Q Which statement applies to an amortized loan that requires fixed principal payments?
A The loan payments will decrease over time.
Q An increase in which one of these is most apt to decrease the nominal interest rate?
A liquidity
Q The US Corporate Bond Market
A Is more transparent than it was in the 1990s.
Q The value of a firm
A equals the sum of the individual value of the firm's projects and divisions.
Q Assume you computed the NPV of a project using nominal values. Your partner computed the NPV of the identical project using real values given a positive inflation rate. when you compare results you should discover that:
A your NPV values are identical.
Q Which is one of the criticisms applied to NPV analysis?
A Managers may acquire a false sense of security based on a project's net present value.
Q MM Proposition I, without taxes, assumes that
A individuals and corporations can borrow at the same rate.
Q When selecting a capital structure, managers should aim to maximize the
A value of the firm for its shareholders.
Q The optimal debt-equity ratio tends to
A increase when agency costs of equity exist
Q Which one of the following statements concerning bankruptcy is correct?
A An indirect cost of bankruptcy is loss of employees
Q The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the:
A Date of Record
Q The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the:
A Declaration date
Q Which of these will occur in a world with no taxes and financial distress when a firm is operating at its optimal capital structure?
-> The depbt equity ratio will be optimal.
-> The weighted average cost of capital will be at its minimal point.
-> The increased benefit from additional debt will equal the increased bankruptcy costs of the debt.
Q Which one of these represents the difference between the value of a levered and an unlevered firm?
A TcB
Q Which one of these proposes that the value of a levered firm exeeds the value of an unlevered firm by the present value of the tax shield?
A MM I with Tax
Q The primary difference between a line of credit and a revolving credit arrangement is the
A Length of time period covered by the loan agreement
Q The primary purpose of a lockup agreement is to ensure
A Company insiders maintain an economic interest in the issuer of the IPO for a minimum period of time.
Q If the acquirer wants the target firm’s managers to stay in place, at least for a stated period of time, the acquirer should employ the tactic known as a
A Golden parachute
Q The issuance of new equity shares is cash flow from
A
Q Which one of the following is least apt to encourage managers to act in the best interests of shareholders?
A
Q Depreciation
A
Q As seen on an income statement
A
Q Cash flow to stockholders is best described as
A
Q What ratio calculates the amount of sales generated by each $1 of debt and equity invested in the firm?
A
Q In project analysis, which one of these is a common assumption regarding net working capital?
A Net working capital will be returned to its pre-project level at the end of a project
Q Which one of these measures a firm's operating and asset use efficiency as well as its financial leverage?
A DuPont identity
Q A discount bond has a coupon rate that
A
Q Which one of the following is least apt to encourage managers to act in the best interests of shareholders?
A
Q Depreciation
A
Q As seen on an income statement
A
Q Cash flow to stockholders is best described as
A
Q What ratio calculates the amount of sales generated by each $1 of debt and equity invested in the firm?
A
Q In project analysis, which one of these is a common assumption regarding net working capital?
A Net working capital will be returned to its pre-project level at the end of a project
Q Which one of these measures a firm's operating and asset use efficiency as well as its financial leverage?
A DuPont identity
Q A discount bond has a coupon rate that
A is
less than the bond's yield to maturity.
Q The internal rate of return
Q All else constant, a bond will sell at ________ when the yield to maturity is ________ the coupon rate
A a discount; higher than
Q A stock that pays a constant annual dividend will have a market price that
A decreases when the market rate of return increases
Q The excess return earned by an asset that has a beta of one over that earned by a risk-free asset is referred to as the
Q In scenario analysis, which one of the following items is least apt to be assigned a range of values?
A Initial
costQ The internal rate of return
Q All else constant, a bond will sell at ________ when the yield to maturity is ________ the coupon rate
A a discount; higher than
Q A stock that pays a constant annual dividend will have a market price that
A decreases when the market rate of return increases
Q The excess return earned by an asset that has a beta of one over that earned by a risk-free asset is referred to as the
Q In scenario analysis, which one of the following items is least apt to be assigned a range of values?
Q A company that uses the MACRS system of depreciation
A will expense the entire cost of an asset over the asset's class life
Q The cash flows of a new project that come at the expense of a firm's existing projects are called
Q A supplier, who requires payment this week, should be most concerned about which one of its customer's ratios?
A Cash ratio
Q Which one of these statements is correct?
A Long-term debt requires a payout of cash within a stated time period
Q In a stock market report, the open price represents the
A first trade of the day
Q Which one of these best measures a firm's long-run ability to meet its obligations
A Equity multiplier
Q Current assets include
A inventory and cash
Q Conducting scenario analysis helps managers see the
A . potential range of outcomes from a proposed project.
Q Ignoring taxes, which one of these is a correct formula for calculating the accounting profit breakeven point?
