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Finance Flashcards

FINANCE SDM CH10

Which of the following statements is correct for a project with a positive NPV? IRR exceeds the cost of capital
The IRR can lead to incorrect project rankings because projects with much higher NPVs may also have: longer project lives
A conventional cash flow pattern associated with capital investment projects consists of an initial outflow followed by: A SERIESE OF CASH INFLOW
Chris has been offered the chance to invest $120,000 in a partnership, which is expected to return $25,000 per year. If Chris is in the 30% tax bracket and limits investments to those with a payback of six years, should Chris invest? No, because the payback period is 6.86 years.
Unlike the IRR criteria, the NPV approach assumes an interest rate equal to the: firm’s cost of capital
The profitability index is a ratio of: NPV to invest cost
A firm has undertaken a project with an initial investment of $100,000. The firm’s cost of capital is 14% What is the NPV for this project? $54,623
An NPV profile is __________. a graph of a project’s NPV over a range of different discount rates
A firm is evaluating a proposal which has an initial investment of $45,000 and has cash flows of $5,000 in year 1, $20,000 in year 2, $15,000 in year 3, and $10,000 in year 4. The payback period of the project is: 3.5 years
One weakness of the payback period is that it:
Capital rationing is the process of: using limited cash to select among investments available
The minimum return that must be earned on a project in order to leave the firm’s value unchanged is: the discount rate
The first step in the capital budgeting process is: proposal generation
MIRR is used when: cash flows of a project change sign
Projects that do not compete with one another so that the acceptance of one project will have no bearing on the acceptance of other projects being considered by the firm are known as: independent projects
Jenna is considering an investment which has a price of $16,000. She expects to receive $3,000 for eight years. What is the investment’s internal rate of return? 10%
When resources are limited you should select the projects with the: highest NPV
To evaluate differences in project scale, a financial manager should always use ___________ as the primary capital budgeting evaluation tool. NPV
__________ are projects where the acceptance of one project automatically means we are rejecting other options. mutually exclusive projects
The “gold standard” of investment criteria refers to: net present value
What is the NPV of a project that costs 100,000 USD and returns 50,000 USD annually for three years if the opportunity cost of capital is 14%? CFo= -100,000CF1= 50,000F1=3I=14CPT NPV= 16,801.60
As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows: Project X Project Z Year Cash Flow Cash Flow 0 -$100,000 -$100,000 1 50,000 10,000 2 40,000 30,000 3 30,000 40,000 4 10,000 60,000If Denver’s cost of capital is 15 percent, which project would you choose?A. Neither project.B. Project X, since it has the higher IRR.C. Project Z, since it has the higher NPV.D. Project X, since it has the higher NPV.E. Project Z, since it has the higher IRR. A. neither project.
Unlike using IRR, selecting projects according to their NPV will always lead to a correct accept-reject decision. A. TrueB. False A. True
Which of the following statements is most correct?A. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the IRR.B. The NPV method assumes that cash flows will be reinvested at the risk free rate while the IRR method assumes reinvestment at the IRR.C. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the risk-free rate.D. The NPV method does not consider the inflation premium.E. The IRR method does not consider all relevant cash flows, and particularly cash flows beyond the payback period. A. the NPV method assume that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the IRR.
Assume a project has normal cash flows (i.e., the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?A. All else equal, a project’s IRR increases as the cost of capital declines.B. All else equal, a project’s NPV increases as the cost of capital declines.C. All else equal, a project’s MIRR is unaffected by changes in the cost of capital.D. Answers a and b are correct.E. Answers b and c are correct. B. All else equal, a project’s NPV increase as the cost of capital decline
When managers select correctly from among mutually exclusive projects, they: A. may give up rate of return for NPV.B. may give up NPV for rate of return.C. have a tendency to select the largest project. A. may give up rate of return for NPV
A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: The company’s cost of capital is 12 percent, and it can get an unlimited amount of capital at that cost. What is the regular IRR (not MIRR) of the better project?A. 12.00%B. 15.53%C. 18.62%D. 19.08%E. 20.46% D. 19.08 %
multiple choice questionA company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: The company’s cost of capital is 12 percent, and it can get an unlimited amount of capital at that cost. What is the MIRR of the better project?A.12.00%B. 8.37%C.18.62%D.17.84E.20.46% C. 18.62%
Which of the following investment evaluation tools is considered to be the best capital budgeting decision tool?A. Net present valueB. Internal rate of returnC. Payback periodD. Discounted payback period A. Net present value
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Finance Flashcards

finance chapter 10

On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called? Risk premium
Which one of the following is defined as the average compound return earned per year over a multiyear period? Geometric average return
An efficient capital market is best defined as a market in which security prices reflect which one of the following? All available information
Over the period of 1926-2014, which one of the following investment classes had the highest volatility of returns? small-company stocks
Over the period of 1926-2014: the risk premium on stocks exceeded the risk premium on bonds
The historical record for the period 1926-2014 shows that the annual nominal rate of return on: US treasury bills have had a positive rate of return for every year in the period
what is true regarding the period 1926-2014? US treasury bills had a positive average real rate of return
For the period 1926-2014, which one of the following had the smallest risk premium? US treasury bills
The standard deviation measures the _____ of a security’s returns over time. voltality
What has the narrowest distribution of returns for the period 1926-2014? intermediate-term government bonds
If the financial markets are efficient then: stock prices should respond only to unexpected news and events
One year ago, you purchased a 6 percent coupon bond with a face value of $1,000 when it was selling for 98.6 percent of par. Today, you sold this bond for 101.2 percent of par. What is your total dollar return on this investment? 86(1.012 x 1,000) – (.986 x 1,000) + (.06 x 1,000) = 86
Assume you earned 17.1 percent on your investments for a time period when the risk-free rate was 4.2 percent and the inflation rate was 4.6 percent. What was your real rate of return for the period? 11.95%(1.171/1.046) – 1 = .1195
Assume that over the past 88 years, U.S. Treasury bills had an average return of 3.5 percent as compared to 6.1 percent on long-term government bonds. During this same time period, assume inflation averaged 3.0 percent. What was the average nominal risk premium on the long-term government bonds? 2.6%6.1% – 3.5% = 2.6
A stock has produced returns of 11.9 percent, 5.6 percent, 16.4 percent, and -4.2 percent over the past four years, respectively. What is the geometric average return? 7.14%(1.119 x 1.056 x 1.164 x .958)^1/4 -1 = 7.14
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Finance Flashcards

Finance 300

Difference between initial cost and market value is called net present value
The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the payback period
The length of time a firm must wait to recoup the money it has invested in a project is called the payback period
A project’s average net income divided by its average book value is referred to as the project’s average accounting return
The internal rate of return is defined as the discount rate, which causes the net present value of a project to equal zero
You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project’s cash flows. What is the name given to this graph? NPV Profile
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to have multiple rates of return
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be mutually exclusive
A project has a net present value of zero. Which one of the following best describes this project? The project’s cash inflows equal its cash outflows in current dollar terms
Which one of the following will decrease the net present value of a project? increasing the project’s initial cost at time zero
If a project has a net present value equal to zero, then increasing the project’s initial cost at time zero
Net present value is the best method of analyzing mutually exclusive projects
Which of the following are advantages of the payback method of project analysis II. liquidity biasIII. ease of use
Which one of the following correctly applies to the average accounting rate of return? It can be compared to the return on assets ratio
Which one of the following is an advantage of the average accounting return method of analysis? easy availability of information needed for the computation
Which of the following are considered weaknesses in the average accounting return method of project analysis? I. exclusion of time value of money considerationsII. need of a cutoff rateIV. based on accounting values
Which one of the following statements related to the internal rate of return (IRR) is correct? The IRR is equal to the required return when the net present value is equal to zero.
Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I. positive net present valueIII. internal rate of return greater than the required rate
Mutually exclusive projects are best defined as competing projects which: both require the total use of the same limited resource.
The difference between a firm’s future cash flows if it accepts a project and the firm’s future cash flows if it does not accept the project is referred to as the project’s: incremental cash flows
The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following? opportunity cost
Which one of the following best describes the concept of erosion? the cash flows of a new project that come at the expense of a firm’s existing cash flows
The annual annuity stream of payments that has the same present value as a project’s costs is referred to as which one of the following? equivalent annual cost
the stand-alone principle advocates that project analysis should be based solely on which one of the following costs? incremental
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? selling fewer hot dogs because hamburgers were added to the menu
Changes in the net working capital requirements can affect the cash flows of a project every year of the project’s life.
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Finance Flashcards

Finance Exam 3

CH 9Interest rate parity exists because:A. there are investors who stand ready to engage in arbitrageB. central banks ensure the relationship holds to protect currency valuesC. inflation is the same in all industrialized countriesD. transactions costs and taxes make markets inefficient A. there are investors who stand ready to engage in arbitrage
CH 9Using the weighted average cost of capital as the required rate of return for every project will:A. cause a firm to reject projects that should have been acceptedB. cause a firm to accept projects that were too riskyC. result in maximization of shareholder wealthD. cause a firm to reject projects that should have been accepted and cause a firm to accept projects that were too risky D. cause a firm to reject projects that should have been accepted and cause a firm to accept projects that were too risky
Ch 9Which of the following causes a firm’s cost of capital (WACC) to differ from an investor’s required rate of return on the company’s common stock?A. the fact that the risk free rate of interest has increasesB. the incurrence of flotation costs when new securities are issuedC. the market risk premium exceeds 12%D. none of these – the WACC and required return are the same B. the incurrence of flotation costs when new securities are issued
Ch 9Higher flotation costs will result in all of the following except:A. higher after-tax cost of debtB. higher weighted average cost of debtC. higher cost of retained earningsD. higher cost of common equity when new common shares are sold C. higher cost of retained earnings
Ch 9Why should forms that own and operate multiple businesses that have different risk characteristics use business-specific, or divisional costs of capital?A. not all divisions have equal risk and the firm might accept projects whose returns are higher than are deemed appropriateB. not all business divisions have equal risk and the firm will likely become less risky in the futureC. not all lines of business have equal risk and it is likely that the firm will accept projects whose returns are unacceptably low in relation to the risk involvedD. use of the same weighted average cost of capital for all divisions may result in too much money being allocated to the least risky division C. not all lines of business have equal risk and it is likely that the firm will accept projects whose returns are unacceptably low in relation to the risk involved
Ch 9Which of the following should not be considered when calculating a firm’s WACC?A. cost of preferred stockB. after-tax cost of bondsC. cost of common stockD. cost carrying inventory D. cost carrying inventory
CH 9All of the following variables are used in computing the cost of debt except:A. maturity value of the debtB. market price of the debtC. number of years to maturityD. risk-free rate D. risk-free rate
Ch 9Joe’s Discount Club currently have a weighted average cost of capital of 12%. Joe’s has been growing rapidly over the past several years, selling common stock in each year to finance its growth. However, due to difficult economic times this year, Joe decides to cut its dividend and increase its retained earnings so that the common equity portion of its capital structure will include only retained earnings and no new common stock will be sold. Joe’s weighted average cost of capital this year should beA. zero, since no new stock will be soldB. less than 12%C. equal to 12%D. greater than 12% B. less than 12%
Ch 9Due to changes in regulatory requirements, the transactions costs associated with selling corporate securities increased by $1 per share. This change willA. cause the cost of capital to decreaseB. cause the cost of capital to increaseC. have no effect on the cost of capital because transactions costs are expensed immediatelyD. cause the cost of capital to decrease only if investors may be billed for part of the increase in transactions costs B. cause the cost of capital to increase
Ch 9Asian Trading Company paid a dividend yesterday of $5 per share (D0 = $4). The dividend is expected to grow at a constant rate of 8% per year. The price of Asian Trading Company’s stock today is $29 per share. If Asian Trading Company decides to issue new common stock, flotation costs will equal $2.50 per share. Asian Trading Company’s marginal tax rate is 35%. Based on the above information, the cost of retained earnings is:A. 28.38%B. 24.12%C. 26.62%D. 31.40% C. 26.62%
CH 9KayCee Manufacturing Company paid a dividend yesterday of $3.50 per share. The dividend is expected to grow at a constant rate of 10% per year. The price of KayCee’s common stock today is $40 per share. If KayCee decides to issue new common stock, flotation costs will equal $4 per share. KayCee’s marginal tax rate is 35%. Based on the above information, the cost of retained earnings is:A. 26.41%B. 20.09%C. 19.63%D. 17.55% C. 19.63%
Ch 9Jiffy Co. experts to pay a dividend of $3 per share in one year. The current price of Jiffy common stock is $60 per share. Flotation costs are $3 per share when Jiffy issues new stock. What is the cost of internal common equity (retained earnings) if the long-term growth in dividends is projected to be 8% indefinitely?A. 13%B. 14%C. 15%D. 16% A. 13%
CH 9Durocorp has a target captial structure of 30% debt and 70% equity. Durocorp is planning to invest in a project that will necessitate raising new capital. New debt will be issued at a before-tax yield of 14%, with a coupon rate of 10%. The equity will be provided by internally generated funds so no new outside equity will be issued. If the required rate of return on the firm’s stock is 22% and its marginal tax rate is 35%, compute the firm’s cost of capital.A. 18%B. 18.13%C. 19.68%D. 15.55% B. 18.13%
Ch 9A corporate bond has a face value of $1,000 and a coupon rate of 9%. The bond matures in 14 years and has a current market price of $946. If the corporation sells more bonds it will incur flotation costs of $26 per bond. If the corporate tax rate is 35%, what is the after-tax cost of debt capital?A. 5.57%B. 6.56%C. 8.18%D. 7.31% B. 6.56%
Ch 9Clothier, Inc. has a target capital structure of 40% debt and 60% common equity, and has a 40% marginal tax rate. If Clothier’s yield to maturity on bonds is 7.5% and investors require a 15% return of Clothier’s common stock, what is the firm’s weighted average cost of capital?A. 7.2%B. 10.8%C. 12%D. 12.25% B. 10.8%
CH 9Which of the following should NOT be considered when calculating a firm’s WACC?A. After-tax YTM on a firm’s bondsB. After-tax cost of accounts payableC. Cost of newly issued preferred stockD. Cost of newly issued common stock B. After-tax cost of accounts payable
CH 9Acme Conglomerate Corporation operates three divisions. One division involves significant research and development, and thus has a high-risk cost of capital of 15%. The second division operates in business segments related to Acme’s core business, and this division has a cost of capital of 10% based upon its risk. Acme’s core business is the least risky segment, with a cost of capital of 8%. The firm’s overall weighted average cost of capital of 11% has been used to evaluate capital budgeting projects for all three divisions. This approach willA. favor projects in the core business division because that division is the least riskB. favor projects in the related business division because the cost of capital for this division is the closest to the firm’s weighted average cost of capitalC. favor projects in the research and development division because the higher risk projects look more favorable if a lower cost of capital is used to evaluate themD. not favor any division over the other because they will all use the same company-wide weighted average cost of capital C. favor projects in the research and development division because the higher risk projects look more favorable if a lower cost of capital is used to evaluate them
CH 9 In general, which of the following rankings, from highest to lowest cost, is most accurate?A. cost of new common stock, cost of preferred stock, cost of debt, cost of retained earningsB. cost of debt, cost of preferred stock, cost of new common stock, cost of retained earningsC. cost of new common stock, cost of retained earnings, cost of preferred stock, cost of debtD. cost of preferred stock, cost of new common stock, cost of retained earnings, cost of debt C. cost of new common stock, cost of retained earnings, cost of preferred stock, cost of debt
CH 9Which of the following differentiates the cost of retained earnings from the cost of newly-issued common stock?A. The cost of the preemptive rights held by existing shareholdersB. The greater marginal tax rate faced by the now-larger firmC. The flotation costs incurred when issuing new securitiesD. The larger dividends paid to the new common stockholders C. The flotation costs incurred when issuing new securities
CH 9A US company can borrow 12,000 pounds in Great Britain for 4% interest, paying back 12,480 pounds in one year. Alternatively, the US company can borrow an equivalent amount of US dollars in the US and pay 8% interest. Assuming capital markets are efficient, estimate the expected inflation rate in the US if inflation is Great Britain is expected to be zero.A. 5.02%B. 4.16%C. 4%D. 3.85% D. 3.85%
CH 9The average cost associated with each additional dollar of financing for investment projects is:A. the incremental returnB. the marginal cost of capitalC. CAPM required returnD. the component cost of capital B. the marginal cost of capital
CH 9Interest rate parity exists becauseA. there are investors who stand ready to engage in arbitrageB. central banks ensure the relationship holds to protect currency valuesC. inflation is the same in all industrialized countriesD. transactions cost and taxes make markets inefficient A. there are investors who stand ready to engage in arbitrage
CH 9Which of the following should not be considered when calculating a firm’s WACC?A. cost of preferred stockB. after-tax cost of bondsC. cost of common stockD. cost of carrying inventory D. cost of carrying inventory
