
Sweet Treats pays a constant annual dividend of $2.38 a share and currently sells for $52.60 a share. What is the rate of return? 4.52
Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent? 12.16
Solar Energy will pay an annual dividend of $1.93 per share next year. The company just announced that future dividends will be increasing by 1.6 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 11.75 percent? 19.01
Braxton’s Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.8 percent. What is the amount of the next annual dividend if the dividends are increasing by 2.4 percent annually? 3.72
The common stock of Up-Towne Movers sells for $33 a share, has a rate of return of 11.4 percent, and a dividend growth rate of 2 percent annually. What was the amount of the last annual dividend paid? 3.04
Dry Dock Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 9.48 percent. What is the dividend growth rate? .95
Best Ever Toys just paid its annual dividend of $1.78 per share. The required return is10.6 percent and the dividend growth rate is 1.23 percent. What is the expected value of this stock five years from now? 20.44
This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now? 2.43
Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm’s annual dividend. The last annual dividend was $.86 a share but all future dividends will be decreased by 3.5 percent annually. What is a share of this stock worth today at a required return of 17.8 percent? 3.90
. Lamey Gardens has a dividend growth rate of 5.6 percent, a market price of $13.16 a share, and a required return of 14 percent. What is the amount of the last dividend this company paid? 1.05
The common stock of Sweet Treats has a total return of 11.62 percent, a stock price of $48.20, and recently paid an annual dividend of $2.38. What is the capital gains rate if the company maintains a constant dividend? 6.68
River Rock, Inc., just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent? 24.65
The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.12 per share a year for the following two years, and then a final liquidating dividend of $14.20 per share four years from now. How much is one share of this stock worth to you today if you require a rate of return of 18.7 percent of this risky investment? 9.63
Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at that level through Year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share? 25.51
The Fish House is expected to pay annual dividends of $1.23 and $1.25 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $1.35 a share. What is the value of this stock at a required return of 16.4 percent? 8.05
The Impulse Shopper recently paid an annual dividend of $1.13 per share. The company just announced that it is suspending all dividend payments on its common stock for the next five years. After that, the company expects to pay $.50 a share at the end of each year. At a required return of 18 percent, what is this stock worth today? 1.21
Business Solutions is expected to pay its first annual dividend of $.84 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 2 percent per year. What is the value of this stock today, Year 0, at a required return of 14.4 percent? 5.01
Nu-Tek is expanding rapidly. As a result, the company expects to pay annual dividends of $.62, .80, and $1.05 per share over the next three years, respectively. After that, the dividend is projected to increase by 4 percent annually. What is the current value of this stock if the required return is 16 percent? 7.63
Toy Mart recently announced that it will pay annual dividends at the end of the next two years of $1.60 and $1.10 per share, respectively. Then, in Year 5 it plans to pay a final dividend of $13.50 a share before closing its doors permanently. At a required return of 13.5 percent, what should this stock sell for today? 9.43
Dixie Mart plans to pay dividends of $1.36, $1.15, $1.35, and $.40 at the end of the next four years, respectively. After that, the company will be sold and shareholders are expected to receive $82.40 per share in Year 6 when the sale should be finalized. If the required return is 11.4 percent, what is the current value of one share of this stock? 46.50
The Three Amigos just paid an annual dividend of $.60 per share but plans to double that amount each year for three years. After that, the firm expects to maintain a constant dividend. What is the value of this stock today if the required return is 15 percent? 27.05
Village East expects to pay an annual dividend of $1.40 per share next year, and $1.68 per share for the following two years. After that, the company plans to increase the dividend by 3.4 percent annually. What is this stock’s current value at a discount rate of 13.7 percent? 15.15
The required return on Mountain Brook stock is 13.8 percent and the dividend growth rate is 3.64 percent. The stock is currently selling for $32.80 a share. What is the dividend yield? 10.16
For the past six years, the price of Slippery Rock stock has been increasing at a rate of 8.21 percent a year. Currently, the stock is priced at $43.40 a share and has a required return of 11.65 percent. What is the dividend yield? 3.44
A stock has paid dividends of $1.70, $1.85, $2.00, $2.20, and $2.50 over the past five years, respectively. What is the average capital gains yield? 10.14
The Toy Chest will pay an annual dividend of $2.64 per share next year and currently sells for $48.30 a share based on a market rate of return of 11.67 percent. What is the capital gains yield? 6.2
A stock is priced at $38.24 a share and has a market rate of return of 9.65 percent. What is the dividend growth rate if the company plans to pay an annual dividend of $.48 a share next year? 8.39
Vegan Delite stock is valued at $68.60 a share. The company pays a constant annual dividend of $2.40 per share. What is the total return on this stock? 3.50
Last year, when the stock of Alpha Minerals was selling for $49.50 a share, the dividend yield was 3.4 percent. Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains a constant dividend growth rate of 2.2 percent? 6.40
There are three open positions on the board of directors of XYZ Enterprises. The company has 264,000 shares of stock outstanding. Each share is entitled to one vote. How many shares of stock must you own to guarantee your personal election to the board of directors if the firm uses cumulative voting? 66,001
A preferred stock sells for $54.20 a share and has a market return of 9.68 percent. What is the dividend amount? 5.25
Spiral Staircase is offering preferred stock which is referred to as 10-10 stock. This stock will pay an annual dividend of $10 a share starting 10 years from now. What is this stock worth to you today if you require a rate of return of 9.5 percent? 46.51
Graphic Designs has 68,000 shares of cumulative preferred stock outstanding. Preferred shareholders are supposed to be paid $1.60 per quarter per share in dividends. However, the firm has encountered financial problems and has not paid any dividends for the past three quarters. How much will the firm have to pay per share of preferred next quarter if the firm also wishes to pay a common stock dividend? 6.40
Industrial Products has both common and noncumulative preferred stock outstanding. The dividends on these stocks are $1.10 per quarter per share of common and $2.25 per quarter per share of preferred. The company has not paid any dividends for the past two quarters but is expected to pay dividends on both the common and the preferred stock next quarter. What is the minimum amount the firm must pay per share to its preferred stockholders next quarter if it plans to pay a common dividend? 2.25
AZ stock closed today at $18.24, down .23. The dividend yield is 2.4 percent. What was yesterday’s closing price if the firm pays a constant $.40 per share quarterly dividend? 18.47
Today’s stock market report shows that SW Companies has a PE ratio of 9.8, a dividend yield of 2.2 percent, a closing price $29.86, and a net change of .11. What is the annual dividend amount? .66
