3313 Practice 1-10 (Conceptual) – Flashcards
Unlock all answers in this set
Unlock answersquestion
Why should you approach every problem by drawing a timeline?
answer
A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.
question
T/F?
To calculate a cash flow's PV, you must compound it.
answer
False
question
If $15,000 is invested at 13% per year, in approximately how many years will the investment double?
answer
5.7 years
question
Every public company is required to produce quarterly and annual financial statements. Those statements are?
answer
The statement of financial position,
the income statement,
statement of cash flows, statement of stockholder's equity.
question
What checks are there on the accuracy of these statements?
answer
Public companies must use a common set of rules and standard format when they prepare their reports
Corporations are required to hire a neutral party, known as an auditor, to check the annual financial statements, ensure that the statements are prepared according to GAAP and provide evidence to support the reliability of the information.
In addition to the auditor's role in reviewing the financial statements, the SOX Act requires both the CEO and the CFO to personally attest to the accuracy of the financial statements presented to shareholders and to sign a statement to that effect.
question
What is GAAP and who oversees it?
answer
GAAP stands for Generally Accepted Accounting Principles.
GAAP was established by FASB and is the format required by the SEC when companies submit their quarterly and annual reports.
question
T/F?
In the US, publicly traded companies can choose whether or not they wish to release periodic financial statements.
answer
False
question
Which of the following best describes why a firm produces financial statements?
answer
To provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short and long term financial condition of a business.
question
US public companies are required to file their annual financial statements with the US Securities and Exchange Commission on which form?
answer
10-K
question
The third party who checks annual financial statements to ensure that they are prepared according to GAAP and verifies that the information reported is reliable is the __________?
answer
Auditor
question
A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability?
answer
Revenue received for the delivery of item that have not yet been delivered.
question
T/F?
In general, a successful firm will have a M-to-B ratio that is substantially greater than 1.
answer
True
question
Which of the following is NOT considered to be an operating expense on the income statement?
answer
Corporate Taxes
question
T/F?
PE ratios tend to be high for fast growing firms.
answer
True
question
Which of the following is NOT a reason that the income statement does not accurately indicate how much cash firm has earned?
answer
It includes cash inflows from services rendered.
question
A printing company prints a brochure for a client and then bills them for this service. At the time the printing company's financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?
answer
The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.
question
A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?
answer
As an outflow under investment activites
question
A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firm's management discussion and analysis (MD&A)?
answer
That the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages.
question
Your company has sales of $100,700 this year and COGS of $71,600. You forecast sales to increase to $116,800 next year. Using the percent of sales method, forecast next year's COGS.
answer
$83,047
COGS % of Sales= COGS/Sales
Forecasted COGS=
Forecasted Sales*COGS % of Sales
question
Building a model form long-term forecasting reveals points in the future where the firm will need ______ when retained earning are not enough to fund planned future investments.
answer
External Financing
question
The yield curve is typically ______.
answer
Sloping up
question
Why, in general, do investment opportunities offer a rate greater than that offered by US Treasury securities for the same horizon?
answer
Most investment opportunities bear far greater risk than those offered by IS Treasury securities.
question
You have purchased a 9% coupon bond for $1,050. What will happen to the bond's price if market interest rates rise?
answer
If market interest rates rise the bond's price will decrease.
question
Which of the following best illustrates why a bond is a type of loan?
answer
When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance that it will be repaid at a date in the future.
question
Which of the following statements regarding bonds and their terms is FALSE?
answer
By convention, the coupon rate is expressed as an effective annual rate.
question
T/F?
Prior to its maturity date, the price of a zero-coupon bond is its face value.
answer
False
question
Which of the following risk-free, zero-coupon bonds could be bought for the lowest price?
answer
One with a face value of $1,000, a YTM of 5.9% and 20 years to maturity.
question
Which of the following statements regarding bonds and their terms is FALSE?
answer
Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.
question
Which of the following statements regarding bonds and their terms is FALSE?
answer
The YTM of a bond is the discount rate that sets the FV of the promised bind payments equal to the current market price of the bond.
question
T?F?
A bond will trade at a discount if its coupon rate is less than its YTM
answer
True
question
Which of the following bonds is trading at par?
answer
A bond with a $1,000 FV trading at $1,000
question
T/F?
Bonds with a high risk of default generally offer high yields.
answer
True
question
Why are the interest rate of US Treasury securities less than the interest rates of equivalent corporate bonds?
answer
US Treasury securities are widely regarded to be risk-free
question
T/F?
The Valuation Principle states that the value of a stock is equal to the PV of both the dividends and future sale price of that stock which the investor will receive.
answer
True
question
T/F?
A firm can either pay its earning to its investors, or it can keep them and reinvest them.
answer
True
question
Which of the following is NOT a way that a firm can increase its dividend?
answer
By increasing its retention rate.
question
Which of the following will NOT increase a company's dividend payments?
answer
It can issue more shares.
question
T/F?
Stocks that do not pay a dividend must a a value of $0.
answer
False
question
Which of the following is a limitation of the DDM?
answer
It cannot handle negative growth rates.
question
Which of the following statements is FALSE?
answer
When using the discounted free cash flow model, we should use a firm's equity cost of capital.
question
If you want to value a firm that consistently pays out its earnings as dividends, the simplest model for you to use it the _________.
answer
Dividend-discount model
question
If you want to value a firm but do not want to explicitly forecast its dividends, the simplest model for you to use is __________.
answer
the discounted free cash flow model
question
Which of the following statements is FALSE?
answer
Free cash flow measures the cash generated by a firm after payments to debt or equity holders are considered.
question
T/F?