Joe’s Discount Club currently has a weighted average cost of capital of 12%. Joe’s had been growing rapidly over the past several years, selling common stock in each year to finance its growth. However, due to difficult economic times this year, Joe’s decides to cut its dividend and increase its retained earnings so that the common equity portion of its capital structure will include only retained earnings and no new common stock will be sold. Joe’s weighted average cost of capital this year should beA. zero, since no new stock will be soldB. less than 12%C. equal to 12%D. greater than 12% B. less than 12%
CH 9KayCee Manufacturing Company paid a dividend yesterday of $3.50 per share. The dividend is expected to grow at a constant rate of 10% per year. The price of KayCee’s common stock today is $40 per share. If KayCee decides to issue new common stock, flotation costs will equal $4 per share. KayCee’s marginal tax rate is 35%. Based on the above information, the cost of new common stock is:A. 26.41%B. 20.09%C. 19.63%D. 17.55% B. 20.09%
CH 9A company has preferred stock that can be sold for $21 per share. The preferred stock pays an annual dividend of 3.5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.25 per share. The company’s marginal tax rate is 35%. Therefore, the cost of preferred stock is:A. 18.87%B. 17.72%C. 14.26%D. 12.94% B. 17.72%
CH 9General Bill’s will issue preferred stock to finance a new artillery line. The firm’s existing preferred stock pays a dividend of $4 per share and is selling for $40 per share. Investment bankers have advised General Bill that flotation costs on the new preferred issue would be 5% of the selling price. The General’s marginal tax rate is 30%. What is the relevant cost of new preferred stock?A. 7%B. 7.37%C. 10%D. 10.53%E. 15% D. 10.53%
CH 9Five Rivers Casino is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Gamblers flotation expense on the bonds will be $50 per bond. Gamblers marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds?A. 8.76%B. 8.12%C. 7.49%D. 10.25% A. 8.76%
CH 9Kendall, Inc. has $15 million of outstanding bonds with a coupon rate of 10%. The yield to maturity on these bonds is 12.5%. If the firm’s tax rate is 30%, what is relevant cost of debt financing to Kendall, Inc.?A. 13.75%B. 8.75%C. 7%D. 3.75% B. 8.75%
CH 9Milton Parker has a capital structure that consists of $7 million of debt, $2 million of preferred stock, and $11 million of common equity, based upon current market values. Parker’s yield to maturity on its bonds is 7.4% and investors require a 8% return on Parker’s preferred and a 14% return on Parker’s common stock. If the tax rate is 35%, what is Parker’s WACC?A. 7.21%B. 8.12%C. 10.18%D. 12.25% C. 10.18%
CH 10A significant disadvantage of the payback period is that it:A. is complicated to explainB. increase firm riskC. does not properly consider the time value of moneyD. provides a measure of liquidity C. does not properly consider the time value of money
CH 10A significant disadvantage of the internal rate of return is that it:A. does not fully consider the time value of moneyB. does not give proper weight to all cash flowsC. may have an unrealistic reinvestment assumption with respect to the discount rate used for re-investment of the cash flowsD. It is expressed as a percentage C. may have an unrealistic reinvestment assumption with respect to the discount rate used for re-investment of the cash flows
CH 10Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives?A. the net present valueB. the paybackC. the internal rate of returnD. the equivalent annual annuity D. the equivalent annual annuity
CH 10Project A has an internal rate of return (IRR) of 15%. Project B has a IRR of 14%. Both projects have a required return of 12%. Which of the following statements is most correct?A. Both projects have a positive net present value (NPV)B. Project A must have a higher NPV than project BC. If the required return were less than 12%, Project B would have a higher IRR than Project AD. Project B has a higher profitability index than Project A A. Both projects have a positive net present value (NPV)
CH 10The net present value methodA. is consistent with the goal of shareholder wealth maximizationB. recognizes the time value of moneyC. uses all of a project’s cash flowsD. all of the above D. all of the above
CH 10What is the internal rate of return’s assumption about how cash flows are reinvested?A. they are reinvested at the firm’s discount rateB. they are reinvested at the required rate of returnC. they are reinvested at the project’s internal rate of returnD. they are only reinvested at the end of the project C. they are reinvested at the project’s internal rate of return
When reviewing the net present value profile for a projectA. the higher the discount rate, the higher the NPVB. the higher the discount rate, the higher the IRRC. the IRR will always be a point on the horizontal axis line where NPV = 0D. the IRR will always be a point on the horizontal axis equal to the required return C. the IRR will always be a point on the horizontal axis line where NPV = 0
CH 10Which of the following statements is most correct?A. if a project’s internal rate of return (IRR) exceeds the required return, then the project’s net present value (NPV) must be negativeB. if Project A has a higher IRR than Project B, then Project A must have a higher NPVC. the IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the IRRD. a project with NPV = 0 is not acceptable C. the IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the IRR
CH 10The net present value always provides the correct decision provided thatA. cash flows are constant over the asset’s lifeB. the required rate of return is greater than the internal rate of returnC. capital rationing is not imposedD. the internal rate of return is positive C. capital rationing is not imposed
CH 10We compute the profitability index of a capital budgeting proposal byA. multiplying the internal rate of return by the cost of capitalB. dividing the present value of the annual after tax cash flows by the cost of capitalC. dividing the present value of the annual after tax cash flows by the cash investment in the projectD. multiplying the cash inflow by the internal rate of return C. dividing the present value of the annual after tax cash flows by the cash investment in the project
CH 10The internal rate of return is:A. the discount rate that makes the NPV positiveB. the discount rate that equates the present value of the cash inflows with the present value of cash outflowsC. the discount rate that makes NPV negative and PI greater than oneD. the rate of return that makes the NPV positive B. the discount rate that equates the present value of the cash inflows with the present value of cash outflows
CH 10A project would be acceptable if:A. the pay back is greater than the discounted equivalent annual annuityB. the equivalent annual annuity is greater than or equal to the firm’s discount rateC. the profitability index is greater than the net present valueD. the net present value is positive D. the net present value is positive
CH 10Your firm is considering an investment that will cost $920,000 today. The investment will produce cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 in year 5. The discount rate that your firm uses for projects of this type is 11.25%. What is the investment’s net present value?A. $540,000B. $378,458C. $192,369D. $112,583 C. $192,369
CH 10Project XYZ requires an initial outlay of $400,000 and has a profitability index of 1.5. The project is expected to generate equal annual cash flows over the next twelve years. The required return for this project is 20%. What is project XYZ’s net present value?A. $600,000B. $200,000C. $120,000D. $80,000 B. $200,000
CH 10Your firm is considering an investment that will cost $920,000 today. The investment will produce cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 in year 5. The discount rate that your firm uses for projects of this type is 11.25%. What is the investment’s internal rate of returnA. 27.28%B. 21.26%C. 20.53%D. 15.98% C. 20.53%
CH 11Which of the following cash flows are not considered in the calculation of initial outlay for a capital investment proposal?A. increase in accounts recievableB. cost of issuing new bonds if the project is financed by a new bond issueC. installation costsD. none of these – all are considered B. cost of issuing new bonds if the project is financed by a new bond issue
CH 11Sunk costs are:A. recoverableB. incrementalC. not relevant in capital budgetingD. not deductible for tax purposes C. not relevant in capital budgeting
CH 11The pure play method:A. calculates beta using only project returnsB. uses the beta of a firm that is similar to the project being analyzed to determine the required rate of return for the projectC. selects a firm similar to the project being analyzed and uses its returns as the market return in estimating a project betaD. selects one of the firm’s existing projects that is similar to the project being analyzed and uses that project’s required rate of return B. uses the beta of a firm that is similar to the project being analyzed to determine the required rate of return for the project
CH 11A bakery company is considering one capital budgeting project involving the replacement of a sophisticated brick over, and another capital budgeting project involving research and development into synthetic food substitutes. Which of the following statement is most correct concerning the risk-adjusted discount rate(s) for the projects?A. the rate will likely be higher for the replacement project because the likelihood of success is higherB. the rate of return will likely be higher for the research and development project because of the uncertainty involved with research and development projectsC. the rate should be the same for both projects because they are being considered by one company with the same common shareholdersD. the rate should be higher for the replacement project because the company is more certain of the returns from a project similar to their existing business B. the rate of return will likely be higher for the research and development project because of the uncertainty involved with research and development projects