According to today’s stock report, BL Lumber shares were up .14, the stock dividend yield is 2.6 percent, and the PE ratio is 9.8. What is the amount of the next annual dividend if yesterday’s closing price was $35.14? .917
TMS just paid an annual dividend of $2.84 per share on its stock. The dividends are expected to grow at a constant rate of 1.85 percent per year. If investors require a rate of return of 10.4 percent, what will be the stock price be in Year 11? 41.39
The next dividend payment by S&S will be $1.38 per share. The dividends are anticipated to maintain a 2.5 percent growth rate, forever. If the stock currently sells for $26.90 per share, what is the required return? 7.63
A particular stock sells for $43.20 share and provides a total return of 11.6 percent. The total return is evenly divided between the capital gains yield and the dividend yield. Assuming a constant dividend growth rate, what is the current dividend per share? 2.37
The VIC Co. has preferred stock outstanding that pays a $4.50 dividend annually and sells for $48.20 per share. What is the rate of return? 9.34
Russell Foods pays a fixed annual dividend of $2.28 a share. At a required return of 11.5 percent, the stock is valued at $43.20 a share. What is the dividend growth rate at this price? 6.22
JL Tools is a young start-up company. The company expects to pay its first dividend of $.20 a share in Year 6 with annual dividend increases of 1.5 percent thereafter. At a required return of 12 percent, what is the current share price? 1.08
Gamma Corp. is expected to pay the following dividends over the next four years: $7.50, $8.25, $15, and $1.80. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return is 14 percent, what is the current share price? 35.20
JLT is a mature manufacturing firm. The company just paid an annual dividend of $3.62, but management expects to reduce future payouts by 3.5 percent per year, indefinitely. What is this stock worth today at a required return of 12.5 percent? 21.83
KIT Kars stock currently sells for $54.10 per share and has a fixed 2.5 percent dividend growth rate. What was the amount of the last dividend paid if the required rate of return is 11 percent? 4.49
Juniper Trees has earnings per share of $1.38, all of which is added to retained earnings. What is the value of a share of its stock if the PE ratio is 9.8 and market-to-book ratio is 2.5? 13.52
Blasco International has sales of $389,700 and costs of $413,210. The company has 120,000 shares outstanding. What is the price-sales ratio if the stock has a book value of $19.20 per share and a market value per share of $8.60? 2.65
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Finance Flashcards

Business final

Your boss asks you to email a spreadsheet that shows what the company owns and what it has borrowed (owes) at a fixed point in time and shows the net worth of the business. When sending the email, you most likely will attach the file named ______? Balance_sheet
The amounts spent by a publishing company to pay for manufacturing its books is called ____? Cost of good purchased
Accounting involves a great deal of precision and some degrees of interpretation, therefore, accounting is ________? Both an art and a science
FASB stands for ______? Financial Accounting Short- Term Budget
In her work as an accountant, Sandra Garcia recognizes that for every transaction that affects an asset, an equal transaction must also affect a liability or owners equity. Sandra is using ________ bookkeeping? Double Entry
You are a financial manager. Your assistant tells you that there will be a cash flow gap next month, meaning that cash outflows are expected to be _______ cash inflows? Greater Than
Numbers used to compare current data to data from previous years, competitors’ data, or industry averages is call a ________ analysis? Ratio
Funds that a manager can access at anytime up to an amount agreed upon between the bank and the company are called a line of ________? Liability
The two divisions that make up most finance departments are _______? Accounting and Financial management
Demand deposits include ________ accounts? Both Checking and Savings
Your boss asks you to email a spreadsheet that shows the exchange of money between the company and everyone else it deals with over a period of time. When sending the email you most likely will attach the file named ________? Statement_of_asset_flows
Accounting is important for ___________? Organizations of all sizes and types
Factoring is the process of selling accounts ______ for cash? Receivable
Current assets – Current liabilities = _____ capital? Working
If a company has negative working capital, its current assets ______ is its current liabilities? Are less than
Short – term liabilities are also known as ________liabilities? Current
Your boss asks you to email a spreadsheet that shows how much money came into the company and how much money the company spent last month. When sending the email, you most likely will attach the file named _______? Income – Statement
Long – term financing generated by the owners of a company is called ______ financing? Equity
Laureen Cooley is preparing a spreadsheet that shows inventory, sales, purchase, manufacturing, and marketing costs for her organization. This document is called a ______ Budget? Operating
Mark Lewis manages a corporate department that reviews and evaluates the accuracy of financial reports. Mark works in ______? Auditing
A financial manager is responsible for ______? Raising capital for future growth and expansion
As a financial manager, you decide to borrow funds in order to meet payroll. Your company will pay back the funds within nine months. You are seeking ______ financing? Short – Term
The clothing and accessories at New Fashion Stores, Inc. are an example of ______assets? Current
Monitoring cash flows is important because it measures a company’s _________? Short – Term financial health and financial efficiency
When New Fashion Stores, Inc. built 100 new stores, it recorded to outflowing cash in the _______ activities section of its statement of cash flows? Investing
Kay aldan manages a department that prepares annual reports. Kay works in ______? Financial Accouting
When New Fashion Stores, Inc. paid a dividend to its shareholders, it recorded to outflowing cash in the ________ activities section of its statement of cash flows? Financing
CFO Jorge Sierra needs short – term financing for a large corporation. He decides to issue an unsecured debt instrument of $200,000 to be paid back in 150 days. Jorge is using ______ ? Commercial Paper
Iris Velez manages a department that calculates payments to be made to federal, state, and local governments. Iris works in ________ ? Tax Accounting
Joseph Coulter needs long – term financing for his company. He contacts funders group, which is willing to provide funding in exchange for an ownership stake, an active role in management of Joseph’s company, and an opportunity for a large return on its investment. Funders Group is offering _____ capital? Venture
The amounts that New Fashion Stores, Inc. owes to clothing manufacturers are an example of ________? Liabilities
Adam Zarand wants to help his company decide whether or not to shut down an unproductive plant. Which type of accounting will he most likely use? Managerial
Last year Huge TV Corp. had net income equaling $5 million. At the end of the year, the corporation had 4 million shares of stock outstanding. The company’s earnings per share were? $1.25
A common leverage ratio is for a company to have at least _____ times the amount of equity as it has debt? Tw0
T0tal liabilities at New Fashion Stores, Inc. are $5 million, and total owners equity is $4 million. The company’s debt to equity ratio is ? 1.25
A financial manager is sometimes referred to as a ? CFO
On an income statement: Revenue – Expenses = Net Income (or less)
New Fashion Stores, Inc. received 1,000 t-shirts on the first of the month. By the end of the month, the company had sold 743 shirts. The difference is ________ Inventory
