BFIN 300 Final STUDY questions

You purchase a run-down home in Albany for $25,000 and spend another $25,000 to repair it. Your total in-cost is $50,000. When the work is done, you place the home back on

the market and find that it’s worth $60,000. What is your NPV?

$10,000

What is the difference between an investment’s market value and cost?

Net Present Value (NPV)

As a financial manager, what will you do with an investment if its Net Present Value (NPV) is negative?

Reject the investment

Which investment technique yields the same result as Net Present Value (NPV)?

Internal Rate of Return

Which statement is true regarding the Internal Rate of Return (IRR)?

It is the discount rate which makes the Net Present Value of an investment equate to zero

What is the best definition of an opportunity cost?

The most valuable investment alternative given up if a particular investment is undertaken

What is considered a relevant cash flow for a project?

A change in the Firm's overall future cash flows that comes about as a direct consequence of a decision to take on that project

What are some common pitfalls when looking at incremental cash flows?

Not including side effects of doing the deal

An example of erosion when taking on a new project would be?

Disney adding a new park in Shanghai which would erode or cannibalize Hong Kong Disney and Tokyo Disney revenues

What are pro forma financial statements?

Financial statement projecting future years operations, Working capital summaries, Changes to working capital, The three components of a cash flow statement

Which type of company analysis only allows for one variable to change?

Sensitivity Analysis

Which type of company analysis considers the inter-relationships between different cash flow components?

Simulation Analysis

If a company is in violation of a financial covenant and is precluded from accessing funding to undertake a positive NPV project, what type of situation what kind of capital rationing would this be considered?

hard rationing

Which of the following is a true statement about “operating leverage”?

The greater the degree of operating leverage, the greater the potential for forecasting risk, Suggests that a business is capital-intensive, The degree to which a business relies on fixed costs, Small errors in operating leverage can magnify problems in forecasting

Steve “Uncle Stevie” Cohen is speaking to David Stearns about “efficient capital markets theory”. Uncle Stevie would be correct if he stated the following about “efficient capital markets”:

A market in which a security trades is priced efficiently, Based on available information, there is no reason that the current share price is too high or too low, Although market inefficiencies may exist, they are relatively small and uncommon, The theory is nonsense and is just taught so professors can sell textbooks

How is return on investment (ROI) of an equity security calculated?

Adding the capital gain percentage to the dividend yield

How is return volatility on a security measured?

Variance and standard deviation, Normal distribution, Bell curve

Brandon Nimmo has a $10,000,000 portfolio, of which $500,000 is in bond, $3,000,000 is in alternative investments, and the remainder in equities. What is his equity portfolio weight?

65%

Tom “Tom Terrific” Seaver is looking to eliminate unsystematic risk in his portfolio which comprises 2 mm shares of Tesla. What is the best way he can go about doing that?

Diversify with shares in multiple industries

Mike Piazza is asking you to tell him about the Capital Asset Pricing Model (CAPM). What will you tell him?

CAPM shows the expected return for a particular asset, CAPM incorporates the pure time value of money, CAPM explains the reward for bearing systematic risk, CAPM alerts you to the amount of systematic risk of a particular security

The Flushing Queens Brewery is 70% funded with debt at an after-tax cost of 9%, while the cost of equity is 12%. What is the Flushing Queens Brewery weighted average cost of capital (WACC)?

9.9%

How is the cost of equity calculated?

Dividend Growth model approach, Security Market Line approach, Bloomberg terminal

Which one of the following is the financial statement which shows the accounting value of a firm's equity as of a particular date?

balance sheet

Net working capital is defined as:

Current assets minus current liabilities

Which one of these set forth the common set of standards and procedures by which audited financial statements are prepared?

Generally accepted accounting principles

Which one of the following accounts is the most liquid?

Accounts Receivable

The process of planning and managing a firm's long-term investment is called:

capital budgeting

Which of the following forms of business organization is subject to double taxation?

corporation

Technically, control of a firm ultimately rests with.

Shareholders

Which of the following should a financial manager take into account when considering an opportunity?

How much cash they expect to receive) When will they receive the funds) How likely they are to receive the funds

Which one is a financial leverage ratio?

debt to equity

Which of the following ratios are considered market-based ratios?