CH 11Incremental cash flows refer to:A. the difference between after-tax cash flows and before-tax accounting profitsB. the new cash flows that will be generated if a project is undertakenC. the cash flows of a project, minus financing costsD. the cash flows that are foregone if a firm does not undertake a project B. the new cash flows that will be generated if a project is undertaken
CH 11A company is expanding and has already signed a lease on new office space that costs $10,000 per month. The company also needs a new information system and hired a consultant to recommend new software. The consultant was paid $5,000 for her recommendation. Now the company is trying to make a choice between three competing software products. In the capital budgeting decision to purchase new software, the monthly rent for the office space is ________ and the consultant’s fee is ________.A. a sunk cost; a sunk costB. an opportunity cost; a sunk costC. incremental cash outflow; an opportunity costD. a sunk cost; a part of the initial outlay A. a sunk cost; a sunk cost
CH 11What method is used for calculation of the accounting beta?A. simulationB. regression analysisC. sensitivity analysisD. both simulation and sensitivity analysis B. regression analysis
CH 11Which of the following should be excluded in an analysis of a new project’s cash flows?A. additional investment in fixed assetsB. additional investment in accounts recievableC. additional investment in inventoryD. additional interest expenses on debt financing D. additional interest expenses on debt financing
CH 11Laural Inc. is a households products firm that is considering developing a new detergent. In evaluating whether to go ahead with the new detergent project, which of the following statements is most correct?A. the company will produce the detergent in a building that they already own. The cost of the building is therefore zero and should be excluded from the analysisB. the company will need to use some equipment that is could have leased to another company. This equipment lease could have generated $200,000 per year in after-tax income. The $200,000 should be excluded because the equipment can no longer be leasedC. the company will need to hire 10 new workers whose salaries and benefits will total $400,000 per year. Labor costs are not part of capital budgeting and should be excludedD. the company will produce the detergent in a building that it renovated 2 years ago for $300,000. The $300,000 should be excluded from the analysis D. the company will produce the detergent in a building that it renovated 2 years ago for $300,000. The $300,000 should be excluded from the analysis
CH 11The bankruptcy costs and/or shareholder under-diversification are an issue, what measure of risk is relevant when evaluating project risk in capital budgeting?A. total project riskB. contribution-to-firm riskC. systematic riskD. capital rationing risk B. contribution-to-firm risk
CH 11Taste Good Chocolates develops a new candy bar and plans to sell each bar for $1. Taste Good predicts that 1 million candy bars will be sold in the first year if the new candy bar is produced and sold, and includes $1 million of incremental revenues in its capital revenues of $700,000. What would explain this change?A. cannibalization of 300,000 of Taste Good Chocolates’ other candy barsB. excessive marketing costs to sell the 1 million candy barsC. a lower discount rateD. a higher selling price for the new candy bars A. cannibalization of 300,000 of Taste Good Chocolates’ other candy bars
CH 11Eastlick Dairy invests in a new kind of frozen desert called polar cream that becomes very popular. So many new customers come to the store that the sales of existing ice cream products are increased. The extra sales revenueA. should not be counted as incremental revenue for the polar cream project because the sales come from existing productsB. are synergistic effects that should be counted as incremental revenues for the polar cream projectC. are cannibalized sales that should be excluded from the analysisD. should be included in the analysis, but not the cost of the ice cream that is sold as that is a recurring expense B. are synergistic effects that should be counted as incremental revenues for the polar cream project
CH 11A local restaurant owner is considering expanding into another urban area. The expansion project will be financed through a line of credit with First National Bank. The administration costs of obtaining the line of credit are $500, and the interest payments are expected to be $1,000 per month. The new restaurant will occupy an existing building that can be rented for $2,500 per month. The incremental cash flows for the new restaurant include:A. $500 administrative costs, $1,000 per month interest payments, $2,500 per month rentB. $500 administrative costs, $2,500 per month rentC. $1,000 per month interest payment, $2,500 per month rentD. $2,500 per month rent D. $2,500 per month rent
CH 11Jones Company expects the following results in year one of a new project:Revenue………….$400,000Cash Expense…..150,000Depreciation………90,000EBIT……………………..160,000Taxes…………………….48,000Net Income……..$112,000The annual change in operating cash flow is equal toA. $298,000B. $202,000C. $160,000D. $250,000 B. $202,000
CH 11Project XYZ requires an investment in equipment of $600,000 to replace existing equipment. The existing equipment will produce after-tax salvage value of $70,000. Net working capital requirements are increased by $50,000. What is the total cash outflow at time zero?A. $720,000B. $650,000C. $530,000D. $580,000 D. $580,000600,000-70,000+50,000=580,000
CH 12When deciding upon how much debt financing to employ, most practitioners would cite which of the following as the most important influence on the level of the debt ratio?A. providing a borrowing reserveB. maintaining desired bond ratingC. ability to adequately meet financing chargesD. exploiting advantages of financial leverage C. ability to adequately meet financing charges
CH 12Business risk refers to:A. the risk associated with financing a firm with debtB. the variability of a firm’s expected earnings before interest and taxesC. the uncertainty associated with a firm’s CAPMD. the variability of a firm’s stock price B. the variability of a firm’s expected earnings before interest and taxes
CH 12All of the following will make the break-even point increase, other things equal, exceptA. fixed costs increaseB. the sales price per unit is decreased due to competitionC. variable costs increase due to higher direct labor costD. the number of units sold for the year decreased D. the number of units sold for the year decreased
Which of the following would not be a part of a firm’s capital structure?A. short-term notes payableB. long-term bondsC. preferred stockD. common stock A. short-term notes payable
CH 12According to the moderate view of capital costs and financing leverage, as the use of debt financing increases:A. the cost of capital continuously decreasesB. the cost of capital remains constantC. the cost of capital continuously increasesD. there is an optimal level of debt financing D. there is an optimal level of debt financing
CH 12The optimal capital structure is the funds mix that willA. minimize the use of debtB. achieve an equal proportion of debt, preferred stock, an common equityC. minimize the firm’s composite cost of capitalD. maximize total leverage C. minimize the firm’s composite cost of capital
CH 12The break-even point in sales dollars in convenient if:A. the firm sells a large amount of one productB. the firm deals with more than one productC. the price per unit is very lowD. depreciation expense is high B. the firm deals with more than one product
CH 12As production levels increaseA. variable costs per unit decreaseB. fixed costs per unit increaseC. fixed costs per unit stay the same and variable costs per unit increaseD. fixed costs per unit decrease and variable costs per unit stay the same D. fixed costs per unit decrease and variable costs per unit stay the same
Which of the following would be considered a fixed cost in a manufacturing setting?A. depreciationB. direct laborC. sales commissionD. direct materials A. depreciation
CH 12Operating leverage refers to:A. financing a portion of the firm’s assets with securities bearing a fixed rate of returnB. the additional chance of insolvency borne by the common shareholderC. the incurrence of fixed operating costs in the firm’s income statementD. a high degree of variable costs of production C. the incurrence of fixed operating costs in the firm’s income statement
CH 12A firm that uses large amounts of debt financing in an industry characterized by a high degree of business risk would have ________ earnings per share fluctuations resulting from changes in levels of salesA. noB. constantC. largeD. small C. large
CH 12All of the following are likely to result in the use of less debt in a company’s capital structure except:A. desire to maintain financial flexibilityB. desire to maintain a high credit ratingC. insufficient internal fundsD. a decrease in a company’s marginal tax rate C. insufficient internal funds
Ch 12Kocher Steel typically achieves one of three production levels in any given year: 8 million pounds of steel, 10 million pounds of steel, or 16 million pounds of steel. In tracking some of its costs, Kocher Steel’s controller discovered one cost that was $10 per pound no matter what the production level for the year. This is an example of a A. variable costB. fixed costC. semivariable costD. semifixed cost A. variable cost
Based on the data below, what is the break-even point in sales dollars?Average selling price per unit $18Variable cost per unit $13Units sold 400,000fixed costs $650,000interest expense $50,000A. $2,340,000B. $1,850,000C. $1,755,500D. $700,000 A. $2,340,000
CH 12Based on the data below, what is the break-even point in units produced and sold?Average selling price per unit $18Variable cost per unit $13Units sold 400,000Fixed costs $650,000Interest expense $50,000A. 130,000B. 140,000C. 150,000D. 180,000 A. 130,000
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Finance Flashcards