Because BackBeatMusic.com’s current assets are less than its current liabilities, the company has positive working capital true or false? F
A university would consider its students tuition payments to be revenue true or false? T
Using leverage is always beneficial true or false> F
Assets at New Fashion Store, Inc. equal $10 million. Liabilities equal $8 million. Therfore, owners equity equals $2 million true or false? T
financial statements serve as a basis for management to develop expectations of where the company will be in future periods true or false? T
Assets are the amounts that a company owes to its creditors true or false? F
A common set of country – neutral accounting standards is known as International Financial Reporting Standards (IFRSs) True or false? T
Depreciation helps keep the accounting equation in balance by matching the expense of a liability with the revenue that liability is expected to generate true or false? F
Double entry bookkeeping recognizes that for every transaction that affects an asset, an equal transaction must also affect either a liability or owners equity true or false? T
Leverage is the amount of debt used to finance a firm’s assets true or false? T
A commercial finance company is an alternative to a bank as a source of short- term financing true or false? T
Commercial banks are financial institutions that raise funds from businesses and individual in the form of checking and savings accounts and use those funds to make loans to businesses and individuals true or false? T
Government and not for profit accounting refers to the accounting required for organizations that are not focused on generating a profit, such as legislative bodies and charities true or false? T
Accounts receivables is an example of a fixed asset true or false? F
Factoring is the process of selling accounts receivable for cash instead of using them as collateral for a loan true or false? T
Financial management involves setting up and monitoring controls to make certain the plans and budgets are monitored sufficiently so that the business can reach its financial goals true or false? T
You work at a fast food restaurant your wages are an example of operating expenses true or false? T
The Sarbanes – Oxley Act established the public company accounting oversight board, which is responsible for overseeing financial audits of public companies. true or false? T
The longest period covered in financial accounting reports is three months true or false? F
The financing activities section of a statement of cash flows include cash used or provided by the core business of the company true or false? F
A highly efficient company and potential good investment must have a high earnings per share ratio true or false? F
Categories
Finance Flashcards

Finance Chapter 5-7

In words, what is the formula for the break-even point? What questions can a break-even analysis be used to help answer? The break-even point in units is equal to the fixed costs divided by the contribution margin, which is the price minus the variable cost per unit. Typical questions it can address include:How much will changes in volume affect cost and profit? At what point does the firm break even? What is the most efficient level of fixed assets to employ in the firm?
In terms of operating leverage, should a firm be more conservative, or be more highly leveraged? The answer depends partly on perceptions of the future. Is management apprehensive about the economic future, or is this a growing business in times of relative prosperity?Does the firm desire to maintain stability or become a market leader?Is management relatively risk averse or aggressive? What is the expected return for that level of risk?
If debt is such a good thing, in that it provides financial leverage, why sell any stock? Financial leverage offers advantages up to a point, beyond which debt financing may be detrimental. Lenders will perceive a greater financial risk and raise the average interest rate on new or replacement debt, or put restrictions on the firm. Common stockholders likewise may dump their shares, driving down the stock price. Debt, if used in moderation, with stable firms in favorable economic conditions, is recommended.Remember, the goal is to maximize the firm’s overall value in the market.
Explain the components of combined leverage and why they might be considered together. Operating leverage reflects the extent to which fixed assets and associated fixed costs are utilized in the firm. Financial leverage reflects the amount of debt used in the capital structure. The first could increase/decrease EBIT. The second could increase/decrease EPS. If both are used, it allows the firm to get maximum leverage. But these are double-edged swords.
How does the financial manager view inventory? Anything that can reduce inventory levels without creating out-of-stock situations will reduce the amount of money needed to finance inventory.
What is working capital management? What are some typical questions that must be answered? Working capital management involves the financing and management of the current assets of the firm. Questions like the following must be answered:How much inventory is to be carried, and how do we get the funds to pay for it?What will the A/R pattern be, and how will we fund it?
Discuss the assertion that all current assets should be financed by current liabilities (accounts payable, short-term bank loans, commercial paper, etc.) This statement is subject to challenge when one sees the permanent buildup that can occur in current assets. If a much smaller level of sales occurs, a company could be sitting on a large inventory that needs to be financed but is generating no cash. Theoretically, the firm could be declared technically insolvent (bankrupt) if short-term sources of funds were used but were unable to be renewed when they came due.
“The most appropriate financing pattern would be one in which asset buildup and length of financing terms is perfectly matched.” Discuss the difficulty involved in achieving this financing pattern. Only a financial manager with unusual insight and timing could design a plan in which asset buildup and the length of financing terms are perfectly matched. One would need to know exactly what current assets are temporary and which ones are permanent. Furthermore, one is never quite sure how much or short-term or long-term financing is available at all times. Even if this were known, it would be difficult to change the financing mix on a continual basis.
Describe two opposite approaches for financing current assets. Draw illustrations. What types of firms typically rely on the second approach and why? 1) Using long-term financing for part of short-term needs, as in Figure 6-62) Using short-term financing for part of long-term needs, as in Figure 6-7Many small business do not have access to long-term capital and are forced to rely heavily on short-term bank and trade credit.
What is the premise of liquidity premium theory? Long-term rates should be higher than short-term rates, because short-term securities have greater liquidity and, therefore, higher rates have to be offered to potential long-term bond buyers to entice them to hold these less liquid and more price-sensitive securities.
How are yield curves constructed, and what does an upward-sloping yield curve suggest in terms of expectations theory? The yield curve is a chart showing the relative level of short-term and long-term interest rates at a point in time. Generally, U.S. government securities are used to construct yield curves because they are free of default risk and the large number of maturities creates a fairly continuous curve. Expectations theory states that the more upward-sloping the yield curve, the greater the expectation that interest rates will rise.
In the management of cash and marketable securities, what is the primary objective? Cash and marketable securities are generally used to meet the transaction needs of the firm and for contingency purposes. Because the funds must be available when needed, the primary concern should be with safety and liquidity rather than the maximum profits.
