Final FIN

The present value of an uneven cash flow can be determined by using the annuity equations.

False

If Standard & Poor's ratings of a firm's bonds is below BBB, the _____.

firm will find it difficult to find potential investors when issuing new bonds

Helium Brands Ltd. has a beginning balance of retained earnings of $185 million. Helium has a net income of $48 million and has paid a dividend of $15 million in the current year. What is the ending balance of retained earnings?

$218 million

A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 8 percent, and if you require a 14 percent rate of return, how much should you be willing to pay for this stock? (Round intermediate calculations to two decimal places.)

$43.96

Smith and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's cost of preferred stock is 11 percent and its cost of retained earnings is 14 percent. The firm expects to generate $15,000 in retained earnings this year. Compute the weighted average cost of capital (WACC) break point associated with issuing new common stock.

$30,000

Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday? (Round the answer to two decimal points.)

15.19 years

If the opportunity cost rate is 8 percent, compounded annually, what is the present value of $8,200 due to be received in 12 years? (Round the answer to the nearest whole dollar.)

$3,256

Which of the following statements is correct?

The net present value (NPV) technique provides an indication of the dollar benefit (on a present value basis) to the firm's shareholders of purchasing a capital budgeting project.

A bond backed by tangible (real) assets is known as a _____.

mortgage bond

Considering the economic value added (EVA) of a firm, which of the following should increase the firm's value?

EVA > 0

The _____ on a bond is the cost to the firm for using bondholders' funds.

yield to maturity (YTM)

If a German company sells its stock in the United States, it is called a(n) _____.

Yankee stock

The risk that is limited to a particular firm is also known as _____.

unsystematic risk

Diversification refers to the reduction of the _____.

stand-alone risk of an individual investment, which is measured by the standard deviation of its returns, by combining it with other investments in a portfolio

On January 1 of the current year, the price of a stock is $42.50, whereas on December 31 of the current year, the price of the stock is $48.78. Determine the capital gain yield of the stock.

14.78%

Which of the following securities generates a return that is closest to a risk-free rate of return?

Treasury bill

Other things held constant, a risk-averse investor requires a higher return to invest in securities with higher risks, which means they will pay lower prices for such investments.

True

Bicksler Corporation has a current ratio of 2.0 on July 21 of the current year. On July 22, Bicksler purchased (and received) raw materials on credit from its supplier. Assuming all other things are equal, how will this transaction affect the current ratio of Bicksler?

The value of the current ratio will decrease.

The firm's statement of retained earnings reports changes in the _____.

common equity accounts between balance sheet dates

When evaluating multiple independent projects, a firm will reach the same conclusions about the acceptability of each project using either the net present value (NPV) technique or the internal rate of return (IRR) technique.

True

An investment firm is selling a new product that will pay $100 at the end of each of the next 20 years. If the new investment costs $1,246 to purchase, what is its internal rate of return (IRR)?

5%

A share of a preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is currently $50, what is the simple annual rate of return?

20%

Which of the following financial statements summarizes the revenue generated and the expenses incurred by a firm during the accounting period?

Income statement

GP&L sold $1,000,000 of 12 percent, 30-year, semiannual payment bonds with a face value of $1,000, 15 years ago. The bonds are not callable, but they do have a sinking fund, which requires GP&L to redeem 5 percent of the original face value of the issue each year ($50,000), beginning in Year 11. To date, 25 percent of the issue has been retired. The company can either call bonds at par for sinking fund purposes or purchase bonds in the open market, spending sufficient money to redeem 5 percent of the original face value each year. If the current market yield of the bonds is 14 percent, what is the least amount of money GP&L must put in to satisfy the sinking fund provision for the next redemption?

$43,796

Which of the following statements is true of a bond?

The maturity date of a bond is contractually fixed.

Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements. Trend analysis is one method of measuring a firm's performance over time.

True

When the market value of debt is the same as its par value, it is _____.

selling at its face value

The Security Market Line (SML) relates the risks of individual securities to their required rate of return. If investors conclude that the inflation rate is going to increase, which of the following change would occur?

The required returns on all stocks will increase.

Assume Valentina is considering combining two investments to form a portfolio, and she is very concerned with the risk that will result from the combination. If she wants to attain the greatest effect from diversification, she would prefer that the assets _____.

are negatively related

If a firm's existing quick ratio is 1.2, and all other variables remain unchanged, the quick ratio can be increased by _____.

receiving interest income

Which of the following mathematical expressions is used to compute the net working capital of a firm?

Net working capital = Current assets − Current liabilities

The rates of return, or costs, that a firm must pay to raise funds to invest in capital budgeting projects are determined by the _____.

investors who purchase the firm's stocks and bonds in the financial markets

Stock prices move opposite to the changes in the dividends stockholders expect to be paid in the future, but they move in the same direction as changes in rates of return.

False

Which of the following is true about the change in a stock price?

