215 terms

One key reason a long-term financial plan is developed is because

there are direct connections between achievable corporate growth and the financial policy

Projected future financial statements are called

pro forma statements

The percentage of sales method

separates accounts that vary with sales and those that do not vary with sales and allows the analyst to calculate how much financing the firm will need to support the predicted sales level.

A _____ standardizes items on the income statement and balance sheet as a percentage of total sales

and total assets, respectively.

and total assets, respectively.

common-size statement

Relationships determined from a firm's financial information and used for comparison purposes are

known as:

known as:

financial ratios.

Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are

known as _____ ratios

known as _____ ratios

short-term solvency

The current ratio is measured as

current assets divided by current liabilities

The quick ratio is measured as

current assets minus inventory, divided by current liabilities

The cash ratio is measured as

cash on hand divided by current liabilities

Ratios that measure a firm's financial leverage are known as _____ ratios

long-term solvency

The financial ratio measured as total assets minus total equity, divided by total assets, is the

total debt ratio.

The debt-equity ratio is measured as total

debt divided by total equity

The equity multiplier ratio is measured as total

assets divided by total equity

The financial ratio measured as earnings before interest and taxes, divided by interest expense is

the

the

times interest earned ratio

The financial ratio measured as earnings before interest and taxes, plus depreciation, divided by

interest expense, is the

interest expense, is the

cash coverage ratio

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _____

ratios

ratios

asset management

The inventory turnover ratio is measured as

cost of goods sold divided by inventory

The financial ratio days' sales in inventory is measured as

365 days divided by the inventory turnover

The receivables turnover ratio is measured as

sales divided by accounts receivable

The financial ratio days' sales in receivables is measured as

365 days divided by the receivables turnover

The total asset turnover ratio is measured as

sales divided by total assets

Ratios that measure how efficiently a firm's management uses its assets and equity to generate bottom

line net income are known as _____ ratios

line net income are known as _____ ratios

profitability

The financial ratio measured as net income divided by sales is known as the firm's

profit margin

The financial ratio measured as net income divided by total assets is known as the firm's

return on assets

The financial ratio measured as net income divided by total equity is known as the firm's

return on equity

The financial ratio measured as the price per share of stock divided by earnings per share is known as

the

the

price-earnings ratio

The market-to-book ratio is measured as

market value of equity per share divided by book value of equity per share

The _____ breaks down return on equity into three component parts

Du Pont identity

The External Funds Needed (EFN) equation DOES NOT measure the

rate of return to shareholders given the change in sales

To calculate sustainable growth rate without using return on equity, the analyst needs the

profit margin,payout ratio.

,debt-to-equity ratio and total asset turnover.

,debt-to-equity ratio and total asset turnover.

Growth can be reconciled with the goal of maximizing firm value

because growth must be an outcome of decisions that maximize NPV

Sustainable growth can be determined by the

profit margin, the payout ratio, the debt-to-equity ratio, and the asset requirement or asset turnover

ratio.

ratio.

Which of the following will increase sustainable growth?

Increase profit margin

The main objective of long-term financial planning models is to

determine the asset requirements given the investment activities of the firm, plan for contingencies or uncertain events and determine the external financing needs.

On a common-size balance sheet, all _____ accounts are shown as a percentage of ____.

liability; total assets

Which one of the following statements is CORRECT concerning ratio analysis?

A single ratio is often computed differently by different individuals

Which of the following are liquidity ratios?

current ratio and quick ratio.

An increase in which one of the following accounts increases a firm's current ratio without affecting

its quick ratio?

its quick ratio?

Inventory

A supplier, who requires payment within ten days, is most concerned with which one of the following

ratios when granting credit?

ratios when granting credit?

Cash

The long-term debt ratio is probably of most interest to a firm's

mortgage holder

A banker considering loaning a firm money for ten years would most likely prefer the firm have a debt

ratio of _____ and a times interest earned ratio of ______.

ratio of _____ and a times interest earned ratio of ______.

.35; 3.00

From a cash flow position, which one of the following ratios best measures a firm's ability to pay the

interest on its debts?

interest on its debts?

Cash coverage ratio

The higher the inventory turnover measure, the

faster a firm sells its inventory.

Which one of the following statements is correct if a firm has a receivables turnover measure of 10?

The firm has an average collection period of 36.5 days

A total asset turnover measure of 1.03 means that a firm has $1.03 in

sales for every $1 in total assets

Puffy's Pastries generates five cents of net income for every $1 in sales. Thus, Puffy's has a _____ of

5%.

