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Fin03
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FIN101-REVISION
CH-8
Q1: Describe the three types of corporate bonds.
1. A vanilla bond pays fixed regular coupon payments over the life of the
bond, and the entire principal is repaid at maturity.
2. A zero coupon bond pays all interest and all principal at maturity. Since
there are no payments before maturity, zero coupon bonds are issued at
prices below their face value.
3. Convertible bonds can be exchanged for common stock at a predetermined
ratio.
Q2: Why bond prices vary negatively with interest rate movements.
Bond prices vary negatively with interest rates because the coupon rate on most
bonds are fixed at the time the bond is issued. As market interest rates go up, the
prices of bonds with fixed coupon payments will bid down by investors, driving
the yields of those bonds up to market levels. When interest rates decline, the
yield on fixed income securities will be higher relative to yield on similar securities
price to market; the favorable yield will increase investor demand for these
securities, increasing their price and lowering their yield to the market yield.
Q3: Distinguish between a bond’s coupon rate, yield to maturity, realized
yield, and effective annual yield.
A bond’s coupon rate is the stated interest rate on the bond when it is
issued. U.S. bonds typically pay interest semiannually, whereas European
bonds pay once a year.
The yield to maturity is the expected return on a bond if it is held to
maturity date.
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The realized yield is the return earned on a bond given the cash flows
actually received by the investor.
Effective annual interest rate is the yield an investor actually earns in one
year, adjusting for the effects of compounding.
Q4: Explain why investors in bonds are subject to interest rate risk, and
discuss the bond thermos.
Because interest rates are always changing in the market, all investors who hold
bonds are subject to interest rate risk. Interest rate risk is the change in bond
prices
caused by fluctuations in interest rates.
Three of the most important bond theorems can be summarized as follows:
1. Bond prices are negatively related to interest rate movements.
2. For a given change in interest rates, the prices of long-term bonds will change
more than the prices of short-term bonds.
3. For a given change in interest rates, the prices of lower-coupon bonds will
change more than the prices of higher-coupon bonds.
Q5: Discuss the concept of default risk and know how to compute a default
risk premium.
Default risk is the risk that the issuer will be unable to pay its debt obligation.
Since investors are risk averse, they must be paid a premium to purchase a
security
that exposes them to default risk.
The default risk premium has two components:
(1) Compensation for the expected loss if a default occurs.
(2) Compensation for bearing the risk that a default could occur.
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The default risk is also reflected in a company’s bond rating. The highest-grade
bonds, those with the lowest default risk, are rated Aaa (or AAA). The default risk
premium on corporate bonds increases as the bond rating becomes lower.
Q6: Describe the factors that determine the level and shape of the yield curve.
(1) The real rate of interest.
(2) The expected rate of inflation.
(3) Interest rate risk.
CH-9
Q1: List and describe the four types of secondary markets.
(1) Direct search, buyers and sellers seek each other out directly.
(2) Broker, brokers bring buyers and sellers together for a fee.
(3) Dealer, trades in dealer markets go through dealers who buy securities at one
price and sell at a higher price. The dealers face the risk that prices could decline
while they own the securities.
(4) Auction, Auction markets have a fixed location where buyers and sellers
confront each other directly and bargain over the transaction price.
Q2: Explain why many financial analysts treat preferred stock as a special
type of bond rather than as an equity security.
1. Similar to bonds, preferred stock issues have credit ratings,
2. Preferred stock are sometimes convertible to common stock,
3. Preferred stock are often callable.
4. Owners of nonconvertible preferred stock do not have voting rights and do
not participate in the firm’s profits beyond the fixed dividends they receive.
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CH-10
Q1: Discuss why capital budgeting decisions are the most important
investment decisions made by a firm’s management.
Capital budgeting is the process by which management decides which productive
assets the firm should invest in.
Capital budgeting decisions are considered the most important investment
decisions made by management due to the following:
1. capital expenditures involve large amounts of money,
2. capital expenditures critical to achieving the firm’s strategic plan,
3. Define the firm’s line of business over the long term,
4. and determine the firm’s profitability for years to come.
Q2: Explain the benefits of using the net present value (NPV) method to
analyze capital expenditure decisions.
The net present value (NPV) method leads to better investment decisions than
other techniques because it:
(1) Uses the discounted cash flow valuation approach, which accounts for the
time
value of money.
