Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off
Reading...
Front

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key

image

Play button

image

Play button

image

Progress

1/78

Click to flip

78 Cards in this Set

  • Front
  • Back
SYSTEMATIC RISK
a 27. The systematic risk of the market is measured by:
a. a beta of 1.0.
UNSYSTEMATIC RISK
c 29. Which one of the following is an example of unsystematic risk?
c. an oil tanker runs aground and spills its cargo
MARKET RISK PREMIUM
d 37. The market risk premium is computed by:
d. subtracting the risk-free rate of return from the market rate of return.
MARKET RISK PREMIUM
b 38. The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-
free asset is referred to as the
b. market risk premium.
DIVERSIFICATION AND RISK
c 40. Diversification can effectively reduce risk. Once a portfolio is diversified, the type of risk remaining is:
c. risk related to the market portfolio.
BETA
b 44. Beta measures:
b. how an asset covaries with the market.
CAPITAL ASSET PRICING MODEL (CAPM)
e 50. According to the Capital Asset Pricing Model
e. the expected return on a security is positively and linearly related to the security's beta.
EXPECTED RETURN AND BETA
c 53. When a security is added to a portfolio the appropriate return and risk contributions are:
c. the expected return and the beta.
CORRELATION
d 56. You have plotted the data for two securities over time on the same graph, i.e., the month return of each security for the last 5 years. If the pattern of the movements of the two securities rose and fell as the other did, these two securities would have:
d. a strong positive correlation.
COVARIANCE
a 57. If the covariance of stock 1 with stock 2 is -.0065, then what is the covariance of stock 2 with stock 1?
a. -.0065
CAPM
e 70. According to the CAPM:
e. the expected return on a security is positively and linearly related to the security’s beta.
BETA
a 73. The beta of a security is calculated by:
a. dividing the covariance of the security with the market by the variance of the market.
RISK PREMIUM
d 79. Zelo, Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Zelo stock?
d. 6.77%
CAPITAL ASSET PRICING MODEL (CAPM)
d 101. The risk-free rate of return is 4% and the market risk premium is 8%. What
is the expected rate of return on a stock with a beta of 1.28?
d. 14.24%
CAPITAL ASSET PRICING MODEL (CAPM)
e 102. The common stock of Flavorful Teas has an expected return of 14.4%. The
return on the market is 10% and the risk-free rate of return is 3.5%. What
is the beta of this stock?
e. 1.68
ACCRUED INTEREST
b 46. Accrued interest must be paid annually on a 7% coupon paying $1,000 par bond bought between interest dates. On January 1st you bought a bond issues by the Hardy Can Company. with interest dates of April 15th and September 15th. Approximately how much of the amount you paid for the bond was accrued interest?
b. $20.42
CALL PREMIUM
c 47. Chevalier Manufacturing issued a callable bond with a 2016 maturity date. The bond was sold at par and the call premium was set equal to the coupon rate of 20%. A declining call premium was also in place so that the premium declined evenly over the last ten years of premium to zero. What would be the call premium if the bond was called in 2007?
c. $180
BOND COUPON
b 48. What is the correct coupon amount if the bond is priced to sell at par?
b. $ 75.42
BOND PRICE
c 49. If the coupon were set to $70 what would the bond sell for?
c. $ 964.25
BOND COUPON
d 54. If the bond sells for par today, what is the coupon?
d. $75.62
BOND PRICE
b 55. What is the bond's value today if the coupon is set at $70?
b. $946.70
TYPES OF LEASES
b 5. Which of the following is not a financial lease?
b. An operating lease
TYPES OF LEASES
a 6. If the lessor borrows much of the purchase price of a leased asset, the lease is called:
a. a leveraged lease.
OPERATING LEASE
b 7. An operating lease's primary characteristics are:
b. not fully amortized, lessor maintains equipment and there is a cancellation clause.
FINANCIAL LEASE
e 10. A financial lease has which as its primary characteristics:
e. is fully amortized, lessee maintains equipment and there is a renewal clause and a no cancellation clause
LEVERAGED LEASE
d 12. A leveraged lease typically involves a non-recourse loan in which:
d. All of the above.
FAS 13
c 16. Which of the following is not an implication of FAS 13, Accounting for Leases?
c. FASB 13 allows for off-balance-sheet-financing for operating leases.
TAX IMPLICATIONS
