Finance Ch1,5,6,7,8,9,10 non-math ?s

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Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

agency problem

A stakeholder is:

any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

Which one of the following best states the primary goal of financial management?
A. maximize current dividends per share
B. maximize the current value per share
C. increase cash flow and avoid financial distress
D. minimize operational costs while maximizing firm efficiency
E. maintain steady growth while increasing current profits

maximize the current value per share

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?
A. increase in the amount of the quarterly dividend
B. decrease in the per unit production costs
C. increase in the number of shares outstanding
D. decrease in the net working capital
E. increase in the market value per share

increase in the market value per share

Why should financial managers strive to maximize the current value per share of the existing stock?

because they have been hired to represent the interests of the current shareholders

Decisions made by financial managers should primarily focus on increasing which one of the following?

. market value per share of outstanding stock

The Sarbanes-Oxley Act of 2002 is a governmental response to:

management greed and abuses.

Which one of the following is an unintended result of the Sarbanes-Oxley Act?

corporations delisting from major exchanges

A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:

can provide less information to its shareholders than it did prior to "going dark".

Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002?
I. increased foreign stock exchange listings of U.S. stocks
II. decreased compliance costs
III. increased privatization of public corporations
IV. increased public disclosure by all corporations

A. I and III only

I. increased foreign stock exchange listings of U.S. stocks
II. decreased compliance costs

Which one of the following actions by a financial manager is most apt to create an agency problem?

increasing current profits when doing so lowers the value of the firm's equity

Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes.
I. compensation based on the value of the stock
II. stock option plans
III. threat of a company takeover
IV. threat of a proxy fight

all

I. compensation based on the value of the stock
II. stock option plans
III. threat of a company takeover
IV. threat of a proxy fight

Which form of business structure is most associated with agency problems?

corporation

. Which one of the following is an agency cost?
A. accepting an investment opportunity that will add value to the firm
B. increasing the quarterly dividend
C. investing in a new project that creates firm value
D. hiring outside accountants to audit the company's financial statements
E. closing a division of the firm that is operating at a loss

hiring outside accountants to audit the company's financial statements

Which one of the following is least likely to be an agency problem?
A. increasing the size of a firm
B. concentrating on maximizing current profits
C. closing a division with net losses
D. increasing the market value of the firm's shares
E. obtaining a patent for a new product

increasing the market value of the firm's shares

Which one of the following is a means by which shareholders can replace company management?

proxy fight

Which one of the following grants an individual the right to vote on behalf of a shareholder?

proxy

Which one of the following parties has ultimate control of a corporation?
A. chairman of the Board
B. board of directors
C. chief executive officer
D. chief operating office
E. shareholders

shareholders

Which of the following parties are considered stakeholders of a firm?
I. employee
II. long-term creditor
III. government
IV. common stockholder

I and III only

. Give some examples of ways in which manager's goals can differ from those of shareholders.

The primary goal of a financial manager should be to maximize the current value of the outstanding stock. This goal focuses on enhancing the returns to stockholders who are the owners of the firm. However, managers frequently are more concerned with their personal benefits from employment, the prestige of their position, and the perks to which they feel entitled. There are numerous examples, some of which are excessive compensation packages, large corporate offices, excessive staffing, and first-class travel and conference locations, to name a few.

How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial intent of that Act?

Some of the key requirements of Sarbanes-Oxley are: the prohibition of personal loans from the company to its officers, an annual report by management of the internal control and financial reporting within the firm along with an independent auditor's assessment of that report, a review and sign off by the corporate officers of the annual financial statements, and the responsibility for the accuracy of the financial reports placed directly on senior management of the firm. While firms that have opted to remain publicly-owned are complying with these requirements, they are paying a cost to do so. This cost has caused other firms to "go dark" or to opt for listing on a foreign exchange rather than a U.S. exchange. While some of the results do match the intent of the Act, the costs, "going dark", and foreign listings were most likely not intended by the supporters of the Act.

How might agency problems arise in partnerships?

Agency conflicts typically arise when there is a separation between the ownership and the management of a business. In a general partnership, especially if the partnership is small, there is less of a chance of an agency conflict if all the partners are involved with the business on a regular basis. However, in a limited partnership, the opportunity exists for an agency problem to arise between the general and the limited partners.

Which one of the following terms is defined as a conflict of interest
between the corporate shareholders and the corporate managers?

agency problem

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?

increase in the market value per share

Why should financial managers strive to maximize the current value per
share of the existing stock?

because they have been hired to represent the interests of the current shareholders

Decisions made by financial managers should primarily focus on
increasing which one of the following?

market value per share of outstanding stock

You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now?

future value

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

compounding

Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10 interest on his $100 investment. He reinvested the $10. The second year, he earned $11 interest on his $110 investment. The extra $1 he earned in interest the second year is referred to as:

interest on interest

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

compound interest

Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. Which type of interest is Sara earning?

simple interest

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?
A. Barb will earn more interest the first year than Andy will.
B. Andy will earn more interest in year three than Barb will.
C. Barb will earn interest on interest.
D. After five years, Andy and Barb will both have earned the same amount of interest.
E. Andy will earn compound interest.

Barb will earn interest on interest

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?
A. Sue will have less money when she retires than Neal.
B. Neal will earn more interest on interest than Sue.
C. Neal will earn more compound interest than Sue.
D. If both Sue and Neal wait to age 70 to retire, then they will have equal amounts of savings.
E. Sue will have more money than Neal as long as they retire at the same time.

. Sue will have more money than Neal as long as they retire at the same time.

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?
A. The present values of Luis and Soo Lee's monies are equal.
B. In future dollars, Soo Lee's money is worth more than Luis' money.
C. In today's dollars, Luis' money is worth more than Soo Lee's.
D. Twenty years from now, the value of Luis' money will be equal to the value of Soo Lee's money.
E. Soo Lee's money is worth more than Luis' money given the 7 percent discount rate.

In today's dollars, Luis' money is worth more than Soo Lee's.

Martin invested $1,000 six years ago and expected to have $1,500 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, Martin only has $1,420 in his account today. Which one of the following must be true?
A. Martin earned simple interest rather than compound interest.
B. Martin earned a lower interest rate than he expected.
C. Martin did not earn any interest on interest as he expected.
D. Martin ignored the Rule of 72 which caused his account to decrease in value.
E. The future value interest factor turned out to be higher than Martin expected.

Martin earned a lower interest rate than he expected.

Gerold invested $6,200 in an account that pays 5 percent simple interest. How much money will he have at the end of ten years?

$9,300

You are considering two separate investments. Both investments pay 7 percent interest. Investment A pays simple interest and Investment B pays compound interest. Which investment should you choose, and why, if you plan on investing for a period of 5 years?

Simple interest is interest earned on the initial principal amount only. Compound interest is interest earned on both the initial principal and all prior interest earnings that have been reinvested. You should choose Investment B which pays compound interest as you will earn more interest income over the 5 years by doing so.

What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?

The future value formula is: FV = PV (1 + r)t. Time is the exponent. While the rate of return is important and has a direct affect on the growth of an investment account, time is critical. To maximize retirement income, workers need to commence saving when they are young so that reinvested earnings have time to compound.

An ordinary annuity is best defined as

equal payments paid at regular intervals over a stated time period

Which one of the following accurately defines a perpetuity?
A. a limited number of equal payments paid in even time increments
B. payments of equal amounts that are paid irregularly but indefinitely
C. varying amounts that are paid at even intervals forever
D. unending equal payments paid at equal time intervals
E. unending equal payments paid at either equal or unequal time intervals

unending equal payments paid at equal time intervals

Which one of the following terms is used to identify a British perpetuity?

consol

You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the following statements is correct concerning these two annuities?
A. These two annuities have equal present values but unequal futures values at the end of year five.
B. These two annuities have equal present values as of today and equal future values at the end of year five.
C. Annuity B is an annuity due.
D. Annuity A has a smaller future value than annuity B.
E. Annuity B has a smaller present value than annuity A.

Annuity B has a smaller present value than annuity A.

You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

Option B has a higher present value at time zero than does option A.

Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?

coupon

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?

face value

. A bond's coupon rate is equal to the annual interest divided by which one of the following?

face value

The specified date on which the principal amount of a bond is payable is referred to as which one of the following?

maturity

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?

yield to maturity

The current yield is defined as the annual interest on a bond divided by which one of the following?

market price

A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond?
I. discounted price
II. premium price
III. yield-to-maturity that exceeds the coupon rate
IV. yield-to-maturity that is less than the coupon rate

II and IV only

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

. a discount; less than

The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond?

decrease the market price

Which of the following are characteristics of a premium bond?
I. coupon rate < yield-to-maturity
II. coupon rate > yield-to-maturity
III. coupon rate < current yield
IV. coupon rate > current yield

II and IV only

Which of the following relationships apply to a par value bond?
I. coupon rate < yield-to-maturity
II. current yield = yield-to-maturity
III. market price = call price
IV. market price = face value

II and IV only

Which one of the following relationships is stated correctly?
A. The coupon rate exceeds the current yield when a bond sells at a discount.
B. The call price must equal the par value.
C. An increase in market rates increases the market price of a bond.
D. Decreasing the time to maturity increases the price of a discount bond, all else constant.
E. Increasing the coupon rate decreases the current yield, all else constant.

Decreasing the time to maturity increases the price of a discount bond, all else constant.

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

greater than 7 percent.

. Which of the following increase the price sensitivity of a bond to changes in interest rates?
I. increase in time to maturity
II. decrease in time to maturity
III. increase in coupon rate
IV. decrease in coupon rate

I and IV only

Which one of the following bonds is the least sensitive to interest rate risk?

. 3-year; 6 percent coupon

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

increases at a decreasing rate.

You own a bond that has a 6 percent annual coupon and matures 5 years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?
A. The current yield-to-maturity is greater than 6 percent.
B. The current yield is 6 percent.
C. The next interest payment will be $30.
D. The bond is currently valued at one-half of its issue price.
E. You will realize a capital gain on the bond if you sell it today.

You will realize a capital gain on the bond if you sell it today

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

long-term; zero coupon

A 6 percent, annual coupon bond is currently selling at a premium and matures in 7 years. The bond was originally issued 3 years ago at par. Which one of the following statements is accurate in respect to this bond today?
A. The face value of the bond today is greater than it was when the bond was issued.
B. The bond is worth less today than when it was issued.
C. The yield-to-maturity is less than the coupon rate.
D. The coupon rate is greater than the current yield.
E. The yield-to-maturity equals the current yield.

The yield-to-maturity is less than the coupon rate.

What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

dividend growth

Which one of the following is computed by dividing next year's annual dividend by the current stock price?

dividend yield

Which one of following is the rate at which a stock's price is expected to appreciate?

capital gains yield

National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:

. priced the same as a $1 perpetuity.

An increase in which of the following will increase the current value of a stock according to the dividend growth model?
I. dividend amount
II. number of future dividends, provided the current number is less than infinite
III. discount rate
IV. dividend growth rate

I, III and IV only

High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of High Country Builders' has a higher ______ than the stock of Valley High Builders.

capital gains yield

The dividend growth model:
I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point in time.
III. can be used to value zero-growth stocks.
IV. requires the growth rate to be less than the required return.

all of the above

Which one of the following is an underlying assumption of the dividend growth model?

A stock's value is equal to the discounted present value of the future cash flows which it generates.

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

a decrease in all stock values.

Which one of the following statements is correct concerning the two-stage dividend growth model?

G1 can be greater than R.

Which one of the following statements is correct?
A. The capital gains yield is the annual rate of change in a stock's price.
B. Preferred stocks have constant growth dividends.
C. A constant dividend stock cannot be valued using the dividend growth model.
D. The dividend growth model can be used to compute the current value of any stock.
E. An increase in the required return will decrease the capital gains yield.

The capital gains yield is the annual rate of change in a stock's price.

Supernormal growth is a growth rate that:

is unsustainable over the long term.

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?

The stock has a negative capital gains yield.

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

. Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?

dividend payments which increase by 10 percent per year for 5 years followed by dividends which increase by 3 percent annually thereafter

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?

net present value

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?

discounted cash flow valuation

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 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

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

net present value

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate.

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

cash inflow in the final year of the project

Which one of the following increases the net present value of a project?