(2) Provides a direct measure of how much a capital project is expected to
increase
the dollar value of the firm.
(3)NPV is consistent with the top management goal of maximizing stockholders
value.
Q3: Describe the strengths and weaknesses of the payback period as a capital
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expenditure decision-making tool.
The payback period is the length of time it will take for the cash flows from a
project to recover the cost of the project.
Strengths:
1. The payback period is widely used, mainly because it is simple to apply and
easy to understand.
2. It also provides a simple measure of liquidity risk because it tells
management how quickly the firm will get its money back.
Weaknesses:
1. Ignores the time value of money.
2. It fails to take account of cash flows recovered after the payback period.
3. The payback period is biased in favor of short-lived projects.
4. The hurdle rate used to identify what payback period is acceptable is
arbitrarily determined.
Q4: Explain why the accounting rate of return (ARR) is not recommended as
a capital expenditure decision-making tool.
1. The ARR is based on accounting numbers, such as book value and net
income, rather than cash flow data.
2. it is not a true rate of return. Instead of discounting a project’s cash flows
over time, it simply gives us a number based on average figures from the
income statement and balance sheet.
3. There is no economic rationale for establishing the hurdle rate.
4. The ARR does not account for the size of the projects when a choice
between two projects of different sizes must be made.
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Q5: discuss the conditions under which the IRR technique and the NPV
technique produce different results.
1. When a project’s cash flows are unconventional, the IRR calculation may
yield no solution or more than one IRR.
2. The IRR technique cannot be used to rank projects that are mutually
exclusive because the project with the highest IRR may not be the project
that would add the greatest value to the firm if accepted—that is, the project
with the highest NPV.
Q6: Explain the benefits of post-audit and ongoing reviews of capital
projects.
A post-audit review:
1. Enables managers to determine whether a project’s goals were met
and to quantify the actual benefits or costs of the project.
2. Managers can avoid making similar mistakes in future projects,
learn to better recognize opportunities.
3. Keep people involved in the budgeting process honest.
An ongoing review:
1. Enables managers to assess the impact of changing information
and market conditions on the value of a project that is already
underway.
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CH-11
Q1: Explain why incremental after-tax cash flows are relevant in evaluating
a project.
The incremental after-tax free cash flows, FCFs, for a project equal the expected
change in the total after-tax cash flows of the firm if the project is adopted. The
impact of a project on the firm’s total cash flows is the appropriate measure of
cash
flows because these are the cash flows that reflect all of the costs and benefits
from
the project and only the costs and benefits from the project.
Q2: Discuss the five general rules for incremental after-tax free cash flow
calculations.
Rule 1: Include cash flows and only cash flows in your calculations. Stockholders
only care about the impact of a project on the firm’s cash flows.
Rule 2: Include the impact of the project on cash flows from other product lines. If
a project affects the cash flows from other projects, we must take this fact into
account in NPV analysis in order to fully capture the impact of the project on the
firm’s total cash flows.
Rule 3: Include all opportunity costs. If an asset is used for a project, the relevant
cost for that asset is the value that could be realized from its most valuable
alternative use By including this cost in the NPV analysis, we capture the change
in the firm’s cash flows that is attributable to the use of this asset for the project.
Rule 4: Forget sunk costs. The only costs that matter are those to be incurred
from
this point on.
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Rule 5: Include only after-tax cash flows in the cash flow calculations. Since
stockholders receive cash flows after taxes have been paid, they are only
concerned
about after tax cash flows.
Q3: why cash flows stated in nominal (real) dollars should be discounted using
a nominal (real) discount rate.
Since a nominal discount rate reflects both the expected rate of inflation and the
real return, we would be over adjusting for inflation if we discounted a real cash
flow with a nominal rate. Similarly, if we discounted a nominal cash flow using a
real discount rate, we would be undercompensating for expected inflation in the
discounting process. This is why we discount nominal cash flows using only a
nominal discount rate and we discount real cash flows using only a real discount
rate.
Q4: Describe how distinguishing between variable and fixed costs can be
useful in forecasting operating expenses.
Variable costs vary directly with the number of units sold, while fixed costs do
not.
