110 terms

Financial Management Test 1-7

The primary objective of the firm is:
Shareholder wealth maximization
Shareholder returns can take the form of
Periodic dividend payments and proceeds from the sale of the stock
The two most important disciplines on which financial management relies are
accounting and economics
The most widely accepted objective of the firm is to
maximize shareholder wealth
The ____ the risk of receiving future cash flows, the ____ will be the present value of those cash flows.
greater, lower
A major advantage of using the maximization of shareholder wealth as the primary goal of the firm is that this goal considers
the timing and the risk of the expected benefits to be received
The primary reason for the divergence between the shareholder wealth maximization goal and the actual goals pursued by management has been attributed to
separation of ownership and control
Agency costs include all of the following
expenditures to monitor management's actions

providing stock as part of management's compensation

bonding expenditures
The chief financial officer (CFO) normally has responsibility for all the
managing interest rate risk

trading foreign currencies

accounting functions
The ____ has a goal of serving as a bridge between academic study of finance and the application of financial principles by financial managers.
Financial Management Association
There is often a divergence between the shareholder wealth maximization goal and the actual goals pursued by management. The primary reason for this is ____.
separation of ownership and control
Cash flow concepts are ____ but generally accepted accounting principles are ____ in the determination of a firm's net income.
unambiguous, ambiguous
The net present value rule provides appropriate guidance for financial decision makers when costs are incurred immediately
future cash flows are not known with certainty

marginal costs are equal to marginal revenue

marginal costs are greater then marginal revenue
A company that requires that its top officers own common stock in the company that is at least equal to their annual salary is:
Ford Motor Company
In a limited partnership, the limited partners may limit their:
Which of the following statements is/are correct?
I. Shareholders elect the Chairman of the Board
II. The board of directors has no control over whether or not dividends will be paid.
Neither I nor II
There are three major factors that determine the market value of a company's share of stock. All of the following are factors
Cash flows

Timing of cash flows

Risk taken to generate cash flows
Eurodollars are U.S. dollars that have been deposited in
foreign banks and foreign branches of U.S. banks
Financial middlemen include
securities brokers

securities dealers

investment bankers
Insider trading is defined as
an individual buying or selling on the basis of material nonpublic information
In an efficient capital market, all security investments will have:
a NPV of zero
The barriers to the free flow of capital among the major world capital markets include all of the following
taxation policies

foreign exchange risks

legal restrictions
For the financial manager, taxes have important implications for
dividend policy

financial restructurings

capital structure policy
If the spot rate for the Japanese yen is $0.009204 and the 90-day forward rate is $0.009227, what is the annualized premium (discount)?
premium of 1.00%
Christy purchased 100 shares of Good Idea stock for $48 last year. Yesterday she sold the stock for $45. If she received $4 in dividends during the time she held the security, what is her holding period return?
If an investor purchased 100 shares of Biggee stock for $30 per share, 6 months ago, and then sold the stock today for $33 per share, what was the investor's holding period return if a total of $1 per share in dividends was received over the 6 month period?
Two years ago you bought 100 shares of Big Bubba convertible preferred stock at $25 per share. The preferred stock had an annual dividend of $2.125 per share, and a total of $3.19 in dividends per share have been paid so far. Today the company announced that the stock is redeemable for $26.70 plus accrued and unpaid dividends, for a total of $27.76. Alternatively, holders may convert their shares of preferred stock at a conversion rate of 1.6393 shares of Big Bubba common stock for each share of preferred stock. If the closing price of Big Bubba common stock is $27.50, what is your holding period return?
If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717, then the Yen is trading at an annualized
premium of 3.98%
All of the following are financial intermediaries
commercial banks