VB Personal Finance Intro to Investing (Math Quizzes)

QUESTION 1 of 5: You put $500 in an interest bearing bank account that pays 2% per year but has a fee of $2 per month. Are you getting ahead? b) No
QUESTION 2 of 5: You invest $1,000 in a fund. You check your statement at the end of April and you have lost 13%. When the statement for May comes, you see you have gained 13% in May. What is the value of your account? Round to the nearest dollar. c) $983
QUESTION 3 of 5: You invested $2,300 in a stock. Your account now has a value of $2,643. Your percentage gain on the investment (rounded to the nearest percent) was: d) 15%
QUESTION 4 of 5: You have some cash. You can either invest in a short-term bond that pays 4% or payoff some credit card debt at 9%. Which should you do? b) Pay off the credit card
QUESTION 5 of 5: You invested $1,200 in a mutual fund. Your account now has a value of $1,333. Your gain was: a) $133
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Finance Flashcards

Personal Finance

Types of financial institutions: what are Commercial Banks? Commercial banks are owned by stock holders and operate for profitThey offer checking, savings, and lending servicesThey serve both individuals and businesses
Types of financial institutions: what are Savings and Loans Associations? Savings and loan associations specialize in savings accounts and mortgage loansToday they include some checking accounts, business loans, and investment services
Types of financial institutions: what are Mutual Savings Banks? Mutual Savings Banks are owned by depositors (people who deposit money) they specialize in savings accounts and mortgage loansThey are located mainly in the Northeast U.S.
Types of financial institutions: what are Credit Unions? Credit Unions are nonprofit financial institutions owned by its members for their benefitMembers have have a common bond–membership in a labor union, employment by the same company, etc.
What are the four types of financial institutions? 1. commercial banks2. savings and loans associations3. mutual savings banks4. credit unions
What is the FDIC (Federal Deposit Insurance Company)? The FDIC is and institution which helps protect deposits in banksIt works to help maintain consumer/business confidence in the banking systemIt insures each account up to $250,00, so if something were to happen to that money in the bank, it would be insured/the person with the account would be reimbursed
What is the NCIA (National Credit Union Adminstrator)? The NCIA is a federal agency that charters and supervises federal credit unions, insuring deposits up to $250,000 per person
What are three other financial institutions? Life insurance companies: financial security for dependentsInvestment companies: offer mutual funds–combination of stocks and bondsFinance companies: make high interest loans to consumers/companies who cant buy elsewhere
What are four types of problematic financial businesses? 1. Pawnshops: make loans based on the value of possessions, used to get cash quick2. Check Cashing Outlets: used by people without a bank account. Charges 1-20% of the value of the the check3. Payday Loans: desperate borrowers go here to get cash; for example, they write a check for $115 to borrow $100 for 14 days. 4. Rent-to-own Center: stores that lease products out to people who can own those products if they complete a certain number of monthly or weekly payments
What are good questions to ask financial institutions when comparing them? Where can I get the highest rate of interest on my savings?Where can I obtain a checking account with low (or no) fees?Will I be able to borrow money from the institution when I need it?Do I need an institution that offers free financial advice?Is this institution FDIC or NCUA insured?Does this institution have have convenient locations?Does it have online banking services?Does it have any special banking services that I might need?
Four main categories of financial services: What is the first? 1. Savings: save storage of money, can be Time Deposits, money left in for months or years to collect interestWhen choosing a bank to start a savings account take these things into consideration: interest rates, safety convenience
Four main categories of financial services: What is the second? 2. Payment Services: used to make payments online or otherwiseDemand deposit–means that you can withdraw the money at anytimeAlso used for transferring money
Four main categories of financial services: What is the third? 3. Borrowing: used to borrow money either short term (credit card payment help) or long term (like a car or mortgage loan)
Four main categories of financial services: What is the fourth? 4. Other financial services: Include overdraft protection, stop payment, safe deposit boxes, investment accounts, income tax assistance, and financial planning services
What are some electronic banking services? Direct Deposit: an automatic deposit of net pay to an employee’s designated bank accountAutomatic Payments: they bank withdraws the amount you’ve spent from your bank account for bills and or paymentsATMs (Automatic Teller Machines): computer terminal that allows a withdrawal of cash from an accountDebit Card: allows you to withdraw money and pay for purchases with a PIN (Personal Identification Number
How has banking changed of over the years? Interest on savings is much lower (2-5% to now .5%)Records are handled electronically and much fasterThere used to be no interest on checking accounts, but now there is for many plansSecurity has gotten tighter with cameras and alarmsDifferent types of transactions are handled by different departments now whereas before the tellers did mostly everythingMore money is insured nowBanks have more convenient open hours nowThere are outdoor services now like ATM and drive-up banking whereas before everything was indoorThere is a larger variety of services now than before
Types of Checking accounts: What are regular checking accounts? Regular checking accounts allow you to deposit/withdraw money and write checks when you need to
Types of Checking accounts: What are Interest earning checking accounts? These are a combination of checking/savings accounts where you can earn interest on your money if you maintain a minimum amount (sometimes referred to as NOW accounts (Negotiable Order of Withdrawl))
When deciding what checking account to register for, what should you consider? Restrictions like minimum balance and withdrawal limitationsFees and Charges like monthly service charges, overdrafts, and low balance penaltiesInterest: frequency and compounding, the way interest is calculated, and rates to borrow moneySpecial Services like ATMs, online banking, overdraft protection, open hours, credit cards, and bill pay options
What are some advantages to having a checking account? ConvenienceSafetyProof of paymentrecord of finances
What are some disadvantages to having a checking account? Costs involvedChance of losing
What do you need to open a checking account? MoneyID (one of the following): Social security card or drivers licence or birth certificateMust be 18 yrs old or have an adult with you
What is a signature card? A signature card is the bank’s official record of your signature; after this is obtained, the account number is then printed on the bottom of checks and deposit slips
What are the four ways to list a check on a deposit slip? By the:1. Bank Transit Number (the two-part number printed at the upper right hand corner of all checks)2. The Check Number 3. The writer of the check 4. The city and state of the bank where the checking account is held