When forecasting operating expenses, it is often useful to treat variable and fixed
costs separately. Separating fixed costs from the variable also makes it easier to
identify the factors that will cause them to change over time and therefore easier
to
forecast them.
Q5: Explain the concept of equivalent annual cost.
The equivalent annual cost (EAC) is the annualized cost of an investment that is
stated in nominal dollars. In other words, it is the annual payment from an
annuity
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that has the same NPV and the same life as the project.
Q6: Determine the appropriate time to harvest an asset.
The appropriate time to harvest an asset is that point in time where harvesting
the
asset yields the largest present value, in today’s dollars, of the project NPV.
CH-13
Q1: Explain what the weighted average cost of capital for a firm is and why it
is often used as a discount rate to evaluate projects.
The weighted average cost of capital (WACC) for a firm is a weighted average
of the current costs of the different types of financing that a firm has used to
finance the purchase of its assets. When the WACC is calculated, the cost of each
type of financing is weighted according to the fraction of the total firm value
represented by that type of financing.
The WACC is often used as a discount rate in evaluating projects because it is not
possible to directly estimate the appropriate discount rate for many projects.
Q2: explain the limitations of using a firm’s weighted average cost of capital
as the discount rate when evaluating a project.
When a firm uses a single rate to discount the cash flows for all of its projects,
some project cash flows will be discounted using a rate that is too high and other
project cash flows will be discounted using a rate that is too low. This can result in
the firm’s rejecting some positive-NPV projects and accepting some negative-NPV
projects. It will bias the firm toward accepting more risky projects and can cause
the firm to create less value for stockholders than it would have if the appropriate
discount rates had been used.
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Q3: discuss the alternatives to the firm’s weighted average cost of capital that
are available.
One approach to using the WACC is to identify a firm that engages in business
activities that are similar to those associated with the project under consideration
and that has publicly traded stock. The returns from this pure-play firm’s stock
can
then be used to estimate the common stock’s beta for the project. In instances
where pure-play firms are not available, financial managers can classify projects
according to their systematic risks and can use a different discount rate for each
classification.
CH-15
Q1: Explain what is meant by bootstrapping when raising seed financing and
why bootstrapping is important.
Bootstrapping is the process by which many entrepreneurs raise “seed” money
and obtain other resources necessary to start new businesses. Seed money often
comes from the entrepreneur’s savings and credit cards and from family and
friends.
Bootstrapping is important because business start-ups are a significant factor in
determining and sustaining long-term economic growth in an economy. Indeed,
some state and local governments have invested heavily in business incubators,
hoping to foster new business formation.
Q2: Describe the role of venture capitalists in the economy.
Venture capitalists specialize in helping business firms get started by advising
management and providing early-stage financing.
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Q3: discuss how venture capitalists reduce their risk when investing in start up
businesses.
Because of the high risk of investing in start-up businesses, venture capitalists
finance projects in stages and often require the owners to make a significant
personal investment in the firm. The owners’ equity stake signals their belief in
the
viability of the project and ensures that management actions are focused on
building a successful business. Risk is also reduced through syndication and
because of the venture capitalist’s in-depth knowledge of the industry and
technology.
Q4: Discuss the advantages and disadvantages of going public.
Advantages:
1. Entering public markets provide firms with access to large quantities of
money at relatively low cost.
2. Enable firms to attract and motivate good managers.
3. Provide liquidity for existing stockholders, such as entrepreneurs, other
managers, and venture capitalists.
Disadvantages:
1. The high cost of the IPO.
2. The cost of ongoing SEC disclosure requirements.
3. The need to disclose sensitive information.
4. A possible incentives focus on short-term profits rather than on long- term
value maximization.
Q5: Explain why, when underwriting new security offerings, investment
bankers prefer that the securities be underpriced.
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When underwriting new securities, investment bankers prefer that the issue be
underpriced because it increases the likelihood of a successful offering. The lower
the offering price, the more likely that the securities will sell out quickly—and the
less likely that the underwriters will end up with unsold inventory. Furthermore,
many investment bankers will argue that some underpricing helps attract long-
term
institutional investors who help provide stability for the stock price.
Q6: Discus the total cost of an IPO.
The total cost of issuing an IPO includes three elements:
(1) The underwriter’s spread.
(2) Out-of-pocket expenses, which include legal fees, sec filing fees, and other
expenses.
