6. Market value ratios Aa Aa E
Ratios are mostly calculated based on the financial statements of a firm. However, another group of ratios, called
marketbased ratios, relate to a firms observable market value, stock prices, and book values, integrating
inf
5. Bond yields Aa Aa a
Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This
percentage return is referred to as the bond's yield.
Yield to maturity (YTM) is the rate of return expected from a
True/False Questions
1. At a given net income, a build-up of inventories paid for with debt results in a
decrease in operating cash flows
a. True; increase in inventory increase in net working capital (reduces
operating cash flows)
2. An increase in cash
M IDTERM PRACTICE QUESTIONS
Part 1. Answer the following questions TRUE or FALSE and EXPLAIN your
answer in ONE sentence. (Note that you lose 2 points out of 3 if you answer only
True or False)
1. The risk of investing in a security from an investors pers
Notes: FIN 303 Fall 09, Part 3 Financial Institutions
Professor James P. Dow, Jr.
Part 3. Financial Institutions
This section will introduce you to the major kinds of financial institutions.
What is a Financial Intermediary?
Many financial institutions pl
6. Determining the optimal capital structure Aa 5
Understanding the optimal capital structure
Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld
Consortium Corp. has gathered the following fi
6. Determining the optimal capital structure Aa 1%
Understanding the optimal capital structure
Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc.
has gathered the following financial i
1. The risk of investing in a security from an investors perspective is usually
measured by the variance of the securitys return.
A: False; the risk of an individual security is determined by its beta (or contribution to
the total market risk and measure
Format: True/False
Learning Objective: LO 1
Level of Difficulty: Easy
1. Time value of money is based on the belief that people have a positive time
preference for consumption.
A)
True
B)
False
Ans:
A
Format: True/False
Learning Objective: LO 1
Level of D
Multiple Choice Question 28
The assumption of arm's-length transaction states that:
a.
both parties to a transaction can act independently of each other and make economically rational decisions.
b.
both parties to a transaction must have had previous tran
7. Capital structuretheory Aa Aa EL
Which of the following are ways that a rm can reduce cash ows in order to prevent managers from wastefully spending excess cash ows? Check
all that apply.
4 El Minimizing the amount of debt in the rms capital structure
Chapter 2
The Financial Environment and the Level of Interest
Rates
Learning Objectives
1.
Discuss the primary role of the financial system in the economy, and describe the
two basic ways in which fund transfers take place.
The primary role of the financi
6. Determining the optimal capital structure Aa Aa [3
Understanding the optimal capital structure
Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld
Consortium Corp. has gathered the followin
Problem 6.14
Your grandfather is retiring at the end of next year. He would like to ensure that his heirs receive payments
of $8,100 a year forever, starting when he retires. If he can earn 11.3 percent annually, how much does
your grandfather need to inv
2. Business and financial risk Aa Aa E
The impact of financial leverage on return on equity and earnings per share
Consider this case:
Suppose Free Spirit Industries Inc. is considering a project that will require $400,000 in assets.
0 The project is ex
5. Capital structure decisions and firm value Aa Aa '5
Why focus on the optimal capital structure?
Capital structure decisions involve the ways a firms assets are financed and are often presented as a percentage of
the type of financing used, such as debt
4. Bond valuation Aa Aa E
The process of bond valuation is based on the fundamental concept that the current price of a security can be determined by calculating the present
value of the cash ows that the security will generate in the future.
There is a c
Which of the following statements is most correct?
a. 70% of the interest received by corporations is excluded from taxable income.
b. 70% of the dividends received by corporations is excluded from taxable income.
c. Because taxes on long-term capital gai
3. Convertible bonds, warrants, and other exotic bond features Aa Aa a
As the name suggests, convertible bonds allow the owner the option to convert the bonds into a fixed number of
shares of common stock.
Innovative Energy LLC is a start-up company that
Chapter 1
The Financial Manager and the Firm
LEARNING OBJECTIVES
1.
Identify the key financial decisions facing the financial manager of any business
firm.
In running a business, the financial manager faces three basic decisions: (1) which productive
asse
Case 3: AVON
Prepared By:
1
Avon had been attempting to move into the healthcare industry by acquiring
multiple companies that they eventually sold off in the subsequent years. After this
debacle they decided to stick to what they know and maintain their
1. Dividend policy Aa E
A firms value depends on its expected free cash flow and its cost of capital. Distributions made in the form of
dividends or stock repurchases impact the firms value and the investors in different ways.
Some analysts have argued th
1
Chapter 6
Discounted Cash Flows and Valuation
Learning Objectives
1. Explain why cash flows occurring at different times must be discounted to a
common date before they can be compared, and be able to compute the present
value and future value for multi
1
Chapter 16
Capital Structure Policy
Learning Objectives
1.
Describe the two Modigliani and Miller propositions, the key assumptions underlying
them, and their relevance to capital structure decisions.
M&M Proposition 1 states that the value of a firm is
7. Constant-growth rates Aa Aa E
One of the most important components of stock valuation is a firms estimated growth rate. Financial statements
provide the information needed to estimate the growth rate.
Consider this case:
Robert Gillman, an equity res
4. Modified internal rate of return (MIRR) Aa Aa E
The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the
IRR. However, in reality the reinvested cash flows may not necessarily generate a return equ
Chapter 4
Analyzing Financial Statements
LEARNING OBJECTIVES
1. Explain the three perspectives from which financial statements can be viewed.
Financial statements can be viewed from the owners, managers, or creditors perspective. All three
groups are ulti
2. Characteristics of bonds Aa Aa IE
To be effective issuing and investing in bonds, knowledge of their terminology, characteristics, and features is
essential.
For example:
0 A bonds face or maturity valuel is generally $1,000 and represents the amount b
Chapter 6
Discounted Cash Flows and Valuation
LEARNING OBJECTIVES
1.
Explain why cash flows occurring at different times must be discounted to a
common date before they can be compared, and be able to compute the present
value and future value for multipl
4. Bond valuation Aa Aa a
The process of bond valuation is based on the fundamental concept that the current price of a security can be determined by calculating the present
value of the cash ows that the security will generate in the future.
There is a c
10. Bond ratings A; Aa '5
Rating agenciessuch as Standard 8: Poors (5&P), Moodys Investor Service, and Fitch Ratingsassign credit ratings
to bonds based on both quantitative and qualitative factors. These ratings are considered indicators of the issuers
d
For example, assume Olivia wants to earn a return of 7.50% and is offered the opportunity to purchase a $1,000 par value bond that pays a 6.25%
coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be use
9. More on types of bonds Aa Aa E
You can distinguish the various types of bonds by their terms of contract, pledge of collateral, and so on. Identify the
type of bond based on each description given in the table that follows:
Description Type of Bond
The
8. Risks of investing in bonds Aa Aa a
The higher the risk of a security, the higher its expected return will be. A bond's risk level is reflected in its yield, but
understanding the different risks involved when investing in bonds is important.
The follo
11. Bond listings and yield spreads Aa Aa E
The following bond list is from the business section of a nancial newspaper on January 1, 2012. Assume that each
bond shown matures on January 1 in 5, 10, or 30 years. Each bond shown pays a semiannual couponthe