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FINA 3332 Final Exam Already Graded A+
Emerald Corporation's current ratio is 0.5, while Ruby (Emerald's competitor) Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions? - correct answer Only Emerald Corporation's current ratio will be increased. The statement of retained earnings for Redwood Systems Ltd. shows a retained earnings balance of $300 million on December 31. During the year, Redwoos generated net income of $60 million and paid dividends of $20 million to its stockholders. What was beginning balance of retained earnings at the start of the year? - correct answer $? +60 million-$20 million = $300 million x= $260 million Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0? - correct answer Accounts receivable are collected. Bicksler Corporation has a current ratio of 2.0 on July 21 of the current year. On July 22, Bicksler purchased (and received) raw materials on credit from its supplier. Assuming all other things are equal, how will this transaction affect the current ratio of Bicksler? - correct answer The value of the current ratio will decrease. Under the best-efforts arrangement, the investment banker purchases all of the shares from the issuing firm and then resells them to the public. Under this arrangement, the investment banker assumes significant risk. True or False - correct answer False Which of the following is true of shareholders in continental Europe? -The stocks of corporations are widely dispersed among a large number of different investors, both individuals and institutions. -Many shareholders assign banks their proxy votes for the directors of the companies.
-Banks are major shareholders of corporations in continental Europe. -Major shareholders of closed corporations are not involved in the firm's daily operations. -Shareholders in continental Europe are often family units resulting from the universal banking relationship existing in the United States. - correct answer Many shareholders assign banks their proxy votes for the directors of the companies. An arrangement in which the investment banking firm typically buys the securities from the issuing firm and then sells the securities in the primary markets, hoping to make a profit, is called a(n) - correct answer Underwritten arrangement The management's primary goal is stockholder wealth maximization, which translates into___ - correct answer Maximizing the value of the firm as measured by the price of its common stock In an underwritten agreement, the investment banker assures the company that is issuing new securities that the entire issue will be sold, which means the investment banker bears significant risks in such an offering. True or False - correct answer True Which of the following forms of business offers limited personal liability to owners as well as the choice to be taxed as either a corporation as a partnership? - correct answer Limited liability company The difference between the issuing price of debt or equity issue and the net proceeds of the issue and the net proceeds of the issue received by the issuing firm is known as the___? - correct answer Underwriter's spread Which of the following mathematical expressions computes the net worth of a firm? - correct answer Net worth= Total assets minus total liabilities Which of the following is true of the investment function of finance? -The investment functions focus on socially responsible actions taken by corporations.
Dual listing of stocks and the mandatory use of the trade-through rule when trading in securities have made the stock markets extremely competitive. True or False - correct answer True Which of the following statements is true of corporate bylaws? -Corporate bylaws are a set of rules drawn up by the state to enable managers to run the firm in accordance with state laws. -Procedures for electing corporate directors are contained in corporate bylaws. -Procedures that govern changes in corporate bylaws are contained in the corporate charter. -To open their doors and start their operations are legally required only to file their bylaws with the appropriate agency in the state where they incorporate. -The declaration of the activities that a firm will pursue and the number of directors are included in the corporate bylaws - correct answer Procedures for electing corporate directors are contained in corporate bylaws Which of the following is true of a firm that tries to coordinate and control the worldwide operations of its subsidiaries? -The management personnel of its subsidiaries need to be fluent only in English. -The subsidiaries based in different countries never face any constraints on the transfer of corporate resources. -Cash flows in different subsidiaries are denominated in different currencies. -The terms of trade determined after negotiation with the host government and the multinational corporation are always well aligned to the firm's policies. -All the subsidiaries are based only in countries that have homogeneous cultural heritages - correct answer Cash flows in different subsidiaries are denominated in different currencies. In many countries, the terms under which companies compete, the actions that must be taken or avoided, and the terms of trade various transactions are determined by___ - correct answer Direct negotiation between the host government and the multinational corporation