When endorsing a check, what is a blank endorsement? Where anyone can cash the check (sign your name as it is written on the front of the check)
When endorsing a check, what is a restrictive endorsement? Write “For Deposit Only” and for a specific account number (if known), then sign your name.
When endorsing a check, what is a special (or full) endorsement? Write “Pay to the Order of” and the person’s name to whom you are transferring the check, then sign your name (used to transfer a check to someone else)
When writing a check, what is an order paper? It’s where a specific name of a recipient of that cash is written and the money can only be cashed by that person
When writing a check, what is a bearer paper? It’s where the check says “Pay to the order of: Cash” and anyone who hold that paper (or the bearer of that paper) can cash the check
What is a check register? It’s where you keep record of all transactions made that affect the balance of your checking account (including checks, withdrawals, transfers, and deposits)A check register shows the current balance of money in your checking account
Review the reconciling a bank statement assignment and it’s steps This will be on the test!
Special use checks: what are certified checks? a personal check, the amount you write the check out for is immediately subtracted from your account
Special use checks: what are cashier’s checks? a check that a bank draws on its own funds – the bank guarantees this payment.
Special use checks: what are travelers checks? checks used when identification is difficult (ex. when you’re traveling) these are bought in multiples of $50, $100 or more and have a fee a 1% of the value of the check. You sign each check at the time of purchase and then again when you cash it to establish your identity, these can be replaced if lost
Special use checks: what are money orders? an order for a specific amount of money payable to a specific payee. Used for transferring money for someone who doesn’t have a checking account or by someone who needs to transfer money a great distance safely. These are processed at certain financial institutions or at U.S. post offices.
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Finance Flashcards

Personal Finance Chapter 11 & 12

t/f Interest rate risk is greater for long-term bonds than for short-term bonds. True
t/f The returns you expect from securities are income and growth True
t/f Bondholders will receive interest payments after the stockholders receive dividends False
t/f You receive stock dividend this year instead of cash. This is taxable income. False
t/f You receive a cash dividend from your stock investment this year. This is taxable income True
Which of the following type of investment is the most liquidity risk? A. Mutual fund sharesB. LandC. Corporate bondsD. Common stockE. Treasury bonds B. Land
The Smith Family owns 200 shares of Elta stock. The company declared a 5% stock dividend. The smiths now own __________ shares 210 (5% of 200… add that to original shares)
Cash dividends on common stock are most often paid:A. weeklyB. semi-anuallyC. monthlyD. quarterlyE. annually D. quarterly
U-Need-This has $12 million in liabilities, $12 million preferred stock, $10 million shares of common stock outstanding, and $39 million in total assets. The book value is:A. $4.10 per shareB. $1.50 per shareC. $4.30 per shareD. $2.00 per shareE. none of the above B. $1.50 per share
The amount of stockholders’ equity in a firm; determined by subtracting the company’s liabilities and preferred stock from its assets Book Value
The ______ of a stock reflects stockholder confidence.A. par valueB. face valueC. dividend yieldD. price/earnings ratioE. book value D. Price/earnings ratio
purchasing power risk a type of risk resulting from possible changes in price levels, which can significantly affect investment returns
fixed-income securities securities such as bonds, notes, and preferred stocks that offer purchasers fixed periodic income.
liquidity risk a type of risk associated with the inability to liquidate an investment conveniently and at a reasonable price
event risk the risk that some major, unexpected event will occur that leads to a sudden and substantial change in the value of an investment
Dividends Payments from corporations to common stockholders in the form of cash and/or additional stock. Cash dividends are most common.
Dividend Yield formula Dividend Yield = Annual dividend per share/market price per share of stock
stock dividends new shares of stock distributed to existing stock-holders as a supplement to or substitute for cash dividends
Earnings Per Share (EPS) The dollar return earned by each share of common stock; calculated by dividing all earnings remaining after paying preferred dividends by the number of common shares outstanding
Net profit margin relates a firms net profits to its sales; shows the rate of return a company is earning on sales
Common stock a piece of ownership in a company.
Bonds bonds are liabilities. An individual who invests in a bond receives a stipulated interest income, typically paid every six months, plus the return of the principal value of the bond at maturity
mutual fund an organization that invests in and professionally manages a diversified portfolio of securities
Bull Market prices go UP (associated with investor optimism, economic recovery and expansions, rising securities prices)
Bear Market prices go DOWN (associated with pessimism & economic slowdown, falling securities prices)
Stop loss (Stop order) when the market price reaches or drops below a specified level. used to protect the investor against rapid declines in stock prices.. activated when stop price is reached.
t/f Two prerequisites to investing are above average risk and clear understanding of market direction false
preferred stock combines the fixed income features of bonds with the same price appreciation potential as common stock false
Mutual funds often sell directly to investors true
_________ is a short-term investment activityA. Buying life insuranceB. SavingC. Investing in common stockD. Buying bondsE. Speculating in common stock E. Speculating in common stock
The most common reason for investing is:A. sheltering earnings from taxesB. enhancing current incomeC. paying for an expensive vacationD. saving for college educationE. saving for retirement E. Saving for retirement
You have been offered an opportunity to buy shares of a diversified collection of securities. You will be investing in: A. BondsB. Mutual fundsC. Real EstateD. Stock opt ionsE. Common stock B. Mutual funds
Which of the following is an order to sell a stock when the market price drops to or below a specified level?A. Stop-loss orderB. day orderC. Market orderD. limit orderE. fill or kill order A. Stop-loss order
The SIPC provides protection to the investor fromA. low or missing dividend paymentsB. declining security pricesC. brokerage firm failureD. using margin requirementsE. none of these C. brokerage firm failure
Which of the following would offer the best return on investment? Assume that you buy $6,000 in stock in all three cases, and ignore interest and transaction costs in all your calculations.A. Buy a stock at $85 without margin and sell it 1 year later at $95.B. Buy a stock at $30 with 50% margin and sell it 1 year later at $45.C. Buy a stock at $70 with 75% margin and sell it 1 year later at $85. B. Buy a stock at $30 with 50% margin and sell it 1 year later at $45.
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Finance Flashcards