c 17. The reason the IRS is most concerned about lease contracts is:
c. that leases can be set up solely to avoid taxes.
TAX IMPLICATIONS
b 18. A lease with high payments early in its life which then decline to termination would:
b. be evidence of tax avoidance and not acceptable to the IRS.
CASH FLOW
b 31. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-9?
b. $-955
CASH FLOW
c 32. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?
c. $6,950
NPV OF A LEASE
b 33. What is the NPV of the lease relative to the purchase?
b. $ 339.78
CASH FLOW WITH RESIDUAL VALUE
d 34. What would the after-tax cash flow in year 9 be if the asset had a residual value of $500 (ignoring any possible risk differences)?
d. $-1,305
DISCOUNT RATE
b 36. What is the appropriate discount rate for valuing the lease?
b. 5.28%
CASH FLOW
c 37. What is the after-tax cash flow from leasing in year 0?
c. $852,000
WARRANT
d 2. Warrants are most often issued in combination with:
d. new privately placed debt.
WARRANT
c 3. An "equity kicker" most often refers to a:
c. warrant.
VALUE OF WARRANTS
e 5. BrightView Windows issued warrants with an exercise price of $17. BrightView's common stock currently sells for $20 per share. The warrants are
e. Both A and C.
WARRANTS AND CALL OPTIONS
e 8. Two major differences between a warrant and a call option are:
e. Both B and C.
CONVERTIBLES
b 13. If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be:
b. convertible.
CONVERTIBLE BONDS
d 17. Concerning convertible bonds, which of the following statements is not correct?
d. Since convertible bonds will be exchanged for common stock, convertible bonds are generally not callable.
UPPER AND LOWER LIMITS
e 27. BrightView Windows issued warrants with an exercise price of $17 for one share per warrant. On May 1, BrightView's common stock is at $20 per share. The lower and upper limits on the warrant value on May 1 are
e. $ 17 and $20
CONVERSION RATIO
a 28. The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. The conversion ratio is:
a. 25.
GAIN FROM EXERCISE OF WARRANTS
d 32. What would your gain be from exercising the warrants, assuming all are exercised?
d. $25.00 per share
CONVERSION PRICE
b 34. What is the conversion price?
b. $28.57
CONVERSION PREMIUM
b 35. What is the conversion premium?
b. 29.86%
MERGER
a 1. The complete absorption of one company by another, wherein the acquiring firm retains its identity and the acquired firm ceases to exist as a separate entity, is called a:
a. merger.
CONSOLIDATION
b 2. A merger in which an entirely new firm is created and both the acquired and acquiring firms cease to exist is called a:
b. consolidation.
TENDER OFFER
c 3. A public offer by one firm to directly buy the shares of another firm is called a:
c. tender offer.
HORIZONTAL ACQUISITION
d 4. The acquisition of a firm in the same industry as the bidder is called a _____ acquisition.
d. horizontal
VERTICAL ACQUISITION
e 5. The acquisition of a firm involved with a different production process stage than the bidder is called a _____ acquisition.
e. vertical
CONGLOMERATE ACQUISITION
a 6. The acquisition of a firm whose business is not related to that of the bidder is called a _____ acquisition.
a. conglomerate
LEVERAGED BUYOUT
d 9. Going-private transactions in which a large percentage of the money used to buy the outstanding stock is borrowed is called a:
d. leveraged buyout.
SYNERGY
e 10. The positive incremental net gain associated with the combination of two firms through a merger or acquisition is called:
e. synergy.
POISON PILLS
d 14. A financial device designed to make unfriendly takeover attempts financially unappealing, if not impossible, is called:
d. a poison pill.
WHITE KNIGHTS
c 16. A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a:
c. white knight.
EQUITY CARVE-OUT
b 17. The sale of stock in a wholly owned subsidiary via an initial public offering is referred to as a(n):
b. equity carve-out.
SPIN-OFF
d 18. The distribution of shares in a subsidiary to existing parent company stockholders is called a(n):
d. spin-off.
GOODWILL
b 52. Turner, Inc. has $4.2 million in net working capital. The firm has fixed assets with a book value of $48.6 million and a market value of $53.4 million. Martin & Sons is buying Turner, Inc. for $60 million in cash. The acquisition will be recorded using the purchase accounting method. What is the amount of goodwill that Martin & Sons will record on its balance sheet as a result of this acquisition?
b. $2.4 million
MERGER PREMIUM
