Upgrade to remove ads
Only $2.99/month

CFIN Final Study Guide

Terms in this set (57)

The higher the expected rate of inflation, _.
The higher is the required rate of return on investment
A corporate bond that yields 12% includes a risk-free rate of 7% and a default premium of 3%. The Bond's maturity risk premium is _.
2%
Which bond has the highest default risk for a given return? _.
A CCC Corporate bond with a 10-year maturity
Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _ the YTM with the call provision.
lower than
A bond that only pays interest if the firm has sufficient earnings to cover the interest payments is called a(n): _.
income bond
Which event would make it less likely for a company to choose to call its outstanding callable bonds?
an increase in interest rates
Which statement is true about a zero coupon bond?
a zero coupon bond is issued at a substantial discount below its par value
Which type of investor would be most likely to purchase zero coupon bonds? _.
tax free investors such as pension funds
The face value of a debt is _.
the principal value written on the face, or outside cover of the bond
A debt is said to be selling at par, when the _ of the debt is equal to the _.
Maturity value, par value of the debt
Commercial paper is a type of _.
Promissory note
If interest rates decline, bondholders will earn _.
a lower rate of return on reinvested cash flows
The current market interest rate declines from 10% to 8%. Due to interest rate reinvestment risk, the bondholders will _.
earn a lower return on the reinvested cash flows
All else being equal, an increase in the yield to maturity of a bond will result in _.
a greater interest rate price risk on a long-term bond than on a short term bond.
The amount in excess of par value that a company must pay when it repurchases a security is known as the _.
call premium
Which of the following provisions will call for the repurchase and retirement of a given percentage of the preferred stock each year?
sinking fund
The change of receiving an actual return that differs from the one that is expected is called _.
risk
Diversification refers to the _.
reduction of the stand-alone risk of an individual investment, measure returns, by combing it with other investments in the portfolio
Which of the following is the only risk that is relevant to a rational, diversified investor?
market risk
Which of the following statements about beta is correct?
Firms with greater systematic risk volatilities than the market have betas that are greater than 1.0 and firms with smaller systematic risk volatilities than the market have betas that are less than 1.0.
A portfolio is made up of Stocks A, B, C, and D in the proportion of 20%, 30%, 25%, and 25% respectively. The nondiversifiable risks of the stocks as measured by their betas are 0.4, 1.2, 2.5, and 1.75 for stock A, B, C, and D respectively. The expected returns of the stocks are 12%, 24%, 30%, and 28% respectively. Measure the beta of the portfolio.
1.5
Which of the following is a component of systematic risk?
financial risk
Diversifiable risk includes _.
business risk
Which of the following statements about the various kinds of risk is true?
liquidity risk and political risk are systematic risks
Financial services refer to functions provided by organizations that _________.
deal with management of money
Identify a true statement about an S Corp
the income of an S corp passes through the company to the owners
Identify a true statement about business ethics
Business ethics attract and keep employees of the highest caliber.
Which of the following financial statements is included in the annual reports of a company?
Statement of cash flows
Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?
statement of cash flows
How is net income calculated in an income statement
net income = earnings before taxes - taxes
Which of the following ratios shows the relationship between a firm's cash and other current assets, and its current liabilities?
Liquidity ratios
A firm's current ratio has steadily increased over the past 5 years, from 1.9 to 3.8. What would a financial analyst probably conclude from this information?
The firm's liquidity position has improved
When a business sells its stocks or bonds to investors without going through any type of intermediary or financial institution, this process is known as a(an) _____.
Negotiated deal
Union Atlantic Corporation, which has a required rate of return to 14 percent, is evaluating a capital budgeting project. The initial cash outflow is $170,000 and the cash inflow at the end of each of the following four years is $60,750. According to this information, which of the following statements is correct?
The project is acceptable as the net present value of the project is positive
If the NPV of a project is positive, it means that:
Accepting the project increases the value of the firm
An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay a premium of $100 per year at the end of each of the 20 years. Find the internal rate of return to the nearest whole percentage point.
5%
When evaluating a new project, a firm should consider _____, as an incremental cash flow occurs only at the start of a project's life.
Initial investment outlay
Hill Top Lumber Company is considering building a sawmill in the state of Washington because the company doesn't have such a facility to service its growing customer base that is located on the west coast. Hill Top's executives believe that future growth in west coast customers will make the sawmill project a good investment. When evaluating the acceptability of the project, which of the following would be considered a relevant cash flow that should be included when determining its initial investment outlay?
It will cost 3 million to clear the land on which Hill Top was built on
When evaluating the cash flows associated with a capital budgeting project, shipping and installation costs associated with the purchase of an asset, such as a lathe, are considered part of the:
Initial investment outlay
A project with more corporate risk than average will also have:
More beta risk
One of the differences between capital budgeting for domestic and foreign operations is that the:
Cash flows for foreign operations are subject to future exchanges
Cash Conversion Cycle
The average period of time between the purchase of inventory and the receipt of cash from accounts receivable
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
Coupon Rate
the interest rate that a bond issuer will pay to a bondholder
Discount Rate
The interest rate on the loans that the Fed makes to banks
Generally Accepted Accounting Principles (GAAP)
an accepted set of guidelines and practices for companies reporting financial information and for the accounting profession
International Accounting Standards Board (IASB)
The organization responsible for evaluating, setting, or modifying GAAP in many countries outside the USA. 15 members, 9 countries.
Investment Opportunity Schedule
Collection of possible risk-return combinations available from portfolios of individual assets.
IRR
Internal Rate of Return
Marginal Cost of Capital
Cost of raising new funds as opposed to the historical cost of funds
Operating Leverage
a measure of how sensitive net operating income is to a given percentage change in dollar sales
Ordinary Annuity
an annuity with payments that occur at the end of each period
Preemptive Right
Stockholders' right to maintain their proportionate interest in a corporation with any additional shares issued.
Recession
A slowdown in economic activity over a period of time. During one of these periods all of the following things decline: Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation. Meanwhile bankruptcies and the unemployment rate rise.
Revolving Credit Agreement
a line of credit that's guaranteed but usually comes with a fee
Signaling Theory
theory that employers are willing to pay more for people with certificates, diplomas, degrees, and other indicators of superior ability
Term Life Insurance
Life insurance that pays a death benefit if the policyholder dies within a specific time period but has no remaining value at the end of this time.
THIS SET IS OFTEN IN FOLDERS WITH...