finance final exam

Considered alone, which of the following would increase a company’s current ratio?1. an increase in net fixed assets2. an increase in accrued liabilities3. an increase in notes payable4. an increase in accounts receivable5. an increase in accounts payable 4. an increase in accounts receivable
____________ _______________ are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders bond covenants
the ______________________ shows how much the firm’s cash, total of currency, bank deposits, and short term liquid securities (or cash equivalents) increased or decreased during a year statement of cash flows
If the stock price at the end of last year was 33.50 and the book value per share was 25.00 what was the market/book ratio? 1.34
other things held constant, which of the following actions would increase the amount of cash on a company balance sheet?a. company repurchases common stockb. company pays dividendc. company issues new common stockd. company gives customers more time to pay their bills c. company issues new common stock
which of the following would indicate an improvement in a company’s financial position holding other things constant?a. TIE declinesb. DSO increasesc. quick ratio increasesd. current ratio declinese. total assets turnover decreases c. quick ratio increases
If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will ____________ from the previous years balance decline
A company issues 300 mil. of new common stock and use the proceeds to pay off some ofits outstanding bonds that carry a 7% interest rate. Assume that the company, which does not pay any dividends, takes this action, and that the total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?a. taxable income fallsb. company’s interest expense would not changec. company would have less common equity than befored. company’s net income would increase c. company would have less common equity than before
One of the advantages to forming a corporation is that the owners of the firm have _____________________ limited liability
A key conclusion of the CAPM is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio. The risk of the asset held in isolation is not relevant under the CAPMa. trueb. false a. true
the y axis of the SML represents the required return of a portfolio with a beta of zero, which is the risk free rate.a. trueb. false a. true
Diversification will normally reduce the riskiness of a portfolio of stocks.a. trueb. false a. true
the corporate valuation model cannot be used unless a company pays dividends.a. trueb. false b. false
according to CAPM investors are concerned with portfolio risks, not the risks of individual stocks held in isolation. thus the relevant risk of a stock is the stock’s contribution to the riskiness of a well diversified portfolio. a. trueb. false a. true
if investors become less averse to risk, the slope of the SML will increase a. trueb. fasle false
the coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return standardized measure of the risk per unit of expected return.a. trueb. false a. true
because of differences in the expected returns on different investments, the standard deviation is an adequate measure of risk. however, the coefficient of variation adjusts for differences in expected returns and thus investors to make better comparisons of investments stand alone riska. trueb. false a. true
risk aversion implies that investors require higher expected returns on riskier than on less risky securities. true false true
if in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that the investor thinks a. stock experiencing supernormal growthb. stock should be soldc. stock is a good buyd. mgt is not trying to maximize the price per share c. stock is a good buy
a stocks beta measures its diversifiable risk relative to the diversifiable risk of other firmsa trueb. false false
assume that investors have recently become more risk averse, so the market risk premium has increased. also, assume the risk free rate and expected inflation have not changed. which of the following is most likely to occur:a. required rate of return for an average stock will increase by an amount equal to the increase in the market risk premiumb. the required rate of return will decline for stocks whos betas are less than 1.0 c. the required rate of return on the market, rm, will not change as a result ofthese changesd. the required rate of return on a riskless bond will decline a. the required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium
Adding more randomly selected stocks will ______________ the portfolio’s unsystematic, or diversifiable, risk Reduce
inflation, recession, and high interest rates are economic events that are best characterized as beinga. systematic risk factors that that can be diversified awayb. company specific risk factors that can be diversified awayc. among the factors that are responsible for market riskd. risks that are beyond the control of investors and thus should not be considered by security analysts or porfolio managers c. among the risk factors that are responsible for market risk
the risk of a stock held in a portfolio is typically ____________ than the stocks risk when it is held alone lower
which is correct:a. the yield on a 2 year corp bond should always exceed the yield on a 2 year treasury bondb. the yield on 3 year corp bond should always exceed yield on 2 year corp bondc. if inflation increases, then yield on a 2 year bond should exceed that of a 3 year bond a. yield on 2 year corporate bond should always exceed the yeild on a 2 year treasury bond
longer treasury securities= _________ yield than shorter treasury securities bigger
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Finance Flashcards