5%.

profit margin

If a firm produces a 10% return on assets and also a 10% return on equity, then the firm:

has no debt of any kind.

If shareholders want to know how much profit a firm they are making on their entire investment in the

firm, the shareholders should look at the:

firm, the shareholders should look at the:

return on equity

BGL Enterprises increases its operating efficiency such that costs decrease while sales remain

constant. As a result, given all else constant, the:

constant. As a result, given all else constant, the:

return on equity will increase.

The only difference between Joe's and Moe's is that Joe's has old, fully depreciated equipment. Moe's

just purchased all new equipment which will be depreciated over eight years. Assuming all else

equal:

just purchased all new equipment which will be depreciated over eight years. Assuming all else

equal:

Moe's will have a lower profit margin

Last year, Alfred's Automotive had a price-earnings ratio of 15. This year, the price earnings ratio is

18. Based on this information, it can be stated with certainty that:

18. Based on this information, it can be stated with certainty that:

either the price per share, the earnings per share, or both changed.

Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of 19. Thus, you

can state with certainty that one share of stock in Alfred's

can state with certainty that one share of stock in Alfred's

has a higher market price per dollar of earnings than does one share of Turner's.

Which two of the following are most apt to cause a firm to have a higher price-earnings ratio?

high prospect of firm growth and very low current earnings.

Which one of the following sets of ratios applies most directly to shareholders?

Market-to-book ratio and price-earnings ratio

The three parts of the Du Pont identity can be generally described as

financial leverage, operating efficiency and asset use efficiency and the equity multiplier, the profit margin and the total asset turnover.

If a firm decreases its operating costs, all else constant, then

both the return on assets and the return on equity increase.

Which one of the following statements is correct?

Financial statements are frequently the basis used for performance evaluations.

It is easier to evaluate a firm using its financial statements when the firm:

uses the same accounting procedures as other firms in its industry.

Which two of the following represent the most effective methods of directly evaluating the financial

performance of a firm?

performance of a firm?

comparing a firm's financial ratios to those of other firms in the firm's peer group who have similar operations and comparing the current financial ratios to those of the same firm from prior time periods.

In the financial planning model, external funds needed (EFN) is equal to changes in

assets - (liabilities + equity).

Which of the following represent problems encountered when comparing the financial statements of

one firm with those of another firm?

one firm with those of another firm?

Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business, The operations of the two firms may vary geographically, The firms may use differing accounting methods for inventory purposes and The two firms may be seasonal in nature and have different fiscal year ends.

A firm's sustainable growth rate in sales directly depends on its:

debt to equity ratio, profit margin.

dividend policy and asset efficiency.

dividend policy and asset efficiency.

The sustainable growth rate will be equivalent to the internal growth rate when

a firm has no debt.

The sustainable growth rate

is normally higher than the internal growth rate.

If a firm bases its growth projection on the rate of sustainable growth, and shows positive net income,

then the:

then the:

debt-equity ratio will remain constant while retained earnings increase.

Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 40%. The

firm does not want to increase its equity financing but is willing to maintain its current debt-equity

ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to:

firm does not want to increase its equity financing but is willing to maintain its current debt-equity

ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to:

the sustainable rate of growth.

One of the primary weaknesses of many financial planning models is that they:

ignore the size, risk, and timing of cash flows.

Financial planning, when properly executed:

helps ensure that proper financing is in place to support the desired level of growth.

When examining the EBITDA ratio, lower numbers are:

considered poor.

A firm's market capitalization is equal to:

firm's stock price multiplied by number of shares outstanding.

Enterprise value focused on:

market values of debt and equity.

An annuity stream of cash flow payments is a set of:

level cash flows occurring each time period for a fixed length of time.

Annuities where the payments occur at the end of each time period are called _____, whereas _____ refer to annuity streams with payments occurring at the beginning of each time period.

ordinary annuities; annuities due

An annuity stream where the payments occur forever is called a(n):

perpetuity.

The interest rate expressed in terms of the interest payment made each period is called the _____ rate.

stated annual interest

The interest rate expressed as if it were compounded once per year is called the _____ rate

effective interest

The interest rate charged per period multiplied by the number of periods per year is called the _____ rate

annual percentage

You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities?

Annuity A has a higher future value than annuity B.

You are comparing two investment options. The cost to invest in either option is the same today. Both

options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the

first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each.

Which one of the following statements is correct given these two investment options?

options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the

first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each.

