29 terms

a poison pill

a financial device designed to make unfriendly takeover attempts unappealing, if not impossible

All else equal, the market value of a stock will tend to decrease by roughly the amount of the dividend on the:

ex-dividend date

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

a discount; less than... if YTM > cpn. rt --> par value > bond price

an indenture is:

the legal agreement between the bond issuer and the bondholders

A bond that can be paid off early at the issuer's discretion is referred to as being what:

callable

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

0.05(1-t**) = 0.07; rearranged from .07 (1-t**) = .05

A bond has a market price that exceeds its face value. What features currently apply to this bond?

Premium price; YTM that is less than the coupon rate....premium bond, par value < bond price, YTM < cpn rate

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

Corporation

Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?

The present value decreases

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 pa you on the last day of each month. What statement is correct concerning these two annuities?

Annuity B has a smaller present value than annuity A.

Perpetuity

unending equal payments paid at equal time intervals

This morning, TL Trucking invested $80,000 to help fund a company expansion project planned for 4 years from now. How much additional money will the firm have 4 years from now if it can earn 5 percent rather than 4 percent on its savings?

-80000 PV, N=4, I=4.....-80000 PV, N=4, I=5. "5" --> 97,240.50 vs "4"-->93,588.68. Thus, earning 5 percent instead of 4 leads to $3,651.82 more.

What risk premium compensates for the possibility of nonpayment by the bond issuer?

Default risk

What best describes the "January effect" as we discussed it in class?

The return in January allegedly predicts the return for the entire year.

You want to have $1 million in your saving account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. What will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire?

Invest in a different account paying a higher rate of interest; retire later

What will help convince managers to work in the best interest of the stockholders?

Compensation based on the value of the stock; stock option plans; threat of a company takeover; threat of prison

Most loans are a form of a(n)

annuity

What is true with regard to CEO/Chairman duality as we discussed in class?

When the CEO of the firm is also the chairman of the board; the new CEO of GM will also serve as the role Chairman of the Board; is usually found in low-growth, easily tractable businesses that the board would be able to understand easily

The weighted average cost of capital for a firm is dependent upon the firm's:

level of systematic risk, debt-equity ratio, and tax rate

Incremental cash flow

any and all changes in the firm's future cash flows that are a direct consequence of taking the project

The internal rate of return (IRR) rule states that a project is acceptable when the IRR...

exceeds the required rate of return

The internal rate of return (IRR) is the rate that causes the net present value of a project to equal...

zero

A project's operating cash flow will increase when:

depreciation expense increases

The capital structure weights used in computing the weighted average cost of capital are based on:

the market value of the firm's debt and equity securities

The capital structure weights used in computing the weighted average cost of capital are based on the ______ value of the firm's debt and equity securities

market

Decreasing the required rate of return will ________ the net present value of a project.

increase

When calculating a firm's equity beta in practice, what should be considered?

The estimation period over which you run the regression; the benchmark "market" index which you run your regression against.

You are aware that your neighbor trades stocks based on confidential info he overhears at his workplace. This info is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you tend to argue that the financial markets are, at best, ________ form efficient.

semistrong

In class, we spoke about a lawyer that buys variable annuities in the names of terminally ill patients. What is consistent with our discussion?

The death benefit of the annuities provides a risk-free investment option.