Stock pricing models do not give precise results due to the uncertainty of future cash
flows.
In many financial mergers, private equity groups are taking advantage of firms whose
market value is less than their intrinsic value.
Lock boxes are designed to reduce mail float.
The ROCE measures the profitability of operations before financing charges but after
taxes on a basis comparable to ROE.
The issuing corporation or government entity is usually involved in a primary market
transaction.
Market segmentation theory states that loan terms define independent segments of the
debt market which set separate rates.
Bonds are referred to as amortized debt due to fact that interest and principal payments
are made to the lender until maturity.
The primary market is the resale market for securities.
The dividend yield is the annual dividend divided by the current stock’s price.
Tranches refer to slices of CDO cash flows categorized based on risk. Higher-risk
tranches are sold at higher prices, which reduces their return.
We say a working capital financing policy is conservative if short-term funding is used
to support working capital.
A planning assumption is a physical or economic condition or management decision
that is expected to exist during the planning period.
Risk can be incorporated into capital budgeting through a computer technique called
Monte Carlo Simulation in which the computer simulates the project many times by
drawing cash flows randomly from probability distributions.
When an acquiring firm pays too much for an acquisition the real losers are the
acquirer’s top management and board of directors.
Assume the following facts about a firm:
The firm’s external funding requirement for next year is
Hint: You don’t have to remember the EFR formula. Just realize that the funding
requirement is the growth in assets less that in current liabilities less next year’s retained
earnings. A negative result means surplus funds are available.)
A.$10,800
B.($28,800)
C.($10,800)
D.$28,800
____ risk CAN be diversified away by investing in a diversified portfolio.
A.Systematic
B.Business-specific
C.Unsystematic
D.Both b & c
The modified internal rate (MIRR) of return eliminates the:
A.average return problem of IRR.
B.negative cost of capital under the NPV method.
C.the reinvestment and multiple solutions problems of IRR.
D.present value problem of the payback period method.
In a congeneric merger:
A.the combining companies are in unrelated businesses.
B.the combining companies are competitors.
C.the combining companies are in related but not competing businesses.
D.one of the combining companies is a supplier of the other.
€Term€ is defined as:
A.a number of years.
B.an annuity.
C.a period of time.
D.when an annuity is calculated.
Inventory carrying costs include:
A.the costs of storage, security, taxes, and insurance.
B.the costs of financing and obsolescence.
C.the costs of spoilage, shrinkage, and breakage.
D.All of the above
Business risk, as defined in terms of variation in a firm’s operating performance and
measured by EBIT, would be effected by variation in all of the following, except:
A.anticipated changes in federal regulations.
B.business operations.
C.expenses.
D.revenues.
The conflict of interest between management and stockholders is known as:
A.the stockholder/management problem.
B.the management problem.
C.the agency problem.
D.a problem relating to excess compensation.
If a company decides to factor its receivables without recourse, it will:
A.offer the receivables to a lending institution as collateral.
B.sell receivables to a lender and remain liable for uncollectible accounts.
C.sell the receivables at a discount.
D.offer receivables that are more than 120 days old to a collection agency.
E.none of the above defines factoring receivables.
Although quick and easy to apply, the payback method is deficient. In that it:
A.disregards the time value of money.
B.it assumes that inflows are reinvested at the internal rate of return until the end of the
project’s life.
C.disregards cash flows after the payback period.
D.a and c
If the discount rate is 12%, what is the present value of the following cash flows:
A.$144,618
B.$127,923
C.$127,197
D.$90, 537
Fast Wheels, Inc. expects to pay an annual dividend of $0.72 next year. Dividends have
been growing at a compound annual rate of 6 percent and are expected to continue
growing at that rate. What is the value of a share of Fast Wheels if similar stocks return
14 percent?
A.$9.00
B.$5.14
C.$9.54
D.none of the above
Kaneb Services, Inc. has just declared a 3-for-2 stock split. The company’s pre-split
common stockholders’ equity was as follows:
If the pre-split price of common stock was $42, what will be the amount of retained
earnings after the split?
A.$140,100,000
B.$139,200,000
C.$182,100,000
D.$141,350,000
A firm has EBIT of $3.6M and debt of $15M on which it pays 8% interest. What is its
Degree of Financial Leverage (DFL)?
A.1.0
B.1.4
C.1.5
D.1.6
Which of the following is true of the Dividend Aristocrats?
A.Dividend Aristocrats are companies that are measured based on the performance
index of S&P 500.
B.Dividend Aristocrats are companies that pay a constant dividend every year.
C.Dividend Aristocrats are companies that have been immune from recessions.
D.Dividend Aristocrats are companies that have increased their dividends every year in
the past twenty years.
Suppose your savings account pays an annual rate of 3% compounded monthly. What is
the yield on this account?
A.2.25%
B.2.68%
C.3.04%
D.3.27%
The cash budget is prepared for managers to:
A.identify short-term cash inflows and outflows.
B.match expenses with revenue on an accrual accounting basis.
C.discover if the plans of the firm will create a positive or negative profit.
D.All of the above
Accounting and finance each have significant responsibilities related to the firm’s
financial performance; however, the accountant’s role is informational, while the
financial analyst’s role is critical and investigative. Therefore, we can say that:
A.the accountant’s job stops at the presentation of information.
B.the analyst must rely on the accountant to assist in analyzing the financial statements
because the accountant is more familiar with their content.
C.the financial analyst assesses the information presented in the accountant’s financial
statements to seek out problems and their ramifications for the firm.
D.financial analysts qualified to practice as CPAs may undertake both responsibilities
and eliminate any overlap of similar tasks.
Capital budgeting involves:
A.planning and justifying how capital dollars are spent on long- term projects.
B.planning and justifying how capital dollars are spent on short- term projects.
C.saving for future investments.
D.evaluating past business projects.
Explain the breakeven analysis.
Explain the difference between a promissory note, a line of credit, and a revolving
credit agreement.
A partial financial plan for Blatt Inc. is shown below. Blatt pays 10% interest on all of
its debt and is subject to a total effective tax rate of 50%
Complete the forecast developing consistent debt and interest figures for next year.
Payables are entirely due to inventory purchases at Cosmo Inc. COGS is 70% materials,
and the company pays its bills in 50 days. This year’s revenue is $1,000,000 and is
forecast to grow by 15% next year. The cost ratio (COGS as a % of revenue) is planned
at 40% next year. Forecast next year’s ending payables balance.
SMK Broadcasting is thinking about increasing its current dividend from $1.00 to either
$1.07 (a seven percent growth rate) or $1.10 (a ten percent growth rate). Once it adopts
the change, SMK wants to maintain the same dividend growth rate for the foreseeable
future. Hence, the required return with the higher growth rate is 16%, while the required
return with the lower growth rate is 13%. Which dividend adjustment will result in a
higher price for SMK Broadcasting’s common stock?
The emergence of the junk bond as a financing tool contributed significantly to the
merger and acquisition activity of the 1980s. Describe the junk bond and explain the
premise on which its popularity grew. What was the inherent flaw in the rationale?
Explain call provisions on a bond. How does it help bond-issuers?
The Rich Company has a dividend growth rate of 14 percent, a current share price of
$56.00, and a current dividend of $1.50. What is the required rate of return for Rich
Company shares?