(3) The cost of underpricing
Q7: Discuss the costs of bringing a general cash offer to market.
The total cost of bringing a general cash offer to market is lower than the cost of
issuing an IPO because these seasoned offerings do not include a large
underpricing cost and underwriting spreads are smaller.
Q8: Explain why a firm that has access to the public markets might elect to
raise money through a private placement.
1. Desire to avoid the regulatory costs and transparency requirements.
2. Preference for working with a small group of sophisticated investors rather
than the public at large.
Q9: Review some of the advantages of borrowing from a commercial bank
rather than selling securities in financial market.
1. Small- and medium-sized firms may have limited access to the financial
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markets.
2. Banks provide not only funds but a full range of services, including financial
advice. Furthermore,
3. if a firm’s financial circumstances change over time, it is much easier for the
firm to borrow or renegotiate the debt contract with a bank than with other
lenders.
4. For many companies, bank borrowing may be the lowest-cost source of
funds.
Q10: discuss bank term loans.
Bank term loans are business loans with maturities greater than one year. The
cost
of the loans depends on three factors: the prime rate, an adjustment for default
risk,
and an adjustment for the term to maturity.
CH-16
Q1: Describe the two Modigliani and Miller propositions, the key assumptions
underlying them, and their relevance to capital structure decisions.
M&M Proposition 1 states that the value of a firm is unaffected by its capital
structure if the following three conditions hold: (1) there are no taxes, (2) there
are
no information or transaction costs, and (3) capital structure decisions do affect
the
real investment policies of the firm. This proposition tells us the three reasons
that
capital structure choices affect firm value.
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M&M Proposition 2 states that the expected return on a firm’s equity increases
with the amount of debt in its capital structure. This proposition also shows that
the
expected return on equity can be separated into two parts—a part that reflects
the
risk of the underlying assets of the firm and a part that reflects the risk associated
with the financial leverage used by the firm. This proposition helps managers
understand the implications of financial leverage for the cost of the equity used to
finance the firm’s investments.
Q2: Discuss the benefits and costs of using debt financing.
Benefits:
1. A major benefit arises from the deductibility of interest payments. Since
interest payments are tax deductible and dividend payments are not,
distributing cash to investors through interest payments are not, distributing
cash to investors through interest payments can increase the value of a 16
firm.
2. Debt is also less expensive to issue than equity.
3. Debt can benefit stockholders in certain situations by providing managers
with incentives to maximize the cash flows produced by the firm and by
reducing their ability to invest in negative NPV projects.
Costs:
1. Bankruptcy cost: Bankruptcy costs arise because financial leverage
increases the probability that a firm will get into financial distress.
Direct bankruptcy costs are the out-of-pocket costs that a firm
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incurs when it gets into financial distress.
Indirect bankruptcy costs are associated with actions the people
who deal with the firm take to protect their own interests when the
firm is in financial distress.
2. Agency costs: result from conflicts of interest between principals and agents
where one party, known as the principal, delegates its decision-making
authority to another party, known as the agent.
Stockholder-manager agency costs occur to the extent that the
incentives of the managers are not perfectly identical to those of
the stockholders, managers will make some decisions that benefit
themselves at the expense of the stockholders.
Stockholder-lender agency costs can occur when investors lend
money to a firm and delegate authority to the stockholders to
decide how that money will be used.
Q3: Describe the trade-off and pecking order theories of capital structure
choice and explain what the empirical evidence tells us about these theories.
The trade-off theory says that managers balance, or trade off, the benefits of debt
against the costs of debt when choosing a firm’s capital structure in an effort to
maximize the value of the firm.
The pecking order theory says that managers raise capital as they need it in the
least expensive way available, starting with internally generated funds, then
moving to debt, then to the sale of equity.
In contrast to the trade-off theory, the pecking order theory does not imply that
managers have a particular target capital structure. There is empirical evidence
that
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supports both theories, suggesting that each helps explain the capital structure
choices made by managers.
Q4: Discuss some of the practical considerations that managers are concerned
with when they choose a firm’s capital structure.
Practical considerations that concern managers when they choose a firm’s capital
structure include the impact of the on capital structure financial flexibility, risk,
net income, and the control of the firm.
1. Financial flexibility involves having the necessary financial resources to
take advantage of unforeseen opportunities and to overcome unforeseen
problems.