International Finance Chapter 18

1 Efficient cash management techniques cana) reduce the investment in cash balances and foreign exchange transaction expenses.b) provide for maximum return from the investment of excess cash.c) result in borrowing at lowest rate when a temporary cash shortage exists.d) all of the above D
2 Cash management refers toa) the decision to grant credit to customers or to remain “cash and carry”.b) the investment the firm has in transaction balances and precautionary balances.c) a domestic firm’s investment in foreign currency.d) none of the above B
3 Precautionary cash balancesa) are necessary in case the firm has underestimated the amount of cash need to cover transactions.b) are necessary to cover scheduled outflows of funds during a cash budgeting period.c) both a) and b)d) none of the above A
4 Precautionary cash balances a) represent an increasingly-important source of interest income for many MNCs.b) are necessary in case the firm has underestimated the amount needed to cover transactions. c) are synonymous with speculative cash balances.d) bone of the above B
5 Multinational cash managementa) is really no different for a MNC than for a purely domestic firm in a closed economy.b) concerns itself with the size of cash balances, their currency denominations, and where these cash balances are located among the MNC’s affiliates.c) concerns itself with the size of cash balances and their currency denominations, but not where these cash balances are located among the MNC’s affiliates, since intra-affiliate default risk is not an issue.d) none of the above B
6 Good cash management boils down toa) investing excess funds at the most favorable interest rate and borrowing at the lowest rate when there is a temporary cash shortage.b) investing excess funds at the lowest rate and borrowing at the highest rate when there is a temporary cash shortage.c) hedging currency exposure with judicious use of futures, forwards, and currency option contracts.d) none of the above A
7 True or false: Many of the skills necessary for effective cash management are the same regardless of whether the firm has only domestic operations or if it operates internationally.a) Falseb) True B
8 Benefits of a multilateral netting system include:a) The decrease in the expense associated with funds transfer, which in some cases can be over $1,000 for a large international transfer of foreign exchange.b) The reduction in the number of foreign exchange transactions and the associated cost of making fewer but larger transactions.c) The reduction in intracompany float, which is frequently as high as five days even for wire transfers.d) The benefits that accrue from the establishment of a formal information system, which serves as the foundation for centrally managing transaction exposure and the investment of excess funds.e) All of the above E
9 With a CENTRALIZED CASH DEPOSITORY a) There is less chance for an MNC’s funds to be denominated in the wrong currency.b) The central cash manager has a global view of the MNC’s overall cash position.c) There is less chance of mislocated fundsd) All of the above D
10 With a CENTRALIZED CASH DEPOSITORY a) a MNC can facilitate fund mobilization.b) system-wide excess cash are invested at the most advantageous rates. c) system-wide cash shortages are borrowed at the most advantageous rates. d) all of the above D
11 Not all countries allow MNCs the freedom to net payments,a) by limiting netting, more needless foreign exchange transactions flow through the local banking system.b) MNCs can avoid these restrictions by using a Centralized Cash Depository.c) MNCs can avoid these restrictions by using wire transfers.d) both b) and c) A
12 With regard to cash management systems in practice, studies suggest that the benefits of a multilateral netting system includea) the decrease in the expense associated with funds transfer, which in some cases can be over $1,000 for a large international transfer of foreign exchange.b) the savings in administrative time.c) the reduction in intra company float, which is frequently as high as five days, even for wire transfers.d) all of the above D
13 Several international banks offer multilateral netting software packages. These packagesa) calculate the net currency positions of each affiliate.b) can integrate the netting function with foreign exchange exposure management.c) only work on the Mac platform.d) both a) and b) D
14 MNCs can reduce their exchange rate expensea) by using bilateral netting.b) by using a centralized cash management system.c) by using multilateral netting.d) all of the above D
16 The U.S. IRS allows transfer prices to be set using Comparable uncontrolled price method. This method requiresa) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.b) the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.c) an appropriate profit is added to the cost of the manufacturing affiliate.d) financial models and econometric techniques. A
17 The U.S. IRS allows transfer prices to be set using the resale price methoda) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.b) the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.c) an appropriate profit is added to the cost of the manufacturing affiliate.d) financial models and econometric techniques. B
18 The U.S. IRS allows transfer prices to be set using the cost plus approacha) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.b) the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.c) an appropriate profit is added to the cost of the manufacturing affiliate.d) financial models and econometric techniques. C
19 Which will reduce the number of foreign exchange transaction the most for a MNC?a) Multilateral nettingb) Bilateral nettingc) Fish nettingd) None of the above A
20 Under multilateral nettinga) each affiliate nets all its inter-affiliate receipts against all its disbursements. It then transfers or receives the balance, respectively, if it is the net payer or receiver.b) each pair of affiliates determines the net amount due between them, and only the net amount is transferred. c) no inter-affiliate payments are made or even computed, since no real cash flows are involved.d) all of the above A
21 One benefit of a centralized cash depository is a) the MNC’s investment in precautionary cash balances can be substantially reduced without a reduction in its ability to cover unforeseen expenses.b) each affiliate will have greater autonomy in managing its own cash balances.c) exchange rate restrictions can be easily circumvented.d) none of the above A
22 The lower the transfer pricea) the higher the net profit reported by the MNC.b) the lower the gross profit of the transferring division relative to the receiving division.c) the higher the gross profit of the receiving division relative to the transferring division.d) none of the above B
23 Multinational cash managementa) is really no different for a MNC than for a purely domestic firm in a closed economy.b) concerns itself with the size of cash balances, their currency denominations, and where these cash balances are located among the MNC’s affiliates.c) concerns itself with the size of cash balances and their currency denominations, but not where these cash balances are located among the MNC’s affiliates, since intra-affiliate default risk is not an issue.d) none of the above B
24 Which term correctly describes the following situation? When a country imposes exchange restrictions on its own currency, limiting conversion to other currencies, a MNC’s frustrated remittance of profits from a subsidiary would bea) blocked funds.b) stopped funds.c) constipated funds.d) money down the toilet. A
25 On blocked funds strategy isa) transferring personnel from corporate headquarters to the subsidiary offices .b) using the national airlines of the host country when possible for the international travel of all MNC executives.c) holding business conferences of the MNC in the host country, where all expenses are paid by the local subsidiary.d) all of the above D
26 Reasons for a country to impose exchange restrictions on its own currency, limiting conversion to other currencies includea) enticing more foreign investment from MNCs.b) for a variety of reasons, the country may find itself short of foreign currency reserves.c) creating a home-grown business climate.d) all of the above B
27 Why can blocked funds can be detrimental to all concerned?a) Host countries want to attract foreign industries that benefit their economic development; blocked funds make MNCs less willing to invest.b) MNCs should not be expected to make beneficial investment where they may not be able to receive an appropriate return.c) Local competitors may be able to reap monopoly profits.d) Both a) and b) D
28 A firm keeps a precautionary cash balance to cover unexpected transactions during the budget period. The size of this balance depends on how safe the firm desires to be in its ability to meet unexpected transactions. a) The larger the precautionary cash balance, the greater is the firm’s ability to meet unexpected expenses.b) The larger the precautionary cash balance, the less is the risk of financial embarrassment and loss of credit standing. c) The larger the precautionary cash balance, the greater the potential opportunity cost.d) All of the above D
29 Some countries allow interaffiliate transactions to be settled only on a gross basis. That is, a) all receipts for a settlement period must be grouped into a single large receipt and all disbursements must be grouped into a single large payment.b) all receipts and disbursements for a settlement period must be handled individually.c) all receipts and disbursements for a settlement period must be netted against each other and then a single large payment is made.d) each affiliate nets all its interaffiliate receipts against all its disbursements. It then transfers or receives the balance, respectively, if it is a net payer or receiver. A
30 True or False: A central cash manager has a global view of the most favorable borrowing rates and most advantageous investment rates.a) Trueb) False A
31 True or False: A centralized cash management system with a cash pool can reduce the investment the MNC has in precautionary cash balances, saving the firm money.a) Trueb) False A
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Finance Flashcards

Chapter 13 Personal Finance Exam

A fund that invests only in a particular industry would be a _______ fund sector
The current market value of all the securities a mutual fund owns, less any liabilities, on a pershare basis is known as the fund’s: net asset value
Redeeming your mutual fund shares might result in a charge called the: back-end load
A(n) _____ sells fund shares either directly to the public or through certain authorized dealers. distributor
General-purpose money fund is: a money fund that invests in virtually any type of short-term investment vehicle
_____ funds are balanced funds that automatically change the asset allocation from more to less equity exposure as an investor ages. Life
The fund that is structured to match the performance of a certain market segment is known as a(n) _____ fund. index
Which of the following bond mutual funds invest in tax-exempt securities? municipal bond funds
Leverage means: using borrowed money to magnify returns
A(n) _____ is a service offered by mutual funds that helps an investor earn compound interest on their investments. automatic reinvestment plan
________ gives the property owner an allowance for the decline in the physical condition of real estate over time. Depreciation
A closed-end investment company that invests in various types of income-producing properties and mortgage loans is a: hybrid real estate investment trust
The actual ownership of a mutual fund is in the hands of the shareholders
______ funds are highly speculative and seek large profits from capital gains Aggressive growth
Which of the following real estate investment trusts (REITs) is the most attractive to income-oriented investors? Mortgage
Compared to mutual funds, exchange traded funds (ETFs): accommodate investors pursuing narrow market segments
A(n) ______ real estate investment trust (REIT) would invest in income-producing properties and mortgage loans. hybrid
Both load and no-load funds always charge a: management fee
A(n) _______ actually runs the portfolio and makes the buy and sell decisions investment advisor
In the online quotes from The Wall Street Journal’s listing of mutual funds, an “r” after the mutual fund name means that the particular mutual fund has a _____ associated with it. back-end load
Which of the following combines some of the operating characteristics of an open-end fund with some of the trading characteristics of a closed-end fund? exchange traded fund
An annual fee charged by some mutual funds to cover marketing and selling expenses is called the: 12b-1 fee
Which of the following is a reason to invest in mutual funds? mutual funds provide diversification of invested funds
Investment in real estate is attractive to investors because it permits a high degree of financial leverage
If you are a mutual fund investor who needs a steady income, you might take advantage of a fund’s: systematic withdrawal plans
Which of the following is true of real estate investments? Real estate investments lead to lower taxes due to tax shelter
Exchange traded mutual funds (ETFs): are traded throughout the day on stock exchanges
Exchange traded funds (ETFs) invest in narrow market segments