Why are Treasury bills a favorite place for financial managers to invest excess cash? The financial manager has a virtual supermarket of securities from which to choose. Choice is influenced by yield, maturity, minimum investment required, safety, and marketability. Treasury bills are popular because of the large and active market in which they trade. With the government issuing new Treasury bills weekly, a wide range of choices is always available. While the yield is relatively low, there is nothing safer, and they can be sold quickly for cash.
What are the 5 Cs of credit that are sometimes used by bankers and others to determine whether a potential loan will be repaid? Describe 2 of them. Character – the moral and ethical quality of the individual or leaders of a company Capital – the level of financial resources available to the company (i.e. D/E, capital structure)Capacity – availability and sustainability of cash flow at a level high enough to pay off the loanConditions – the sensitivity of the operating income and and cash flows to the economyCollateral – the quality of the assets pledged against the loan
What does the EOQ formula tell us? What assumption is made about the usage rate for inventory? The Economic Order Quantity (EOQ) is the lowest-cost ordering quantity for an item that a firm regularly orders. It minimizes the total ordering and carrying costs associated with inventory. It assumes a constant usage rate.
Why might a firm keep a safety stock? What effect is it likely to have on the costs associated with inventory? Management cannot always assume the delivery schedules of suppliers will be constant or that there will be delivery of new inventory when old inventory reaches zero. A safety stock will guard against late deliveries due to weather, production delays, equipment breakdowns, and the many other things that can go wrong between the placement of an order and its delivery.A minimum safety stock will increase the cost of inventory because the carrying cost will rise. This cost should be offset by eliminating lost profits on sales due to stockouts and also by increased profits from unexpected orders that can now be filled.
If a firm uses a just-in-time inventory system, what effect is that likely to have on the number and location of suppliers? Usually suppliers are located near manufacturers and are able to fill orders in small lot sizes because of short delivery times. One side effect has been for manufacturers to reduce their number of suppliers to assure quality as well as to ease the complexity of ordering and delivery. Computerized ordering/inventory tracking systems both on the assembly line and in the supplier’s production facility are necessary for JIT to work.
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Finance Flashcards

Finance Test 5

beta of 1 The systematic risk of the market is measured by a:Multiple Choicebeta of 1.beta of 0. standard deviation of 1. standard deviation of 0. variance of 1.
portfolio weight Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?Multiple ChoicePortfolio return Portfolio weightDegree of risk Price-earnings ratio Index value
market value of the investment in each stock. The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:Multiple Choicenumber of shares owned of each stock. market price per share of each stock. market value of the investment in each stock.original amount invested in each stock. cost per share of each stock held.
Expected rate of return Which one of the following is most directly affected by the level of systematic risk in a security?Multiple ChoiceVariance of the returns Standard deviation of the returns Expected rate of returnRisk-free rate Market risk premium
total Standard deviation measures which type of risk?Multiple ChoiceTotalNon-diversifiable Unsystematic Systematic Economic
The actual expected stock return indicates the stock is currently overpriced. The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information?Multiple ChoiceThe actual expected stock return will graph above the security market line. The stock is currently underpriced. To be correctly priced according to CAPM, the stock should have an expected return of 13.56 percent. The stock has less systematic risk than the overall market. The actual expected stock return indicates the stock is currently overpriced.
portfolio Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to her investments?Multiple ChoiceIndex PortfolioCollection Grouping Risk-free
cost of capital Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:Multiple Choiceaverage arithmetic return. expected return. market rate of return. internal rate of return. cost of capital.
can be less than the standard deviation of the least risky security in the portfolio. The standard deviation of a portfolio:Multiple Choiceis a weighted average of the standard deviations of the individual securities held in the portfolio. can never be less than the standard deviation of the most risky security in the portfolio. must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. can be less than the standard deviation of the least risky security in the portfolio.
a higher return than expected for the level of risk assumed. A stock with an actual return that lies above the security market line has:Multiple Choicemore systematic risk than the overall market. more risk than that warranted by CAPM. a higher return than expected for the level of risk assumed.less systematic risk than the overall market. a return equivalent to the level of risk assumed
expected return 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?Multiple ChoiceArithmetic return Historical return Expected returnGeometric return Required return
This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. Which one of the following events would be included in the expected return on Sussex stock?Multiple ChoiceThe chief financial officer of Sussex unexpectedly resigned. The labor union representing Sussex’s employees unexpectedly called a strike. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated.The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm’s products can be toxic to household pets. The board of directors made an unprecedented decision to give sizeable bonuses to the firm’s internal auditors for their efforts in uncovering wasteful spending.
eliminate asset-specific risk. The primary purpose of portfolio diversification is to:Multiple Choiceincrease returns and risks. eliminate all risks. eliminate asset-specific risk.eliminate systematic risk. lower both returns and risks.
Unsystematic risk Which one of the following risks is irrelevant to a well-diversified investor?Multiple ChoiceSystematic risk Unsystematic riskMarket risk Non-diversifiable risk Systematic portion of a surprise
National decrease in consumer spending on entertainment Which one of the following is an example of unsystematic risk?Multiple ChoiceAn across the board increase in income taxes Adoption of a national sales tax Decrease in the national level of inflation An increased feeling of global prosperity National decrease in consumer spending on entertainment
Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term. Which one of the following statements related to unexpected returns is correct?Multiple ChoiceAll announcements by a firm affect that firm’s unexpected returns. Unexpected returns over time have a negative effect on the total return of a firm. Unexpected returns are relatively predictable in the short-term. Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.
The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio Which one of the following statements related to risk is correct?Multiple ChoiceThe beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio. Every portfolio that contains 25 or more securities is free of unsystematic risk. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.Adding five additional stocks to a diversified portfolio will lower the portfolio’s beta. Stocks that move in tandem with the overall market have zero betas.
Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero. Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?Multiple ChoiceGiven the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified.Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.
Systematic Which one of the following is a risk that applies to most securities?Multiple ChoiceUnsystematic Diversifiable SystematicAsset-specific Industry
risk premium. The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:Multiple Choicemarket risk premium. risk premium.systematic return. total return. real rate of return.
