Finance 311 Final

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the owner has unlimited personal liability

a major disadvantage of a sole proprietorship is the fact that

amount of cash flows, timing of cash flows and risk taken to generate cash flows

the three facotrs that determine the market value of a company's share of stock are

weak-form market efficieny

the fact that no investor can expect to earn excess returns based on an investment strategy using only historical stock price of historical return information is an example of

bondholders and stockholders

protective covenants in a company's bond indentures are used in agency relationships involving __&__

retained earnings

the accounting of that portion of a firm's assets that were finance from past earnings is represented by

deterministic, and probabilistic

computerized financial planning models may be classified as any of the following

"golden parachute" contracts

giving top management _________ is one method that ensures managers will act in the interest of shareholders in merger decisions

unnecessary

in an efficient capital market, corporate diversification is

provides a way to consider the risk of the returns being offered

the objective of maximizing shareholder wealth, as measured by the market value of the firm's stock..

identify potential cash flow problems in advance

cash budgeting can be employed effectively by management to

low profit margin and high asset turnover

a fresh fruit wholesaler would normally be expected to have

cash flows should be measured on an incremental basis

which of the following is a basic principle when estimating a project's cash flows??

reduces, reduces

Depreciation ______ reported profits and it ____ taxes paid by a firm.

the loss may be used to offset operating income

if a firm sells an asset for less that its book value..

purchase of a 90-day treasury bill

which of the following would not be classified as a capital expenditure for decision-making purposes?

cash dividend payments and capital gains

the returns investors receive from holding common stocks may be in two forms. they are:

security market line

this is defined as provides a picture of the risk-return tradeoff required by diversified investors considering various risky assets

the firm's future earnings

the market value of common stock is primarily based on

the amount of interest paid is reduced each year

when a loan is amortized over a fiver year term,

the security has below-average systematic risk

a beta value of .5 for a security indicates..

systematic risk

the most relevant risk that must be considered for any widely traded individual security is its ________

systematic risk

that portion of the variability of an individual security's return caused by factors affecting the market as a whole

unsystematic risk

risk that is unique to the firm, and can be eliminated

total asset turnover ratio

indicates how effectively a firm uses its total resources to generate sales and is a summary measure influenced by each of the asset management ratios

fixed-asset turnover ratio

indicates the extent to which a firm is using existing PPE to generate sales

debt ratio

measures the proportion of a firm's total assets that is financed with creditors' funds

debt to equity ratio

relates the amount of a firm's debt financing to the amount of equity financing

return on equity ratio

measures the rate of return that the firm earns on stocholders' equity

gross profit margin

measure the relative profitability of a firm's sales after the cost of sales has been deducted, revelaing how effectively the firm's management is making decisions regarding pricing and the control of production costs

net profit margin

measure how profitable a company's sales are after all expenses

expected value

the ___ is a statistical measure of the mean or average value of the possible outcomes

larger, riskier

the ___the standard deviation, the ___the investment

standard deviation

when comparing two equal sized investments, the ____ is an appropriate measure of total risk

true

t/f? the higher the correlation of return between the two stocks the higher the portfolio risk

foreign competition with an industry's products

which of the following is not an example of a source of systematic risk?

shift it up and to left

All other things being equal, what is the major impact that an increase in the expected inflation rate would be expected to have on the security market line?

less positively, greater

The ____ correlated the returns from two securities are, the ____ will be the portfolio effects of risk reduction.

changes in inflation

All of the following factors have their primary impact on unsystematic risk except

multiple risk factors

Arbitrage pricing theory is a model that relates expected returns on securities

capital asset pricing model

In the ____, the expected return on a security is equal to the risk-free rate plus a single risk premium that is equal to the product of the expected rate of return on the market portfolio less the risk-free rate times the sensitivity of the security's returns to the market return.

less

The security returns from multinational companies tend to have ____ systematic risk than domestic companies.

averse

Investors generally are considered to be risk ____ because they expect to be compensated for assuming risk.

maturity

The term structure of interest rates is the pattern of interest rate yields for debt securities that are similar in all respects except for differences in

the length of time to maturity

The term structure of interest rates is the pattern of interest rate yields for securities that differ only in

expectations theory

According to the ____, long-term interest rates are a function of expected short-term interest rates.

marketability risk

____ refers to the ability of an investor to buy and sell a company's securities quickly and without a significant loss of value.

liquidity premium

The ____ theory of the yield curve holds that required returns on long-term securities tend to be greater the longer the time to maturity.

borrowing money

On the capital market line (CML), any risk-return combination beyond the Market Portfolio (m) is obtained by ____.

default risk

That portion of the risk premium that is based on the ability of the borrower to repay principal and interest is the:

its par value is changed

From an accounting standpoint, when a stock is split

the number of shares are decreased

In a reverse stock split

perpetuities

Many preferred stocks are treated as ____ in determining their values.

