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Business Finance Final Exam Borrowed
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Terms in this set (47)
From the perspective of evaluating a firm's financial health, a negative value in the _____ segment of the Statement of Cash Flows is most likely to indicate a potential problem with the firm's financial health.
Cash Flows from Operation Activities
What is the effective annual rate (keff) of 10% compounded bi-weekly (26 times a year)
10.50%
Choose the correct statement regarding social responsibility, ethics, and finance.
Engaging in socially responsible and ethical behavior has been shown to have a positive correlation with financial performance.
Which of the following financial statements is NOT impacted by seasonality?
Annual income statement
T or F: In finance, cash flows are considered more important than net income because cash flows better allow us to account for the time value of money.
True
T or F: Because the Board of Directors is supposed to look out for the interests of owners (stockholders), it is not legal for upper-level management (CEO, CFO, COO, etc.) to be a member of the Board of Directors.
False
T or F: Short-term creditors are likely to be more interested in the return on Equity ratio than are stockholders.
False
T or F: You want to accumulate $500,000. You currently have $90,000 saved. You must add $202.63 at the end of each week for the next 15 years in order to reach your goal if you earn 6.4%?
True
T or F: Bonds offer a fixed and finite cash flow stream while stocks offer a variable and potentially infinite cash flow stream.
True
T or F: The present value of cash flow stream will always be less than the value of the sum of the cash flows. Alternatively, the future value of a cash flow stream will always be greater than the value of the sum of the cash flows. Assume a positive interest rate for both cases.
True
T or F: Firm A has $175,000,000 in Assets and $75,000,000 in Liabilities. This implies that it has $250,000,000 in Owners' Equity.
False
T or F: One of the advantages of the corporate form of ownership (compared to a sole proprietorship) is that it is much easier for owners of corporations to be diversified and own multiple businesses in multiple industries.
True
T or F: Trend analysis refers to the process of looking at ratios and/or common size statements over time. Because more data is better, we should only consider trend analysis relevant if there are at least 10 years of data and more is better.
False
The three key factors that we must focus on to help us achieve our primary goal include?
Magnitude of exp. cash flows
Timeliness of exp. cash flows
Riskiness of exp. cash flows
T or F: Junk bonds have a greater probability of default than investment grade bonds. They also have higher Yield-to-Maturity than investment grade bonds with similar time to maturity.
True
What is the most important measure of value in common stock?
Market Value
T or F: Treasury bonds should have a zero (or close to it) default risk premium. All else equal, the greater the likelihood of default, the greater the default risk premium.
True
What are three examples of primary market transaction?
The US Treasury issues $40million in 10-year Treasury bonds. Shake Shack has an initial public offering. Exxon issues and additional 10 million shares of stock.
Assuming you expected interest rates to drop significantly in the next couple weeks, which bond would you expect to have the largest percentage increase in price?
A 25-year zero coupon bond
The yield-to-maturity is more important/relevant to investors.
Than the coupon rate and the yield-to-call (assuming the YTM is less than the YTC)
Assuming markets are efficient
The current stock price is the best estimate of its true value. Stock prices should respond immediately to all new information. Earning a rate of return higher than the stock market average implies that investors took higher risk/lucky.
T or F: All else equal, the longer the time to maturity for a security, the greater its maturity risk premium should be.
True
T or F: All else equal, the higher the expected annualized inflation rate over the life of security, the greater it's inflation premium should be.
True
What rights are associated with a common stock?
The right to residual income, to information, and to transfer (sell) securities.
T or F: When a bond is trading at a premium its Yield-to-Maturity should be greater than its Coupon Rate.
False
T or F: According to our stock valuation models, we are willing to pay more for a stock that we plan to hold for 10 or more years than we are for a stock we only plan to hold for 2 years. This is because we will receive more dividends over the 10 year time frame making the stock more valuable.
False
T or F: All else equal, we would expect convertible bonds to have lower yields (interest rates) and callable bonds to have higher yields (interest rates).
True
T or F: All else equal, an increase in the risk associated with a common stock should cause the price of the stock to increase.
False
T or F: According to weak form market efficiency, all publicly available information is already reflected in the current stock price and investors should not be able to use this information (From annual reports, current press releases, etc.) to outperform the market.
False
T or F:A sinking fund provision refers to the process by which bond defaults are settled after the issuing firm declares that it can not make the interest and/ or principal payments that it promised.
False
T or F: A 9% coupon bond with 25 years remaining until maturity is currently trading for $1213.88. The bond is callable in 7 years for $1045. Based on this, the Yield-to-call is 5.77%
True
T or F: Financial intermediaries work better than financial markets in situations where the security needs transformed (change in maturity, risk profile, etc.) between the supplier and demander of capital.
True
In regard to Diversification
We can eliminate most of our firm-specific risk by holding a portfolio of 50 stocks from a variety of industries.
T of F: An ETF is a security that is structured like a mutual fund (each share represents a portfolio of securities), but trades like a stock (bought sold through a brokerage account on stock exchanges)
True
When evaluating a stock to add to a well-diversified portfolio, the appropriate measure of risk is?
Beta
Payback period fails to meet which of the following criteria?
Consider all relevant cash flows and rank project by value added.
A Roth IRA
Refers to a tax shelter designed to encourage retirement savings.
Evidence on the security market line shows that?
High beta stocks do not consistently earn higher returns than low beta stocks.
Stock A has an expected return of 7%. This implies that?
If you invest in stock A, and could repeat next year a nearly infinite number of times, your average rate of return would be 7%.
T or F: When comparing two individual investments to be held as a stand-alone investments (not as part of a well-diversified portfolio), standard deviation is a better risk measurement than beta.
True
T or F: When dealing with independent projects, the size problem associated with the IRR is no longer relevant.
True
T or F: If you are vested, all your contributions, the company's matching contributions and the returns from those contributions belong to you when you leave the firm.
True
T or F: You have calculated an expected return for Stock A of 10%. You have also calculated a required return of 8%. Assuming everyone else has the same values, we should expect everyone to want to buy Stock A. This will cause the price to rise, lowering the expected return until it falls to 8%.
True
T or F: I can invest in a mutual fund on its own (outside of an IRA) or I can invest in the same mutual fund as part of my IRA. The primary difference is the tax treatment on my investment income while it is in the IRA.
True
T or F: One advantage of an IRA relative to a 401(k) plan is that the IRA provides greater flexibility in choosing the investments that I would like to include in my IRA. With a 401 (K) plan I am typically limited to a set number of alternatives to choose from.
True
T or F: When combining two stocks into a 2-stock portfolio, the higher the correlation between the two stocks the greater the diversification benefits (lower standard deviation of the portfolio)
False
T or F: We would expect most pairs of stocks to have a correlation that is essentially zero. While some pairs will have positive correlations an almost equal amount will have negative correlations so that for all stocks the average will be close to zero.
False
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