P/E ratio and P/BV ratio

Noncash items refer to:

Expenses which do not directly affect net cash flows

Which of the following are current assets?

Cash and Accounts Receivable

Which of the following are included in current liabilities?

Account payable to a supplier that is due next week and loan payable to the bank in 10 months

Which one of the following statem ents concerning net working capital is correct?

Net working capital may be a negative value

A business partner whose potential financial loss in the partnership will not exceed his or her investm ent in that partnership is called

Limited partner

Which of the following accounts are always included in working capital m anagement?

Accounts Payable and Accounts Receivable

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?

Maximum loss limited to the capital invested

Which of the following represent cash outflows from a corporation?

Payment of dividends and Payment of government taxes

The sources and uses of cash over a period of time are reflected on the:

statement of cash flow

Which one of the following is a source of cash for a firm?

Increase in common stock

Which is a measure of a company's liquidity?

quick ratio

What are bond yields are the combined effect of?

Inflation, Rate risk, Default risk, taxability

What does the phrase inversely proportional mean when it comes to bonds?

Interest rates declining, bond values increasing

Interest earned on both the initial principal and the interest reinvested from the prior periods is called:

compound interest

Wells Fargo is charging you 1.5% per month on your credit card. What is your Annual Percentage Rate (APR)?

18%

Aaron Judge invested $2,000 six years ago at 4.5%. He spends his earnings as soon as he earns any interest so he only receives interest on his initial investment. Which type of interest is Mr. Judge earning this year?

simple interest

Which best describes a secondary market?

london stock exchange

What does a market dealer do?

Buys and sells for its own account

Which is an example of an interest only (I/O) security?

corporate bond

Tesla has a 2021 profit before tax of $10,000,000, a tax rate of 20%, and debt due in 2027 of $19,000,0000. Its depreciation and amortization for 2021 aggregates $3,000,000. What is its approximate cash flow in 2021?

$11,000,000

What is the real rate of interest?

Interest rate less the inflation rate

Who is the primary regulator of the US securities markets?

Securities and Exchange Commission

Which security has a "residual claim" on a company's cash flows?

treasury bond

What is the best definition of a derivative in the context of securities markets?

A security where the value is based on the value of another security

A Pfizer bond pays an 8% coupon rate on a bond provided that its return on equity (ROE) exceeds 8%. Which type of security is this?

income bond

Which two cash flows are received by a typical bond?

Interest and principal at maturity

A bonds coupon rate is equal to the annual interest divided by which one of the following?

face value

Protective covenants:

Are primarily designed to protect bondholders

The process of determining the present value of future cash flows in order to know their worth today is referred to as:

Discounted cash flow valuation

Bank of Princeton's balance sheet shows current assets of $6,300, fixed assets of $32,000, total long-term liabilities of $16,200 and total equity of $18,100. What is Bank of Princeton's current ratio?

1.58x

You received a $100 bond as a gift. The bond will mature in 1 year and yields 6% annually. How much was paid for this bond?

$94.34

You have $500 today in an account yielding 10% annually. In one year, you will deposit another $500 which will also yield 10% annually. Assuming annual compounding, how much will you have in the account two years from today?

$1,225

You receive a perpetual cash flow of $3,000 every year at a rate of 12%. What is the value of this investment

$25,000

You are offered a rate of 8% compounded monthly. What is your effective annual rate?

8.60%

You have a $400 annuity with a rate of 8% for 3 years. What should you pay for this annuity

$1296.00

What is a normal yield curve?

Long term rates exceed short term rates

Which represents the total return on common stock?

Capital gains yield and Interest yield

What is the best definition of corporate finance?

Time value of money

What does your professor think of the Dividend Discount Model/Gordon Growth Model?

Thinks it never provides anything close to the correct answer due to the number of assumptions

Which index is the best measure of the New York Stock Exchange?

S&P 500 Index

Which best explains a sukuk?

Non-interest paying security

Which is the best definition of an annuity?

A cash flow stream where a fixed amount is received every year

Who is the current US Federal Reserve Board Chairman?

