Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?
agency problem
A stakeholder is:
any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.
Which one of the following best states the primary goal of financial management?
A. maximize current dividends per share
B. maximize the current value per share
C. increase cash flow and avoid financial distress
D. minimize operational costs while maximiz
maximize the current value per share
Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?
A. increase in the amount of the quarterly dividend
B. decrease in the per unit production costs
C. increase in the number of shares
increase in the market value per share
Why should financial managers strive to maximize the current value per share of the existing stock?
because they have been hired to represent the interests of the current shareholders
Decisions made by financial managers should primarily focus on increasing which one of the following?
. market value per share of outstanding stock
The Sarbanes-Oxley Act of 2002 is a governmental response to:
management greed and abuses.
Which one of the following is an unintended result of the Sarbanes-Oxley Act?
corporations delisting from major exchanges
A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:
can provide less information to its shareholders than it did prior to "going dark".
Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002?
I. increased foreign stock exchange listings of U.S. stocks
II. decreased compliance costs
III. increased privatization of public corporations
IV. increased pub
A. I and III only
I. increased foreign stock exchange listings of U.S. stocks
II. decreased compliance costs
Which one of the following actions by a financial manager is most apt to create an agency problem?
increasing current profits when doing so lowers the value of the firm's equity
Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes.
I. compensation based on the value of the stock
II. stock option plans
III. threat of a company takeover
IV. threat of a
all
I. compensation based on the value of the stock
II. stock option plans
III. threat of a company takeover
IV. threat of a proxy fight
Which form of business structure is most associated with agency problems?
corporation
. Which one of the following is an agency cost?
A. accepting an investment opportunity that will add value to the firm
B. increasing the quarterly dividend
C. investing in a new project that creates firm value
D. hiring outside accountants to audit the co
hiring outside accountants to audit the company's financial statements
Which one of the following is least likely to be an agency problem?
A. increasing the size of a firm
B. concentrating on maximizing current profits
C. closing a division with net losses
D. increasing the market value of the firm's shares
E. obtaining a pa
increasing the market value of the firm's shares
Which one of the following is a means by which shareholders can replace company management?
proxy fight
Which one of the following grants an individual the right to vote on behalf of a shareholder?
proxy
Which one of the following parties has ultimate control of a corporation?
A. chairman of the Board
B. board of directors
C. chief executive officer
D. chief operating office
E. shareholders
shareholders
Which of the following parties are considered stakeholders of a firm?
I. employee
II. long-term creditor
III. government
IV. common stockholder
I and III only
. Give some examples of ways in which manager's goals can differ from those of shareholders.
The primary goal of a financial manager should be to maximize the current value of the outstanding stock. This goal focuses on enhancing the returns to stockholders who are the owners of the firm. However, managers frequently are more concerned with their
How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial intent of that Act?
Some of the key requirements of Sarbanes-Oxley are: the prohibition of personal loans from the company to its officers, an annual report by management of the internal control and financial reporting within the firm along with an independent auditor's asse
How might agency problems arise in partnerships?
Agency conflicts typically arise when there is a separation between the ownership and the management of a business. In a general partnership, especially if the partnership is small, there is less of a chance of an agency conflict if all the partners are i
Which one of the following terms is defined as a conflict of interest
between the corporate shareholders and the corporate managers?
agency problem
Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?
increase in the market value per share
Why should financial managers strive to maximize the current value per
share of the existing stock?
because they have been hired to represent the interests of the current shareholders
Decisions made by financial managers should primarily focus on
increasing which one of the following?
market value per share of outstanding stock
You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now?
future value
Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as w
compounding
Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10 interest on his $100 investment. He reinvested the $10. The second year, he earned $11 interest on his $110 investment. The extra $1 he earned in interest the second y
interest on interest
Interest earned on both the initial principal and the interest reinvested from prior periods is called:
compound interest
Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. Which type of interest is Sara earning?
simple interest
Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and s
Barb will earn interest on interest
Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following stateme
. Sue will have more money than Neal as long as they retire at the same time.
Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?
A. The present values
In today's dollars, Luis' money is worth more than Soo Lee's.
