On a graph, consumer surplus is represented by the area
Table 7-1
| ||||||||||
 |
Refer to Table 7-1. If the price of the product is $110, then who would be willing to purchase the product?
Table 7-5
| ||||||||||
|
Refer to Table 7-5. You are selling extra tickets to the Midwest Regional Sweet 16 game in the men's NCAA basketball tournament. The table shows the willingness to pay of the four potential buyers in the market for a ticket to the game. Which of the following graphs represents the market demand curve?
Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?
If the price a consumer pays for a product is equal to a consumer's willingness to pay, then the consumer surplus relevant to that purchase is
All else equal, what happens to consumer surplus if the price of a good increases?
Cost is a measure of the
Table 7-7
| ||||||||||||
|
Refer to Table 7-7 . If the market price is $1,000, the producer surplus in the market is
Table 7-10
| ||||||||||
|
Refer to Table 7-10. You want to hire a professional photographer to take pictures of your family. The table shows the costs of the four potential sellers in the local photography market. Which of the following graphs represents the market supply curve?
Figure 7-4
|
|
Refer to Figure 7-4 . Which area represents producer surplus when the price is P 1 ?
Figure 7-5
|
|
Refer to Figure 7-5. If the supply curve is S, the demand curve is D, and the equilibrium price is $100, what is the producer surplus?
Figure 7-5
|
|
Refer to Figure 7-5. If the supply curve is S and the demand curve shifts from D to D', what is the change in producer surplus?
Figure 7-5
|
|
Refer to Figure 7-5. If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus due to new producers entering the market?
Figure 7-6
|
|
Refer to Figure 7-6. When the price is P2, producer surplus is
Figure 7-8
|
|
Refer to Figure 7-8. Total surplus can be measured as the area
The area below the demand curve and above the supply curve measures the producer surplus in a market. |
The lower the price, the lower the producer surplus, all else equal. |
Producer surplus measures the benefit to sellers from receiving a price above their costs. |
When markets fail, public policy can potentially remedy the problem and increase economic efficiency. |
Market power and externalities are examples of market failures. |
In a competitive market, sales go to those producers who are willing to supply the product at the lowest price. |
Producer surplus is the cost of production minus the amount a seller is paid. |
All else equal, a decrease in demand will cause an increase in producer surplus. |
The area below the price and above the supply curve measures the producer surplus in a market. |
The cost of production plus producer surplus is the price a seller is paid. |
Henry is willing to pay 45 cents, and Janine is willing to pay 55 cents, for 1 pound of bananas. When the price of bananas falls from 50 cents a pound to 40 cents a pound,
Dawn's bridal boutique is having a sale on evening dresses. The increase in consumer surplus comes from the benefit of the lower prices to
Suppose there is an early freeze in California that reduces the size of the lemon crop. As the price of lemons rises, what happens to consumer surplus in the market for lemons?
If the cost of producing sofas decreases causing the price of sofas to decrease, consumer surplus in the sofa market will
When the demand for a good increases and the supply of the good remains unchanged, consumer surplus
Figure 7-1
|
|
Refer to Figure 7-1 . When the price rises from P 1 to P 2 , consumer surplus
Producer surplus is
Figure 7-6
|
|
Refer to Figure 7-6. Area A represents
Producer surplus directly measures
Which of the following will cause an increase in producer surplus?
Which of the following events would increase producer surplus?
Which tools allow economists to determine if the allocation of resources determined by free markets is desirable?
We can say that the allocation of resources is efficient if
The distinction between efficiency and equality can be described as follows:
If an allocation of resources is efficient, then
Moving production from a high-cost producer to a low-cost producer will
If a consumer places a value of $15 on a particular good and if the price of the good is $17, then the
An example of a perfectly competitive market would be the
The line that relates the price of a good and the quantity demanded of that good is called the demand
Which of the following changes would not shift the demand curve for a good or service?
Which of the following changes would not shift the demand curve for a good or service?