Eliminating unsystematic risk is the responsibility of the individual investor. Which one of the following statements is correct concerning unsystematic risk?Multiple ChoiceAn investor is rewarded for assuming unsystematic risk. Eliminating unsystematic risk is the responsibility of the individual investor.Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. Beta measures the level of unsystematic risk inherent in an individual security. Standard deviation is a measure of unsystematic risk.
beta Systematic risk is measured by:Multiple Choicethe mean. beta.the geometric average. the standard deviation. the arithmetic average.
systematic risk principle The _____ tells us that the expected return on a risky asset depends only on that asset’s nondiversifiable risk.Multiple Choiceefficient markets hypothesis systematic risk principleopen markets theorem law of one price principle of diversification
Stock with a beta of 1.38 Which one of the following should earn the highest risk premium based on CAPM?Multiple ChoiceDiversified portfolio with returns similar to the overall market Stock with a beta of 1.38Stock with a beta of .74 U.S. Treasury bill Portfolio with a beta of 1.01
spreading an investment across many diverse assets will eliminate some of the total risk. The principle of diversification tells us that:Multiple Choiceconcentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. spreading an investment across five diverse companies will not lower the total risk. spreading an investment across many diverse assets will eliminate all of the systematic risk. spreading an investment across many diverse assets will eliminate some of the total risk.
Over time, the average unexpected return will be zero. Which one of the following statements is correct?Multiple ChoiceThe unexpected return is always negative. The expected return minus the unexpected return is equal to the total return. Over time, the average return is equal to the unexpected return. The expected return includes the surprise portion of news announcements. Over time, the average unexpected return will be zero.
beta 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?Multiple ChoiceBetaReward-to-risk ratio Risk ratio Standard deviation Price-earnings ratio
Capital asset pricing model Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security’s systematic risk?Multiple ChoiceCapital asset pricing modelTime value of money equation Unsystematic risk equation Market performance equation Expected risk formula
standard deviation; beta Total risk is measured by _____ and systematic risk is measured by _____.Multiple Choicebeta; alpha beta; standard deviation alpha; beta standard deviation; betastandard deviation; variance
risk premium The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.Multiple Choicereal return actual return nominal return risk premiumexpected return
the risk-free rate. The intercept point of the security market line is the rate of return which corresponds to:Multiple Choicethe risk-free rate.the market rate. a return of zero. a return of 1.0 percent. the market risk premium.
I and III only Which of the following statements concerning risk are correct?I. Non-diversifiable risk is measured by beta.II. The risk premium increases as diversifiable risk increases.III. Systematic risk is another name for non-diversifiable risk.IV. Diversifiable risks are market risks you cannot avoid.Multiple ChoiceI and III onlyII and IV only I and II only III and IV only I, II, and III only
A decrease in the portfolio standard deviation Which one of the following indicates a portfolio is being effectively diversified?Multiple ChoiceAn increase in the portfolio beta A decrease in the portfolio beta An increase in the portfolio rate of return An increase in the portfolio standard deviation A decrease in the portfolio standard deviation
can be effectively eliminated by portfolio diversification. Unsystematic risk:Multiple Choicecan be effectively eliminated by portfolio diversification.is compensated for by the risk premium. is measured by beta. is measured by standard deviation. is related to the overall economy.
A firm’s sales decrease Which one of the following is the best example of a diversifiable risk?Multiple ChoiceInterest rates increase Energy costs increase Core inflation increases A firm’s sales decreaseTaxes decrease
Security market line Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?Multiple ChoiceReward-to-risk matrix Portfolio weight graph Normal distribution Security market lineMarket real returns
market risk premium and the amount of systematic risk inherent in the security. According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:Multiple Choiceamount of total risk assumed and the market risk premium. market risk premium and the amount of systematic risk inherent in the security.risk-free rate, the market rate of return, and the standard deviation of the security. beta of the security and the market rate of return. standard deviation of the security and the risk-free rate of return.
Reducing the number of stocks held in a portfolio Which one of the following is least apt to reduce the unsystematic risk of a portfolio?Multiple ChoiceReducing the number of stocks held in a portfolioAdding bonds to a stock portfolio Adding international securities into a portfolio of U.S. stocks Adding U.S. Treasury bills to a risky portfolio Adding technology stocks to a portfolio of industrial stocks
increase the average risk level of the company over time. If a company uses its WACC as the discount rate for all of the projects it undertakes then the company will tend to:Multiple Choiceaccept all positive net present value projects. increase the average risk level of the company over time.reject all high-risk projects.reject all negative net present value projects. favor low-risk projects over high-risk projects.
weighted and included in the initial cash flow. Flotation costs for a levered firm should be:Multiple Choiceignored when analyzing a project because they are a sunk cost. spread over the life of a project thereby reducing the cash flows for each year of the project.Incorrectconsidered only when two projects are mutually exclusive. weighted and included in the initial cash flow.totally ignored when internal equity funding is utilized.
rate of return on a perpetuity The cost of preferred stock is computed the same as the:Multiple Choicepretax cost of debt. rate of return on an annuity. aftertax cost of debt. rate of return on a perpetuity.cost of an irregular growth common stock.
is only as reliable as the estimated rate of growth. The dividend growth model:Multiple Choiceis only as reliable as the estimated rate of growth.can only be used if historical dividend information is available. considers the risk that future dividends may vary from their estimated values. applies only when a company is currently paying dividends. is based solely on historical dividend information.
is based on the current yield to maturity of the company’s outstanding bonds. A company’s pretax cost of debt:Multiple Choiceis based on the current yield to maturity of the company’s outstanding bonds.is equal to the coupon rate on the latest bonds issued by the company. is equivalent to the average current yield on all of a company’s outstanding bonds. is based on the original yield to maturity on the latest bonds issued by a company. has to be estimated as it cannot be directly observed in the market.
directly related to the risk level of the firm. A company’s overall cost of equity is:Multiple Choicegenerally less than its WACC given a debt-equity ratio of .5. unaffected by changes in the market risk premium. directly related to the risk level of the firm.generally less than the firm’s aftertax cost of debt. inversely related to changes in the level of inflation
A project that is unacceptable today might be acceptable tomorrow given a change in market returns Which one of the following statements is correct?Multiple ChoiceFirms should accept low-risk projects prior to funding high-risk projects. Making subjective adjustments to a company’s WACC when determining project discount rates unfairly punishes low-risk divisions within the company. A project that is unacceptable today might be acceptable tomorrow given a change in market returns.The pure play method is most frequently used for projects involving the expansion of a company’s current operations. Companies that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate.