A (Fixed costs + Depreciation) / Contribution margin
Q Which one of the following is an example of an incremental cash flow for Project A?
A Rental cost of some new machinery that will be acquired for Project A
Q All else constant, the net present value of a typical investment project increases when
A the rate of return decreases.
Q By federal law, lenders must disclose
A the APR, including fees and other noninterest charges
Q When two projects can share the same economic resource, the projects are generally considered to be
A mutually exclusive.
Q The process of planning and managing a firm's long-term investments is referred to as
A capital budgeting
Q Capital budgeting analysis is based on
A the discounted cash flows incremental to a project
Q Which of the following should be included in the analysis of a proposed project?
A Synergy, erosion, opportunity costs, and incremental costs
Q The voting procedure whereby shareholders may cast all of their votes for one member of the board is called _____ voting.
A cumulative
Q All else equal, the payback period for a project will decrease whenever the
A cash inflows are moved earlier in time.
Q The expected dividend yield is equal to
A Expected cash dividend / Current stock price.
Q An investment is acceptable if its average accounting return (AAR)
A exceeds the target AAR
Q The enterprise value estimates the
A cash required to purchase all of a firm's outstanding stock and pay off the interest-bearing debt.
Q The capital market line
A intersects the vertical axis at the risk-free rate.
Q Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to
A taxes and potential default
Q How is the Sharpe ratio defined as it applies to security returns?
A Risk premium / Standard deviation
Q Which one of these formulas is used to estimate a firm's growth rate?
A Retention ratio × ROE
Q Which one of these is calculated as: 365 / (Cost of goods sold / Inventory)?
A Days sales in inventory
Q A business entity formed by two or more individuals who each have unlimited liability for business debts is called a
A general partnership
Q The primary purpose of portfolio diversification is to
A eliminate asset-specific risk
Q Which one of these is a requirement when computing the net present value of a capital project?
A Real cash flows must be discounted using a real rate.
Q Assume you purchase a bond with a quoted price of 98.6208 on June 30. The bond pays interest on February 1 and August 1. The invoice price you pay for this purchase will equal the
A Dirty Price
Q Which one of the following projects is most apt to be financed with venture capital?
A Prototype for a newly patented tool by an individual inventor
Q A sensible payout policy
Q Efficient markets require which one of these?
A Countervailing irrationalities
Q Flexible short-term financial policies tend to
A maintain large cash balances
Q Which one of these can a shareholder use to alter the dividend policy of a firm?
Q The information content of a regular dividend increase generally signals that
A management believes the future earnings of the firm will be strong.
Q If all clientele groups are currently satisfied, then
A . changes in a single company's dividend policy will have no effect on the company's market value
Q Which one of the following will decrease the operating cycle?
A Collecting accounts receivable faster
Q When a small number of investors acquire all of the equity shares in a firm using borrowed funds, the transaction is best described as a
A leveraged buyout.
Q Which one of these will produce an acceptable estimate of the value of the market risk premium?
A . Dividend yield of the S&P 500 + Consensus forecast of future dividend growth – U.S. Treasury bill rate
Q The primary purpose of a lockup agreement is to ensure
A company insiders maintain an economic interest in the issuer of an IPO for a minimum period of time.
Q From a tax-paying shareholder's point of view, a stock repurchase
A is more desirable than a cash dividend
Q The asset beta is defined as the beta of
A the common stock of an unlevered firm.
Q The argument that selling stock involves too much leeway is the
A . behavioral finance argument in favor of high dividends.
Q As an attempt to avoid bankruptcy, a firm may
A agree to a composition with its creditors.
Q Managers are probably best qualified to predict when
A their company's stock is overvalued.
Q Which one of the following terms is defined as an underwriting for which the underwriters assume full responsibility for any unsold shares?
A Firm commitment underwriting
Q How does the valuation of a company vary from the valuation of a project using WACC?
A . A terminal value is included in the valuation process for a company but generally not for a project
Q If semistrong, or strong, form efficiency exists, then, on average, investors are probably best served by
A . investing in index funds rather than in actively managed mutual funds.
Q Market efficiency
A or the lack thereof, is highly controversial.
Q Which one of these parties is primarily responsible for the pricing and selling of new securities to the general public?
A Underwriter
Q Payments made out of a firm's earnings to its owners in the form of cash or stock are called
A dividends
Q Which one of the following best fits the description of a private placement?
A 10-year loan from an insurance company
Q A Green Shoe provision can be defined as a(n.:
A overallotment option
Q On average, shareholders of
Q In an efficient market, the price of a security will
A react immediately to new information with no further price adjustments related to that information
Q In a changing interest rate environment, the cost of new debt
A is equal to the cost of borrowing.