If investors demand higher returns to invest in stocks, then stock prices should fall

An investor just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid every six months. If the investor expects to earn a 10 percent simple rate of return on this bond, how much should the investor pay for it?

$875.38

There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower (worse).

True

The price-earnings (P/E) ratio gives an indication of _____.

the payback period of a stock

In capital budgeting analyses, the primary difference between the traditional payback period (PB) technique and the discounted payback period (DPB) technique is that the DPB _____.

considers the time value of money

Super Solutions Inc. just paid a dividend equal to $3.00 per share. Its stock sells for $33.00 per share, it is growing at an annual rate equal to 6 percent, which is expected to continue long into the future. What is Super's cost of retained earnings?

15.64%

Which of the following cost of capital measures must be adjusted to account for tax savings?

Cost of debt, which is measured as the debt's yield to maturity (YTM)

A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If an investor's simple annual required rate of return is 12 percent, how much should the investor be willing to pay for this bond?

$1,115.57

Which of the following statements about the security market line (SML) and investor's risk aversion is correct?

The steeper the slope of the line, the greater the average investor's risk aversion, and thus the greater the return investors require as compensation for risk.

A typical common stock issue has a maturity period of 10 years.

False

SW Inc.'s preferred stock, which pays a $5.25 dividend each year, currently sells for $62.50. The company's marginal tax rate is 40 percent. When it issues preferred stock, SW normally incurs flotation costs equal to 8 percent. What is the cost of preferred stock, r_ps, that should be included in the computation of the SW Inc.'s weighted average cost of capital (WACC)?

9.13%

The marginal cost of capital (MCC) schedule generally rises, which implies that the weighted average cost of capital _____.

generally increases because the firm incurs higher flotation costs and higher financial risk as it raises more funds through new debt and new equity issues

Which of the following statements best describes the post-audit function in the capital budgeting process?

The post-audit involves comparing the actual results of previous capital budgeting decisions with the forecasted results to identify and explain any differences.

Federal funds represent _____.

loans from one bank to another bank

In most instances, the payment of utility bills is an example of _____.

uneven cash flows

The post-audit is a simple process in which actual results of capital budgeting analyses are compared with forecasted results and only discrepancies that result from factors that are completely under management's control are evaluated further.

False

Which of the following statements is true about foreign bonds?

Foreign bonds are bonds sold in a foreign country and are denominated in the currency of the country in which the issue is sold.

Which of the following is generally considered an advantage of term loans over corporate bonds?

Speed, or how long it takes to bring the issue to the market

A firm's cost of external equity capital (cost of issuing new stock) is equal to the rate of return that stockholders demand (require) to invest in the firm's outstanding common stock.

False

Which of the following is considered as a liability in the balance sheet of a firm?

Corporate bonds

A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. Calculate the bond's yield to maturity.

11.26%

An investment carries an interest rate of 8 percent compounded annually. When using the time value of money functions of a financial calculator, the interest rate is entered as 8, whereas it is entered as 0.08 when using a spreadsheet to make the time value of money calculations.

True

Mortgage bonds are backed by assets of the issuing firm, whereas debentures are not.

True

A call provision included with a sinking fund effectively adds a maturity option to a preferred stock issue.

True

Which of the following statements about the marginal cost of capital is correct? Assume everything else is equal.

An increase in the tax rate will decrease a firm's marginal cost of debt.

LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of Investment A and Investment B?

9.38 percent and 10.25 percent, respectively

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The face value of the bond is $1,000. The required simple rate of return on this debt has now risen to 16 percent. What is the current value of this bond?

$550

If the standard deviation of returns from an investment is zero, then _____.

there is no risk associated with the investment; that is, the investment is risk free, because there is only one possible payoff

If there are two bonds with a simple interest rate yield of 9 percent, but one bond is compounded quarterly while the other bond is compounded monthly, the bond with quarterly compounding will have a higher effective annual yield.

True

In the economic value added (EVA) equation, the _____ is subtracted from the after-tax operating income to determine the EVA.

average cost of invested capital

A limitation of ratio analysis is that _____.

firms can employ window-dressing techniques to make their financial statements look better

Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity. The firm expects to earn $150,000 in after-tax income during the coming year, and it will retain 30 percent of those earnings. What is the break point of retained earnings?

$75,000

Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased. By forecasting the needs for capital assets in advance, a firm will have an opportunity to purchase and install assets before they are needed.

True

Suppose a capital budgeting project generates its largest cash flows in the early years of its life
(i.e., up front) rather than near the end of its life. In this situation. Which of the following statements about the project must be correct?

The net present value of the project is not as sensitive to changes in the firm's required rate of return as the net present value of a project that generates large cash flows later in its life.

Which of the following statements about the internal rate of return (IRR) capital budgeting technique is correct?

It is the discount rate that equates the present value of a project's expected future cash flows to the initial amount invested.

