Park - Fi360 - Financial Management

Front 1

One of the tasks for financial managers when identifying projects that increase firm value is to identify those projects where

Back 1

benefits are at least equal to the project's costs.

Front 2

Which form of invested capital is subject to most of the firm's business and financial risk?

Back 2

equity capital

Front 3

Which of the following is not a true capital-raising event for the firm?

- primary market transaction
- secondary market transaction
- initial public offering
- a corporate loan from a bank

Back 3

secondary market transaction

Front 4

Which of the following is not one of the five basic corporate finance functions?

- external financing function
- capital budgeting function
- risk management
- auditing

Back 4

auditing

Front 5

William and Theodore have decided to start a travel business called Excellent Adventures. Since their business primarily involves time-travel their clients may be harmed during a small but significant portion of the travels. Consequently, William and Theodore would like a business form that will shield their personal wealth from any legal claims that the firm might be subject to after one of the travel mishaps. If William and Theodore are the only investors in this U.S. domiciled firm, which legal form of organization would be best for Excellent Adventures to protect both William and Theodore?

Back 5

corporation

Front 6

The ultimate owner(s) of an ongoing corporation are

Back 6

the equity holders

Front 7

Which of the following is a valid criticism concerning the goal of firms to maximize profits?

- profit maximization ignores expenses
- profit maximization is completely unrelated to shareholder wealth
- profit maximization may ignore the timing of those profits
- there are no valid criticisms of profit maximizing firms

Back 7

profit maximization may ignore the timing of those profits

Front 8

Which of the following items can be found on an income statement?

- Accounts receivable
- Long-term debt
- Sales
- Inventory

Back 8

Sales

Front 9

Holding all other things constant, which of the following represents a cash outflow?

• The company sells a machine.
• The company acquires inventory.
• The company receives a bank loan.
• The company increases accounts payable.

Back 9

The company acquires inventory.

Front 10

Which of the following is a liquidity ratio?

- Quick ratio
- P/E- ratio
- Inventory turnover
- Equity multiplier

Back 10

Quick ratio

Front 11

You have the choice between two investments that have the same maturity and the same nominal return. Investment A pays simple interest, investment B pays compounded interest. Which one should you pick?

Back 11

B--because it has higher effective annual return.

Front 12

Last national bank offers a CD paying 7% interest (compounded annually). If you invest $1,000 how much will you have at the end of year 5.

Back 12

$1,402.55

Hint 12

Future Value for $1 at 7% at the end of a 5 yr period is 1.40255

or

FV = PV * (1+R)^n
X = 1000(1+.07)^5
X = 1000(1.07)^5
X = 1000 * 1.40255
X = 1402.55

Front 13

You want to buy a house in 4 years and expect to need $25,000 for a down payment. If you have $15,000 to invest, how much interest do you have to earn (compounded annually) to reach your goal?

Back 13

13.62%

Hint 13

Future Value = Present Value x ( 1 + rate ) ^ Number of Periods

FV = PV * (1+R)^n

25,000=15,000*(1+x)^4
25000/15000=(1+x)^4
4^√25000/15000 = 1 + x
1.1362 - 1 = (1 + x ) - 1
0.1362 = x

Front 14

You want to buy your dream car, but you are $5,000 short. If you could invest your entire savings of $2,350 at an annual interest of 12%, how long would you have to wait until you have accumulated enough money to buy the car?

Back 14

6.66 years

Hint 14

PV = FV / ( 1 + R ) ^ n

2350 = 5000 / ( 1 + .12 ) ^ n

Solve for n

Front 15

How much do you have to invest today at an annual rate of 8%, if you need to have $5,000 six years from today?

Back 15

$3,150.85

Hint 15

PV = FV / ( 1 + R ) ^ n

x = 5000 / (1+0.08) ^ 6

Solve for x.

Front 16

If you can earn 5% (compounded annually) on an investment, how long does it take for your money to triple?

Back 16

22.52 years

Hint 16

PV = FV / ( 1 + R ) ^n

3 = 9 / (1+.05)^n

Solve for n.

Front 17

What is the future value of cash flows 1-5 at the end of year 5, assuming a 6% interest rate (compounded annually)?
End of year Cash flow
1 $2,500
2 3,000
3 1,250
4 3,500
5 1,250
6 4,530
7 2,350

Back 17

$13,093.74

Front 18

What is the present value of these cash flows, if the discount rate is 10% annually?
End of yearCash flow
1$2,500
2 3,000
3 1,250
4 3,500
5 1,250
6 4,530
7 2,350

Back 18

$12,620.90

Hint 18

Find Present Value (PV) for each of the cash flows and then add them all up.

PV = FV / ( 1 + R ) ^n

Front 19

You are planning your retirement and you come to the conclusion that you need to have saved $1,250,000 in 30 years. You can invest into an retirement account that guarantees you a 5% annual return. How much do you have to put into your account at the end of each year to reach your retirement goal?