a 53. Rudy’s, Inc. and Blackstone, Inc. are all-equity firms. Rudy’s has 1,500 shares outstanding at a market price of $22 a share. Blackstone has 2,500 shares outstanding at a price of $38 a share. Blackstone is acquiring Rudy’s for $36,000 in cash. What is the merger premium per share?
a. $2.00
MERGER PREMIUM
b 54. Jennifer’s Boutique has 2,100 shares outstanding at a market price per share of $26. Sally’s has 3,000 shares outstanding at a market price of $41 a share. Neither firm has any debt. Sally’s is acquiring Jennifer’s for $58,000 in cash. What is the merger premium per share?
b. $1.62
VALUE OF FIRM B TO A
c 55. Jennifer’s Boutique has 2,100 shares outstanding at a market price per share of $26. Sally’s has 3,000 shares outstanding at a market price of $41 a share. Neither firm has any debt. Sally’s is acquiring Jennifer’s for $58,000 in cash. The incremental value of the acquisition is $2,500. What is the value of Jennifer’s Boutique to Sally’s?
c. $57,100
VALUE OF FIRM B TO A
d 56. Rudy’s, Inc. and Blackstone, Inc. are all-equity firms. Rudy’s has 1,500 shares outstanding at a market price of $22 a share. Blackstone has 2,500 shares outstanding at a price of $38 a share. Blackstone is acquiring Rudy’s for $36,000 in cash. The incremental value of the acquisition is $3,500. What is the value of Rudy’s Inc. to Blackstone?
d. $36,500
CASH ACQUISITION
c 61. Principal, Inc. is acquiring Secondary Companies for $29,000 in cash. Principal has 2,500 shares of stock outstanding at a market price of $30 a share. Secondary has 1,600 shares of stock outstanding at a market price of $15 a share. Neither firm has any debt. The net present value of the acquisition is $4,500. What is the price per share of Principal after the acquisition?
c. $31.80
STOCK ACQUISITION
c 62. Winslow Co. has agreed to be acquired by Ferrier, Inc. for $25,000 worth of Ferrier stock. Ferrier currently has 1,500 shares of stock outstanding at a price of $21 a share. Winslow has 1,000 shares outstanding at a price of $22. The incremental value of the acquisition is $4,000. What is the merger premium per share?
c. $3
EARNINGS AND VALUATION
d 69. The Sligo Co. is planning on merging with the Thorton Co. Sligo will pay Thorton’s stockholders the current value of their stock in shares of Sligo. Sligo currently has 2,300 shares of stock outstanding at a market price of $20 a share. Thorton has 1,800 shares outstanding at a price of $15 a share. How many shares of stock will be outstanding in the merged firm?
d. 3,650 shares
EARNINGS AND VALUATION
b 70. Firm A is planning on merging with Firm B. Firm A will pay Firm B’s stockholders the current value of their stock in shares of Firm A. Firm A currently has 2,300 shares of stock outstanding at a market price of $20 a share. Firm B has 1,800 shares outstanding at a price of $15 a share. The after-merger earnings will be $6,500. What will the earnings per share be after the merger?
b. $1.78
SYNERGY
b 73. Firm V was worth $450 and Firm A had a market value of $375. Firm V acquired Firm A for $425 because they thought the combination of the new Firm VA was worth $925. What is the synergy from the merger of Firm V and Firm A?
b. $100
NPV OF MERGER
b 74. Firm V was worth $450 and Firm A had a market value of $375. Firm V acquired Firm A for $425 because they thought the combination of the new Firm VA was worth $925. What is the NPV from the merger of Firm V and Firm A?
b. $50
FINANCIAL DISTRESS
c 1. Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action.
c. The firm's operating cash flow are insufficient to pay current obligations
INSOLVENCY
c 2. Insolvency can be defined as:
c. an inability to pay one's debts.
STOCK-BASED INSOLVENCY
b 3. Stock-based insolvency is a:
b. balance sheet measurement.
FLOW-BASED INSOLVENCY
e 4. Flow-based insolvency is:
e. Both C and D.
FINANCIAL RESTRUCTURING
d 5. Financial restructuring can occur as:
d. Both A and C.
FINANCIAL DISTRESS
d 6. Financial distress can involve which of the following:
d. All of the above.
RULES OF ABSOLUTE PRIORITY
c 7. APR, as it relates to financial distress, means the rules of:
c. absolute priority.
ALTMAN Z-SCORE
c 31. Altman develop the Z-score model for publicly traded manufacturing firms. Using financial statement data and multiple discriminant analysis, he found that:
c. in actual use, a Z-score of less than 1.81 would predict bankruptcy within one year.
ALTMAN Z-SCORE
d 32. The key intuition of a Z-score model like Altman's is that:
d. financial profiles of bankrupt and non-bankrupt firms are very different one year before bankruptcy.