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49 Cards in this Set
- Front
- Back
This sub-area of finance involves methods and techniques to make appropriate decisions about what kinds of securities to own, which firms' securities to buy, an dhow to be paid back in the form that the investor wishes.
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investments
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The practice generally known as double taxation is due to
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corporate incomes being taxed at the corporate level, then again at the shareholder level when corporate profits are paid out as dividends
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This type of business organization is legally independent entirely from its owners.
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Public Corporations
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For corporations, maximizing the value of owner's equity can also be stated as
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maximizing the stock price.
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Which of the following managers would NOT use finance?
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All of these would use finance.
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This is the set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control.
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corporate governance
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Which of these are NOT basic approaches to minimizing the agency problem?
Question 7 answers |
All of these are basic approaches to minimizing the agency problem.
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A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited liability for business which limits his losses to what he has invested in the company.
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False
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The definition of agency problem is
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the difficulties that arise when a principle hires an agent and cannot fully monitor the agent's actions.
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This is the group who elected by stockholders to oversee management in a corporation.
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Board of Directors
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Which of these statements is true?
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The age of a firm's fixed assets will affect the fixed asset turnover ratio level.
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Which of the following ratios measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs
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times-interest-earned ratio
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Which of the following statements shows the portion of the firm's earnings that has been saved rather than paid out as dividends?
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statement of retained earnings
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For which of the following would one expect the book value of the asset to differ widely from its market value?
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Fixed Assests
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The balance sheet presents a summary of the firm's revenues and expenses over an accounting period.
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False
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Which of the following activities result in an increase in a firm's cash?
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decrease fixed assets
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The information contained in the annual report is used by investors to form expectations about future earnings and dividends.
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True
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This ratio measures a firm's ability to pay off short-term obligations without relying on inventory sales.
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quick or acid test
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This measures the number of dollars of sales produced per dollar of fixed assets.
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fixed asset turnover ratio
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You have $10,000 to invest. Assuming annual compounding, how long will it take for the $10,000 to double if it is invested at 14 percent?
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5.29 years
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How much will $1,000 deposited in a savings account earning a compound annual interest rate of 6 percent be worth at the end of 3 years?
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$1,191
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All else equal, a dollar received sooner is worth more than a dollar received at some later date, because the sooner the dollar is received the more quickly it can be invested to earn a positive return.
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True
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Thirty years ago, Jesse Jones bought 10 acres of land for $1,000 per acre in what is now downtown Houston. If this land grew in value at an 8 percent per annum rate, what is it worth today?
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$100,630
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How much will $1,000 deposited in a savings account earning a compound annual interest rate of 6 percent be worth at the end of 5 years?
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$1,338
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Given an opportunity cost of 10%, what is the future value of a $1,000 annuity for 1 year?
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$1,100
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Given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will
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Be lower.
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What interest rate is implied if you lend $1,850 and are repaid $2,078.66 in two years?
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6%
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What will a deposit of $4,500 at 7% interest be worth if left in the bank for nine years?
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$8,273.25
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How long does it take for $856 to grow into $1,122 at 7%
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4 years
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A corporate stock that was issued last year would now trade in the __________ market.
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secondary
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The existence of financial intermediaries greatly increases the efficiency of financial markets because, without them, savers would have to provide funds directly to borrowers, which would be a much costlier process.
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True
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These feature debt securities or instruments with maturities of one year or less
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money markets
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This is a security formalizing an agreement between two parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future.
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derivative security
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These capital market instruments are long term loans to individuals or businesses to purchase homes, pieces of land, or other real property.
Question 5 answers |
Mortgages
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Which of the following is NOT a capital market instrument?
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U.S. Treasury bills
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Once firms issue financial instruments in primary markets, these same stocks and bonds are then traded in which of these?
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secondary markets
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In the U.S., these financial institutions arrange most primary market transactions for businesses.
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investment banks
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The market for newly issued stock by firms that were private is normally called
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the initial public offering market.
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Which of the following is not an advantage of going public?
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All of the above are advantages of going public.
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Which of these statements is true?
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The higher the default risk, the higher the interest rate that security buyers will demand.
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This theory argues that individual investors and financial institutions have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred requires a higher interest rate.
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Market Segmentation Theory
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This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments.
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default risk
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Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 5.35 percent, on 20-year Treasury bonds is 5.75 percent, and on a 20-year corporate bond is 6.25 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, what is the current rate on a 10-year corporate bond.
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5.85%
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This is the continual increase in the price level of a basket of goods and services.
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inflation
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Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.00 percent, and the 6-year Treasury rate is 7.25 percent. From discussions with your broker, you have determined that expected inflation premium is 1.75 percent next year, 2.25 percent in Year 2, and 2.40 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.75 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security?
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1.10%
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Determinants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 4.50 percent. Your broker has determined the following information about economic activity and the corporation bonds:
Real interest rate = 2.50% Default risk premium = 1.85% Liquidity risk premium = 0.30% Maturity risk premium = 0.75% |
2% and 7.4%, respectively
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Treasury securities that mature in 6 years currently have an interest rate of 8.5%. Inflation is expected to be 5% each of the next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.1%(t - 1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest?
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2.50%
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Which of these is NOT a theory that explains the shape of the term structure of interest rates?
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short-term structure of interest rates theory
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Determinants of Interest Rate for Individual Securities A particular security's default risk premium is 2 percent. For all securities, the inflation risk premium is 2.25 percent and the real interest rate is 3.25 percent. The security's liquidity risk premium is 0.50 percent and maturity risk premium is 0.75 percent.
The security has no special covenants. What is the security's equilibrium rate of return? |
8.75%
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