Back 19

$18,814.30

Front 20

You set up a college fund in which you pay $2,000 each year at the end of the year. How much money will you have accumulated in the fund after 18 years, if your fund earns 7% compounded annually?

Back 20

$67,998.07

Hint 20

FV = PV * ( 1 + R) ^ n

{FV0 = 2000*(1+0.07)^0}+{FV1=2000*(1+0.07)^1}+{FV2=2000*(1+0.07)^2+.....{FV17=2000*(1+0.07)^17}

Front 21

You set up a college fund in which you pay $2,000 each year at the beginning of the year. How much money will you have accumulated in the fund after 18 years, if your fund earns 7% compounded annually?

Back 21

$72,757.93

Hint 21

FV = PV * ( 1 + R) ^ n

{FV0 = 2000*(1+0.07)^0}+{FV1=2000*(1+0.07)^1}+{FV2=2000*(1+0.07)^2+.....{FV18=2000*(1+0.07)^18}

Front 22

When you retire you expect to live for another 30 years. During those 30 years you want to be able to withdraw $45,000 at the beginning of each year for living expenses. How much money do you have to have in your retirement account to make this happen. Assume that you can earn 8% on your investments.

Back 22

$547,128.27

Hint 22

FV = PV * ( 1 + R) ^ n

{FV0 = 45000*(1+0.08)^0}+{FV1=45000*(1+0.08)^1}+{FV2=45000*(1+0.08)^2+.....{FV29=45000*(1+0.08)^29}

Front 23

You are offered a security that will pay you $2,500 at the end of the year forever. If your discount rate is 8%, what is the most you are willing to pay for this security?

Back 23

$31,250

Front 24

You want to buy a new plasma television in 3 years, when you think prices will have gone down to a more reasonable level. You anticipate that the television will cost you $2,500. If you can invest your money at 8% compounded monthly, how much do you need to put aside today?

Back 24

$1,968.14

Front 25

You found your dream house. It will cost you $175,000 and you will put down $35,000 as a down payment. For the rest you get a 30-year 6.25% mortgage. What will be your monthly mortgage payment (assume no early repayment)?

Back 25

$862

Front 26

The first public sale of company stock to outside investors is called a/an

Back 26

initial public offering.

Front 27

Which statement about common shareholders is incorrect?

Back 27

Shareholders have precedence over all other claimholders in the case of bankruptcy.

Front 28

Which of the following stock exchanges has the most strict listing requirements?

Back 28

New York Stock Exchange

Front 29

Bavarian Sausage, Inc. has preferred stock outstanding. This stock pays a semiannual dividend of $1.25. If the next dividend is paid six months from now and the annual required return is 10%, what should be the value of the preferred stock?

Back 29

$25

Front 30

Which of the following investors can force a firm into bankruptcy court if the firm does not pay the expected cash flow to the investor?

Back 30

debt investor

Front 31

A 15-year, 8%, $1000 face value bond is currently trading at $958. The yield to maturity of this bond must be

Back 31

greater than 8%

Front 32

A bond that grants the investor the right to exchange their bonds for common stock, is called a

Back 32

convertible bond.

Front 33

Bonds issued by US states or local governments are called:

Back 33

Municipal bonds.

Front 34

Bavarian Sausage just issued a 10 year 7% coupon bond. The face value of the bond is $1,000 and the bond makes annual coupon payments. If the required return on the bond is 10%, what is the bond's price?

Back 34

$815.66

Front 35

Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of the bond is $1,000 and the bond makes annual coupon payments. If the bond is trading at $967.25, what is the bond's yield to maturity?

Back 35

12.59%

Front 36

Which of the following is an example of systematic risk?

• IBM posts lower than expected earnings.
• Intel announces record earnings.
• The national trade deficit is higher than expected.
• None of the above.

Back 36

The national trade deficit is higher than expected.

Front 37

Which of the following is an example of unsystematic risk?

• IBM posts lower than expected earnings.
• The Fed raises interest rates unexpectedly.
• The rate of inflation is higher than expected.
• None of the above.

Back 37

IBM posts lower than expected earnings.

Front 38

What do you call the portion of your total return on a stock investment that is caused by an increase in the value of the stock.

Back 38

Capital gain.

Front 39

What is one of the most important lessons from capital market history?

Back 39

There is a positive relationship between risk and return.

Front 40

What is the purpose of diversification?

Back 40

Lower the overall risk of your portfolio.

Front 41

The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.5, what is its expected return?

Back 41

17%

Front 42

The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 0, what is its expected return?