. an increase in the aftertax salvage value of the fixed assets

Net present value is the best method of

analyzing mutually exclusive projects.

Why is payback often used as the sole method of analyzing a proposed small project?

. It is the only method where the benefits of the analysis outweigh the costs of that analysis

Which of the following are advantages of the payback method of project analysis?
I. works well for research and development projects
II. liquidity bias
III. ease of use

works well for research and development projects AND ease of use

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?

project A only

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?
A. The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted.
B. The cash flow in year three is ignored.
C. The project's cash flow in year three is discounted by a factor of (1 + R)3.
D. The cash flow in year two is valued just as highly as the cash flow in year one.
E. The project is acceptable whenever the payback period exceeds three years.

The cash flow in year two is valued just as highly as the cash flow in year one.

Which one of the following statements related to payback and discounted payback is correct?
A. Payback is a better method of analysis than is discounted payback.
B. Discounted payback is used more frequently in business than is payback.
C. Discounted payback does not require a cutoff point like the payback method does.
D. Discounted payback is biased towards long-term projects while payback is biased towards short-term projects.
E. Payback is used more frequently even though discounted payback is a better method.

Payback is used more frequently even though discounted payback is a better method.

Which one of the following costs was incurred in the past and cannot be recouped?

sunk

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?
A. expenses that have already been incurred and cannot be recovered
B. change in net working capital related to implementing a new project
C. the cash flows of a new project that come at the expense of a firm's existing cash flows
D. the alternative that is forfeited when a fixed asset is utilized by a project
E. the differences in a firm's cash flows with and without a particular project

. the cash flows of a new project that come at the expense of a firm's existing cash flows

Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications?

ACRS

Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project?
I. utilizing the credit offered by a supplier to purchase the appliance inventory
II. benefiting from increased furniture sales to appliance customers
III. borrowing money from a bank to fund the appliance project
IV. purchasing parts for inventory to handle any appliance repairs that might be necessary

I. utilizing the credit offered by a supplier to purchase the appliance inventory
II. benefiting from increased furniture sales to appliance customers
III. borrowing money from a bank to fund the appliance project

Which one of the following is an example of a sunk cost?
A. $1,500 of lost sales because an item was out of stock
B. $1,200 paid to repair a machine last year
C. $20,000 project that must be forfeited if another project is accepted
D. $4,500 reduction in current shoe sales if a store commences selling sandals
E. $1,800 increase in comic book sales if a store commences selling puzzles

$1,200 paid to repair a machine last year

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

sunk

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?
A. providing both ketchup and mustard for its customer's use
B. repairing the roof of the hot dog stand because of water damage
C. selling fewer hot dogs because hamburgers were added to the menu
D. offering French fries but not onion rings
E. losing sales due to bad weather

selling fewer hot dogs because hamburgers were added to the menu

Which of the following should be included in the analysis of a new product?
I. money already spent for research and development of the new product
II. reduction in sales for a current product once the new product is introduced
III. increase in accounts receivable needed to finance sales of the new product
IV. market value of a machine owned by the firm which will be used to produce the new product

II. reduction in sales for a current product once the new product is introduced
III. increase in accounts receivable needed to finance sales of the new product
IV. market value of a machine owned by the firm which will be used to produce the new product

All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero?
I. purchase of $1,400 of parts inventory needed to support the project
II. loan of $125,000 used to finance the project
III. depreciation tax shield of $1,100
IV. $6,500 of equipment needed to commence the project

I and IV only

Changes in the net working capital requirements:

. can affect the cash flows of a project every year of the project's life.

Which one of the following is a project cash inflow? Ignore any tax effects.
A. decrease in accounts payable
B. increase in inventory
C. decrease in accounts receivable
D. depreciation expense based on MACRS
E. equipment acquisition

decrease in accounts receivable

Net working capital:
A. can be ignored in project analysis because any expenditure is normally recouped at the end of the project.
B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project.
C. is rarely affected when a new product is introduced.
D. can create either a cash inflow or a cash outflow at time zero of a project.
E. is the only expenditure where at least a partial recovery can be made at the end of a project.

can create either a cash inflow or a cash outflow at time zero of a project.

A company that utilizes the MACRS system of depreciation will have a greater:

tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life.

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