Martin invested $1,000 six years ago and expected to have $1,500 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, Martin only has $1,420 in his acco
Martin earned a lower interest rate than he expected.
Gerold invested $6,200 in an account that pays 5 percent simple interest. How much money will he have at the end of ten years?
$9,300
You are considering two separate investments. Both investments pay 7 percent interest. Investment A pays simple interest and Investment B pays compound interest. Which investment should you choose, and why, if you plan on investing for a period of 5 years
Simple interest is interest earned on the initial principal amount only. Compound interest is interest earned on both the initial principal and all prior interest earnings that have been reinvested. You should choose Investment B which pays compound inter
What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
The future value formula is: FV = PV (1 + r)t. Time is the exponent. While the rate of return is important and has a direct affect on the growth of an investment account, time is critical. To maximize retirement income, workers need to commence saving whe
An ordinary annuity is best defined as
equal payments paid at regular intervals over a stated time period
Which one of the following accurately defines a perpetuity?
A. a limited number of equal payments paid in even time increments
B. payments of equal amounts that are paid irregularly but indefinitely
C. varying amounts that are paid at even intervals forev
unending equal payments paid at equal time intervals
Which one of the following terms is used to identify a British perpetuity?
consol
You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the
Annuity B has a smaller present value than annuity A.
You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual payments o
Option B has a higher present value at time zero than does option A.
Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?
coupon
Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?
face value
. A bond's coupon rate is equal to the annual interest divided by which one of the following?
face value
The specified date on which the principal amount of a bond is payable is referred to as which one of the following?
maturity
Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?
yield to maturity
The current yield is defined as the annual interest on a bond divided by which one of the following?
market price
A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond?
I. discounted price
II. premium price
III. yield-to-maturity that exceeds the coupon rate
IV. yield-to-maturity that is less than the coup
II and IV only
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
. a discount; less than
The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond?
decrease the market price
Which of the following are characteristics of a premium bond?
I. coupon rate < yield-to-maturity
II. coupon rate > yield-to-maturity
III. coupon rate < current yield
IV. coupon rate > current yield
II and IV only
Which of the following relationships apply to a par value bond?
I. coupon rate < yield-to-maturity
II. current yield = yield-to-maturity
III. market price = call price
IV. market price = face value
II and IV only
Which one of the following relationships is stated correctly?
A. The coupon rate exceeds the current yield when a bond sells at a discount.
B. The call price must equal the par value.
C. An increase in market rates increases the market price of a bond.
D.
Decreasing the time to maturity increases the price of a discount bond, all else constant.
A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:
greater than 7 percent.
. Which of the following increase the price sensitivity of a bond to changes in interest rates?
I. increase in time to maturity
II. decrease in time to maturity
III. increase in coupon rate
IV. decrease in coupon rate
I and IV only
Which one of the following bonds is the least sensitive to interest rate risk?
. 3-year; 6 percent coupon
As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:
increases at a decreasing rate.
You own a bond that has a 6 percent annual coupon and matures 5 years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is
You will realize a capital gain on the bond if you sell it today
You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?
long-term; zero coupon
A 6 percent, annual coupon bond is currently selling at a premium and matures in 7 years. The bond was originally issued 3 years ago at par. Which one of the following statements is accurate in respect to this bond today?
A. The face value of the bond tod
The yield-to-maturity is less than the coupon rate.
What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?
dividend growth
Which one of the following is computed by dividing next year's annual dividend by the current stock price?
dividend yield
Which one of following is the rate at which a stock's price is expected to appreciate?
capital gains yield
National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:
. priced the same as a $1 perpetuity.
An increase in which of the following will increase the current value of a stock according to the dividend growth model?
I. dividend amount
II. number of future dividends, provided the current number is less than infinite
III. discount rate
IV. dividend g
I, III and IV only
High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually. Give
capital gains yield
The dividend growth model:
I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point in time.
III. can be used to value zero-growth stocks.
IV. requires the growth rate to be less than the require
all of the above
Which one of the following is an underlying assumption of the dividend growth model?
A stock's value is equal to the discounted present value of the future cash flows which it generates.
Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:
a decrease in all stock values.
