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FIN MIDTERM
| Question | Answer |
|---|---|
| Among those who report directly to the ____ are the treasurer and the controller of a corporation | CFO |
| Financial managers primarily create value by | Investing in assets that generate cash in excess of their cost |
| One disadvantage of the corporate form of business ownership is the | double taxation of business profits |
| The Sarbanes-Oxley Act requires public corporations to | list any deficiencies in internal controls |
| If a business is formed as a corporation, ownership of the business | can be transferred an unlimited number of times |
| The focus of short-term finance is on | the timing of cash flows |
| a firms ___ defines its capital structure | proportions of financing from debt and equity |
| the primary goal of financial management is to | maximize the current value per share of the existing stock |
| A(n)__ is defined as a conflict of interest between the stockholders and managers firm | agency problem |
| the amount a firm owes, which it must repay within twelve months, is called a(n) | current liability |
| earnings per share will increase if | net income increases and the number of shares outstanding decreases |
| Book value is based off of___ | historical cost |
| one reason why cash flow is popular is because | it is difficult to manipulate, or spin the cash flows |
| regarding liquidity, how are accounts on the balance sheet listed | listed in order of decreasing liquidity |
| which is an example of a current liability | a note payable to a lender in nine months |
| Cash Flow of the Firm Equation | Cash flow of stockholders + Cash flow to the creditors |
| an effective way to measure a firms ability to pay its bills over the short run without undue stress | liquidity measures |
| Riaz Restaurant Group has a market-to-book ratio of 3.4. The book value per share is $34 and earnings per share are $1.36. Holding the market-to-book ratio and earnings per share constant, a $1 increase in the book value per share will: | increase the price-earnings ratio |
| Equity Multiplier Equation | Total Assets / Total Equity |
| Assume Puffy's Pastries increases its operating efficiency by lowering its costs, but holds its sales constant. As a result, given all else is constant, the | return on equity will increase |
| ___ Ratios measures a firms use of financial leverage | long-term solvency |
| Float Swimwear generates six cents of net income for every $1 in equity, thus they have a ____ of 6% | return on equity |
| Assume a project has an initial cash outflow followed by seven years of cash inflow, if the discount rate increases, the present value will | decrease |
| Net Present Value Equation | Present Value of the Future Cash Flow - The Initial Cost |
| An analyst is evaluating two projects. Project A has projected cash flows of $7,500, $6,000, and $4,500 for the next three years. Project B has projected cash flows of $4,500, $6,000, and $7,500, Assuming both projects have the same initial cost: | Project A is more valuable than Project B, given the same positive discount rate for each product |
| How does perpetuity differ from annuity? | Perpetuity never ceases |
| What is true about time value of money | Decreasing the PV decreases the FV |
| The ___ rate equals the interest rate per period multiplied by the number of periods per year | Annual Percentage |
| The principal amount a bond must be repaid on the bonds___ | maturity date |
| A___ bond makes no coupon payments and is initially priced at a deep discount | Zero Coupon |
| if a bond yield to maturity is less than its coupon rate, the bond will sell at a ___, and increases in market interest rates will ___ | Premium, Decreases this premium |
| the market price of a bond increases when the | discount rate decreases |
| a ___ has a face value of $1,000 and a market price of $1,000 | par value |
| a bond with a coupon rate of 6% pays interest semiannually and is priced at par and will have a market price of ____ and interest payments in the amount of ___ each | $1000, $30 |
| The ____ yield is the rate at which stock's price is expected to appreciate or depreciate | Capital Gains Yield |
| a stock can be valued by using the ___ formula if the stock pays a constant annual dividend | perpetuity present value |
| Which applies to the dividend growth model of stock valuation? | the growth rate must be less than the discount rate |
| the ___ equals the total return on a stock | Dividend Yield + Dividend Growth Rate |
| The constant dividend growth model | can be used to compute a stock price at any point in time |
| the ____ equals the annual dividend amount to be paid next year, divided by the current stock price | Dividend yield |
| a symmetrical, bell shaped frequency distribution that is completely defined by its mean and standard deviation is the____ | normal distribution |
| when estimating the future equity risk premium, it is important to include assumptions about the | Future risk environment and the amount of risk aversion from other investors |
| For any given stock, the capital gains yield + the dividend yield = | Total Return |
| the excess return is computed by _______ the average return for the investment | subtracting the average return on the US Treasury Bill from |
| What is true about excess return | the greater the volatility, the greater the expected excess return |
| The Sharpe Ratio is computed as | The average equity risk premium / standard deviation |
| If a stock portfolio is well diversified, then the portfolio variance | may be less than the variance of the least risky stock in the portfolio |
| the measure called beta is associated most closely with | systematic risk |
| the expected return on a portfolio is calculated as a(n)_____ average of the expected returns on the individual securities held in the portfolio | weighted |
| the primary purpose of portfolio diversification | eliminate asset-specific risk |
| you are considering purchasing a particular stock, which has an expected return of 12% if the economy booms, 8% if the economy is normal, and 3% is the economy goes into a recessionary period. The overall expected rate of return on this stock will | increase as the probability of a boom economy increases |
| the standard deviation of a portfolio will tend to increase when | the portfolio concentration in a singly cyclical industry increases |
| if the number of shares outstanding and total earnings both remain constant, an increase in dividends per share will | reduce the addition to retained earnings |
| assume a firm has a total debt ratio of .36. An analyst would be justified in concluding that the firm has 36 cents in debt for every | 64 cents in total equity |
| _____ratios measure a firms use of financial leverage | Long-term solvency |
| for a proposed purchase to be acceptable, the PV of the future cash flows must | equal or exceed the cost of the purchase |
| the relationship between nominal rates, real rates, and inflation is known as the | fisher effect |
| capital market history shows us that a correct ordering of the average return by asset class, from lowest to highest is | T-Bills, government bonds, large company stocks, small company stocks |
| ______ risk affects at most a small number of assets | unsystematic |
Created by:
haileykaras