Jerome Powell

What does an individual financial statement measure on its own?

Close to nothing

Which company did we not review in detail in class?

Citigroup

Grandma gave you a $100 US Savings bond for your 10th grade birthday, which just so happens to mature on your 12th grade birthday. The prevailing market rate of interest is 8.00%. What is the value of your US Savings bond on your 12th grade birthday?

$100.00

Which bond is 100% exempt from being taxed by the United States government?

municipal

Who is the current US Treasury Secretary?

Janet Yellen

Jamie Foxx attended your high school in the 1980s and today gave all recent alums a $100 US Savings bond, including yourself. If the value of what he paid for your bond is $90.90, what is your bond’s discount rate?

10.00%

Jay Z earned $500,000 for a one-night singing gig in Macau, a zero-tax jurisdiction. He immediately wired those funds to Butterfield Bank in the

British Virgin Islands as a three-year bank deposit. Mr. Z earns 7% on her money each year. What is the value of her deposit after three years?

$612,522

Mr. Kodai Senga recently signed a two-year pitching contract with the New York Mets at $1,000,000 per year. His tax rate is 40% per annum and Senga-san receives his

money at the end of each year. He lives with his best friend, Mr. Shohei Ohtani, in Queens, New York. Mr. Senga doesn’t have any expenses. He deposits his net wages at

the end of every year at a rate of 5.0%. What is the value of Senga-san’s deposit after year two?

$1,230,000

Former President Barack Obama goes on the university speaking circuit for three months per year. He receives $250,000 net of taxes per speaking engagement. His

speaking engagements are monthly and began on January 31, 2023. To date, he has spoken at Stanford and Johns Hopkins, with his last stop at UAlbany on March 31, 2023.

President Obama deposits his funds in his account at Cape Cod Bank & Trust upon receipt. He earns 12% on his deposit per annum paid monthly. What is the cumulative

value of his money on March 31, 2023?

$757,525

A bank quotes an interest rate of 14% per annum on your auto loan, which compounds monthly. What is the 14% interest rate called?

Stated

The UAlbany Business Investment Group (UABIG) purchased 14,750 shares of Firestone Tire at $1.50/share one year ago today. UABIG disposes of the shares at

$1.25/share today. During the period, Firestone shares yielded 2.0%. What was UABIG’s total return on its Firestone investment?

negative 14.7%

Your former classmate, Gigi, works at Morgan Stanley. You call her up to place a short-sell market order on 50,000 shares of Amazon (AMZN.US). Morgan Stanley is not a market maker for this security. What is Gigi’s role in this specific transaction?

broker

Which is a money market security?

T-Bill

What is the best definition of an annuity?

A cash flow stream where a fixed amount is received every year

Based in New Jersey, your classmate Caden is employed as a broker for Bank of America Merrill Lynch (BAML). Who is Caden and BAML’s primary regulator?

Securities and Exchange Commission

What is SpaceX’s profit margin, if it has net income of $50,000 and total revenue of $200,000?

25%

American Airlines has net income of $500,000 and shareholders’ equity of $2,000,000. What is AA’s Return on Equity (ROE)?

25%

Alphabet had $200,000 in cost of goods sold (COGS) and an average inventory value of $50,000. What is the inventory turnover ratio for Alphabet?

4

SingTel has total liabilities of $500,000 and total assets of $1,000,000. What is SingTel’s debt ratio?

50%

Cathay Pacific has current assets of $200,000 and current liabilities of $150,000. What is Cathay Pacific’s current ratio?

1.2

What does the time value of money (TMV) concept primarily emphasize?

The importance of considering the timing of cash flows when making financial decisions

What does the current ratio measure?

short-term liquidity

Microsoft has a stock price of $60 per share and earnings per share (EPS) of $4.50. The company recently announced a 2-for-1 stock split, and as a result, the number of outstanding shares has doubled. Calculate the new P/E ratio for Microsoft after the stock split.

15.0

What does your professor think of the Dividend Discount Model/Gordon Growth Model?

Thinks it never provides anything close to the correct answer due to the number of assumptions.

Which of the following best describes the primary purpose of the Federal Reserve in the United States?

Monetary policy regulation