Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Corporate Finance > Finance Final > Flashcards

Finance Final Flashcards

You may prefer our related Brainscape-certified flashcards:
Series 66 flashcards SIE Exam flashcards Series 63 flashcards Series 79 Top-Off Exam flashcards Series 7 Top-off Exam flashcards CFA flashcards Series 65 flashcards
1
Q

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.

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Most loans are a form of a(n)

A

Annuity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

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

A. increase
B. Decrease

A

Increase

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

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

A

Capital structure decision

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

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

A

present value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

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

A

future value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a bond call option?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

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

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

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

A

Discount

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is a common shareholder entitled to?

A

voting, share in profits, residual assets in a liquidation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Advantages of discounted payback

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Disadvantages of discounted payback

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Advantages of Account rate of return

A

easy to calculate, and needed information will usually be available

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Disadvantages of Account rate of return

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Advantages of Profitability index

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Disadvantages of Profitability index

A

leads to incorrect decisions in comparison of mutually exclusive investments

17
Q

Side effects (positive and negative)

A

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

18
Q

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

A

After-tax

19
Q

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

A

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

20
Q

What two models can estimate the costs of equity?

A

Capital asset pricing model and dividend growth model

21
Q

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

A

historical growth and analysts’ forecast

22
Q

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

A

yield to maturity // not the coupon rate

23
Q

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

A

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

24
Q

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

A

Market value

25
Q

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

A

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

26
Q

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

A

you want to minimize the cost of capital

27
Q

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

A

cost of capital INCREASES and the NPV of projects DECREASE

28
Q

What does beta measure?

A

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

29
Q 
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.
A

Beta Coeffiecient

30
Q 
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.
A

Expected Return

31
Q

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

A

I, II, III, and IV

32
Q

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.

A

Is earning a return that exactly matches the requirement

33
Q

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.

A

Only the initial cash flow is negative

34
Q

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
A

Average Accounting Return

35
Q

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

A

III only

36
Q 
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
A

II and III

Corporate Finance (13 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions