FIN 6406 Quiz: Financial Management Concepts and Calculations, Exams of Banking and Finance

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FIN 6406 Quiz (150 Questions and Answers) Financial managers should strive to maximize the current value per share of the existing stock because: - Correct answer the current stockholders are the owners of the corporation A general partner: - Correct answer has more management responsibility than a limited partner A partnership: - Correct answer terminates at the death of any general partner Which one of the following statements concerning a sole proprietorship is correct? - Correct answer The life of the firm is limited to the lifespan of the owner Which one of the following parties is considered a stakeholder of a firm? a. employee b. long-term creditor c. preferred stockholder d. common stockholder e. all of the above - Correct answer all of the above are stakeholders; our textbook defines stakeholders as anyone with a potential claim on the firm other than creditors and owners, but other sources include owners and creditors in the definition of stakeholder Which form of business structure faces the greatest agency problems? - Correct answer Corporation Which one of the following statements is correct concerning corporations? - Correct answer The largest firms are usually corporations Which one of the following actions by a financial manager creates an agency problem? - Correct answer Agreeing to expand the company at the expense of stockholders' value Which one of the following statements is correct concerning the organizational structure of a corporation? - Correct answer The chief executive officer reports to the board of directors. A proxy fight occurs when: - Correct answer A group solicits proxies to replace the board of directors. The primary goal of financial management is to: - Correct answer maximize the current value per share of the existing stock. The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the: - Correct answer Treasurer The bylaws: - Correct answer mandate the procedure for electing corporate directors Which one of the following business types is best suited to raising large amounts of capital? - Correct answer Corporation Which of the following may be found on the balance sheet? - Correct answer Assets, liabilities, and equity Retained earnings: - Correct answer is the total amount of income over time that has been reinvested in the firm. Which of the following are all components of the statement of cash flows? - Correct answer Cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities _____ is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities. - Correct answer Cash flow from operations Book value: - Correct answer is based on historical cost. Net operating profit after taxes: - Correct answer is the amount of profit a firm would generate if it had no debt and held no non-operating assets The statement of cash flows: - Correct answer reports the impact of a firms operating, investing, and financing activities on cash flows over an accounting period. Which one of the following statements concerning liquidity is correct? - Correct answer Balance sheet accounts are listed in order of decreasing liquidity. Land Land Land, Inc. has a current ratio of 2.0. The average current ratio for the firm's industry is 1.5. Based on this information you know that: - Correct answer LLL is more liquid than the average firm in the industry. The financial ratio measured as net income divided by total assets is known as the firm's: - Correct answer return on assets If a firm produces a 10% return on assets and also a 10% return on equity, then the firm: - Correct answer has no debt of any kind. Casey Motors recently reported net income of $106 million. The firm's tax rate was 40 percent, and interest expense was $29 million. The company's after-tax cost of capital is 11 percent, and the firm's total investor supplied operating capital employed equals $742 million. What is the company's EVA? (Answers are in $ millions.) Group of answer choices - Correct answer $41.78 Cleveland Corporation has 19,540,000 shares of common stock outstanding, its net income is $282 million, and its P/E ratio is 18.3. What is the company stock price? - Correct answer $264.10 Use the information below to calculate the firm's return on common equity. Net profit margin = 8.76%; Debt ratio = 47.62%; Fixed asset turnover = 7.02; Total asset turnover = 3.7; Inventory turnover = 20. - Correct answer 61.88% Financial deficits are created when: - Correct answer profits and retained earnings are less than the capital-spending requirement The market value of the ownership of the firm equals: - Correct answer the market price of the stock times the number of shares outstanding. Based on historical experience, which of the following best describes the "pecking order" of long-term financing strategy in the U.S.? - Correct answer Internal financing first, long-term borrowing, new common equity last. If a firm retires or extinguishes a debt issue before maturity, the specific amount they pay is: - Correct answer the call price. From the corporate perspective, callable bonds may have value over non- callable bonds because - Correct answer the corporation has the option to call the bond if interest rates fall. Investment banks perform which of the following services for corporate issuers: Formulating the method used to issue new securities Pricing the new securities Selling the new securities - Correct answer All of the above Potential investors learn of the information concerning the firm and its new issue from the: - Correct answer red herring A shareholder who has rights is: - Correct answer able to exercise their rights or sell them. Empirical evidence suggests that upon announcement of a new equity issue, current stock prices generally: - Correct answer drop, perhaps because the new issue reflects management's view that common stock is currently overvalued. Assuming everything else is constant, when a stock goes ex-rights its price should: - Correct answer decrease since the stockholder is losing an option. The effective annual rate of interest is: - Correct answer greater than or equal to the nominal interest rate. A partial amortization loan requires a final larger than usual payment that is called: - Correct answer a balloon payment. The future value of a single sum will increase