B22 Finance Final Exam Review – Flashcards
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Which one of the following best exemplifies unsystematic risk?
-Unexpected economic collapse
-Unexpected increase in interest rates
-Unexpected increase in the variable costs for a firm
-Sudden decrease in inflation
-Expected increase in tax rates
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Unexpected increase in the variable costs for a firm
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Systematic risk is:
-totally eliminated when a portfolio is fully diversified.
-defined as the total risk associated with surprise events.
-risk that affects a limited number of securities.
-measured by beta.
-measured by standard deviation.
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Measured by beta
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Expected Return of a stock's portfolio using
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E(R) = p1R1 + p2R2 + .....+ pnRn
Where: pn = the probability the return actually will occur in state n
Rn = the expected return for state n
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Standard Deviation of a Stock's Portfolio is the square root of the variance:
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..
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Capital Asset Price Model
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CAPM --> a model that represents the relationship between Risk and Expected Return (cost of Equity)
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CAPM model is used to
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calculate exactly how much average percentage return that a company should offer investors to make their risk worth it to them to invest in your company
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Which one of the following will increase the cost of equity, all else held constant?
a) Increase in the dividend growth rate
b) Decrease in beta
c) Decrease in future dividends
d) Increase in stock price
e) Decrease in market risk premium
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a) increase in the dividend growth rate
(section 12.2)
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W.A.C.C.
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The minimum return a company needs to earn to satisfy all of it's investors, including stockholders, bondholders and preferred stockholders.
The rate the firm should use for projects of similar risk to the firm's existing activities; If used for all projects with distinctly different risks will cause the firm to incorrectly accept risky projects, will have a tendency for the firm to accept unprofitable investments and become increasingly risky.
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The aftertax cost of which of the following is affected by a change in a firm's tax rate?
I. Preferred stock
II. Debt
III. Equity
IV. Capital
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II and IV:
Debt and Capital
The aftertax cost of debt and capital are affected y a change in a firm's tax rate.
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Earning per Share
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the return earned by each share of common stock; calculated by dividing all earnings remaining after paying preferred dividends by the number of common shares outstanding
=(Earnings-Preferred Dividends)/ (Common Shares Outstanding)
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Which of the following are important factors to consider when seeking a venture capitalist?
I. Exit strategy
II. Management style
III. Personal contacts
IV. Financial strength
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ALL factors are important to consider
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EPS=
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(EBIT)/(Common Shares Outstanding)
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Underwriters
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Investment firms that act as intermediaries between a company selling securities and the investing public
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Venture Capital
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Financing for new, often high-risk ventures
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Relative purchasing power parity is based on the principle that the expected percentage change in the exchange rate between two countries is equal to which one of the following?
-Difference in the risk-free interest rates in the two countries
-Average interest rate in the two countries
-Average inflation rate of the two countries
-Difference in the inflation rates of the two countries
-Difference between the two countries' average inflation and interest rates
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Difference in the inflation rates of the two countries
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Which one of the following is an advantage of being a limited partner?
-Nontaxable share of any profits
-Control over the daily operations of the firm
-Losses limited to capital invested
-Unlimited profits without risk of incurring a loss
-Active market for ownership interest
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Losses limited to capital invested
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The primary goal of financial management is to maximize which one of the following for a corporation?
-Current profits
-Market share
-Number of shares outstanding
-Market value of existing stock
-Revenue growth
answer
Market value of existing stock