If a decrease in income increases the demand for a good, then the good is
A likely example of substitute goods for most people would be
When the quantity demanded has increased at every price, it might be because
Which of the following demonstrates the law of supply?
When we move along a given supply curve,
If something happens to alter the quantity supplied at any given price, then
If the supply of a product increases, then we would expect equilibrium price
If a surplus exists in a market, then we know that the actual price is
Figure 4-7
|
|
Refer to Figure 4-7. At a price of $35, there would be a
What would happen to the equilibrium price and quantity of lattés if coffee shops began using a machine that reduced the amount of labor necessary to produce them?
Figure 4-10
|
|
Refer to Figure 4-10. Which of the following movements would illustrate the effect in the market for golf balls of an increase in green fees?
Figure 4-10
|
|
Refer to Figure 4-10. Which of the following movements would illustrate the effect in the market for chocolate chip cookies of an improved high-speed mixer that allows bakers to produce cookies in less time?
The law of demand states that, other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises. |
A decrease in demand shifts the demand curve to the left. |
If the demand for a good falls when income falls, then the good is called an inferior good. |
A decrease in the price of a complement will shift the demand curve for a good to the left. |
If baked potatoes and sour cream are complements, then an increase in the price of sour cream decreases the demand for baked potatoes. |
If a person expects the price of pumpkins to increase next month, then that person’s current demand for pumpkins will increase. |
Price cannot fall so low that some sellers choose to supply a quantity of zero. |
An increase in the price of a product and an increase in the number of sellers in the market affect the supply curve in the same general way. |
If there is an improvement in the technology used to produce a good, then the supply curve for that good will shift to the left. |
The equilibrium price is the same as the market-clearing price. |
The actions of buyers and sellers naturally move markets toward equilibrium. |
When the market price is above the equilibrium price, suppliers are unable to sell all they want to sell. |
Demand refers to the amount buyers wish to buy, whereas the quantity demanded refers to the position of the demand curve. |
An increase in supply will cause a decrease in price, which will cause an increase in demand. |
Figure 4-2
| ||||
|
Refer to Figure 4-2. If these are the only two consumers in the market, then the market quantity demanded at a price of $15 is
1. Chapter TF, Section .01, Problem 003
The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
|
2. Chapter TF, Section .01, Problem 004
Partnerships and proprietorships generally have a tax advantage over corporations.
|
3. Chapter TF, Section .01, Problem 005
A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.
|
4. Chapter TF, Section .01, Problem 001
In most corporations, the CFO ranks under the CEO.
|
5. Chapter TF, Section .01, Problem 014
The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.
|
6. Chapter TF, Section .01, Problem 016
Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.
|
7. Chapter TF, Section .01, Problem 017
In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."
|
8. Chapter TF, Section .01, Problem 023
A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock's market price would equal its intrinsic value.
|
9. Chapter TF, Section .01, Problem 026
For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.
|
10. Chapter MC, Section .01, Problem 046
| |||
|
The annual report contains four
basic financial statements: the income statement, the balance sheet, the cash
flow statement, and the statement of stockholders' equity.
|
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Solution
Correct Response
true
|
On the balance sheet, total assets
must always equal the sum of total liabilities and equity.
|
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Correct.
Solution
Correct Response
true
|
The income statement shows the
difference between a firm's income and its costs—i.e., its profits—during a
specified period of time. However, not all reported income comes in the form
of cash, and reported costs likewise may not be consistent with cash outlays.
Therefore, there may be a substantial difference between a firm's reported
profits and its actual cash flow for the same period.
|
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Solution
Correct Response
true
|
The balance sheet represents a
snapshot in time, whereas the income statement reports on operations over a
period of time.
|
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Correct
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Correct.
Solution
Correct Response
true
|
EBIT, often referred to as
operating income, stands for "earnings before interest and taxes."
|
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Correct
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Correct.