investment companies

thrift institutions
Which of the following is correct regarding the forms of market efficiency?
I. In an efficient capital market stock prices provide an unbiased estimate of the true value of an enterprise.
II. In an efficient capital market, stock prices reflect the present value of the firm's expected cash flows.
Both I and II
____ indicate the ability of the firm to meet its short-term financial obligations
Liquidity ratios
____ indicate the firm's capacity to meet its debt obligations, both short-term and long-term.
Financial leverage ratios
The quick ratio is the same as current ratio except it does not consider
Asset management ratios indicate
how well a firm is using its assets to support sales
Financial leverage ratios measure the
firm's use of fixed-charge financing
The ____ ratio is a more severe measure of a firm's ability to meet fixed financial obligations than is the times interest earned ratio.
fixed charge coverage
If a firm's total asset turnover ratio is 2.0,
its annual sales are two times its total assets
If a firm's return on investment, i.e., earnings after taxes divided by total assets, is 7%, and the firm has no preferred stock financing, it is
possible that its return on stockholders' equity is 10%.
Firms with a positive economic value added (EVA):
have a return on capital greater than their cost of capital
A component of earnings that recognizes the return that the firm is expected to earn on assets that have not been placed in services is called ____.
allowance for funds used during construction
A firm with an equity multiplier of 4.0, will have a debt ratio of
A firm with a debt ratio of 0.75, will have an equity multiplier of
Stepping Out Shoe Mfg. has inventory purchases of $2,200 during the month of June. If the June 1 accounts payables were $1,700 and June 30 accounts payables were $1,900, what was the cash payment?
Newfangled Dangle Systems had earnings after tax of $1,000,000 last year. Included in its expenses were $50,000 of interest, $100,000 of deferred taxes, and $150,000 of depreciation. In addition, the company paid dividends of $200,000 to its stockholders last year. What was Newfangled's after-tax cash flow last year?
If a firm has interest expenses of $10,000 per year, sales of $700,000, a tax rate of 40%, and a net profit margin of 7%, what is the firm's times interest earned ratio?
Your current assets consist of cash, accounts receivable, and inventory. Total current liabilities equal $200,000. The average collection period is 20 days on average daily credit sales of $2,500. The current ratio is 1.3 and the quick ratio is 0.625. What is the balance in the cash account?
Greg is interested in investing in a small company, and he thinks Good Buy Co. might be a good investment. He has been given the following information and would like to know the return on stockholder's equity. Assume Good Buy's marginal tax rate is 40%.
Earning before taxes = $3 million
Net profit margin = 3.6%
Total liabilities = $15.0 million
Total stockholder's equity = $10.0 million
All of the following are users of financial information
Successful financial ratio analysis requires all of the following
A single ratio is all that is needed to indicate specific areas of weakness that must be addressed.
Market based ratios can be which of the following:
I. Price-to-earnings ratio
II. Dividend yield
I only
The values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the annuity due form by ____ the ordinary annuity interest factor by ____.
multiplying, (1 + i)
Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating the
present value of an annuity
You have just calculated the present value of the expected cash flows of a potential investment. Management thinks your figures are too low. Which of the following actions would improve the present value of your cash flows?
extend the cash flows over a longer period of time, and decrease the discount rate
The present value of an ordinary annuity is the
sum of the present value of a series of equal periodic payments
The more frequent the compounding the
greater the effective interest rate
The effective rate of interest will always be ____ the nominal rate.
equal to or greater than
The annual effective rate of interest (ieff ) is a function of:
the annual nominal rate of interest (inom)

the number of compounding intervals per year (m)
The present value of a(n) ____ is determined by dividing the annual cash flow by the interest rate.
Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a ten-year stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this equipment.
The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years. What is the future value of this lottery if you plan to put each payment in an account earning 9 percent?
$12.79 million
An insurance company offers you an end of year annuity of $48,000 per year for the next 20 years. They claim your return on the annuity is 9 percent. What should you be willing to pay today for this annuity?
Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer. The loan requires five equal annual end of the year payments. If the loan provides the bank with a 12 percent return, what will be your annual payments?
If you invest the $10,000 you receive at graduation (age 22) in a mutual fund that averages a 12% annual return, how much will you have at retirement in 40 years?
Your local bank offers 4-year certificates of deposit (CD) at a 12 percent annual nominal interest rate compounded quarterly. Determine how much additional interest you will earn over 4 years on a $10,000 CD that is compounded quarterly compared with one that is compounded annually.
You wish to save $500,000 in the next 25 years. You notice that a corporate bond fund earns about 11 percent per year and that is where you put your savings. How much must you save each year to obtain your goal?
1st Bank offers you a car loan at an annual interest rate of 10% compounded monthly. What effective annual interest rate is the bank charging you?
Your monthly statement from your bank credit card shows that the monthly rate of interest is 1.5%. What is the annual effective rate of interest you are being charged on your credit card?
When you purchased a car, you borrowed $20,000 from the bank at 9.20% and agreed to make monthly payments for 3 years. What is your monthly payment?
With continuous compounding
the effective rate is higher than the nominal rate
The ____ is the ratio of ____ to the ____.
coefficient of variation, standard deviation, expected value
The security market line can be thought of as expressing relationships between required rates of return and
Users of the CAPM should be aware of some of the problems in its practical application.
estimating expected future market returns