Use of the funds raised Which one of the following is the primary determinant of a firm’s cost of capital?Multiple ChoiceDebt-equity ratio of any new funds raisedMarginal tax rate Pretax cost of equity Aftertax cost of equity Use of the funds raised
is the return investors require on the total assets of the firm. A company’s weighted average cost of capital:Multiple Choiceis equivalent to the aftertax cost of the outstanding liabilities. should be used as the required return when analyzing any new project. is the return investors require on the total assets of the firm.remains constant when the debt-equity ratio changes. is unaffected by changes in corporate tax rates.
assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values. Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 65 percent of the company’s overall sales. Division A is also the riskier of the two divisions. When management is deciding which of the various divisional projects should be accepted, the managers should:Multiple Choiceallocate more funds to Division A since it is the larger of the two divisions. fund all of Division B’s projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values. allocate the company’s funds to the projects with the highest net present values based on the company’s weighted average cost of capital. assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.fund the highest net present value projects from each division based on an allocation of 65 percent of the funds to Division A and 35 percent of the funds to Division B.
A reduction in the risk-free rate All else constant, which one of the following will increase a company’s cost of equity if the company computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.Multiple ChoiceA reduction in the dividend amount An increase in the dividend amount A reduction in the market rate of return A reduction in the firm’s beta A reduction in the risk-free rate
EBIT(TC). When computing the adjusted cash flow from assets, the tax amount is calculated as:Multiple ChoiceEBT(TC). (EBT − Depreciation)(TC). (EBIT + Depreciation − Change in NWC − Capital spending)(TC). EBIT(TC).(EBIT − Depreciation − Change in NWC − Capital spending)(TC).
A decrease in the company’s tax rate Which one of these will increase a company’s aftertax cost of debt?Multiple ChoiceA decrease in the company’s debt-equity ratio A decrease in the company’s tax rateAn increase in the credit rating of the company’s bonds An increase in the company’s beta A decrease in the market rate of interest
both the returns currently required by its debtholders and stockholders. A company’s current cost of capital is based on:Multiple Choiceonly the return required by the company’s current shareholders. the current market rate of return on equity shares. the weighted costs of all future funding sources. both the returns currently required by its debtholders and stockholders.the company’s original debt-equity ratio.
weighted average cost of capital. 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:Multiple Choicereward-to-risk ratio. weighted capital gains rate. structured cost of capital.subjective cost of capital. weighted average cost of capital.
standard deviation of the company’s common stock. The weighted average cost of capital for a company is least dependent upon the:Multiple Choicecompany’s beta. coupon rate of the company’s outstanding bonds. growth rate of the company’s dividends. company’s marginal tax rate. standard deviation of the company’s common stock.
the simplicity of the model. The primary advantage of using the dividend growth model to estimate a company’s cost of equity is:Multiple Choicethe ability to apply either current or future tax rates. the model’s applicability to all corporations. is the model’s consideration of risk. the stability of the computed cost of equity over time. the simplicity of the model.
probably be put on hold until its cost of capital can be lowered. The Road Stop is a national hotel chain with a cost of capital of 12.4 percent. This chain is considering opening a high-end resort that is expected to have a cost of capital that is at least 13 percent. The estimated net present value of the resort project is $500 when discounted at 12.4 percent. The best representation of this situation is that the resort project should:Multiple Choicebe accepted immediately. be financed solely with debt in order for the project to have a positive NPV. probably be put on hold until its cost of capital can be lowered.be permanently rejected. probably be expanded.
Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects. Which one of the following statements is correct?Multiple ChoiceThe subjective approach assigns a discount rate to each project based on other companies in the same category as the project. Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.Companies will correctly accept or reject every project if they adopt the subjective approach. Mandatory projects should only be accepted if they produce a positive NPV when the overall company WACC is used as the discount rate.
pure play When a manager develops a cost of capital for a specific project based on the cost of capital for another firm that has a similar line of business as the project, the manager is utilizing the _____ approach.Multiple Choicesubjective risk pure playdivisional cost of capital capital adjustment security market line
is affected by either a change in the company’s beta or its projected rate of growth. The cost of equity for a company with a debt-equity ratio of .41:Multiple Choicetends to remain static even as the company’s level of risk increases. increases as the unsystematic risk of the company’s stock increases. is affected by either a change in the company’s beta or its projected rate of growth.equals the risk-free rate plus the market risk premium. equals the company’s pretax weighted average cost of capital.
The tax effect of the interest expense must be removed. Why does the tax amount need to be adjusted when valuing a firm using the cash flow from assets approach?Multiple ChoiceThe tax effect of the dividend payments must be eliminated. Only straight-line depreciation can be used when computing taxes for valuation purposes. Taxes must be computed for valuation purposes based solely on the marginal tax rate. The tax effect of the interest expense must be removed.The taxes must be computed for valuation purposes based on the average tax rate for the past ten years.
assumes the reward-to-risk ratio is constant. The capital asset pricing model approach to equity valuation:Multiple Choiceis dependent upon the unsystematic risk of a security. assumes the reward-to-risk ratio increases as beta increases. can only be applied to dividend-paying firms. assumes a firm’s future risks will be higher than its current risks. assumes the reward-to-risk ratio is constant.
is highly dependent upon a company’s tax rate. The aftertax cost of debt:Multiple Choicevaries inversely to changes in market interest rates. will generally exceed the cost of equity if the relevant tax rate is zero. will generally equal the cost of preferred if the tax rate is zero. is unaffected by changes in the market rate of interest. is highly dependent upon a company’s tax rate.
The WACC would most likely decrease if the firm replaced its preferred stock with debt Which one of the following statements related to WACC is correct for a company that uses debt in its capital structure?Multiple ChoiceThe WACC would most likely decrease if the firm replaced its preferred stock with debt.The weight assigned to preferred stock decreases as the market value of the preferred stock increases. The WACC will decrease as the corporate tax rate decreases. The weight of equity is based on the number of shares outstanding and the book value per share. The WACC will remain constant unless a company retires some of its debt.