When generating financial statements, the Securities and Exchange Commission (SEC) allows publicly traded foreign companies to use the International Financial Reporting Standards (IFRS) rather than the Generally Accepted Accounting Principles (GAAP) if IFRS is the accounting system used in their home country.

True

The _____ of an investment is a measure of the tightness, or variability, of its set of returns.

standard deviation of the returns

Which of the following statements about relevant risk and irrelevant risk is correct?

Relevant risk includes interest rate risk, but excludes a firm's default risk.

Banks that need additional funds to meet the reserve requirements of the Federal Reserve _____.

borrow from banks with excess reserves

Dividing the standard deviation of the returns of a stock by the stock's expected return gives us the stock's _____.

coefficient of variation

Which of the following ratios indicate how much investors are willing to pay for a firm's stock for each dollar of reported profits?

Price/earnings ratio

Selzer Inc. sells all of its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64. What is the firm's return on equity (ROE)?

3.3%

Identify the correct equation for calculating the present value of an investment. (Assume r stands for rate of return and n stands for number of periods interest is earned.)

Present value = Future value / (1 + r)ⁿ

A comparison of a firm's ratios with those of other firms in the same industry at the same point in time is called _____.

comparative ratio analysis (benchmarking)

Modified internal rate of return (MIRR) is the discount rate that forces the present value of a project's terminal value to equal the _____.

present value of its cash outflows

The ratings of a firm's bonds are based on _____.

no precise formula

The amount in excess of par value that a company must pay when it repurchases a security is known as the _____.

call premium

A protective feature on a preferred stock that requires preferred dividends that were not paid in previous years to be disbursed before any common stock dividends can be paid is called _____.

cumulative dividends

Everything else equal, an asset's value is _____.

inversely related to the rate of return investors require to purchase it

The book values of shares of stock are always equal to their market values.

false

Eurobonds have a higher level of required disclosure than normally applies to bonds issued in domestic markets, particularly in the United States.

false

Which of the following is an example of a noncash item reported in the income statement of a firm?

Depreciation

Omega Inc. expects its net income to be $525,000 this year. The firm's dividend payout ratio is 60 percent. The firm is financed with 30 percent debt, and it has no preferred stock outstanding. What is the retained earnings break point for Omega Inc.?

$700,000

Which of the following changes is considered a source of cash when preparing a statement of cash flow?

A decrease in inventories

A bond that pays no annual interest but is sold at a discount below its par value is called a _____.

zero coupon bond

Which of the following actions can be considered a source of cash when constructing a statement of cash flows?

Increase in long-term bonds

The current expected value of a stock is $32. If investors demand a higher rate of return of 10 percent instead of the 8 percent rate of return, what will the impact on the stock price of the firm be?

The stock price will decrease as a result of the higher rate of return demanded by investors.

A firm has 1,000 shares of common stock outstanding with a par value of $15 per share. Upon liquidation, the firm has insufficient funds and requires an additional $5,000 to repay its creditors. Which of the following statements is true about the common shareholders' financial obligation?

If the share is purchased for $10, the stockholders are obligated to contribute $5 per share to the firm.

Omega Software Corporation's bond with a face value of $1,000 is currently selling at a premium in the financial markets. If the bond's yield to maturity is 11.5 percent, then the bond's _____.

coupon rate of interest must be greater than 11.5 percent

In which order will assets be listed in a balance sheet?

In order of liquidity

Nahanni Treasures Corporation is planning a new common stock issue of five million shares to fund a new project. The increase in shares will bring the number of shares outstanding to 25 million. Nahanni's long-term growth rate is 6 percent, and its current required rate of return is 12.6 percent. The firm just paid a $1.00 dividend, and the stock sells for $16.06 in the market. On the announcement of the new equity issue, the firm's stock price dropped. Nahanni estimates that the company's growth rate will increase to 6.5 percent with the new project, but as the project is riskier than average, the firm's required return on stock will increase to 13.5 percent. Using the constant growth dividend discount model, what is the change in the equilibrium stock price?

–$0.85

Which of the following is true of founders' shares?

Founders' shares are stocks owned by the creators of a company that have sole voting rights but generally pay out only restricted (if any) dividends for a specified number of years.

The before-tax cost of debt, rd, is the same as the _____.

yield to maturity (YTM) associated with the firm's bonds

A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has a debt of $7,500,000, total assets of $22,500,000, and an interest cost on a total debt of 5 percent, what is the firm's return on total assets (ROA)? (Round answer to two decimal places.)

13.33%

When considering two mutually exclusive projects, the financial manager should always select the project with the higher internal rate of return, provided the projects have the same initial cost.

false

Which of the following statements about beta is correct?

Firms with greater systematic risk volatilities than the market have betas that are greater than 1.0, and firms with smaller systematic risk volatilities than the market have betas that are less than 1.0.

If a bond is callable and if interest rates in the economy decline, then the company can sell a new issue of low-interest-rate bonds and use the proceeds to "call" the old bonds in and effectively refinance its debt at a lower rate.

true