Which of the following statements is correct? -Financial institutions in other countries generally are less regulated than in the United States. -One reason domestic firms "go global" is to sell products in saturated markets. -Often firms can avoid labor laws that apply to foreign manufacturers by establishing manufacturing units in the country where the hurdles apply. -One of the advantages associated with doing business in international markets is that all countries report their financial statements in the U.S. dollar -A multinational firm takes advantage of the cultural differences among countries and uses the same marketing strategy in every country in which it operates. - correct answer Financial institutions in other countries generally are less regulated than in the United States. The New York Stock Exchange (NYSE) is an example of an over-the-counter exchange. True or False - correct answer False A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited liability for business, which limits personal losses to what the proprietor has invested in the company. True or False - correct answer False Which of the following is true of a general partner of a limited liability partnership (LLP)? -A general partner of a limited liability partnership (LLP) is fully personally liable for all business debts. -A general partner of a limited liability partnership (LLP) cannot participate in the management of the business -A general partner of a limited liability partnership (LLP) is considered as an investor only -A general partner of a limited liability partnership (LLP) is liable only to the extent of his/her investment in the partnershispsss
The process of determining the value to which an amount or a series of cash flow will grow in the future when interest on interest is applied is known as - correct answer Compounding An ordinary annuity is an annuity with payments that occur at the beginning of each period - correct answer False The present value of an uneven cash flow can be determined by using the annuity equations - correct answer False Pelican Corporation is planning to invest $12,000 at the beginning of each of the next eight years. This form of cash flow pattern is known as a(n) _____. - correct answer Annuity due A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of cash flow pattern represents a(n) - correct answer Ordinary Annuity The future value of an uneven cash flow stream is also referred to as its - correct answer Terminal Value The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded___ - correct answer annually When the payment for an annuity is made at the end of each period, such as an annuity is referred to as an - correct answer Ordinary Annuity In most instances, the payment of utility bills is an example of___ - correct answer Uneven cash flows The present value of an investment increases as the opportunity cost rate increases. True or False - correct answer False
Andrea's opportunity cost rate is 12 percent compounded annually. The amount he must deposit in an account today if he wants to receive $2,100 at the beginning of each of the next seven years is closest to: - correct answer $10, Dwayne plans to invest $4,700 in a savings account at the beginning of each of the next 12 years. If his opportunity cost rate is 7 percent compounded annually, how much will his investment be worth at the end of 12 years? - correct answer $89,961. Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday? - correct answer 15.19 years Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam's opportunity cost rate is 7 percent compounded annually, what is the maximum amount he should be willing to pay for the investment today? - correct answer $23, An investment carries an interest rate of 8 percent compounded annually. When using the time value of money functions of a financial calculator, the interest rate is entered as 8, whereas it is entered as 0. when using a spreadsheet to make the time value of money calculations. True or False - correct answer True If the opportunity cost rate is 8 percent, compounded annually, what is the present value of $8,200 due to be received in 12 years? - correct answer $3, Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years? - correct answer $36, At the beginning of the year, William bought 20 shares of Zync Corporation at $18.50 per share. Zync pays dividends at the end of each year based on annual profits, which generally vary substantially from year to year. In its 25-year history, Zync has paid dividends every year without fail. The initial investment by William and the receipt of dividend at the end of every year are examples of a(n) - correct answer lump-sum payment; uneven cash flow stream
A leading bank offers an investment that pays 8 percent interest, compounded semiannually. What is the investment's effective annual rate (rEAR)? - correct answer 8.16% Because a bond's rating serves as an indicator of its default risk, the rating has a direct, measurable influence on the firm's: - correct answer cost of using such debt and this the bond's interest rate A bond that can be redeemed for cash at the bondholder's option when certain circumstances exist is called a(n) - correct answer Putable bond The risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates is called _____. - correct answer Interest rate reinvestment risk In general, long-term unsecured debts have lower interest rates (costs) than long-term debts for a particular firm. True or False - correct answer False In the economic value added (EVA) equation, the ___ is subtracted from the after-tax operating income to determine the EVA - correct answer average cost of invested capital If a preferred stock issue has a conversion feature, the stock can be converted into - correct answer Common stock A bond backed by tangible (real) assets is known as a ___ - correct answer Mortgage bond Certificates that represent ownership in stocks of foreign companies and are held in trusts at banks located in the countries where the stocks are traded are called _____. - correct answer American depository receipts Which of the following is true of common stock? - correct answer Dividends must be paid on preferred stock before they can be paid on common stock.
