Principles of Finance Mid Term Test.docx

Principles of Finance Mid-Term Test Diction Publishing estimates that it needs \$500,000 to support its expected growth. The underwriting fees charged by the investment banking firm you work for are 6.5% for such issue sizes. In addition, it is estimated that Diction will incur \$4,900 in other exp...

Principles of Finance Mid-Term Test Diction Publishing estimates that it needs \$500,000 to support its expected growth. The underwriting fees charged by the investment banking firm you work for are 6.5% for such issue sizes. In addition, it is estimated that Diction will incur \$4,900 in other expenses related to the IPO. a\. If your analysis indicates that Diction's stock can be sold for \$40 per share, how many shares must be issued to *net* the company the \$500,000 it needs? Set up and solve the problem. Net Proceeds= (Price per Share) X (Number of Shares Issued) X (1- Underwriting Fee) -- Other Expenses Arrange into a workable Problem. 1\. Industrial groups are organizations comprised of companies in different industries with common ownership interests, which include firms necessary to sell and manufacture products. T\* or F 2\. Nations do not have the sovereignty to takeover (expropriate) the assets of a firm without compensation. T or F\* 3\. Managers of firms that use alternative accounting techniques to inflate current earnings are likely to generate long-term benefits to the shareholders of the firm. T or F\* 4\. If a firm raises its product prices beyond reasonable levels, it will generally lose some of its market share. T\* or F 5\. In general, the role of a financial manager is to plan for the acquisition and use of funds so as to maximize to value of the firm. T\* or False 6\. The prices at which the currency of one country can be converted into the currencies of other countries are known as \_\_\_\_\_\_. a\. Procurement prices b\. Exchange Rates\* 7\. Actions that help a firm increase the price of its stock also \_\_\_\_. a\. Result in inflation b\. Require the development of products that consumers want and need.\* 8\. Stock price maximization requires \_\_\_\_\_\_. a\. Efficient, low-cost plants that produce high-quality goods and service\* b\. Investment in high-cost plants to manufacture efficiently 9\. The primary goal of financial manager should be to \_\_\_\_\_. a\. minimize interest payments b\. maximize the value of the firm's stock\* 10\. Which of the following functions deals with the management of money? a\. Marketing b\. Financial Services\* 1\. Which of the following statements is included in the annual reports of a company? a\. Statement of cash flows\* b\. Proxy Statement 2\. Which of the following financial statements includes information about a firm's assets, equity, and liabilities at a specific point in time? a\. Income Statement b\. Balance Sheet\* 3\. Which of the following is an example of a current asset? a\. Inventory\* b\. Common Stock 4\. \_\_\_\_\_ is an example of a long-term investment of a firm. a\. Retained earnings b\. Equipment\* 5\. Which of the following is considered as a liability in the balance sheet of a firm? a\. Plant and Equipment b\. Corporate Bonds\* 6\. A firm's net income as reported on its income statement is also known as the firm's \_\_\_\_\_\_. a\. Net Sales b\. Accounting Profit\* 7\. Which of the following is an example of a noncash item reported in the income statement of a firm? a\. Taxes b\. Depreciation\* 8\. \_\_\_\_\_ is an example of cash flow from an inventory activity in a cash flow statement. a\. Purchase of inventory b\. Purchase of equipment\* 9\. A firm obtains the funds needed to pay its current bills primarily from its: a\. Equity b\. Liquid Assets\* 10\. Techniques employed by firms to make their financial statements look better than they are, are called: a\. Benchmarking b\. Window-dressing techniques\* 1\. Which form of informational efficiency states that current market prices of securities reflect all pertinent information? a\. Semi strong-form b\. Strong-form\* 2\. When a business sells its stocks or bonds to investors without going through any type of intermediary or financial institution, this process is known as a(n) \_\_\_\_\_\_. a\. Best-effort arrangement b\. Direct Transfer\* 3\. Most foreign financial institutions are allowed to engage in nonbanking (nonfinancial) business activities, whereas the nonbanking activities of U.S. intermediaries have been severely restricted until recently. T \*or F 4\. The international market for bonds has grown at a slower rate as compared to the international stock markets T or F\* 5\. An over-the-counter (OTC) market is a physical exchange, much like the New York Stock Exchange, where securities dealers provide market trading in unlisted securities. T or F\* 6\. Which of the following acts proposed the creation of new organizations to monitor rules associated with the capital, liquidity, and risk of financial institutions to help prevent future failures of mega financial organizations? a\. Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) b\. Emergency Economic Stabilization Act of 2008\* 7\. The form of informational market efficiency that states that current market prices fully reflect all information contained in past price movements is known as the \_\_\_\_\_\_. a\. Real-time efficiency b\. Weak-form efficiency\* 8\. Which of the following terms refers to the process of converting a not-for-profit stock exchange owned by its members to a for-profit organization with publicly-traded stock that are owned by outside shareholders? a\. Demutualization\* b\. Consolidation 9\. A stock with a dual listing is \_\_\_\_\_\_\_. a\. Registered to be traded in more than one money market. b\..Registered to be traded in more than one stock market.\* 10\. Listing requirements of a security refer to the \_\_\_\_\_\_\_\_\_\_\_\_. a\. quantitative and qualitative characteristics a firm posses to be listed on a stock exchange.\* b\. quantitative and qualitative characteristics a firm must possess to be listed with the Securities and Exchange Commission (SEC) 1\. Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment T \*or F 2\. If a loan is to be repaid in equal amounts (monthly, quarterly, or annually), it is said to be an amortized loan. T\* or F 3\. The present value of an uneven cash flow can be determined by using the annuity equations. T or F\* 4\. Gale Corporation leases the printing equipment it uses. The terms of the lease require the monthly lease payments to be made at the beginning of every month. This is an example of an annuity due. T\* or F 5\. The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as \_\_\_\_\_\_\_. a\. Compounding b\. Discounting\* 6\. In most instances, the payment of utility bills is an example of \_\_\_\_\_\_\_. a\. Immediate Annuity b\. Uneven Cash Flows\* 7\. Which of the following is the rate of return on the best available alternative investment of equal risk? a\. Risk adjusted rate b\. Opportunity cost rate\* 8\. Which of the following types of annuities best describe a mortgage payment or payment of rent that normally must be paid at the beginning of each month? a\. Annuity due\* b\. Annuity in arrears 9\. When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) \_\_\_\_\_\_\_. a\. Immediate annuity b\. Ordinary annuity\* 10\. An annuity with payments that occur at the beginning of each period is known as a \_\_\_\_\_\_\_\_. a\. Immediate annuity b\. Annuity due\* 1\. In general, when rates in the financial markets increase, the prices (values) of financial assets decrease. T\* or F 2\. The value of an asset is the future value of the cash flows that the asset is expected to generate during its life. T or F\* 3\. Inflation leads to an increase in the purchasing power of investors. T or F\* 4\. A foreign trade deficit occurs when a country's \_\_\_\_\_\_\_\_. a\. imports are greater than its exports\* b\. savings rate is higher than it borrowing rate 5\. If the Federal Reserve loosens the money supply to control growth in the economy, \_\_\_\_\_\_\_. a\. Interest rates will decrease\* b\. credit supply will decrease 6\. During \_\_\_\_\_, both the demand for money and the rate of inflation tend to fall, which prompts the Fed to take actions to decrease interest rates. a\. a fiscal deficit occurrence b\. recessions\* 7\. The change in the market value of an asset over a particular time period is called the \_\_\_\_\_\_\_. a\. Capital gain\* b\. Yield 8\. \_\_\_\_\_\_\_\_ can be negative if the value of the investment decreases during the period it is held. a\. Risk b\. Capital gains\* 9\. In the financial market context, \_\_\_\_\_\_ is the chance that a financial asset will not earn the return promised. a\. Risk\* b\. Time preference for consumption 10\. The production opportunities that exist in the economy represents one of the four fundamental factors that affect the: a\. Cost of money\* b\. Creditworthiness of investors 1\. The terms and conditions of a bond are set forth in its: a\. indenture\* b\. articles 2\. A bond differs from a term loan in that: a\. A bond involves minimal formal documentation. b\. A bond has a higher issuance cost.