FINA 3332 Exam 2 Review

Since accounting principles differ among countries, the overall global trend is for firms to begin using:

IFRS

Company Y's current stock price is $51.50 per share and the company's most recent earnings were $2.32 a share. What is unit would the ratio be measured in? # of times or percentage?

# of times

Current assets minus inventories / current liabilities is:

acid test ratio/quick ratio

is making a dividend payment a financing activity?

yes

Financial statements also have extensive notes where companies provide additional information such as:

details on leasing activities

Retained earnings are the:

previous years' of earnings less dividends

Which type of income may be distributed to the company's owners or reinvested in the company?

net income

The Sarbanes-Oxley Act attempts to improve the accuracy of information given to both boards and shareholders by:

stiffening penalties for false information

DuPont analysis relates ROE to:

profitability, asset efficiency and leverage

The market-to-book ratio is the ratio of:

market value of equity to the accounting value of equity

The three main financial statements are the balance sheet, the income statement and the statement of cash flows. However, there is a fourth financial statement known as the:

statement of stockholders' equity

The enterprise value adds the total market value of the firm's equity and debt and then subtracts out the most liquid components to obtain the:

value of the firm's underlying business

The financial statements include an introduction known as the management discussion and analysis. This preface must contain information about:

off-balance sheet transactions

Which of the following is considered a current liability?

accounts payable

EBITDA, or earnings before interest, taxes, depreciation and amortization, shows how much cash a firm has earned from:

operations

A statement of cash flows has which three parts?

Operating, investing and financing

Any publicly-traded U.S. firm must file quarterly financial statements and annual financial statements with the __________ and also send an annual report that includes their financial statements to their shareholders.

U.S. Securities and Exchange Commission

Accountants prepare financial statements using a set of guidelines established by the profession to ensure that all financial statements are comparable. These guidelines are known as:

generally accepted accounting principles

Subordinated debentures are:

unsecured bonds with a junior claim on assets

The cash flows of a 10% coupon bond with four years to maturity and a $1,000 par value can be replicated with:

a series of zero coupon bonds

Interest rate risk and the time to maturity have a relationship that is best described as:

direct

What is the market price of a $1,000 face value bond quoted at 97 ½%?

975.00

The top four categories of bond ratings are collectively known as __________.

investment-grade bonds

In the event a firm goes bankrupt, an investment grade senior debenture bond is more likely to receive liquidation proceeds than:

a subordinated debenture

A yield curve can be constructed using similar risk corporate bonds. The yield curves constructed with corporate bonds will __________ the U.S. Treasury yield curve.

plot above

Credit risk, or default risk, is the risk that:

Bond interest payments or the principal payment will not be made.

As market interest rates increase, the value of a bond will __________ all other things equal.

decrease

The risk-free rate of interest is used in a number of financial models. The best approximation for the risk-free rate is:

short-term U.S. Treasuries

One of the ways to protect yourself from the risk of rising interest rates is to

buy an interest rate forward contract

Bonds are often quoted as a __________, which makes an adjustment by reducing the price by the amount of any accrued interest.

clean price

The __________ measures how sensitive a bond's price is to changes in interest rates.

duration

The no-arbitrage price of a coupon bond can be calculated by discounting the annual cash flows using the respective yields of:

zero-coupon bonds with the same maturities

The present value of a bond's __________ determines the value of the bond.

coupon payment and maturity value

A bond will sell at __________ if the required return is greater than the coupon rate.

a discount

All other things equal, a corporation will pay a __________ coupon rate on __________ bonds.

higher, higher risk

A long-term debt instrument issued by a business or government to raise capital is known as a:

bond

Which of the following is one of the top three bond rating firms?

Standard and Poor's

Common stock dividends must be __________ before issued.

declared by the firm's board of directors

Gordon's growth model, also called the constant-growth model, assumes that the present value of a stock's __________ determines the value of the stock.

dividends

One of the assumptions of the constant-growth valuation model is that the growth rate is:

less than the required return.

A __________ is a feature that gives common shareholders the option of maintaining their fraction of ownership in the firm.

preemptive right

Which of the following is a limitation of the dividend-discount model?

Future dividends are difficult to predict with accuracy.

The free cash flow valuation model computes the present value of a firm's expected free cash flows and can be used:

when firms pay no dividends.

What is the value of the firm in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities are divided among the common stockholders?

Book value per share

A common trait of preferred stock is__________.

cumulative dividends

The total payout model states that the value of a share of stock is equal to the present value of:

all future dividends plus share repurchases divided by the number of shares outstanding.

When the firm uses cash to buy back its own stock it is known as a __________.

share repurchase

The total return of a stock is the dividend yield:

plus the capital gain rate.

According to the dividend-discount model, which of the following would cause a stock price to rise?

an increase in the growth rate of the dividend

A fractional share of ownership that carries voting rights is known as __________.

common stock

According to the dividend-discount model, which of the following would cause a stock price to fall?

A decrease in the growth rate of the dividend

The capital gain on a stock is the difference in the:

selling price and the purchase price of the stock.

If a firm increases its dividend payout rate the:

firm will have less cash available for new investment.

Bond Certificate

the terms of a bond as well as the amounts and dates

of all payments to be made

The promised interest payments of a bond.

coupons

The rate of return required in the market for the bond.

YTM

The bond that makes only one payment at the maturity date.

zero coupon bond

Make regular coupon interest payments and pay face value at maturity

Coupon bond

what type of bond is a treasury bill vs treasury note?

zero coupon bond, coupon bond

What type of relationship is between YTM and price?

Inverse

__ sensitivity for longer maturity and ___ coupon bonds

higher, lower

higher default risk =

lower bond rating

higher credit spread and YTM =

lower bond price

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