UGA FINA 3000 Final Exam Study Guide

A mortgage is typically set up as an annuity due.

False

If we increase the leverage for a firm, we are basically increasing the percentage of debt on the balance sheet.

True

Good firm strategy would maximize the current ratio to keep all creditors happy.

False

The interest paid each payment in an amortized loan in constant.

False

In class, we suggested that a perpetuity is the correct formula to value a share of preferred stock.

True

If the yield to maturity is less than the coupon rate, we say that a bond trades at a premium.

True

The effective annual rate is only equal to the annual percentage rate if the compound frequency is 1.

True

With the finite stock model, we assume future dividends and a future selling price.

True

For two stock portfolio, our lowest portfolio risk would come from two stock returns that have zero correlation.

False

Our second time value of money rule states that we must adjust the payment to match the timing of the interest rate.

False

An investor builds a three-asset portfolio by purchasing 100 shares of Alpha Corporation, 200 shares of Bravo Corporation, and 125 shares of Charlie Corporation. Based on our portfolio equation, we can definitely say the largest weight in our portfolio will be for Bravo Corporation.

False

If we increase the interest rate, the present value of an investment decreases (all else equal).

True

Suppose that Dunkin announces they expected an increase in the supply chain risk going forward. Our dividend model suggests that investors will want an increased return due to the risk. This will result in a drop in the current stock price.

True

In determining the portfolio risk of a 20 asset portfolio, the individual variances are more important than the covariance terms.

False

In our current event, AirBnb had a higher market value at the time of their IPO than prior to the COVID pandemic.

True or false

In our current event, Bucees used a cascading strategy to expand the number of large stores throughout the Southeast. They would build a store, then use the profits from the store to finance the next store.

False

The average credit card owner has more than $6,000 in unpaid charges on their account.

True

Some Tesla car owners that have loans for their purchase may be "upside down" on their loan. This means that they have negative equity on the loan.

True

The FDIC decided to only insure deposits at Silicon Valley Bank up to $250,000 which led to a bank run.

False

In the financial crisis current event, the hedge fund managers wanted to "short" the housing market.

True

What answer does NOT correctly describe one of the guiding principles of finance?

a. Firms maximize wealth

b. A dollar today is worth more than a dollar tomorrow

c. The greater the risk of an opportunity, then the greater expected return on the opportunity (all else equal)

d. If we increase the leverage for a firm, shareholder risk and expected return both increase

e. Diversification reduces overall risk but is not a good investment strategy.

E

An investment pays a cash flow in exactly one year. The cash flows will increase by a constant percentage each year for 10 years. To value this investment today, which formula is the correct one to use?

a. PV of a Lump Sum

b. PV of a Growing Annuity

c. PV of an Annuity

d. PV of an Annuity Due

e. PV of a Growing Annuity

E

The US Treasury issues zero-coupon bonds to finance the government budget. The face value on each bond is $1,000, and there are positive interest rates in the economy. Which statement is NOT true regarding this issue?

a. The initial bond price will be less than $1,000.

b. The bond trades at a discount.

c. Assuming the US Government does not default, these bonds will have a value of $1,000 at maturity.

d. To find the price of a zero-coupon bond, we would use the PV of an annuity formula.

D

The interest paid each successive payment in an amortized loan is

decreasing

True

If the yield to maturity is less than the coupon rate, we say that a bond trades at a discount.

False

For a two stock portfolio, our lowest portfolio risk would come from two stock returns that have a correlation of -1.

True

In determining the portfolio risk of a 20 asset portfolio, the individual variances are less than important than the covariance terms.

True

If we increase the leverage for a firm, we are basically increasing the percentage of equity on the balance sheet.

False

According to our SML model, stock prices will increase if the Federal Reserve increases interest rates.

False

If the cost of capital is equal to the IRR, the project will have an NPV of $0.

True

A company decides the enter a business that is outside their normal scope of business activity and risk. The new business is riskier than the typical project considered by the firm. If the firm uses its usual cost of capital, there is a chance that the firm may reject a proposal that should be accepted.

False

Firms favor accelerated depreciation because it leads to higher NPVs for a capital budgeting project.

True

Firms with more cyclical revenues are likely to have a higher beta than firms with non-cyclical revenues. (all else equal)

True

Suppose a firm has five projects that are all mutually exclusive. Our strategy would be to calculate the NPV for each project and take all projects with a positive NPV.

False

If the value of accounts payable increases over the course of the year, it will create a positive impact on the firm's free cash flow.

True

The Dow Jones industrial average is calculated using the market capitalization of the selected 30 stocks.

False

MicroStrategy is financing Bitcoin purchases using convertible debt.

True

In our Apple and Google (aka Alphabet) current event, the announced discussion of using Google Gemini for Apple caused the price of Apple stock to increase.

True

Reddit's IPO was successful due to several consecutive years of positive earnings.

False

The slope of the security market line is the market portfolio risk premium.

True

Exchange traded funds are less expensive than mutual funds, but do not offer full diversification.

True or False

If the expected return on a stock is greater than its required return, we say the stock is currently overvalued.

False

When a trader engages in short selling, the risk is higher because the losses to the trader are potentially unlimited.

True

A corporation will create a forward contract to lock a future exchange rate. The corporation does this to remove exchange rate risk.

True

Dunkin announced that McDonald's will start selling their donuts later in the year. The result was an immediate increase in Dunkin's stock price.

False

In the Tesla current event, Dr. Pope said investors positive about Tesla stock are hopeful that the company's efforts in Full Service Driving and energy are successful.

True

A dividend appreciation mutual fund would likely be called an income fund.

True

Dr. Pope suggested that International Funds have more importance in your portfolio now as the United States has grown more isolated from the rest of the world.

False

Dr. Pope coaches one of his daughters in softball. What is her favorite ride at Universal Studios Orlando?

Velocicoasterfa di

A company decides to enter a business that is outside their normal scope of business activity and risk. The new business is riskier than the typical project considered by the firm. If the firm uses its usual cost of capital, there is a chance that the firm may accept a project that should be rejected.

True

The slope of the security market line is Beta.

False

Krispy Kreme announced that McDonald's will start selling theirdonuts later in the year. The result was an immediate increase in the stock price, but the stock is still priced below its IPO value.

True