Which one of the following statements is correct given these two investment options?

Option A is the better choice of the two given any positive rate of return.

A perpetuity differs from an annuity because:

perpetuity payments never cease.

Which one of the following statements concerning the annual percentage rate is correct?

The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.

Which one of the following statements concerning interest rates is correct?

An effective annual rate is the rate that applies if interest were charged annually.

Which of the following statements concerning the effective annual rate are correct?

The more frequently interest is compounded, the higher the effective annual rate, A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were compounded daily and When making financial decisions, you should compare effective annual rates rather than annual percentage rates.

The time value of money concept can be defined as:

the relationship between a dollar to be received in the future and a dollar today.

Discounting cash flows involves

discounting all expected future cash flows to reflect the time value of money.

Compound interest

allows for the reinvestment of interest payments.

An annuity

is a level stream of equal payments through time.

The stated rate of interest is 10%. Which form of compounding will give the highest effective rate of interest?

Continuous compounding.

The present value of future cash flows minus initial cost is called:

the net present value of the project.

The stated interest payment, in dollars, made on a bond each period is called the bond's:

coupon.

The principal amount of a bond that is repaid at the end of the loan term is called the bond's:

face value.

The specified date on which the principal amount of a bond is repaid is called the bond's:

maturity.

The rate of return required by investors in the market for owning a bond is called the

yield to maturity.

The annual coupon of a bond divided by its face value is called the bond's:

coupon rate.

A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond.

par value

A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond.

discount

A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a _____ bond.

premium

The unfunded debt of a firm is generally understood to mean the firm's:

debts that mature in less than one year.

The written, legally binding agreement between the corporate borrower and the lender detailing the terms of a bond issue is called the

indenture.

indenture.

registered

The form of bond issue in which the bond is issued without record of the owner's name, with relevant payments made directly to whoever physically holds the bond, is called the _____ form.

bearer

The unsecured debts of a firm with maturities greater than 10 years are most literally called: A. unfunded liabilities.

debentures.

The unsecured debts of a firm with maturities less than 10 years are most literally called:

notes.

An account managed by the bond trustee for early bond redemption payments is called a:

sinking fund.

An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to maturity is the _____ provision.

call

The amount by which the call price exceeds the bond's par value is the:

call premium.

In the event of default, _____ debt holders must give preference to more _____ debt holders in the priority of repayment distributions

subordinated; senior

A deferred call provision refers to the:

prohibition of a company from redeeming callable bonds prior to a certain date.

The long-term bonds issued by the United States government are called _____ bonds.

Treasury

The long-term bonds issued by state and local governments in the United States are called _____ bonds.

municipal

A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond

zero coupon

A bond that pays a variable amount of coupon interest over time is called a _____ bond

floating-rate

Parts of the indenture that protect the interests of the lender by limiting certain actions that a company might take during the term of the loan are called:

protective covenants.

A bond which, at the election of the holder, can be swapped for a fixed number of shares of common stock at any time prior to the bond's maturity is called a _____ bond.

convertible

A financial market is _____ if it is possible to easily observe its prices and trading volume.

transparent

The annual coupon payment of a bond divided by its market price is called the:

current yield.

A TIPS bond's interest rate is linked to:

inflation.

A bond that allows the holder to force the issuer to buy back bonds at a stated rate is called a:

put bond.

Interest rates or rates of return on investments that have not been adjusted for the effects of inflation are called _____ rates

nominal

Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _____ rates.

real

The relationship between nominal rates, real rates, and inflation is known as the:

Fisher effect.

The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the:

term structure of interest rates.

The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future overall price appreciation.

inflation

The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer.

default risk

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

a discount; higher than

All else constant, a coupon bond that is selling at a premium, must have:

a yield to maturity that is less than the coupon rate.

The market price of a bond is equal to the present value of the:

face value plus the present value of the annuity payments.

As the yield to maturity increases, the:

amount the investor is willing to pay to buy a bond decreases.

American Fortunes is preparing a bond offering with an 8% coupon rate. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct?

The initial selling price of each bond will be $1,000, Each interest payment per bond will be $40 and The yield to maturity when the bonds are first issued is 8%.

The newly issued bonds of the Wynslow Corp. offer a 8% 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 8 % but less than 9%.

Which one of the following statements is correct concerning interest rate risk as it relates to bonds, all else equal?

The greater the number of semiannual interest payments, the greater the interest rate risk.

Which one of the following bonds has the greatest interest rate risk?