2. Risk refers to the possibility that normal fluctuations in operating profits
will lead to financial distress.
3. Managers are also concerned with the impact of financial leverage on their
reported net income, especially on a per-share basis.
4. The impact of capital structure decisions on who controls the firm also
affects capital structure decisions.
CH-17
Q1: Explain what a dividend is, and describe the different types of
dividends and the dividend payment process.
A dividend is something of value that is distributed to a firm’s stockholders on
a pro-rata basis—that is, in proportion to the percentage of the firm’s shares that
they own.
There are four types of dividends:
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1. Regular cash dividends: are the cash dividends that firms pay on a
regular basis (typically quarterly).
2. Extra dividends: are paid, often at the same time as a regular cash
dividend, when a firm wants to distribute additional cash to its
stockholders.
3. Special dividends: are one-time payments that are used to distribute a
large amount of cash.
4. Liquidating dividends: is the dividend that is paid when a company
goes out of business and is liquidated.
Q2: describe the dividend payment process.
The dividend payment process begins with a vote by the board of directors to
pay a dividend. This vote is followed by the public announcement of the
dividend on the declaration date. On the ex-dividend date, the shares begin
trading without the right to receive the dividend. The record date, which follows
the ex-dividend date by two days, is the date on which an investor must be a
stockholder of record in order to receive the dividend. Finally, the payable date
is the date on which the dividend is paid.
Q3: Explain what a stock repurchase is and how companies repurchase
their stock.
A stock repurchase is a transaction in which a company purchases some of its
own shares from stockholders. Like dividends, stock repurchases are used to
distribute value to stockholders.
The three ways in which stock is repurchased are:
1. open-market repurchases.
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2. tender offers.
3. targeted stock repurchases.
With open-market repurchases, the company purchases stock on the open
market, just like any investor does. A tender offer is an open offer by a
company to purchase shares. Finally, targeted stock repurchases are used
to purchase shares from specific stockholders.
Q4: Discuss the benefits and costs associated with dividend payments.
Benefits from paying dividends:
1. Attracting certain investors who prefer dividends.
2. Sending a positive signal to the market concerning the company’s
prospects.
3. Helping to provide managers with incentives to manage the company
more efficiently.
4. Helping to manage the company’s capital structure.
Costs:
1. The fact that a stockholder must take a dividend, and pay taxes on the
dividend, whether or not he or she wants the dividend.
2. Stockholders who want to reinvest the dividend in the company must pay
brokerage fees to reinvest the money.
3. Paying a dividend can increase a company’s leverage and thereby
increase its cost of debt.
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Q5: Discuss the Advantages and disadvantages associated with stock
repurchase.
Advantages:
1. With a stock repurchase program, investors can choose whether they
want to sell their shares back to the company.
2. Stock repurchases also receive more favorable tax treatment.
3. From management’s point of view, stock repurchase programs offer more
flexibility than dividends and can have less of an effect on the company’s
stock price.
Disadvantages:
One disadvantage of stock repurchases involves an ethical issue: Managers
have better information than others about the prospects of their companies, and
a stock repurchase can enable them to take advantage of this information in a
way that benefits the remaining stockholders at the expense of the selling
stockholders.
Q6: Define stock dividends and stock splits and explain how they differ
from other types of dividends and from stock repurchases.
Stock dividends involve the pro-rata distribution of additional shares in a
company to its stockholders.
Stock splits are much like stock dividends but involve larger distributions of
shares than stock dividends.
Stock dividends and stock splits differ from other types of dividends because
they do not involve the distribution of value to stockholders. The total value of
each stockholder’s shares is the same after a stock dividend or stock split as it
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was before the distribution. Since they do not involve the distribution of value,
stock dividends are not really dividends at all
Q7: Describe factors that managers consider when setting the dividend
payouts for their firms.
1. The expected level and certainty of the firm’s future profitability,
2. The firm’s future investment requirements,
3. The firm’s financial reserves and financial flexibility,
4. The firm’s ability to raise capital quickly if necessary,
5. The control implications of financing dividends by selling equity.
Define bond yield to maturity. Why is it important?
Bond yield to maturity is: -
• The rate that makes the present value of the bond’s cash flows equal the
price of bond
• The rate a bondholder earns if the bond is held to maturity and all coupon
and principal payments are made as promised
• Changes daily as interest rates change.
