Corporate Finance Fundamentals

Which financial statement provides a snapshot of a firm's financial position at a given point in time?

The balance sheet

The balance sheet is also called the:

Statement of financial position

Which of the following is a valuation (market value) ratio?

Enterprise value to sales

A market-to-book ratio below 1.0 means that:

The market value of equity is less than its book value

Market capitalization is calculated as:

Share price × shares outstanding

Accounts payable represents:

Amounts the firm owes suppliers for purchases made on credit

Gross profit is equal to:

Sales minus cost of sales

The income statement is also called the:

Profit and loss (P&L) statement

Why might an analyst use fixed asset turnover instead of total asset turnover?

Total assets include assets that are not directly involved in generating sales

An equity multiplier of 1.0 means that the firm:

Has no liabilities; its assets are financed entirely by equity

A higher inventory turnover generally indicates that:

Inventory is being sold more quickly

Earnings per share (EPS) is calculated as:

Net income ÷ shares outstanding

The book value of a long-term asset equals:

Its acquisition cost less accumulated depreciation

The quick ratio excludes inventory from current assets because:

Inventory may be hard to convert into cash quickly

Operating margin shows:

How much the firm earns before interest and taxes from each dollar of sales

Ratio analysis is most useful when a firm's ratios are compared:

Over time and with similar firms in the industry

Asset turnover measures:

How efficiently a firm uses its assets to generate sales

Why do analysts often look at EBITDA?

Depreciation and amortization are non-cash expenses, so EBITDA reflects cash earned from operations

Which liquidity ratio is the most stringent (conservative)?

Cash ratio

Return on assets (ROA) compares net income to:

Total assets

Enterprise value measures:

The value of the firm's business to all investors (debt and equity), net of cash

An increase in a firm's inventory days most likely means that:

Inventory is taking longer to sell

Net working capital is calculated as:

Current assets minus current liabilities

Accounts receivable represents:

Amounts owed to the firm by customers who bought on credit

Liquidity ratios mainly help answer which question?

Can the firm meet its current obligations?

Which of the following is a current asset?

Inventories

The debt-equity ratio can be calculated using:

Either book values or market values

Net debt is calculated as:

Total debt minus cash and short-term investments

Firms with high market-to-book ratios are often called:

Growth stocks

Two firms have the same profit margin and asset turnover, but Firm X has a higher equity multiplier. According to DuPont analysis, Firm X has:

A higher ROE

The PEG ratio compares a firm's P/E ratio to its:

Expected earnings growth rate

Net profit margin shows:

The fraction of each sales dollar available to equity holders after all expenses, interest, and taxes

An increase in accounts payable days means the firm is:

Taking longer to pay its suppliers

Retained earnings represent:

Profits the firm has earned but not paid out to owners

Public U.S. companies file their annual financial statements with the SEC on which form?

Form 10-K

A current ratio of 0.8 means that:

Current liabilities are larger than current assets

The interest coverage (times interest earned) ratio measures:

How easily a firm can cover its interest payments

Which of the following is a current liability?

Notes payable due within one year

When computing enterprise value, the firm's cash is:

Subtracted

The debt-to-capital ratio measures:

The fraction of the firm financed by debt

Which of the following S&P ratings is investment grade?

BBB

The time remaining until a bond's repayment date is called its:

Term

Interest rate risk is:

The risk that changes in interest rates will change bond prices

If a bond sells at par, the investor's return comes only from:

The coupon payments

The yield to maturity of a bond is:

The discount rate that sets the present value of the bond's promised payments equal to its current price

A bond's credit rating depends mainly on:

The issuer's risk of bankruptcy and bondholders' claim to assets in bankruptcy

Most issuers set the coupon rate so that their bonds initially trade:

At or very close to par

Which of the following issue bonds?