9-year; 7% coupon

Interest rate risk _____ as the time to maturity increases

increases at a decreasing rate

You own a bond that has a 7% coupon and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this.type and quality of bond is 7.5%, then you would expect:

to realize a capital loss if you sold the bond at the market price today.

A bond with semi-annual interest payments, all else equal, would be priced _________ than one with annual interest payments.

lower

All else constant, as the market price of a bond increases the current yield _____ and the yield to maturity _____

decreases; decreases.

Which of the following statements concerning bond features is (are) correct?

Bond interest is tax-deductible as a business expense and Failure to pay either the interest payments or the bond principle as agreed can cause a firm to go into bankruptcy.

Which of the following items are generally included in a bond indenture?

call provisions, security description and protective covenants.

Which one of the following statements is correct concerning bond classifications?

A callable bond can be repurchased by the issuer prior to the initial maturity date.

Callable bonds generally:

are associated with sinking funds.

Which of the following is a (are) positive covenant(s) that might be found in a bond indenture?

The company shall maintain a current ratio of 1.5 or better and The company must maintain the loan collateral in good working order.

Protective covenants:

are primarily designed to protect bondholders from future actions of the bond issuer.

Which one of the following statements concerning bond ratings is correct?

Bond ratings are solely an assessment of the creditworthiness of the bond issuer.

A "fallen angel" is a bond that:

has moved from being an investment-grade bond to being a junk bond.

Bonds issued by the U.S. government:

are considered to be free of default risk.

Treasury bonds are:

generally issued as coupon bonds.

Municipal bonds:

offer income tax advantages to individuals.

A zero coupon bond:

has implicit interest which is calculated by amortizing the loan.

The total interest paid on a zero-coupon bond is equal to:

the face value minus the issue price.

The collar of a floating-rate bond refers to the minimum and maximum:

coupon rates.

Which of the following are common characteristics of floating-rate bonds?

adjustable coupon rates, put provision and coupon cap.

A corporation is more prone to issue floating-rate bonds when it expects future interest rates to _____ over the life of the bond.

continually decline

The yield to maturity is:

the rate that equates the price of the bond with the discounted cash flows, the expected rate to be earned if held to maturity, the rate that is used to determine the market price of the bond and equal to the current yield for bonds priced at par.

Investors generally tend to buy:

convertible bonds for their potential price appreciation.

A convertible bond is a bond that can be:

exchanged for a stated number of shares of common stock of the bond issuer.

A put provision in a bond indenture allows:

the bondholder to force the issuer to buy back the bond at a specified price prior to maturity.

Face value is

same as par value.

The "EST SPREAD" shown in The Wall Street Journal listing of corporate bonds represents the estimated:

difference between the bond's yield and the yield of a particular Treasury issue.

If its yield to maturity is less than its coupon rate, a bond will sell at a ____, and increases in market interest rates will ____.

premium; decrease this premium

Today, August 13, you want to buy a bond with a quoted price of 101.5. The bond pays interest on February 1 and August 1. The price you will pay to purchase this bond is equal to the:

dirty price.

The increase you realize in buying power as a result of owning a bond is referred to as the _____ rate of return.

real

The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of return.

inflation

The term structure of interest rates reflects the:

pure time value of money for various lengths of time.

The market price of _____ maturity bonds fluctuates _____ compared with _____ maturity bonds as interest rates change.

shorter; less; longer

Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to:

taxes and potential default.

An asset characterized by cash flows that increase at a constant rate forever is called a:

growing perpetuity.

The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.

dividend growth

Next year's annual dividend divided by the current stock price is called the:

dividend yield.

The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.

capital gains

A form of equity which receives preferential treatment in the payment of dividends is called _____ stock.

preferred

A _____ is a form of equity security that has a stated liquidating value.

preferred stock

A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock.

common

The voting procedure whereby shareholders may cast all of their votes for one member of the board is called _____ voting.

cumulative

The voting procedure where you must own 50% plus one of the outstanding shares of stock to guarantee that you will win a seat on the board of directors is called _____ voting.

straight

The voting procedure where a shareholder grants authority to another individual to vote his/her shares is called _____ voting.

proxy

Preemptive rights refer to the right of shareholders to:

share proportionately in any new stock issues sold.

Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called:

dividends.

The market in which new securities are originally sold to investors is called the _____ market.

primary

The market in which previously issued securities are traded among investors is called the _____ market.

secondary

An agent who buys and sells securities from inventory is called a:

dealer.