Which one of the following statements is correct concerning the two-stage dividend growth model?
G1 can be greater than R.
Which one of the following statements is correct?
A. The capital gains yield is the annual rate of change in a stock's price.
B. Preferred stocks have constant growth dividends.
C. A constant dividend stock cannot be valued using the dividend growth model
The capital gains yield is the annual rate of change in a stock's price.
Supernormal growth is a growth rate that:
is unsustainable over the long term.
Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?
The stock has a negative capital gains yield.
The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:
grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
. Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?
dividend payments which increase by 10 percent per year for 5 years followed by dividends which increase by 3 percent annually thereafter
A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?
net present value
Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?
discounted cash flow valuation
The length of time a firm must wait to recoup the money it has invested in a project is called the:
payback period
A project has a net present value of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in current dollar terms.
Which one of the following will decrease the net present value of a project?
increasing the project's initial cost at time zero
Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?
net present value
If a project has a net present value equal to zero, then:
the project earns a return exactly equal to the discount rate.
Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present valu
cash inflow in the final year of the project
Which one of the following increases the net present value of a project?
. an increase in the aftertax salvage value of the fixed assets
Net present value is the best method of
analyzing mutually exclusive projects.
Why is payback often used as the sole method of analyzing a proposed small project?
. It is the only method where the benefits of the analysis outweigh the costs of that analysis
Which of the following are advantages of the payback method of project analysis?
I. works well for research and development projects
II. liquidity bias
III. ease of use
works well for research and development projects AND ease of use
Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has a
project A only
A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?
A. The cash flows in each of the three years must exceed one-third of the project's initial cost if t
The cash flow in year two is valued just as highly as the cash flow in year one.
Which one of the following statements related to payback and discounted payback is correct?
A. Payback is a better method of analysis than is discounted payback.
B. Discounted payback is used more frequently in business than is payback.
C. Discounted payb
Payback is used more frequently even though discounted payback is a better method.
Which one of the following costs was incurred in the past and cannot be recouped?
sunk
The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?
opportunity cost
Which one of the following best describes the concept of erosion?
A. expenses that have already been incurred and cannot be recovered
B. change in net working capital related to implementing a new project
C. the cash flows of a new project that come at th
. the cash flows of a new project that come at the expense of a firm's existing cash flows
Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications?
ACRS
Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project?
I. utilizing the credit offered by a supplier to purchase the appliance inventory
I
I. utilizing the credit offered by a supplier to purchase the appliance inventory
II. benefiting from increased furniture sales to appliance customers
III. borrowing money from a bank to fund the appliance project
Which one of the following is an example of a sunk cost?
A. $1,500 of lost sales because an item was out of stock
B. $1,200 paid to repair a machine last year
C. $20,000 project that must be forfeited if another project is accepted
D. $4,500 reduction in
$1,200 paid to repair a machine last year
G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated a
sunk
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?
A. providing both ketchup and mustard for its customer's use
B. repairing the roof of the hot dog stand because of water damage
C. selling fewer hot
selling fewer hot dogs because hamburgers were added to the menu
Which of the following should be included in the analysis of a new product?
I. money already spent for research and development of the new product
II. reduction in sales for a current product once the new product is introduced
III. increase in accounts re
II. reduction in sales for a current product once the new product is introduced
III. increase in accounts receivable needed to finance sales of the new product
IV. market value of a machine owned by the firm which will be used to produce the new product
All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero?
I. purchase of $1,400 of parts inventory needed to support the project
II. loan of $125,000 used to finance the project
III. depreciat
I and IV only
Changes in the net working capital requirements:
. can affect the cash flows of a project every year of the project's life.
Which one of the following is a project cash inflow? Ignore any tax effects.
A. decrease in accounts payable
B. increase in inventory
C. decrease in accounts receivable
D. depreciation expense based on MACRS
E. equipment acquisition
decrease in accounts receivable
Net working capital:
A. can be ignored in project analysis because any expenditure is normally recouped at the end of the project.
B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project.
C. is rarel
can create either a cash inflow or a cash outflow at time zero of a project.
A company that utilizes the MACRS system of depreciation will have a greater:
tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life.