Finance Final

Question 1

The capital structure weights used in computing the weighted average cost of capital:
A. remain constant over time unless the firm issues new securities.
B. are based on the market value of the firm’s debt and equity securities.
C. are computed using the book value of the long-term debt and the book value of equity.
D. are restricted to the firm’s debt and common stock.
E. are based on the book values of total debt and total equity.

Answer 1

are based on the market value of the firm’s debt and equity securities.

Question 2

Most loans are a form of a(n)

Answer 2

Annuity

Question 3

Decreasing the required rate of return will ________ the net present value of a project.

A. increase
B. Decrease

Answer 3

Increase

Question 4

A decision to issue additional shares of stock is what kind of decision?

Answer 4

Capital structure decision

Question 5

For a given time period, the higher the interest rate, the smaller the _________

Answer 5

present value

Question 6

For a given interest rate, the higher the ______, the lower the present value

Answer 6

future value

Question 7

What is a bond call option?

Answer 7

it gives the company the right to call or purchase the bonds at a specified price from bondholders

Question 8

What is the yield-to-maturity of a bond?

Answer 8

bondholders required rate of return for holding a bond. it is the current required market rate.

Question 9

If the coupon is higher than the YTM then it is a ____ bond

Answer 9

Discount

Question 10

What is a common shareholder entitled to?

Answer 10

voting, share in profits, residual assets in a liquidation

Question 11

Advantages of discounted payback

Answer 11

includes time value money, easy to understand, biased towards liquidity

Question 12

Disadvantages of discounted payback

Answer 12

requires cut off point, ignores cash flows beyond cut-off point and may reject positive NPV investments.

Question 13

Advantages of Account rate of return

Answer 13

easy to calculate, and needed information will usually be available

Question 14

Disadvantages of Account rate of return

Answer 14

exclusion of time value of money, need a cut off rate and based on accounting values

Question 15

Advantages of Profitability index

Answer 15

easy to understand and communicate, useful when investment funds are limited

Question 16

Disadvantages of Profitability index

Answer 16

leads to incorrect decisions in comparison of mutually exclusive investments

Question 17

Side effects (positive and negative)

Answer 17

positive: benefits to other projects
Negative: costs to other projects

Question 18

should operating cash flows be pre-tax or after tax?

Answer 18

After-tax

Question 19

What is the capital asset pricing model and what does it measure?

Answer 19

it defines the relationship between risk and return. We can use the CAPM to determine its expected return and expected equity on return

Question 20

What two models can estimate the costs of equity?

Answer 20

Capital asset pricing model and dividend growth model

Question 21

What are the two ways to estimate the growth in dividends?

Answer 21

historical growth and analysts’ forecast

Question 22

How do you measure the cost of debt? is it equal to the coupon outstanding company debt?

Answer 22

yield to maturity // not the coupon rate

Question 23

Which components of the capital structure are adjusted for taxes and why?

Answer 23

Debt is adjusted for taxes because only interest is tax-deductible. Companies are not allowed to adjust dividends.

Question 24

In calculating the weighted average cost of capital do you use the market value or the book value?

Answer 24

Market value

Question 25

If you one of the models and compare a cost of equity to be less than the cost of debt does this make sense?

Answer 25

No, because equity should have a higher return and debt since, it carries more risk to the holder.

Question 26

What are you trying to minimize/maximize when you select a debt- equity ratio?

Answer 26

you want to minimize the cost of capital

Question 27

As the firms risk increases, the cost of capital _______ and the NPV of projects __________

Answer 27

cost of capital INCREASES and the NPV of projects DECREASE

Question 28

What does beta measure?

Answer 28

beta measures the systematic risk of market risk which cannot be divorced away. The risk you can't get rid of such as things that impact all companies or economic downturns

Question 29

``` The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is called the: a. mean. B. beta coefficient. c. risk premium. d. standard deviation. e. variance. ```

Answer 29

Beta Coeffiecient

Question 30

``` The return on a risky asset that is anticipated in the future is called the: a. real return. b. risk premium. c. systematic return. D. expected return. e. beta. ```

Answer 30

Expected Return

Question 31

Which of the following will increase the sustainable growth rate of a firm? I. eliminating all dividends II. increasing the target debt-equity ratio III. increasing the profit margin IV. increasing the total asset turnover rate a. I, III, and IV only B. I, II, III, and IV c. I, II, and III only d. I and II only e. II, III, and IV only

Answer 31

I, II, III, and IV

Question 32

A net present value of zero implies that an investment: A. is earning a return that exactly matches the requirement. b. has no initial cost. c. never pay back its initial cost. d. should be rejected even if the discount rate is lowered. e. has an expected return that is less than the required return.

Answer 32

Is earning a return that exactly matches the requirement

Question 33

A conventional cash flow is defined as a series of cash flows where: A. The total of the cash flows is positive. B. All of the cash flows are positive. C. The sum of the cash flows is equal to zero. D. The present value of the cash flows is equal to zero. E. Only the initial cash flow is negative.

Answer 33

Only the initial cash flow is negative

Question 34

Which of the following decision rules has the advantage that the information needed for the computation is readily available? ``` A. Net present value B. Internal rate of return C. Payback period D. Average accounting return E. Discounted payback ```

Answer 34

Average Accounting Return

Question 35

Which of the following calculations takes the time value of money into an account? I. Payback II. Average accounting return III. Profitability index

Answer 35

III only

Question 36

``` The CAPM shows that the expected return for a particular asset depends on: I. The amount of unsystematic risk. II. The reward for bearing systematic risk. III. The pure time value of money. A. I only B. I and II only C. III only D. I, II, and III E. II and III only ```

Answer 36

II and III