Final Exam Review

1. Final Exam Review

2. Chapter 1 According to the authors, the goal of financial managers should be ________. • minimizing the amount of taxes paid by the firm • maximizing shareholder wealth • maximizing the profits earned by the firm • increasing the types of products or services provided by the firm

3. Chapter 1 The ________ decision is concerned with how the assets will be financed. • asset management • wealth management • financing • investment

4. Chapter 1 The ________ decision determines how many assets are needed and also involves decisions related to which assets should be reduced, eliminated or replaced. • asset management • wealth management • financing • investment

5. Chapter 1 The ________ decision is concerned about giving the manager an appropriate level of operating responsibility over existing assets to supervise the assets efficiently. • asset management • wealth management • financing • investment

6. Chapter 1 In a large corporation, the controller is primarily concerned with ________. • gathering and reporting accounting information • cash and credit management • determining the financing necessary to support assets • managing and acquiring assets

7. Chapter 1 The treasurer of a large corporation is primarily concerned with ________. • preparing budgets and forecasts • investment, financing, and asset management decisions • gathering and reporting information for external bodies, such as the SEC • gathering and reporting accounting information for internal company use

8. Chapter 1 When a firm is meeting today’s needs without giving up the ability of future generations to meet their own needs, it is commonly referred to as ________. • agency theory • sustainability • the investment decision

9. Chapter 2 Which of the following is correct with regard to a sole proprietorship? • Double taxation is imposed, meaning that the owner pays income taxes first on the income of the business, then again as personal income. • The owner has unlimited liability for all business obligations, including any lawsuits brought against the business. • Fringe benefits are legitimate business expenses and therefore deductible for tax purposes.

10. Chapter 2 A major advantage of the corporation compared to other forms of business organization is ________. • higher credit ratings • limited owner liability • lower cost to organize • reduction of double taxation

11. Chapter 2 The primary difference between the corporation and other forms of business organizations is _________ • that the corporation is primarily concerned with the social welfare of society • the separation between ownership and management • that owners and management are generally the same person • that the corporation is unconcerned about the welfare of its employees

12. Chapter 2 The purpose of financial markets is to ________. • increase the price of common stocks • control inflation • make buying and selling financial products easier and cheaper • lower the yield on bonds

13. Chapter 2 A 15-year corporate bond issued in 2010 would now trade in the ________. • secondary capital market • primary capital market • secondary money market • primary money market

14. Market Words • Money Market: short-term government and corporate debt (<1 year) • Capital Market: long-term stocks and bonds (>1 year) • Primary Market: raises new money for capital investment • Secondary Market: existing investments—does not raise money for capital investment

15. Chapter 2 A 15-year corporate bond issued in 2010 would now trade in the ________. • secondary capital market • primary capital market • secondary money market • primary money market

16. Chapter 3 You invest $8,000 in a savings account paying 5% interest a year, compounded annually. How much will your account contain at the end of four years? • Future Value of a Single Deposit • FVn = P0 (FVIFi,n) • Table 1 • $9,728

17. Chapter 3 What is the present value of $5,000 received at the end of 5 years, discounted at 10 percent? • Present Value of a Single Deposit • PV0 = FVn (PVIFi,n) • Table 2 • $3,105

18. Chapter 3 You plan to deposit $400 at the end of each year for 16 years in an account that pays 9% compounded annually. What is the future value at the end of the 16 year period? • Future Value of an Ordinary Annuity

19. Parts of an Annuity End of Period 2 (Ordinary Annuity) End of Period 1 End of Period 3 0 1 2 3 $100 $100 $100 Equal Cash Flows Each 1 Period Apart Today

20. Chapter 3 You plan to deposit $400 at the end of each year for 16 years in an account that pays 9% compounded annually. What is the future value at the end of the 16 year period? • Future Value of an Ordinary Annuity • FVAn = R (FVIFAi%,n) • Table 3 • $13,201

21. Chapter 3 What is the present value of $100 received at the end of every year for 10 years discounted at 8 percent? • Present Value of an Ordinary Annuity

22. Parts of an Annuity End of Period 2 (Ordinary Annuity) End of Period 1 End of Period 3 0 1 2 3 $100 $100 $100 Equal Cash Flows Each 1 Period Apart Today

23. Chapter 3 What is the present value of $100 received at the end of every year for 10 years discounted at 8 percent? • Present Value of an Ordinary Annuity • PVAn = R (PVIFAi%,n) • Table 4 • $671

24. Chapter 3 Suppose you wish to save $2,000 at the beginning of each of the next 10 years in an account paying 12 % compounded annually. The first $2,000 deposit would be made now. How much will you have in your account at the end of 10 years? • Future Value of an Annuity Due

25. Parts of an Annuity Beginning of Period 2 (Annuity Due) Beginning of Period 1 Beginning of Period 3 0 1 2 3 $100 $100 $100 Equal Cash Flows Each 1 Period Apart Today

26. Chapter 3 Suppose you wish to save $2,000 at the beginning of each of the next 10 years in an account paying 12 % compounded annually. The first $2,000 deposit would be made now. How much will you have in your account at the end of 10 years? • Future Value of an Annuity Due • FVADn = (1 + i) (R) (FVIFAi%,n) • Table 3 • $39,310

27. Chapter 3 What is the present value of $1,000 received at the beginning of each of the next 3 years (starting today), assuming a discount rate of 7%? • Present Value of an Annuity Due

28. Parts of an Annuity Beginning of Period 2 (Annuity Due) Beginning of Period 1 Beginning of Period 3 0 1 2 3 $100 $100 $100 Equal Cash Flows Each 1 Period Apart Today

29. Chapter 3 What is the present value of $1,000 received at the beginning of each of the next 3 years (starting today), assuming a discount rate of 7%? • Present Value of an Annuity Due • PVADn = (1 + i) (R) (PVIFAi%,n) • Table 4 • $2807.68

30. Chapter 4 The market value of a company is ________. • the higher of its liquidation or book value • the higher of its book or going-concern value • the higher of its liquidation or going-concern value

31. Chapter 4 Which of the following best describes liquidation value? • The price a security "should be" based on all factors. • The amount a company could be sold for as a continuing operating business. • The market price of an asset. • The amount of money a company is worth if it goes out of business and all of the assets are sold.

32. Chapter 4 Which of the following best describes going-concern value? • The amount a company could be sold for as a continuing operating business. • The market price of an asset. • The price a stock or bond "should be" based on all factors. • The amount of money a company is worth if it goes out of business and all of the assets are sold.

33. Chapter 4 The intrinsic value of a bond ________. • is the discounted yield expected on the bond • increases when the required rate of return increases, if the coupon is held constant • is zero if the company pays no coupon • is what the price "should be" based on all valuation factors

34. Chapter 4 Interest rates and the prices of bonds: • have no relationship with each other (i.e., they are independent). • generally move in opposite directions. • generally move in the same direction. • sometimes move in the same direction, sometimes in opposite directions.

35. Chapter 4 If interest rates rise, the prices of bonds will ________. • remain unchanged • fall • change violently • rise

36. Chapter 4 If the required rate of return for a bond is 8%, and the bond pays a 10% coupon, this bond will currently be priced ________. • at a premium over (more than) face value • at par value • at face value • at a discount from (less than) face value

37. Chapter 4 What is the value of a bond with a $1,000 face value and provides an 8% annual coupon for 30 years. The discount rate is 10%. • Coupon bond • V = I (PVIFAkd, n) + MV (PVIFkd, n) • Table 4 Table 2 • $811.16