Midterm

Question 1

The process of planning and managing a firms long-term assets is called __________

Answer 1

Capital Budgeting

Question 2

A ______________________ is a legal “person,” separate and distinct from its owners, and it has many of the rights, duties, and privileges of an actual person.

Answer 2

Corporation

Question 3

According to the textbook, the goal of financial management is to _____________________.

Answer 3

Maximize the current value per share of the current stock

Question 4

The possibility of conflicts of interest between the stockholders and the management of the firm is known as the ___________________.

Answer 4

Agency Prolem

Question 5

Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm is called a _____________.

Answer 5

Stakeholder

Question 6

Finance is a sub-discipline of ____________.

Answer 6

Economics

Question 7

The traditional “buy low and sell high” mantra of finance is operational if and only if _________________

Answer 7

1) Market prices and intrinsic values occasionally diverge; 2) Market values generally return to intrinsic values over time; and 3) Tools exist to identify divergence of market values from intrinsic values

Question 8

Finance is the study of the optimal _____________________.

Answer 8

1) Procurement of capital; 2) Deployment of capital; 3) Distribution of free cash flows to creditors and shareholders

Question 9

Which of the following types of capital usually has the highest cost of capital (is the most expensive for the firm requesting the capital)?

Answer 9

Venture Capital (you are selling you business equity and a share of future cash flows)

Question 10

The difference between a firm’s current assets and its current liabilities is called ________________________.

Answer 10

Net Working Capital (NWC)

Question 11

_________________ are the set of standards and procedures by which audited financial statements are prepared.

Answer 11

GAAP

Question 12

The ______________ tax rate is the rate of the tax you would pay if you earned one more dollar.

Answer 12

Marginal

Question 13

__________________ is money spent on fixed assets less money received from the sale of fixed assets.

Answer 13

Net Capital Spending

Question 14

Any cash used to repurchase stock would be considered __________________.

Answer 14

Cash flow to shareholders

Question 15

Financial planning provides a plethora of benefits. Which of the following is/are benefits offered by financial planning?

Answer 15

1) Helps avoid surprises; 2) Allows for the exploration of several options; 3) Helps to ensure feasibility

Question 16

Forecasted financial statements are typically referred to as ____________.

Answer 16

Pro-forma statements

Question 17

The ratio of cash dividends/net income is known as the ________________ ratio.

Answer 17

Dividend-payout

Question 18

The maximum growth rate a firm can achieve without external financing of any kind is called the ____________ growth rate.

Answer 18

Internal growth rate

Question 19

Which of the following would increase a firm’s sustainable growth rate?

Answer 19

Decreasing the dividend payout ratio

Question 20

What does top-down forecasting rely on - brief explanation . . .

Answer 20

Top-down forecasting involves first an analysis of the market within which a company does business. We want to know the size of the market, relevant segments we conduct business in, our market share in each segment, and the historical growth rates in the market overall, the segments, and our market share. When we know the market size (and segment size) we can estimate what our market share will be in the future. We will then multiply our estimated market share by the market size to estimate our forecasted revenue.

Question 21

Explain how you might go about estimating the depreciation expense for Marriott International, Inc. if you were forecasting its financial statements for the next year.

Answer 21

Depreciation expenses are driven by growth in sales (revenue) as cash is converted to assets as a means of generating revenue. These assets are depreciated over time. I would estimate future revenue, look at current assets as a % of sales for the current year to estimate net change in fixed assets and factor in the how the assets were depreciated in the prior year to current year. Alternatively, you may use a SALY approach and consider prior year’s depreciation expenses.

Question 22

Interest earned on both the initial principal and the interest reinvested from prior periods is known as _____________ interest.

Answer 22

Compound

Question 23

An annuity for which the cash flows occur at the beginning of the period (instead of the end) is known as a(n) _______________.

Answer 23

Annuity Due

Question 24

An annuity in which the cash flows continue forever is called a(n) _____________.

Answer 24

Perpetuity

Question 25

Explain why money to be received in the future should be discounted.

Answer 25

inflation generally rises with time which decreases the purchasing power of a dollar now vs. a future dollar. Alternatively, a dollar now held in an interest bearing account creates an opportunity cost when interest can be earned vs. receiving a dollar in the future

Question 26

Which of the following would most clearly make the interest-rate risk of a bond higher?

Answer 26

Longer time to maturity

Question 27

A __________ is a part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender’s interest?

Answer 27

Protective covenant

Question 28

The biggest borrower in the world (by a wide margin) is ____________________.

Answer 28

The U.S. Government

Question 29

Bond ratings measure __________________.

Answer 29

risk of default

Question 30

A ______________ is a convertible bond that can be converted to stock only if the contingency feature is met.

Answer 30

A CoCo Bond

Question 31

_______________ are a particularly popular form of floating rate bond issued by the US government with coupon payments that adjust based on inflation.

Answer 31

TIPS

Question 32

The highest price a dealer is willing to pay for a security is known as the _______________.

Answer 32

Bid

Question 33

Based on the Fisher effect, what is the real rate of return if the nominal rate is 9% and inflation is 4%?

Answer 33

4.81%

Question 34

Which of the following is the most likely to cause fluctuations in the shape of the yield curve?

Answer 34

Inflation Premium

Question 35

If YTM remains constant over the life of the bond, what happens to the market price of the bond over time?

Answer 35

It would approach the par value

Question 36

If you were confident that inflation was going to decrease over the next few months, would you want to buy or sell bonds now?

Answer 36

Rising inflation erodes the future value of bonds. An expected drop in inflation rate would increase the value of the bond by increasing expected future cash flows. You should buy bonds if you expect to have a decline in inflation

Question 37

If you believed that YTM over the next several months were going to be highly volatile, would you recommend holding long or short duration bonds?

Answer 37

Short duration bonds minimize risk and exposure to loss by reducing the effects of volatility.