American depository receipts (ADRs) are foreign stocks listed on stock exchanges located outside the country where the firms are headquartered. True or False - correct answer False Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located. True or False - correct answer True Federal funds represent___. - correct answer loans from one bank to another bank As junk bonds are high-risk instruments, the returns on such bonds are not very high. True or False - correct answer False Which of the following would be considered a Euro stock? - correct answer A German company selling stock in Japan A(n)___ is a provision that facilitates the orderly retirement of a bond issue. - correct answer Sinking fund Which of the following is true about the payment of dividends by a firm? - correct answer Growth stocks pay little or no dividends; rather, the firms retain most their earnings each year to reinvest in assets. A bond with a $100 annual interest payment and $1,000 face value with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%. - correct answer True Which of the following stocks is a nonvoting stock and is referred to a s a hybrid stock? - correct answer Preferred stock
A firm's___ is determined by subtracting the costs associated with both the debt and the equity that the firm uses from its after-tax operating income? - correct answer Economic value added (EVA) If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be: - correct answer selling at premium; i.e., the bond's market price should be greater than its face value Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased. By forecasting the needs for capital assets in advance, a firm will have an opportunity to purchase and install assets before they are needed. - correct answer True When considering two mutually exclusive projects, the financial manager should always select the project with the higher internal rate of return, provided the projects have the same initial cost. - correct answer False Everything else equal, an asset's value is___. - correct answer inversely related to the rate of return investors require to purchase it. Which of the following statements about the internal rate of return (IRR) capital budgeting technique is correct? - correct answer It is the discount rate that equates the present value of a project's expected future cash flows to the initial amount invested. Which of the following statements best describes the post-audit function in the capital budgeting process? - correct answer The post-audit involves comparing the actual results of previous capital budgeting decisions with the forecasted results to identify and explain any differences. Which of the following statements about the various kinds of risks is correct? - correct answer Interest rates is a systematic risk, hence it should be rewarded by the market. According to the bond-yield-plus-risk-premium approach, a firm's cost of retained earnings, rs, can be estimated by adding a risk premium of 3 to 5 percentage points to: - correct answer Before-tax interest cost of debt, rs
The part of the security's risk associated with economic factors that affect all firms to some extent is known as the - correct answer market risk Which of the following statements is correct about about the reinvestment assumptions that are inherent in the use of the net present value(NPV) method and the internal rate of return (IRR) method? - correct answer The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the project's IRR The value of any asset--real or financial-- is based on the ____ and the . - correct answer cash flow expected to be generated by the asset; rate of return required by investors Which of the following capital budgeting techniques makes the assumption that the project's cash flows are reinvested at the firm's required rate of return - correct answer Net Present Value Which of the following is a measure of the extent to which the returns on a given stock move with the stock market? - correct answer Beta coefficient A firm's cost of external equity capital (cost of issuing new stock) is equal to the rate of return that stockholders demand (require) to invest in the firm's outstanding common stock. - correct answer False The ___ of an investment is a measure of the tightness, or variability, of its set of returns - correct answer standard deviation of the returns The before-tax cost of debt, rd, is the same as the - correct answer yield to maturity (YTM) associated with the firm's bonds Which of the following statements about beta is correct? - correct answer Firms with greater systematic risk volatilities than the market have betas that are greater than 1.0, and firms with smaller systematic risk volatilities than the market have betas that are less than 1. Which of the following statements is true about the beta of a portfolio? - correct answer If the beta of a stock is three, the stock's relevant risk is three times as volatile as the market portfolio
