Final Exam
Quiz yourself by thinking what should be in
each of the black spaces below before clicking
on it to display the answer.
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| Assets are listed on the balance sheet in order of? | decreasing liquidity
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| 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
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| What is the primary goal of the corporation? | Maximize the value of the stockholders because they own the corporation
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| 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.
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| What is the interest rate used to calculate the present value of future cash flows? | the discount rate
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| Accounting liquidity is... | the ease and quickness with which assets can be converted to cash
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| What is the process of planning an managing a firm's long-term investments? | Capital Budgeting
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| What is the process of accumulating interest on an investment over time to earn more interest? | Compounding
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| 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
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| What is bond called if it has a face value of $1000 and it sells for more than that in the market? | Premium bond
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| What is the price a dealer is willing to pay for a security held by an investor? | Bid price
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| What is the process of finding the present value of some future amount called? | discounting
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| The value of common stock today depends on... | the expected future dividends, capital gains and the discount rate
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| 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
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| Why do accepting the positive NPV projects benefit the stockholders? | because the present value of the expected cash flows are greater than the cost
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| 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
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| 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
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| What is money that the firm has already spent or is committed to spend regardless of whether a project is taken? | Sunk cost
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| Why is interest expense typically excluded in the project cash flow? | Becuase the discount rate or WACC reflects the cost of debt
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| 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
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| What decision rule is considered the "best" in principle? | Net present value
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| What is the name of the cash flow savings generated as a result of a firm's tax-deductible depreciation expense? | Depreciation tax shield
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| Based on historical record from 1926-2001, what type of security earned the 2nd lowest return? | Long-term government bonds
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| 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
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| What are risks that affect a large number of assets, each to a greater or lesser degree called? | Systematic risks
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| What is the linear relation between an asset's expected return and its beta coefficient? | Security market line
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| What is the asset-specific risk also known as? | Diversifiable risk
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| What kind of risk is irrelevant to a well-diversified investor? | Asset-specific risk
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| What is the return that shareholders require on their investment in the firm? | Cost of equity
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| 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
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| 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
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