An agent who arranges security transactions among investors without maintaining an inventory is called a:

broker.

The owner of a seat on the New York Stock Exchange is called a(n) _____ of the exchange.

member

A member of the New York Stock Exchange acting as a dealer in one or more securities on the exchange floor is called a:

specialist.

A member of the New York Stock Exchange who executes orders for commission brokers on a fee basis is a:

floor broker.

A member of the New York Stock Exchange who executes buy and sell orders directly from customers once transmitted to the exchange floor is called a:

commission broker.

A member of the New York Stock Exchange who trades for his or her own account, trying to anticipate temporary price fluctuations, is called a(n):

floor trader.

The electronic system used by the New York Stock Exchange which enables orders to be transmitted directly to a specialist is called the ______ system.

SuperDOT

The ________ has a multiple market maker system rather than a specialist system.

NASDAQ

A securities market primarily comprised of dealers who buy and sell for their own inventories is generally referred to as a(n) ______ market.

over-the-counter

Electronic communications networks, or ECNs, act to:

increase competition and increase liquidity.

The James River Co. pays an annual dividend of $1.50 per share on its common stock. This dividend amount has been constant for the past 15 years and is expected to remain constant. Given this, one share of James River Co. stock:

is valued as if the dividend paid is a perpetuity.

The common stock of the Kenwith Co. pays a constant annual dividend. Thus, the market price of Kenwith stock will:

decrease when the market rate of return increases.

The Koster Co. currently pays an annual dividend of $1.00 and plans on increasing that amount by 5% each year. The Keyser Co. currently pays an annual dividend of $1.00 and plans on increasing its dividend by 3% annually. Given this, it can be stated with certainty that the _____ of the Koster Co. stock is greater than the _____ of the Keyser Co. stock.

total return; total return

The constant dividend growth model:

assumes that dividends increase at a constant rate forever and can be used to compute a stock price at any point in time.

The underlying assumption of the dividend growth model is that a stock is worth:

the present value of the future income that the stock generates.

Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:

market values of all stocks to decrease, all else constant.

The total rate of return earned on a stock is composed of which two of the following?

dividend yield and capital gains yield.

Which one of the following correctly defines the constant dividend growth model?

R = (D1 / P0) + g

Shareholders generally have the right to:

elect the corporate directors.

Jack owns 35 shares of stock in Beta, Inc. and wants to exercise as much control as possible over the company. Beta, Inc. has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect two new directors. Which one of the following statements must be true given this information?

If cumulative voting applies, Jack is assured one seat on the board.

ABC Co. is owned by a group of shareholders who all vote independently and who all want personal control over the firm. If straight voting is utilized, a shareholder:

must either own enough shares to totally control the elections or else he/she has no control whatsoever.

The Zilo Corp. has 1,000 shareholders and is preparing to elect three new board members. You do not own enough shares to control the elections but are determined to oust the current leadership. The most likely result of this situation is a:

proxy fight for control of the firm.

Common stock shareholders are generally granted rights which include the right to:

share in company profits, vote for company directors, vote on proposed mergers and residual assets in a liquidation.

The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:

must still declare each dividend before it becomes an actual company liability.

The dividends paid by a corporation:

to an individual become taxable income of that individual and to another corporation may or may not represent taxable income to the recipient.

The owner of preferred stock:

is entitled to a distribution of income prior to the common shareholders.

Which one of the following statements concerning preferred stock is correct?

Preferred shareholders may be granted voting rights and seats on the board if preferred dividend payments remain unpaid.

The value of common stock today depends on

the expected future dividends, capital gains and the discount rate.

Which one of the following transactions occurs in the primary market?

The initial sale of JKL stock by JKL to Jamie

Which one of the following statements concerning dealers and brokers is correct?

A broker does not take ownership of the securities being traded.

The formula P0 = DIV/r represents

the present value of a stream of zero growth dividends in perpetuity, the value of a no growth dividend stream and a lower value than if a positive growth element was included.

The post is a stationary position on the floor of the New York Stock Exchange where a _____ is assigned to work.

specialist

A stock listing contains the following information: P/E 17.5, closing price 33.10, dividend .80, YTD% chg 3.4, and net chg of -.50. Which of the following statements are correct given this information?

The stock price has increased by 3.4% during the current year and The earnings per share are approximately $1.89.

The discount rate in equity valuation is composed entirely of:

the dividend yield and the growth rate.

The net present value of a growth opportunity, NPVGO, can be defined as

the net present value per share of an investment in a new project.