\* 3\. In the event of liquidation, a (n) \_\_\_\_\_ has a claim on assets only after the senior debt has been paid off. a\. Subordinated debenture\* b\. Indenture 4\. A (n) \_\_\_\_\_ bond can be exchanged for shares of equity at the owner's (bondholder's) discretion. a\. Callable b\. Convertible\* 5\. \_\_\_\_\_ bonds are high-risk, high-yield bonds that are often used to finance merger, leveraged buyouts, and troubled companies. a\. Junk\* b\. Floating-rate 6\. Which of the following bonds pays interest based on an inflation index? a\. Income bonds b\. Purchasing power bonds\* 7\. The par value of debt is: a\. Is equal to the market value of the debt b\. Must be repaid at some point during the life of the debt\* 8\. The face value of a debt is: a\. The principle value written on the face, or outside cover, of a debt contract.\* b\. Always equal to the market value of the debt. 9\. The date on which the principal amount of a debt is due is the: a\. maturity date\* b\. issue date 10\. For installment loans, the maturity date is: a\. The date on which the last installment repayment of the principal amount is due.\* b\. The date on which the market interest rate rises above the coupon rate. 1\. Which of the following types of securities is referred to as a hybrid security? a\. Preferred stock\* b\. Foreign equity 2\. If a preferred stock issue has a conversion feature, the stock can be converted into \_\_\_\_\_. a\. Common stock\* b\. Corporate bonds 3\. Which of the following securities can be converted into common stock by investors? a\. Proxy stocks b\. Preferred stocks\* 4\. A convertible preferred stock can be exchanged for a certain number of shares of common stock at the \_\_\_\_\_\_. a\. Conversion price\* b\. Par value 5\. Stocks that produce returns that are based primarily on dividends are traditionally called \_\_\_\_\_\_. a\. Income stocks\* b\. Growth stocks 6\. How can a firm effectively incorporate a maturity provision within a preferred stock issue? a\. By including a call provision\* b\. By including a cumulative dividends provision 7\. What is another name for the par value of a preferred stock? a\. Interest b\. Liquidation value\* 8\. A shareholder can transfer the right to vote to another person by means of an instrument known as \_\_\_\_\_\_. a\. Consortium b\. Proxy\* 9\. If a German company sells its stock in the United States, it is termed as a(n) \_\_\_\_\_\_\_\_. a\. Yankee stock\* b\. Euro Stock 10\. If the expected rate of return on a stock exceeds the required rate, it means that \_\_\_\_\_\_. a\. The stock should be sold. b\. The stock is a good buy.\* 1\. The greater the variability of the possible returns on an investment, \_\_\_\_\_\_. a\. The lesser the expected return. b\. The riskier the investment\* 2\. The probability of the payoffs on an investment consists of a \_\_\_\_\_\_. a\. Listing of all possible outcomes with a chance of occurrence assigned to each outcome.\* b\. Measure of the relationship of one investment with another investment. 3\. The expected rate of return of an investment \_\_\_\_\_\_\_. a\. Is the mean value of the probability distribution of possible outcomes. b\. Equals one of the possible rates of return for that investment. 4\. The \_\_\_\_\_ of an investment is a measure of tightness, or variability, of its set of returns. a\. Standard deviation of the returns\* b\. Expected return 5\. The difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky is known as the \_\_\_\_\_. a\. Risk premium\* b\. Standard deviation of returns 6\. Which of the following portfolios would have no diversification benefits? a\. A portfolio consisting of two perfectly positively correlated stocks.\* b\. A portfolio consisting of two perfectly negatively correlated stocks. 7\. Which of the following is a measure of the extent to which the returns on a given stock move with the stock market? a\. Beta Coefficient\* b\. Standard Deviation 8\. In a given portfolio, replacing an existing investment with a lower beta investment results in \_\_\_\_\_\_. a\. An increase in the expected rate of return of the portfolio. a\. A decrease in the required rate of return of the portfolio.\* 9\. The part of a security's risk associated with economic factors that affect all firms to some extent is known as the \_\_\_\_\_. a\. Market Risk\* b\. Business Risk 10\. The part of a security's risk associated with random outcomes generated by events or behaviors specific to the firm is known as \_\_\_\_\_\_. a\. Systematic Risk b\. Unsystematic Risk\*