Both governments and corporations

Compared with safer firms, corporations with higher default risk must:

Pay higher coupons (yields) to attract buyers

A bond's coupon rate is:

Set by the issuer and stated on the bond certificate

U.S. Treasury bills are:

Zero-coupon government securities with maturities of up to one year

When interest rates are positive, a zero-coupon bond always trades:

At a discount to its face value

When an investor buys a newly issued bond, the investor is:

Lending money to the issuer

The credit spread is the difference between:

A corporate bond's yield and the yield on a comparable Treasury

U.S. Treasury notes have original maturities of:

One to ten years

Which of the following is one of the best-known bond rating agencies?

Moody's

A bond whose coupon rate equals its yield to maturity trades:

At par

For a bond with default risk, a higher yield to maturity:

Does not necessarily mean a higher expected return

Credit risk (default risk) is the risk that:

The issuer will not make the promised payments

Most bonds are interest-only loans, which means that:

Interest is paid during the bond's life and the principal is repaid at maturity

A zero-coupon bond generates which two cash flows for the investor?

The purchase price paid and the face value received at maturity

All else equal, which bond has the greatest interest rate risk?

A 30-year bond

A yield curve plots bond yields against:

Time to maturity

A bond whose coupon rate is below its yield to maturity trades:

At a discount

If a bond is trading at a premium, its yield to maturity is:

Lower than its coupon rate

U.S. Treasury bonds have original maturities of:

More than ten years

When bond prices are quoted, they are conventionally quoted per:

$100 of face value

Zero-coupon bonds are also called:

Pure discount bonds

Bond traders usually quote bonds in terms of:

Yields rather than prices

All else equal, bonds with higher coupon payments have:

Lower interest rate risk

For an investor who plans to hold a stock for N years, the stock price equals the present value of the dividends over N years plus:

The present value of the expected sale price in year N

Preferred stock dividends are usually:

Fixed as a percent of par value

Nasdaq is best described as:

A dealer market

When a firm has Class A and Class B common stock, the classes usually differ in their:

Voting rights

A market order is an order to buy or sell a stock that:

Executes immediately at the most favorable available price

If a firm has just paid a dividend of Div₀, to use the constant growth model you should first:

Multiply Div₀ by (1 + g) to get Div₁

Cumulative preferred stock means that:

Unpaid preferred dividends must be paid before any common dividends

For legal and tax purposes, preferred stock is treated as:

Equity

An investor should consider buying a stock when its market price is:

Below its intrinsic value

The two sources of cash flow from owning a stock are:

Dividends and the proceeds from selling the shares

Common stockholders vote to elect the firm's:

Board of directors

Holding other factors constant, a higher equity cost of capital will cause the stock price to:

Decrease

There is a tradeoff between current dividends and growth because:

 

Paying higher dividends leaves less money to invest in growth opportunities

Preferred stock is similar to a bond because it:

Pays fixed dividend payments

A stock's equity cost of capital equals:

The expected return of other investments with equivalent risk

Proxy voting allows a shareholder to:

Authorize another person to vote their shares on their behalf

The New York Stock Exchange (NYSE) is best described as:

An auction market

In a nonconstant growth model, the terminal value (P_N) is usually found by:

Applying the constant growth model once dividends begin growing at a constant rate

Common stock dividends can be paid only after:

Interest on debt and preferred dividends are paid

A stock's intrinsic value is:

The price a rational investor is willing to pay given its risk and expected cash flows

The expected future cash flows of a stock are discounted at the:

Equity cost of capital

Valuing stocks is more complex than valuing bonds for all of the following reasons EXCEPT:

Stock cash flows are fixed by contract

Which of the following would NOT increase a firm's future dividend per share?

Issuing many new shares

Holding other factors constant, a higher expected dividend growth rate (g) in the constant growth model will cause the stock price to:

Increase

The constant dividend growth model is based on the formula for a:

Growing perpetuity

A stock's dividend yield is:

The expected dividend divided by the current share price

Preferred stock is similar to common stock because:

Its dividends are not required to be paid and it has no maturity date

If you pay more for a stock than the price given by the dividend discount model, your expected return will be:

Less than the equity cost of capital

A nonconstant (multistage) growth model is most useful when a firm:

Currently pays no dividends or has unusually high growth for a few years

In the constant dividend growth model, Div₁ is:

The dividend expected next year