If you value a stock using a range of stock valuation methods and these valuations indicate a stock price that is greater than its actual market price, it is most likely that the stock is under-valued.
answer
False
question
T/F?
Individual investors trade conservatively, given the difficulty of finding over-valued and under-valued stocks.
answer
False
question
Individual investors' tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals is known as _______.
answer
The investor overconfidence hypothesis
question
A study of trading behavior of individual investors at a discount brokerage found that individual investors ____________.
answer
Trade very actively, despite the fact that their performance is actually worse because of trading costs.
question
Disposition effect is the tendency of individual investors to _______.
answer
Hold on to stocks that have lost value and sell stocks that have risen in value since the time of purchase.
question
Which of the following situations can lead to an IRR giving a different decision than NPV?
-delayed investment
-differences in project scale
-multiple IRRs
-all of the above
answer
All of the above can lead to IRR giving a different decision than NPV
question
According to Graham and Harvey's 2001 survey (Figure 8.2 in the text), the most popular decision for capital budgeting used by CFOs are _______.
answer
IRR, NPV, Payback period
question
Which of the following is NOT a limitation of the payback rule?
answer
It is difficult to calculate.
question
A convenience store owner is contemplating putting a large neon sign over his store. It would cost $50,000, but is expected to bring an additional $24,000 of profit to the store every year for five years. Would this project be withwhile if evaluated using a payback period of two years or less and if the cost of capital is 10%?
answer
No, since the value of the cash flows over the first two years are less than the initial investment.
question
Which pf the following statements is FALSE?
answer
An IRR will always exist for an investment opportunity.
question
T/F?
When different investment rules give conflicting answers, then decisions should be based on the NPV rule, as it is the most reliable and accurate decision.
answer
True
question
T/F?
IRR can reliably be used to choose between mutually exclusive projects.
answer
False
question
T/F?
When different projects put different demands on a limited resource, then NPV is always the best way to choose the best project.
answer
False
question
You are opening up a brand new retail strip mall. You presently have more potential retail outlets wanting to locate in your mall than you have space available. What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space?
answer
Profitability Index
question
The ultimate goal of the capital budgeting process it to _________.
answer
Determine the effect of the decision to accept or reject a project on the firm's cash flows.
question
which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves to determine whether that decision is worthwhile?
answer
These earnings are not actual cash flows.
question
Which of the following costs would you consider when making a capital budgeting decision?
answer
Opportunity cost.
question
Which of the following would you NOT consider when making a capital budgeting decision?
answer
The cost of a marketing study completed last year.
question
Which of the following is an example of cannibalization?
answer
A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line.
question
Which of the following adjustments should NOT be made when computing free cash flow from incremental earnings?
answer
Subtracting depreciation expenses from taxable earnings.
question
Which of the following formulas will correctly calculate Net Working Capital?
answer
Cash + Inventory + Receivables - Payables
question
A decrease in the sales of a current project because of the launching of a new project is _______.
answer
Cannibalization.
question
A company spends $20 million researching whether it is possible to create a durable plastic from the process waste from feedstock preparation. The $20 million should best be considered _______.
answer
As a sunk cost.
question
John pre-orders a non-refundable movie ticket. He then reads a number of review of the movie in question that make him realize that he will not enjoy it. He goes to see it anyway, rationalizing that otherwise his money will have been wasted. Is Joe succumbing to the Sunk Cost Fallacy, and why?
answer
Yes, since he invested a valuable asset, his time, in a project based on its previous costs.
question
T/F?
The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.
answer
True
question
The difference between scenario analysis and sensitivity analysis is ___________.
answer
Scenario analysis considers the effect on the NPV of changing multiple project parameters.
question
There are two ways to calculate the expected return of a portfolio: Either calculate the expected return using the value and dividend stream of the portfolio as a whole, or calculate the weighted average of the expected returns of the individual stocks that make up the portfolio. Which return is higher?
answer
Neither--both calculations give the same answer.
question
If the return of two stocks has a correlation of 1, what does this imply about the relative movements in the stock prices?
answer
If the price of one stock goes up, the other stock price always goes up as well.
question
T/F?
Stocks have both diversifiable risk and undiversifiable risk, but on diversifiable risk is rewarded with higher expected returns.
answer
False
question
T/F?
When we combine stocks in a portfolio, the amount of risk that is estimated depends on the degree to which the stocks face common risks and move together.
answer
True
question
The volatility of Home Depot share prices is 50% and that of General Motors shares is 25%. When I hold both stocks in my portfolio, the overall volatility of the portfolio is?
answer
More information needed
question
Diversification reduces the risk of a portfolio because _________, and some of the risks are averaged out of the portfolio.
answer
Stocks do not move identically.
question
T/F?
If you build a large enough portfolio, you can diversify away all the risks of a portfolio.
answer
False
question
The S&P index traditionally is a(n) ________ portfolio of the 500 largest US stocks.
answer
Value weighted
question
The beta of the market portfolio is:
0
1
-1
2
answer
1
question
The slope of a linear regression between a stock's returns and the market's return represents?
answer
The stock's beta.
question
T/F?
The market or equity risk premium can be estimated by computing the historical average excess return on the market portfolio.
answer
True
question
T/F?
The CAPM says that the risk premium on a stock is equal to its beta times the market risk premium.
answer
True
