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FINA 3000

Final Exam

QuestionAnswer
Assets are listed on the balance sheet in order of? decreasing liquidity
The general partner(s) in a general partnership agree to share work, costs, profits, and losses. Each partner... has liability for the debts of the partnership
What is the primary goal of the corporation? Maximize the value of the stockholders because they own the corporation
Shareholders attempt to control managerial behavior by... electing the board of directors, the threat of a takeover by another firm, and setting compensation contracts and tying compensation to corporate success.
What is the interest rate used to calculate the present value of future cash flows? the discount rate
Accounting liquidity is... the ease and quickness with which assets can be converted to cash
What is the process of planning an managing a firm's long-term investments? Capital Budgeting
What is the process of accumulating interest on an investment over time to earn more interest? Compounding
What was special about the Google IPO? It was an IPO done in auction style and the price of offering was the highest price at which all bids cleared
What is bond called if it has a face value of $1000 and it sells for more than that in the market? Premium bond
What is the price a dealer is willing to pay for a security held by an investor? Bid price
What is the process of finding the present value of some future amount called? discounting
The value of common stock today depends on... the expected future dividends, capital gains and the discount rate
In the dividend valuation model the selling price at the end of the holding period is based on... the anticipated dividend stream to the purchaser
Why do accepting the positive NPV projects benefit the stockholders? because the present value of the expected cash flows are greater than the cost
What are the two fatal flaws of the internal rate of return rule? Failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem
When does an investment in net working capital arise? When inventory is purchased, cash is kept in the project as a buffer against unexpected expenses, and credit sales are made
What is money that the firm has already spent or is committed to spend regardless of whether a project is taken? Sunk cost
Why is interest expense typically excluded in the project cash flow? Becuase the discount rate or WACC reflects the cost of debt
How can he internal rate of return be best stated? An investment is acceptable if its IRR exceeds the required return, else is should be rejected
What decision rule is considered the "best" in principle? Net present value
What is the name of the cash flow savings generated as a result of a firm's tax-deductible depreciation expense? Depreciation tax shield
Based on historical record from 1926-2001, what type of security earned the 2nd lowest return? Long-term government bonds
What is inconsistent with efficient markets at its strongest level? Historical price trends give you a good idea of where prices are headed in the future
What are risks that affect a large number of assets, each to a greater or lesser degree called? Systematic risks
What is the linear relation between an asset's expected return and its beta coefficient? Security market line
What is the asset-specific risk also known as? Diversifiable risk
What kind of risk is irrelevant to a well-diversified investor? Asset-specific risk
What is the return that shareholders require on their investment in the firm? Cost of equity
What is the appropriate discount rate to be used when analyzing an investment project? the rate of return financial markets offer on investments of similar risk
What is a security that is issued in the US that represents shares of a foreign stock and allows that stock to be traded in the US called? American depository receipt
Created by: talday
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