Finance Principles

conceptual knowledge

One of the reasons why cash flow analysis is popular is because:

it is difficult to manipulate, or spin the cash flows.

Liquidity is

valuable to a firm even though liquid assets tend to be less profitable to own.

An increase in __________blank will cause the operating cash flow of a profitable firm to increase.

depreciation

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.

As seen on the income statement of a tax-paying firm:

depreciation reduces both the pretax income and the net income.

Which one of the following statements is correct?

Earnings per share can be negative but dividends per share cannot be negative.

If total assets increase:

the change must be offset by an equal increase in liabilities and stockholders’ equity.

When comparing the financial statements of one firm with those of another firm, the least number of issues will arise if the two firms:

have the same fiscal year-end.

Paulhill Organic Produce wants to maintain its current dividend policy, which is a payout ratio of 25 percent. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Paulhill can grow is equal to:

the sustainable rate of growth.

Assume you need to compare a firm’s costs with those of its competitors, all of which are significantly larger than the firm you are analyzing. Preparing __________blank would be the best way to compare costs across the industry.

common-size income statements

Last year, Seo & Stewart had a price-earnings ratio of 12 and earnings per share of $.97. This year, the price-earnings ratio is 16 and the earnings per share is $.97. Based on this information, it can be stated with certainty that:

the investors' outlook for the firm has improved.

Which one of the following sets of ratios would generally be of the most interest to stockholders?

Return on equity and price-earnings ratio

A firm with a high level of growth opportunities is most apt to have a:

high PE ration and a high EV multiple

The most effective method of directly evaluating the financial performance of a firm is to compare the financial ratios of the firm to:

the firm's ratios from prior time periods and to the ratios of firms with similar operations

Alpha Corporation owns only fully depreciated equipment. Beta Corporation owns only new equipment, which will be depreciated over ten years. If Alpha and Beta have the same sales, costs, tax rate, and enterprise value, then:

Alpha and Beta will have the same EV multiple

Aubrey just purchased an annuity that will pay $2,500 per month for five years. The first payment was issued today. Bennett just purchased an annuity that will pay $2,500 per month for five years. The first payment will be issued one month from today. Which one of the following statements is correct concerning these two annuities?

Aubrey’s annuity has a higher present value than Bennett’s

Assume you borrow $20,000 for 6 years with equal annual repayments. If the interest rate on the actual loan turns out to be higher than you anticipated, then the:

annual payments will be higher than anticipated.

For any given interest rate, __________blank compounding will yield the highest effective annual rate.

continuous

In which way does a perpetuity differ from an annuity?

Perpetuity cash flows never cease.

An annuity is a stream of:

equal cash flows occurring at equal time periods during a fixed length of time.

A(n) __________blank is a stream of unending payments that increase by a set percentage each year and occur at regular intervals of time.

growing perpetuity

Assume a project has an initial cash outflow followed by seven years of cash inflows. If the discount rate increases, the present value will:

decrease.

For a proposed purchase to be acceptable, the PV of the future cash flows must:

equal or exceed the cost of the purchase.

Your firm is considering the purchase of a company called Frost. What rate of return should be used to compute the NPV of the proposed purchase?

The discount rate applicable to other investments with similar risks

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, respectively. Project B has projected cash flows of $4,500, $6,000, and $7,500 for the next three years, respectively. Assuming both projects have the same initial cost, the analyst knows that:

Project A is more valuable than Project B, given the same positive discount rate for each project.

The __________blank premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bondholder wish to sell the bond prior to maturity.

liquidity

All else constant, a bond will sell at __________blank when the yield to maturity is __________blank the coupon rate.

a discount; greater than

Aspen leaf is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest annually. Which one of the following statements is correct? Assume a face value of $1,000.

At issuance, the bond's yield to maturity is 5.5 percent.

The _______ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future loss in purchasing power.

inflation

Which one of these bonds is the most interest-rate sensitive?

10-year zero coupon bond

The market price of a bond increases when the:

discount rate decreases

All else held constant, interest rate risk will increase when the time to maturity:

increases of the coupon rate decreases

One advantage of the EV/EBITDA ratio over the PE ratio is the:

lessened impact of leverage on the ratio.

For a firm with a constant payout ratio, the dividend growth rate can be estimated as:

Return on retained earnings × Retention ratio.

A stock’s PE ratio is primarily affected by which one of the following sets of three factors?

Risk, opportunities, accounting practices

The underlying assumption of the dividend growth model is that a stock is worth:

the present value of the future income that the stock is expected to generate.

Singh Sport Training currently pays no dividends. The company is anticipating annual dividends of $.03, $.07, $.12, and $.25 over the next 4 years, respectively. After that, the company anticipates increasing the dividend by 2.5 percent per year. To value this stock as of today, an analyst would most likely first determine the value of:

P4

Assume you are using the dividend growth model to value stocks. If you expect the market rate of return to increase for all equity securities, then you should also expect the:

market values of all stocks to decrease.

Of the following choices, which one applies to the dividend growth model of stock valuation?

The growth rate must be less than the discount rate.

The excess return is computed by __________blank the average return for the investment.

subtracting the average return on the U.S. Treasury bill from

Which one of the following statements concerning the excess return is correct?

The greater the volatility of returns, the greater the expected excess return.

The average compound return earned per year over a multi-year period is called the __________blank average return.

geometric

One example of a nondiversifiable risk is the sudden:

outbreak of a global virus.

On a single graph, you plotted the monthly returns for two securities for the past five years. You observed that the returns of each of the two securities generally rose and fell together at the same time, and to the same degree. This indicates the securities have:

a strong positive correlation

Which one of the following is the best example of systematic risk?

Inflation increases consumer prices

Which one of the following would indicate a portfolio is being effectively diversified?

A decrease in the portfolio standard deviation

As we add more diverse securities to a portfolio, the __________blank risks of the portfolio will decrease.

total and unsystematic

Unsystematic risk:

can be effectively eliminated through portfolio diversification