Back 42

5%

Front 43

According to the CAPM (capital asset pricing model), the security market line is a straight line. The intercept of this line should be equal to

Back 43

the risk-free rate

Front 44

According to the CAPM (capital asset pricing model), the security market line is a straight line. The slope of this line should be equal to

Back 44

the expected risk premium on the market portfolio

Front 45

A particular asset has a beta of 1.2 and an expected return of 10%. The expected return on the market portfolio is 13% and the risk-free is 5%. Which of the following statement is correct?

Back 45

This asset lies below the security market line.

Front 46

The capital budgeting process involves

• identifying potential investments and estimating the incremental cash inflows and outflows of cash associated with each investment
• analyzing and prioritizing the investments utilizing various decision criteria
• implementing and monitoring the selected investment projects
• estimating a fair rate of return on each investment given its risk
• all of the above

Back 46

all of the above

Front 47

The preferred technique for evaluating most capital investments is

Back 47

net present value

Front 48

Gamma Electronics -- Gamma Electronics is considering the purchase of testing equipment that will cost $500,000 to replace old equipment. Assume the new machine will generate after-tax savings of $250,000 per year over the next four years. Referring to Gamma Electronics. What's the payback period for the investment?

Back 48

2.0 years

Front 49

Gamma Electronics -- Gamma Electronics is considering the purchase of testing equipment that will cost $500,000 to replace old equipment. Assume the new machine will generate after-tax savings of $250,000 per year over the next four years. Referring to Gamma Electronics. If the firm has a 15% cost of capital, what's the discount payback period of the investment?

Back 49

2.6 years

Front 50

If Gamma Electronics has a 15% cost of capital, what's the NPV of the investment?

Back 50

$213,745

Front 51

Gamma Electronics is considering the purchase of testing equipment that will cost $500,000. The equipment has a 5-year lifetime with no salvage value. Assume the new machine will generate after-tax savings of $100,000 per year for the five years. If the firm has a 15% cost of capital, what is the equivalent annual cost of the equipment?

Back 51

$49,158

Front 52

Paul earns $60,000 as an engineer, and he is considering quitting his job and going to graduate school. This $60,000 should be treated as a ____ if Paul runs an NPV analysis of his graduate degree.

Back 52

opportunity cost

Front 53

Operating leverage describes the relationship between...

Back 53

EBIT and sales

Front 54

Everything else being equal a higher corporate tax rate...

• will increase the WACC of a firm with debt and equity in its capital structure
• will not affect the WACC of a firm with debt in its capital structure
• will decrease the WACC of a firm with some debt in its capital structure
• will decrease the WACC of a firm with only equity in its capital structure

Back 54

Will decrease the WACC of a firm with some debt in its capital structure

Front 55

The appropriate cost of capital for a project depends on . . .

Back 55

the risk associated with the project

Front 56

Which law mandated the separation of investment and commercial banking?

Back 56

Glass-Steagall Act

Front 57

A security offering that raises capital for firms is called a(n)

Back 57

primary security offering

Front 58

A bank that helps firms to acquire external capital is called a

Back 58

investment bank

Front 59

Which of the following is not considered an advantage of going public?

• new capital for the company
• listed stock for use as compensation
• stock price emphasis
• personal wealth and liquidity

Back 59

Stock price emphasis

Front 60

Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. If the offering price of the stock is set at $12.50 per share, what is the per share proceeds that Bavarian will receive?

Back 60

$11.59

Hint 60

Determine the underwriting cost and subtract it from the value of the share.

12.50 * 0.0725 = 0.90625
12.50 - 0.90625 = 11.59

Front 61

The uncertainty caused by the variability of a firm's cash flows is called . . .

Back 61

business risk

Front 62

Which of the following is considered an indirect cost of bankruptcy?

• document printing expenses
• professional fees paid to lawyers
• loss of key employees
• none of the above

Back 62

loss of key employees

Front 63

Which of the following is considered a direct cost of bankruptcy?

• diversion of management's time
• constrained capital investment spending
• lost sales
• none of the above

Back 63

none of the above

Front 64

A situation where shareholders refuse financing a "good" investment, because they think that only the bondholders will benefit will lead to

Back 64

underinvestment

Front 65

Bavarian Brew Bavarian Brew, an unlevered firm, has an expected EBIT of $500,000. The required return on assets for the firm's assets is 10%. The company has 250,000 shares outstanding. The company is considering raising $1 million in debt with a required return of 6% and would use the proceeds to repurchase outstanding stock.What is the value of Bavarian Brew before restructuring? Assume no corporate taxes.

Back 65

$5,000,000

Front 66

What is net working capital?

Back 66

Current assets minus current liabilities

Front 67

What are the two types of annuities?

Back 67

Ordinary Annuity - Payments occur at the end of a period

Annuity Due - Payments occur at the beginning of each period

Front 68

What is a large lump-sum payment that pays back the entire loan principal at the maturity of a term loan that during its life requires only periodic interest payments?

Back 68

Balloon Payment