Neither Deep Mining nor Precious Metals Deep Mining and Precious Metals are separate firms that are both considering a silver mining project. Deep Mining is in the actual mining business and has an aftertax cost of capital of 16.2 percent. Precious Metals is in the precious gem retail business and has an aftertax cost of capital of 13.4 percent. The project under consideration has initial costs of $950,000 and anticipated annual cash inflows of $165,000 a year for 12 years. Which firm(s), if either, should accept this project?Multiple ChoiceDeep Mining only Precious Metals only Both Deep Mining and Precious Metals Neither Deep Mining nor Precious MetalsCannot be determined without further information
Cost of equity 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?Multiple ChoiceDividend yield Cost of equityCapital gains yield Cost of capital Income return
is dependent upon a reliable estimate of the market risk premium Assume Russo’s has a debt-equity ratio of .4 and uses the capital asset pricing model to determine its cost of equity. As a result, the company’s cost of equity:Multiple Choiceis affected by the firm’s rate of growth projections. implies that the firm pays out all of its earnings to its shareholders. is dependent upon a reliable estimate of the market risk premium.would be unaffected if the dividend discount model were applied instead. will be unaffected by changes in overall market risks.
cost of debt. Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the:Multiple Choicecompound rate. current yield. cost of debt.capital gains yield. cost of capital.
may cause the company’s overall weighted average cost of capital to either increase or decrease over time. Assigning discount rates to individual projects based on the risk level of each project:Multiple Choicemay cause the company’s overall weighted average cost of capital to either increase or decrease over time.will prevent the company’s overall cost of capital from changing over time. will cause the company’s overall cost of capital to decrease over time. decreases the value of the company over time. negates the company’s goal of creating the most value for its shareholders.
are based on the market values of the outstanding securities. The capital structure weights used in computing a company’s weighted average cost of capital:Multiple Choiceare based on the book values of debt and equity. are based on the market values of the outstanding securities.depend upon the financing obtained to fund each specific project. remain constant over time unless new securities are issued or outstanding securities are redeemed. are restricted to debt and common stock.
The cost of equity is unaffected by a change in the company’s tax rate. Black River Tours has a capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. The dividend payout ratio is 30 percent, the company’s beta is 1.21, and the tax rate is 21 percent. Given this, which one of the following statements is correct?Multiple ChoiceThe aftertax cost of debt will be greater than the current yield-to-maturity on the company’s outstanding bonds. The company’s cost of preferred is most likely less than the company’s actual cost of debt. The cost of equity is unaffected by a change in the company’s tax rate.The cost of equity can only be estimated using the capital asset pricing model. The weighted average cost of capital will remain constant as long as the company’s capital structure remains constant.
the weighted average of the flotation costs associated with each form of financing. The flotation cost for a company is computed as:Multiple Choicethe arithmetic average of the flotation costs of both debt and equity. the weighted average of the flotation costs associated with each form of financing.the geometric average of the flotation costs associated with each form of financing. one-half of the flotation cost of debt plus one-half of the flotation cost of equity. a weighted average based on the book values of the company’s outstanding securities.
is equal to the dividend yield. The cost of preferred stock:Multiple Choiceis equal to the dividend yield.is equal to the yield to maturity. is highly dependent on the dividend growth rate. is independent of the stock’s price. decreases when tax rates increase.
assigns discount rates to projects based on the discretion of the senior managers of a firm. The subjective approach to project analysis:Multiple Choiceis used only when a firm has an all-equity capital structure. uses the WACC of Firm X as the basis for the discount rate for a project under consideration by Firm Y. assigns discount rates to projects based on the discretion of the senior managers of a firm.allows managers to randomly adjust the discount rate assigned to a project once the project’s standard deviation has been determined. applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.
the risks associated with the use of the funds required by the project. The discount rate assigned to an individual project should be based on:Multiple Choicethe company’s overall weighted average cost of capital. the actual sources of funding used for the project. an average of the company’s overall cost of capital for the past five years. the current risk level of the overall firm. the risks associated with the use of the funds required by the project.
rate of return a company must earn on its existing assets to maintain the current value of its stock. The weighted average cost of capital for a firm with debt is the:Multiple Choicediscount rate that the firm should apply to all of the projects it undertakes. rate of return a company must earn on its existing assets to maintain the current value of its stock.coupon rate the firm should expect to pay on its next bond issue. minimum discount rate the firm should require on any new project. rate of return debtholders should expect to earn on their investment in this firm.
increase the initial project cost by dividing that cost by (1 − .083). When a firm has flotation costs equal to 8.3 percent of the funding need, project analysts should:Multiple Choiceincrease the project’s discount rate to offset these expenses by multiplying the company’s WACC by 1.083. increase the project’s discount rate to offset these expenses by dividing the company’s WACC by (1 − .083). add 8.3 percent to the company’s firm’s WACC to determine the discount rate for the project. increase the initial project cost by multiplying that cost by 1.083. increase the initial project cost by dividing that cost by (1 − .083).
prefer higher risk projects over lower risk projects. Jenner’s is a multi-division firm that uses its overall WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to:Multiple Choicereceive less project funding if its line of business is riskier than that of the other divisions. avoid risky projects so it can receive more project funding. become less risky over time based on the projects that are accepted. have an equal probability with all the other divisions of receiving funding. prefer higher risk projects over lower risk projects.
depends upon how the funds raised for that project are going to be spent. The cost of capital for a new project:Multiple Choiceis determined by the overall risk level of the firm. is dependent upon the source of the funds obtained to fund that project. is dependent upon the firm’s overall capital structure. should be applied as the discount rate for all other projects considered by the firm. depends upon how the funds raised for that project are going to be spent.
increase the initial cash outflow of the project. Incorporating flotation costs into the analysis of a project will:Multiple Choicecause the project to be improperly evaluated. increase the net present value of the project. increase the project’s rate of return. increase the initial cash outflow of the project.have no effect on the present value of the project.
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Finance Flashcards

Chapter 7 – Personal Finance

Truth in Lending Law A federal law that requires creditors to disclose the annual percentage rate (APR) and the finance charge as a dollar amount
Finance charge The total dollar amount paid to use credit
Annual Percentage Rate (APR) The percentage cost (or relative cost) of credit on a yearly basis. The APR yields a true rate of interest for comparison with other sources of credit
Simple Interest Interest computed on principal only and without compounding
Declining Balance Method A method of computing interest when more than one payment is made on a simple interest loan
Add-on Interest Method A method of computing interest in which interest is calculated on the full amount of the original principal
Adjusted Balance Method The assessment of finance charges after payments made during the billing period have been subtracted
Previous Balance Method A method of computing finance charges that gives no credit for payments made during the billing period
Average Daily Balance Method A Method of computing finance charges that uses a weighted average of the account balance throughout the current billing period
Rule of 78s A mathematical formula to determine how much interest has been paid at any point in a loan term
Credit Insurance Any type of insurance that ensures repayment of a loan in the even the borrower is unable to repay it
Fair Debt Collection Practices Act (FDCPA) A federal law, enacted in 1978, that regulates debt collection activities
Consumer Credit Counseling Service (CCCS) A local, nonprofit organization that provides debt counseling services for families and individuals with serious financial problems
Chapter 7 Bankruptcy One type of personal (or straight) bankruptcy in which many debts are forgiven
Chapter 13 Bankruptcy A voluntary plan that a debtor with regular income develops and proposes to a bankruptcy court
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Finance Flashcards

Finance ch. 3 quiz and LS questions

Jamie is employed as a currency trader in the Japanese yen market. Her job falls into which one of the following areas of finance? International finance
Jenna has been promoted and is now in charge of all external financing. In other words, she is in charge of: capital structure management.