Q A type of short-term loan where the borrower sells its accounts receivables to the lender at a discount to face value is called
A factoring
Q Beta values are highly dependent on the
A covariance of a security with the market
Q A stock that pays a constant annual dividend will have a market price that:
A decreases when the market rate of return increases
Q Which one of these is an indicator that a market is efficient?
A Normal rates of return
Q The underlying assumption of the dividend growth model is that a stock is worth
A the present value of the future income provided by that stock
Q MM Proposition I, with tax, supports the theory that
A there is a positive linear relationship between the debt-to-equity ratio and firm value.
Q Based on the dividend growth model, an increase in investors' overall level of required returns will:
A cause the market values of all stocks to decrease, all else held constant
Q An agent who arranges security transactions among investors without maintaining an inventory is called a:
A broker
Q Differential growth refers to a firm that increases its dividend by:
A varying rates over a period of time
Q If behavioral finance holds, this implies
A some investors are irrational some of the time
Q Which one of these represents the portion of a stock's rate of return that is attributable to the growth rate of the dividends?
A Capital gains yield
Q What is the primary role of a designated market maker (DMM)?
A Providing a two-sided market
Q Which one of the following will increase net working capital? Assume the current ratio is positive.
A Using a long-term loan to buy inventory
Q Jack owns shares of stock in Boynton Foods and wants to be elected to the company's board of directors. There are 10,000 shares of stock outstanding and each share is granted one vote for each open position on the board. Presently, the company is voting to elect two new directors. Jack can be assured of his election:
A if cumulative voting applies and he owns one-third of the shares, plus one additional share
Q A dealer will buy at the ____ price and sell at the _____ price.
A bid; ask
Q The efficient market hypothesis says that
A market prices reflect underlying asset values.
Q A securities market primarily comprised of dealers who buy and sell for their own inventories is generally referred to as a(n) ______ market.
A Over-the-counter
Q In the absence of taxes, MM argues that
A no one capital structure for a firm is superior to any other capital structure for that firm.
Q Alto stock pays an annual dividend of $1.10 a share and has done so for the past six years. No changes in the dividend amount are expected. The relevant market rate of return is 7.8 percent. Given this, one share of this stock:
A is valued as a perpetuity
Q Synergy is created in an acquisition only if the
A value of the combined firm exceeds the sum of the individual firm's separate values
Q What does the present value of the tax shield from debt formula assume?
A The debt is perpetual.
Q A prearranged credit agreement with a bank typically open for two or more years is called a
A revolving credit arrangement
Q A project’s operating cash flow (OCF) will increase when:
A depreciation expense increases
Q _______ refers to finding the present value of a lump sum (e.g. moving it back in time)?
A Discounting
Q The future value of $1,000 today will be larger if investors earn an interest rate compounded more frequently.
A True
Q The present value of $1,000 promised in the future (i.e., FV = $1,000) will be larger if the investor requires a higher interest rate.
A False
Q What is “short-term finance"?
A Involves cash inflows and outflows that occur in a year or less
Q What is the importance of the cash cycle to the financial manager attempting to increase firm value?
A A longer cash cycle implies greater financing needs, and, therefore, greater financing costs. Further, a longer cash cycle suggests greater investment in inventories and receivables, reducing total asset turnover and ROA.
Q Why are interest rate levels important to the short-term financial manager?
A Interest rate levels affect the firm’s costs (actual and opportunity),as well as its revenues from marketable securities investments.
Q Which one of these formulas is used to estimate a firm's growth rate?
A Retention ratio X ROE
Q The total return on a stock is equal to:
A the capital gains yield plus the dividend yield
Q Assume you are using the total payout method for determining the price of a share of stock. When computing the total present value, the total payout is divided by the:
A required rate of return minus the net income rate of growth
Q According to finance professionals, which one of these factors has the biggest impact on a firm's PE ratio?
A Growth opportunities
A Retention ratio X ROE
Q The total return on a stock is equal to:
A the capital gains yield plus the dividend yield
Q Assume you are using the total payout method for determining the price of a share of stock. When computing the total present value, the total payout is divided by the:
A required rate of return minus the net income rate of growth
Q According to finance professionals, which one of these factors has the biggest impact on a firm's PE ratio?
A Growth opportunities
Q The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.
A Capital gains
Q Multiple classes of stock are primarily created to:
A allow certain shareholders to retain control of a firm
Q The EV/EBITDA ratio has an advantage over the PE ratio in situations where comparisons are being made of firms that vary based on their:
A degree of leverage
Q A _____ is a form of equity security that has a stated liquidating value
A Preferred stock
Q The free cash flow model, as compared to other models, tends to be most helpful when valuing a share of stock in:
A a non-dividend paying firm that has external financing needs
Q A market participant who buys and sells securities from inventory is called a:
A Dealer
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