Explain why preferred stock is considered to be a hybrid of equity and debt
securities?
• Represent ownership interest in a corporation
• Are the two most frequently used types of
equity securities
• Dividend payments do not affect a firm’s taxes
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Preferred stock is equity but a strong case can be made that it is a special type of
debt
• Regular preferred has no voting rights.
• Dividends are due regardless of earnings.
• It frequently has a credit rating.
• It may be convertible into common stock.
• Most preferred is not a “true perpetuity” – it may be called/retired by a
firm.
TYPES OF DIVIDENDS:
• Regular Cash Dividend
• Extra dividends
• Special Dividend
• Liquidating Dividend
You deposit $120 in a savings account earning 10% compounded annually for 6
years. How much is in
the account at the end of that time
A. $230.111
B. $212.587
C. $250
D. $222.587
P.V = 120 , r = 0.10 , n = 6
FV = PV ( 1+ i ) ^n
FV = 120 ( 1+ 0.10)^6 = 212.587
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Assume a firm's cash flow was 520,000$ last year, the cash flow is expected to
increase by 6% per year
forever. If you use a discount rate of 16%, what is the value of the firm ?
A. $5,532,800
B. $5,512,000
C. $5,550,000
D. $4,523,700
Cash Flow = 520,000 , G = 0.06 , i= 0.16
520,000 ( 1+0.06) = 551,200
PV= Cash Flow / I – G
551,200 / 0.16 – 0.06
551,200 / 0.10 = 5,512,000
Net income is equal :
A. EBIT - operating expenses - taxes
B. EBIT - Taxes
C. EBT - Taxes
D. EBIT – interests
_____Indicate how the market is valuing the firm's equity
A. Leverage ratios
B. Efficiency ratios
C. Profitability ratios
D. Market value ratios
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Your firm produced revenues of $1,145,227 in 2008. It has expenses (excluding
depreciation) of
$812,640, depreciation of $131,335, and interest expense of $81,112. It pays an
average tax rate of 35
percent. What is the firm's net income after taxes ? مقالي يجيكم ممكن
A. $68,148
B. $78,091
C. $48,475
D. $76,848
Revenue : 1,145,227
Expenses : (-)812,640
332,587
Dep : (-) 131,335
201,252
Int exp : (-) 81,112
120,140
Tax rate : 120,140 * 0.35 = 42,049
Net income = 120,140 – 42,049 = 78,091
Working capital management decisions involve :
A. The fixed asset portion of the balance sheet .
B. How the firm should finance its assets.
C. Which productive assets the firm should employ.
D. How a firm's day-to-day financial matters should be managed .
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You have a five-year loan on which you will make annual payments of $2,000,
beginning now. If the
interest rate on the loan is 9 %, what is the present value of this annuity?
A. $8,853,51
B. $9,588,44
C. $8,479,439
D. $8,895,44
CF : 2,000 , I : 0.09 , n = 4
𝑃𝑉𝐴𝑛 = 𝐶𝐹 × [ 1− 1 (1+𝑖)𝑛 𝑖 ]
م بعد
القانون تطبقون ا
الناتج لكم يطلع راح
6,479.439
نزود
000
2
اللي
الخامسه للسنة بدفعهم
6,479.439 + 2,000 = 8,479,439
NYSE is an example of :
A. an electronic market exchange .
B. an over-the-counter market exchange .
C. an organized exchange.
D. all of the above.
A communications company Days annual dividends of $10.56 with no possibility
of it changing in the
next several years. If the firm's stock is currently selling at $96, what is the
required rate of return
A- 12.5%
B- 14%
C- 11 %
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D- 13%
P0 = D / R =
10.56 / 96 = 0.11 OR 11%
Alma Corporation has just paid a dividend of $4.45. The company has forecasted a
growth rate of 8
percent for the next several years. If the appropriate discount rate is 14 percent,
what is the current
price of this stock?
A - $80.10
B- $ 88.10
C- $98.25
D- $88.15
D0 = 4.45 , G = 8% , R = 14%
P0 = D1 / R-g
D1 = D0 (1+g) / R – g =
4.45 (1,08) / 0.14 – 0.08 = 4.806/0.06 = 80.10
Lama Corp. is planning to find a project by issuing 8-year zero coupon bonds with
a face value of
$1,000. Assuming semiannual coupons payments what will be the price of these
bonds if the
appropriate discount ate 14. Percent?