Working capital management includes which one of the following? Determining which customers will be granted credit
Capital budgeting includes the evaluation of which of the following? Size, timing, and risk of future cash flows
Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm’s debts? Corporation
Corporate shareholders: have the ability to change the corporation’s bylaws.
Which one of the following statements correctly applies to a sole proprietorship? Obtaining additional equity is dependent on the owner’s personal finances.
Maria is the sole proprietor of an antique store that is located in a rented warehouse. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and apply the proceeds to the debtII. Sell the lighting fixtures from the building and apply the proceeds to the debt III. Withdraw funds from Maria’s personal account at the bank to pay the store’s debt IV. Sell any assets Maria personally owns and apply the proceeds to the store’s debt I, III, IV
The Sarbanes-Oxley Act of 2002 has: essentially made officers of publicly traded firms personally responsible for the firm’s financial statements.
The primary goal of financial management is to maximize: the market value of existing stock.
An agency issue is most apt to develop when: the control of a firm is separated from the firm’s ownership.
The potential conflict of interest between a firm’s owners and its managers is referred to as which type of conflict? Agency
An employee has a claim on the cash flows of Martin’s Machines. This claim is defined as a claim by one of the firm’s: stakeholders.
who can sell stock in the primary market? the company
cash management should be assigned to the corporate treasurer rather than the controller
primary goal of financial management for a sole proprietorship maximize the market value of the equity
The mixture of debt and equity is referred to as the firm’s capital structure
Function generally a responsibility to the corporate treasurer capital expenditures
Sole proprietorship: Obtaining additional equity is dependent on the owner’s personal finances.
All over-the-counter sales occur in dealer markets True
an agency issue is most apt to develop when the control of a firm is separated from the firm’s ownership
There must be at least one general partner True
Security dealers buy and sell from their own inventory
Advantage of the corporate form of organization is the ability to raise larger sums of equity capital than other organizational forms
Being in charge of all external financing is being in charge of capital structure management
Sarbanes-Oxley act in 2002 was primarily prompted by which one of the following from the 1990s Corporate accounting and financial fraud
Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge of: capital budgeting
Stadford Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm’s: capital structure
Lester’s BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm’s: working capital
Margie opened a used bookstore and is both the 100 percent owner and the store’s manager. Which type of business entity does Margie own if she is personally liable for all the store’s debts? sole proprietorship
Todd and Cathy created a firm that is a separate legal entity and will share ownership of that firm on a 50-50 basis. Which type of entity did they create if they have no personal liability for the firm’s debts? corporation
The potential conflict of interest between a firm’s owner and its managers is referred to as which type of conflict? agency
The federal government has a tax claim on the cash flows of the The Window Store. This claim is defined as a claim by one of the firm’s: stakeholders
Which one of the following occupations best fits into the international area of finance? currency trader
Which one of the following individuals commonly use finance in the course of their job?I. chief financial officersII. accountants III. security analysts IV. strategic managers I, II, III, and IV
Which one of the following is a working capital decision? How much cash should the firm keep in reserve?
Which one of the following is a capital structure decision? establishing the preferred debt-equity level
The daily financial operations of a firm are primarily controlled by managing the: working capital
A sole proprietorship has its profits taxed as personal income
Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners? limited liability company
Which one of the following best match the primary goal of financial management? increasing the market value of the firm
The goal of financial management is to increase the: current market value per share
What is the goal of financial management for a sole proprietorship? maximize the market value of the equity
Which one of the following situations is most apt to create an agency conflict? rejecting a profitable project to protect employee jobs
Which one of the following is most apt to create a situation where an agency conflict could arise? separating management from ownership
Which one of the following is most apt to align management’s priorities with shareholders’ interests? compensating manger with shares of stock that must be held for 3 years before the shares can be sold
Marti had an unexpected surprise when she ate her Lotsa Good cereal this morning. She found a piece of metal mixed in her cereal. The potential claim that Marti has against this firm is that of a(n): stakeholder
Which one of the following transactions occurred in the primary market? South Wind Products sold 1,000 shares of newly issued stock to Mike
Valerie bought 200 shares of Able stock today. Able stock has been trading for some time on the NYSE. Valerie’s purchase occurred in which market? secondary market
The goal of financial management is to maximize the firms value per share of stock
Which one of the following applies to a general partnership? Any one of the partners can be held solely liable for all of the partnership’s debt.
A corporation: a legal entity separate from its owners
Which one of the following functions is generally a responsibility assigned to the corporate treasurer? capital expenditures
Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm’s: capital structure
If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas? investments
Which one of the following occupations best fits into the corporate area of finance? chief financial officer
Which one of the following functions should be assigned to the corporate treasurer rather than to the controller? Cash management
Theo’s BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts as referred to as: working capital management
The Sarbanes-Oxley Act: require the corporate officers to personally attest that the financial statements are a fair representation of the company’s financial results.
Limited liability companies are primarily designed to: provide limited liability while avoiding double taxation.
Which one of the following is contained in the corporate bylaws? Procedures for electing corporate directors
Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm’s debts? general partnership
When conducting a financial analysis of a firm, financial analysts: rely solely on accounting information.
Which one of the following statements about a limited partnership is correct? There must be at least one general partner.
Jamie is employed as a commercial loan officer for a regional bank centered in the midwestern section of the U.S. Her job falls into which one of the following areas of finance? financial institutions
Which one of the following is an advantage of being a limited partner? Losses limited to capital invested
Which one of the following functions should be assigned to the treasurer rather than the controller? Cash management
Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm’s: capital structure
In a general partnership, each partner is personally liable for: the total debts of the partnership, even if he or she was unaware of those debts.
A limited liability company: prefers its profits be taxed as personal income to its owners.
Which one of the following best matches the primary goal of financial management? Increasing the market value of firm