determining the most appropriate measure of the risk- free rate

determining an asset's future beta
The risk-free rate of return can be thought of as consisting of the following two components:
a real rate of return, an inflation premium
Arbitrage pricing theory is a model that relates expected returns on securities to
multiple risk factors
Is a relative (rather than absolute) measure of risk?
coefficient of variation
The term structure of interest rates is related to the ____.
maturity risk premium
Richtex Brick has a current dividend of $1.70 and the market value of its common stock is $28. The expected market return is 13 percent and the risk-free rate is 9 percent. If Richtex stock is half as volatile as the market, and the market is in equilibrium, what rate of growth is expected for Richtex's dividends assuming a constant growth valuation model is appropriate for Richtex?
AKA's stock is currently selling for $11.44. This year the firm had earnings per share of $2.80 and the current dividend is $0.68. Earnings are expected to grow 7% a year in the foreseeable future. The risk-free rate is 10 percent and the expected market return is 14.2 percent. What will be the effect on the price of AKAs' stock if systematic risk increases by 40 percent, all other factors remaining constant?
a decrease of $1.99
Determine the beta of a portfolio consisting of the following common stocks:
Security Market Value Beta
Boeing $5,000 1.2
Exxon $4,000 0.8
Duke Power $2,500 0.6
Blockbuster $2,000 1.4
Coca-Cola $7,500 1.0
HDTV has planned on diversifying into the dual-VCR field. As a result, HDTV's beta would rise to 1.6 from 1.2 and the expected future long-term growth rate in the firm's earnings would increase from 12% to 16%. The expected market return, km, is 14%; the risk free rate, rf, is 7%; and the current dividend, Do, is $0.50. Should HDTV go into the dual-VCR field?
Yes-stock price increase $9.89
Total risk of a security can be viewed as consisting of two parts. Which of the following apply?
I. verifiable risk
II. non-verifiable risk
Neither I nor II
An investor, by investing in combinations of stocks, develops a ____ portfolio
What is the current value of a share of Chyrox if its current dividend is $1.50 and dividends are expected to grow at an annual rate of 20 percent for the next 5 years? Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years for $72.
The earnings and dividends of MicroSun Computer Co. are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year. MicroSun currently pays a dividend of $0.50 per share. What is the value of MicroSun stock to an investor who requires a 14 percent rate of return?
Over the past 5 years, NBA's common stock earnings per share have grown from $0.62 to $0.91. If an investor is NBA stock is assumed to have a required rate of return of 14%, what is the current value of NBA if its current dividend is 0.12? Assume EPS will continue to grow at a constant rate.
Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If investors in Morton require a 13% rate of return, what is the current dividend?
Over the past 10 years the dividends of Allegro have grown from $0.45 to $1.82 per share. Determine the value of Allegro's common stock to an investor who requires a 20% rate of return, assuming that dividends continue growing at the same rate as they grew over the past 10 years.
The zero growth method is used to value
preferred stock
In a reverse stock split
the number of shares are decreased
Which of the following is not an advantage of common stock financing?
involves relatively high flotation costs
The valuation of common stock is considerably more complicated than the valuation of bonds or preferred stocks because:
The returns can be in annual cash payments or price appreciation, and they are normally expected to grow and not remain constant
One of the assumptions of the constant growth dividend valuation model is that
the required rate of return is greater than the dividend growth rate
Which of the following is not a characteristic of long- term debt?
firm is not legally required to pay interest to bond-holders
A sinking fund allows the issuer to
purchase a portion of the debt each year in the open market or call a portion of the debt for mandatory redemption
Which of the following is the highest risk debt issue?
The basic relationship in bond valuation is for a given percentage point change in the required rate of return, the ____ the time to maturity, the ____ the change in value.
longer, greater
A zero coupon bond is an example of a(n) ____.
fixed income security and an original issue deep discount bond
The State of Adaven issued $50 million of perpetual bonds in 1990. The bonds were issued in $100 denominations with an annual coupon interest rate of 5%. Determine the value of these bonds today to an investor who requires a 10% return on his investment.
A WPI 10s 08 bond closed at 89. What is the current yield on this bond?
Five years ago, the City of Baltimore sold at par a $1,000 bond with a coupon rate of 8 percent and 20 years to maturity. If this bond pays interest semiannually, what is the value of this bond to an investor who requires an 8 percent rate of return?
What is the value of an Orion bond that has a 10 percent coupon, pays interest semiannually, and has 10 years to maturity, if the required rate of return is 12 percent?
Determine the yield-to-call (to nearest 0.1 of a percent) of an LTV bond with a 14 percent coupon, that pays interest semiannually. The bond can be called in 7 years, has a call premium of $140, and is currently selling for $1154.
What is the value of a Northern Pacific bond with an 11 percent coupon, maturing in 15 years? Assume the market rate for this bond is 14 percent and that the interest is paid semiannually.
Determine the yield to maturity (to the nearest tenth of 1 percent) of an 8-year zero coupon bond ($1,000 par value) that is currently selling for $521.
What is the issue price of a zero coupon bond with 15 years to maturity if it is sold to yield 7.55%?
Dippity Doo-Dah Party Dips has revenues of $50,000, general & administrative expenses of $35,000, interest expense of $4,000 and depreciation expense of $4200. The firm is in the 38% tax bracket. What would be the firm's cash flow from operations?
Jones Company sales last year were $25 million and its total assets were $8 million. Accounts payable were $2 million and common stock and retained earnings were $5 million. Jones sales are forecasted to be $30 million this year, earnings after tax are expected to be 3% of sales, and dividends of $250,000 are expected to be paid. Assuming that the ratio of assets to sales and current liabilities to sales remain the same this year as last year, determine the amount of additional financing required.
Getrag expects its sales to increase 20% next year from its current level of $4.7 million. Getrag has current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All assets are expected to grow proportionately with sales. If Getrag has a net profit margin of 10%, what additional financing will be needed to support the increase in sales? Getrag does not pay dividends.
No financing needed, surplus of $224,400
Generally, which of the following non-cash charges is/are added to earnings after tax to calculate the after-tax cash flow?
Both I and II
The financial statement that shows the effects of a company's operating, investing, and financing activities on its cash balance is known as the:
statement of cash flows