A- $258.42
B- $319,078
C- $322.5
Zero Coupon Bond: 𝑃𝐵 = 𝐹𝑚𝑛 (1 + 𝑖/𝑚)𝑚n
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Marketability is the ability of an investor:
A - to sell the security above its par value
B- to sell a security quickly, at a low transaction cost, and at a pike close to its fait
market value
C- to sell at the future value
D- to sell at a profit under all circumstances.
If a bond's coupon rate is greater than the market rate, then the bond will sell
A- at a price greater than its face value.
B- at a price less than its face value
C- at a price equal to its face value.
D- None of the above.
The yield to maturity of a bond is the discount rate that makes the present value
of the coupon and
principal payments
A- less than the price of the bond
B- equal to zero.
C- exceed the price of the bond.
D- equal to the price of the bond
You would like to own shares that have a record date on Thursday 22 March
2020. What is the last
data that you can purchase the share and still receive the dividend?
A. 19 march
B. 21 march
C. 20 march
D. 22 march
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Liquidity Ratio indicates
A)How balanced is the organization?
B)How profitable is the organization?
C)How well is the organizational position to meet its short-term obligations?
D)How are the organization’s assets financed and ability to take on new debt?
Financial decisions of the firm are guided by:
A)Financial Leverage
B)Risk-Return Trade OFF
C)Retention Ratio
D)Firm’s Wealth
What is the present value of a $50 perpetuity if interest rates are 7%?
A)$663.5
B)$788.12
C)$714.29
D)$611.21
50 / 0.07 = 714.29
The statement of cash flows dose not include
A)Cash flows from investing activities
B)Cash flows from financing activities
C)Changes in Net Assets
D)Cash flows from operating activities
Multiyear product or service contract with periodic cash flows that increase at a
constant rate for a
finite number of years is called
A) annuity due
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B) growing annuity
C)perpetuity
D)ordinary annuity
The risk that cannot be eliminated through diversification is called
A)Unsystematic & Systematic Risk
B) Systematic Risk
C) Unsystematic Risk
D) Symmetric Risk
Which one of the following is not a characteristic of corporations?
a. Can enter into contracts
b. Can borrow money
c. Are the easiest type of business to form
d. Can own stock in other companies
The market risk premium is 6 percent and the risk free rate is 5 percent. If
beta equal 0.25 what is the expected return on a bond?
a. %6.5
b. %5.6
c. %5
d. 6%
5% + 0.25 * 6% = 6.5%
Firm-specific risk is the :
a. Non-diversifiable risk of an asset .
b. Diversifiable risk of an asset.
c. Standard deviation of an asset .
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d. The variance of an asset
DuPont analysis relates ROE to :
a. Profitability, equity and leverage
b. Profitability, equity and debt
c. Profitability, asset efficiency and leverage
d. Liquidity, equity and debt
If inflation is anticipated to be 4% during the next year, while the real rate of
interest for a one-year loan is 8%, then what should be the nominal rate of
interest
for a risk-free one-year loan ?
a. 4%
b. 8%
c. 12%
d. 32%
85+4% = 12%
One technique often used in time value of money problems that provides a
linear representation of cash flows is :
a. A graph
b. A timeline
c. A scatterplot
d. A timing diagram
A disadvantage of a partnership is.__________
a. unlimited liability
b. double taxation
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c. limited liability
d. ease of raising funds
X Corp. has total current assets of $11,845,175, current liabilities of
$5,311,020, and inventory of $7,118,367, calculate its current ratio . VERY
IMPORTANT
a. 2.23
b. 0.45
c. 0.89
d. 2.57
Current Ratio = Current assets / Current liabilities
11,845,175 / 5,311,020 = 2.23
When the payment of an annuity occurs at the beginning of the period
instead
of at the end of the period it is known as:
a. An ordinary annuity
b. A beginning annuity
c. A compound annuity
d. An annuity due
Alfred wants to receive $15,000 in perpetuity and will invest his money
in an
investment that will earn a return of 12% annually. What is the value of
the
investment that he needs to make today to receive his perpetual cash
flow