if the interest rate increases. - Correct answer True You are offered an investment with a quoted annual interest rate of 10% with weekly compounding of interest. What is your effective annual interest rate? - Correct answer 10.51% If you wish to accumulate $246,000 in 17 years, how much must you deposit today in an account that pays an annual interest rate of 15%? Group of answer choices - Correct answer $22,859.77 How many years will it take for $196,000 to grow to be $511,000 if it is invested in an account with a quoted annual interest rate of 10% with monthly compounding of interest? - Correct answer 9.62 You are told that if you invest $13,900 per year for 14 years (all payments made at the beginning of each year) you will have accumulated $511,000 at the end of the period. What annual rate of return is the investment offering? - Correct answer 12.16% You plan to borrow $467,000 now and repay it in 10 equal annual installments (payments will be made at the end of each year). If the annual interest rate is 14%, how much will your annual payments be? - Correct answer $89,530.22 You are valuing an investment that will pay you $27,000 per year for the first 8 years, $35,000 per year for the next 13 years, and $61,000 per year the following 20 years (all payments are at the end of each year). If the appropriate annual discount rate is 9.00%, what is the value of the investment to you today? - Correct answer $372,103.82 You plan to retire 40 years from now. You expect that you will live 20 years after retiring. You want to have enough money upon reaching retirement age to withdraw $150,000 from the account at the beginning of each year you expect to live, and yet still have $2,700,000 left in the account at the time of your expected death (60 years from now). You plan to accumulate the retirement fund by making equal annual deposits at the end of each year for the next 40 years. You expect that you will be able to earn 12% per year on your deposits. However, you only expect to earn 9% per year on your investment after you retire since you will choose to place the money in less risky investments. What equal annual deposits must you make each year to reach your retirement goal? - Correct answer $2,573.72 John and Peggy recently bought a house. They financed the house with a $246,000, 30-year mortgage with a nominal interest rate of 9.86%. Mortgage payments are made at the end of each month. What total dollar amount of their mortgage payments during the first 4 years will go towards repayment of principal? - Correct answer $6,564.88 The carrying value or book value of assets: - Correct answer is determined under GAAP and is based on the cost of the asset. Which two of the following are most apt to cause a firm to have a higher price-earnings ratio?I. slow industry outlookII. high prospect of firm growthIII. very low current earningsIV. investors with a low opinion of the firm - Correct answer II and III only The market-to-book ratio is measured as: - Correct answer market value of equity per share divided by book value of equity per share. The written agreement between a corporation and its bondholders is called: - Correct answer the indenture What percentage of the dividends received by one corporation from another is taxable? - Correct answer 30% The offering price is set to make an issue attractive to the market and provide a good price to the issuer. Which of the following is/are true? - Correct answer All of the above. The corporate document that sets forth the business purpose of a firm is the: - Correct answer articles of incorporation A stakeholder: - Correct answer Any person or entity who potentially has a claim on the cash flows of the firm Which one of the following best describes the primary advantage of being a limited partner rather than a general partner? - Correct answer Liability for firm debts limited to the capital invested ________ refers to the cash flow that results from the firm's ongoing, normal business activities. - Correct answer Cash flow from operating activities Venture capitalists provide financing for new firms from the seed and start up stage all the way to mezzanine and bridge financing. In exchange for financing, entrepreneurs give: - Correct answer an equity position and usually board of director positions. A call provision gives the investor the right to force the issuer to buy the bonds back before maturity. - Correct answer False All else equal, if a bonds yield-to-maturity increases: - Correct answer its price will fall If the market is semistrong-form efficient, you can expect to outperform the overall market by observing the past price history of an individual stock. - Correct answer False Two firms with the same dividend and growth rate must also have the same stock price. - Correct answer False You are considering buying bonds in ACBB, Inc. The bonds have a par value of $1,000 and mature in 16 years. The annual coupon rate is 8.0% and the coupon payments are annual. If you believe that the appropriate discount rate for the bonds is 17.0%, what is the value of the bonds to you? Group of answer choices - Correct answer $513.52 XZYY, Inc. currently has an issue of bonds outstanding that will mature in 24 years. The bonds have a face value of $1,000 and a stated annual coupon rate of 15% with semi-annual coupon payments. The bond is currently selling for $856. The bonds may be called in 3 years for 117% of par value. What is the quoted annual yield-to-maturity for these bonds? - Correct answer 17.58% XZYY, Inc. currently has an issue of bonds outstanding that will mature in 37 years. The bonds have a face value of $1,000 and a stated annual coupon rate of 8% with annual coupon payments. The bond is currently selling for $829. The bonds may be called in 5 years for 111% of par value. What is your expected quoted annual rate of return if you buy the bonds and the company calls them when possible? - Correct answer 14.71% You are considering buying common stock in Grow On, Inc. The firm yesterday paid a dividend of $6.70. You have projected that dividends will grow at a rate of 10.0% per year indefinitely. If you would want an annual return of 20.0% to invest in this stock, what is the most you should pay for the stock now? - Correct answer $73.70 Grow On, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid a dividend of $5.90. You believe that dividends will grow at