earnings capacity

The most important factor to be considered in the valuation of a closely held firm is

on the basis of balance sheet figures

A common stock's book value is calculated

disposition of excess warrants

Which one of the following is not a reason a firm may decide to repurchase its own stock.

higher, decline

If the general level of interest rates in the economy moves up, then investors will require a ____ rate of return on securities, and, in general, stock prices should ____, ceteris paribus.

dividend rights

The rights of stockholders to share equally on a per share basis in any distributions of corporate earnings is known as ____.

capital gains yield and dividend yield

In the constant growth dividend valuation model, the required rate of return on a common stock is equal to the sum of the ____.

underwriting spread

The difference between the selling price to the public of a new issue and the net the issuing firm actually receives is known as the

quarterly

Common stock dividends normally are paid

original issue deep discount bonds

Zero coupon bonds are an example of

marginnal investor's required rate of return

When the market for an asset is in equilibrium, the expected rate of return on the asset is equal to the:

LOWER, HIGHER

The ____ the investor's required rate of return on a bond, the ____ will be the value of the bond to the investor.

required rate of return

The value of a perpetual bond is equal to the annual interest payment divided by the:

more

The value of a 15-year bond will change ____ for a given change in the required rate of return than the value of a 5 year bond.

debentures

All of the following types of bonds are secured except

pay no explicit interest

treasury bills..

greater the effective interest rate

The more frequent the compounding the

equal to or greater than

The effective rate of interest will always be ____ the nominal rate.

optimization

Which of the following is a financial model that attempts to maximize or minimize the value of a criterion function (e.g., profits, costs)?

determination of estimated receipts

The first step in cash budget preparation is the

budget simulator

Which of the following is an example of a deterministic model?

discriminant analysis

____ is the statistical technique that helps the analyst classify observations (firms) into two or more predetermined groups based on certain characteristics of the observation.

strategic

In considering financial planning, the type of planning that focuses more on the overall direction of the business and the industry is:

return on total assets

The best accounting-based measure of a firm's profitability is

times interest earned

Which ratio is frequently used in conjunction with the analysis of a bond's quality?

increase its equity multiplier

If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must

fixed charge coverage

The ____ ratio is a more severe measure of a firm's ability to meet fixed financial obligations than is the times interest earned ratio

low, high

Stocks with ____ dividend yield often indicate ____ expected future growth.

capital

____ markets deal in long-term securities having maturities greater than one year.

money

____ markets deal in short-term securities having maturities of one year or less.

primary

In the ____ market, the firm receives the proceeds from the sale of its securities.

thrift institution

A savings and loan association is an example of which type of financial intermediary?

issuing their own debt securities

Finance companies obtain a significant amount of their funds by

hey quickly reflect information relevant to determining stock value

The U.S. financial markets are said to be highly informationally efficient. This means

low transaction costs

The barriers to the free flow of capital among the major world capital markets include all of the following except:

market value

Shareholder wealth is measured by the ____ of the shareholders' common stock holdings.

separation of ownership and control

The primary reason for the divergence between the shareholder wealth maximization goal and the actual goals pursued by management has been attributed to

financial management association

The ____ has a goal of serving as a bridge between academic study of finance and the application of financial principles by financial managers.

cash flow

Accounting-based measures of performance include all the following except

total shareholder wealth

____ equals the number of shares outstanding times the market price per share.

value

The net present value of an investment made by a firm represents the contribution of that investment to the ____ of the firm.

assets and future earnings of the firm

Corporate securities represent claims against the____

common stock

____ is (are) referred to as a residual form of ownership in a corporation.

back 2, forward 20

A corporation's net operating loss may be carried ____ years and ____ years to offset taxable income in those years.

deductible only against capital gains

Capital losses are

opportunity cost

The value of resources used in an investment project should be measured in terms of their

sunk cost

In estimating the net investment, an outlay that has already been made is known as a (n) ____.

reduces, reduces

Depreciation ____ reported profits and it ____ taxes paid by a firm.

greater, lower

The ____ the amount of depreciation charged in a period, the ____ will be the firm's taxable income.

simplified capital budgeting model

The set of investment projects arranged in descending order according to their expected rates of return is known as the ____.

contingent

A(n) ____ project is one whose acceptance is dependent on the adoption of one or more other projects.

capital rationing

Capital expenditure projects may be classified in all the following types except:

independent

When two or more normal ____ projects are under consideration, the profitability index, the net present value, and the internal rate of return methods will yield identical accept/reject signals.

firm's value is the sum of the value of all the projects undertaken

The "value additivity principle" means that the

abandonment

Generally, the existence of a(n) ____ option reduces the downside risk of a project and should be considered in project analysis.

risk free rate

The discount rate used in calculating the certainty equivalent net present value is the

mostly beneficial for large projects

Simulation techniques are

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