a rate of 22% per year for three years, and then at a rate of 8% per year thereafter. You expect the stock will sell for $44.50 in three years. You expect an annual rate of return of 21% on this investment. If you plan to hold the stock indefinitely, what is the most you would pay for the stock now? - Correct answer $68.23 Timeless Corporation issued preferred stock with a par value of $900. The stock promised to pay an annual dividend equal to 17% of the par value. If the appropriate discount rate for this stock is 19%, what is the value of the stock? - Correct answer $805.26 Which of the following statements is most correct? The modified IRR (MIRR) method: - Correct answer Answers a and b are correct. a. Overcomes the problem of multiple rates of return. b. Compounds cash flows at the cost of capital There is virtually no link between capital budgeting and stock values. - Correct answer False A major disadvantage of the payback period is that it: - Correct answer Statements b and c are correct: b. Ignores cash flows beyond the payback period. c. Does not directly account for the time value of money. Sunk costs include any cost that: - Correct answer has previously been incurred and cannot be changed. A cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected is called: - Correct answer a sunk cost You are evaluating a potential purchase of several light-duty trucks. The initial cost of the trucks will be $206,000. The trucks fall in the MACRS 5- year class that allows depreciation of 20% the first year, 32% the second year, 19% the third year, 12% the fourth year, 11% the fifth year, and 6% the sixth year. You expect to sell the trucks for 28,800 at the end of five years. The expected revenue associated with the trucks is $161,000 per year with annual operating costs of $84,000. The firm's marginal tax rate is 20.0%. What is the after-tax cash flow associated with the sale of the equipment? - Correct answer $25,512 An analysis of the relationship between the sales volume and various measures of profitability is called _____ analysis. - Correct answer Break-even Which one of the following is most likely a variable cost? - Correct answer Direct labor costs Fixed costs: - Correct answer are constant over the short-run regardless of the quantity of output produced. Sensitivity analysis is conducted by: - Correct answer changing the value of a single variable and computing the resulting change in the current value of a project. All else constant, as the variable cost per unit increases, the: - Correct answer contribution margin decreases. A stock with a beta of one would be expected to have a rate of return equal to: - Correct answer the market return. Risk can be analyzed: - Correct answer both on a stand-alone and portfolio basis. The principle of diversification tells us that: - Correct answer spreading an investment across many diverse assets will eliminate some of the risk. Risk averse individuals will: Always chose the lowest risk alternative Always chose the highest return alternative Always Ignore risk when making choices - Correct answer None of the above are correct Which one of the following is a correct ranking of securities based on their volatility over the past 80 years or so? Rank from highest to lowest. - Correct answer small company stocks, large company stocks, long-term corporate bonds What is the expected return for the following stock? Outcomes Returns Probability Better 31% 19% Same 29% 40% Worse 16% 41% - Correct answer 24.05% What is the expected return for the following portfolio? Stock Exp. Returns Investment AAA 39% $500,000 BBB 25% $1,300,000 CCC 24% $1,200,000 DDD 5% $1,500,000 - Correct answer 19.62% The risk-free rate of return is 4.7% and the market return is 17.0%. What is the expected return for the following portfolio? Stock Betas Investment AAA 3.30 $700,000 BBB 2.80 $1,100,000 CCC 1.60 $2,200,000 DDD 0.90 $1,800,000 - Correct answer 27.03% If the risk-free rate is 4.0%, the market risk premium is 15.0%, and the expected return on Security J is 37.0%, what is the beta for Security J? - Correct answer 2.20 You are holding a stock that has a beta of 1.49 and is currently in equilibrium. The required return on the stock is 14.41%, and the expected return on the market portfolio is 12.20%. What would be the expected return on the stock if the expected market return increased to 17.00% while the risk-free rate and beta remained unchanged? - Correct answer 21.57% The coupon rate on existing debt is usually: a good estimate of the before-tax cost of new debt. always higher than the before-tax cost of new debt always lower than the before-tax cost of new debt none of the above statements are true - Correct answer None of the above are true The before-tax cost of debt is the yield-to-maturity adjusted for flotation costs. - Correct answer True Costly Corporation plans a new issue of bonds with a par value of $1000, a maturity of 37 years, and an annual coupon rate of 11.0%. Flotation costs associated with a new debt issue would equal 3.0% of the market value of the bonds. Currently, the appropriate discount rate for bonds of firms similar to Costly is 9.0%. The firm's marginal tax rate is 50%. What will the firm's true cost of debt be for this new bond issue? Group of answer choices - Correct answer 4.65% Costly Corporation is considering a new preferred stock issue. The preferred would have a par value of $500 with an annual dividend equal to 16.0% of par. The company believes that the market value of the stock would be $462.00 per share with flotation costs of $18.00 per share. The firm's marginal tax rate is 40%. What is the firm's cost of preferred stock? - Correct answer 18.02% Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $29.00 per share. The firm's dividend for next year is expected to be $5.30 with an annual growth rate of 5.0% thereafter indefinitely. If the firm issues new stock, the flotation costs would equal 15.0% of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of internal equity? - Correct answer 23.28% Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $45.00 per share. The firm's dividend for next year is expected to be $6.00 with an annual growth rate of 7.0% thereafter indefinitely. If the firm issues new stock, the flotation costs would equal 14.0% of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of external equity? - Correct answer 22.50%