Solution
Correct Response
true
6. Chapter TF, Section .03, Problem 011
§
|
Consider
the following balance sheet for Games Inc. Because Games has $800,000 of
retained earnings, we know that the company would be able to pay cash to buy
an asset with a cost of $200,000.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Note that the firm has only $50,000 of cash. It
would have to either sell assets or borrow $150,000 to pay cash for the new
asset. That might not be possible.
Solution
Correct Response
false
7. Chapter TF, Section .03, Problem 014
§
|
The
value of any asset is the present value of the cash flows the asset is
expected to provide. The cash flows a business is able to provide to its investors
is its free cash flow. This is the reason that FCF is so important in
finance.
|
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Solution
Correct Response
true
8. Chapter TF, Section .03, Problem 012
§
|
Typically,
the statement of stockholders' equity starts with total stockholders' equity
at the beginning of the year, adds net income, subtracts dividends paid, and
ends with total stockholders' equity at the end of the year. Over time, a
profitable company will have earnings in excess of the dividends it pays out,
resulting in a substantial amount of retained earnings shown on the balance
sheet.
|
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Solution
Correct Response
true
9. Chapter TF,
Section .03, Problem 018
§
|
The
balance sheet measures the flow of funds into and out of various accounts
over time, while the income statement measures the firm's financial position
at a point in time.
|
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Solution
Correct Response
false
10. Chapter TF, Section .03, Problem 026
§
|
To
estimate the cash flow from operations, depreciation must be added back to
net income because depreciation is a non-cash charge that has been deducted
from revenue in the net income calculation.
|
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Solution
Correct Response
true
- The higher the interest rate the higher the FV.
- T
True
- F
False
- Question 2
This is a question on the Finance quiz.
- T
True
- F
False
- Question 3
What is my monthly mortgage payment on a $200,000 mortgage with a 5%
interest rate on a 30-year mortgage?
$1,074
$13,010
$1,084
$556
- Question 4
What is the FV of a series of $7,000 annual payments over 10 years if I
can earn 9%?
$107,350.51
$106,350.51
$115,922.06
$115,350.51
- Question 5
The lower the discount rate the lower my PV on a series of future
payments?
- T
True
- F
False
- Question 6
The further out I receive a FV, the higher the PV.
- T
True
- F
False
- Question 7
The higher the rate earned the fewer number of years it will take to get
to a given future value
- T
True
- F
False
- Question 8
The higher the future payments the higher my PV all else equal?
- T
True
- F
False
- Question 9
What is the PV of a series of $5,000 annual payments over 5 years if the
discount rate is 8%?
$19,964
$25,000
$29,333
Need more information
- Question 10
The higher the discount rate or interest rate the lower my PV.
- T
True
- F
False
- Question 11
What rate of return did I earn if I invest $50,000 and receive $75,000
seven years later?
5.69% per year
5.96% per year
6.5% per year
5.69% per month
- Question 12
The more money I invest the higher the Future Value (FV)
- T
True
- F
False
- Question 13
Essentially, the value of stocks and bonds is the discounted value of
their cash flows or dividends?
- T
True
- F
False
- Question 14
How much would I pay for a lump sum of $15,000 in 3 years if my required
return is 10%?
$11,269,72
$1,126.972
$12,269.27
$10,102.22
- Question 15
How many years will it take to generate $500,000 if I can invest $50,000
now and invest $5,000 annually at a rate of8%?
22 Years
23 Years
20 Years
21 Years
- Question 16
To calculate a loan payment I must adjust my number of periods and my
interest rate to reflect the payment terms (monthly, quarterly)
- T
True
- F
False
- Question 17
What is the PV of $40,000 received in 5 years if the rate or return or
discount rate is 6%?
$29,890.33
$28,980.33
$29,980.33
$26,980.33
- Question 18
What is the FV of $10,000 in 5 years at a 7% rate of return?
-$14,025.52
$1,4025.52
$14,025.52
$14,125.52
- Question 19
The more time I have to invest the lower my FV
- T
True
- F
False
- Question 20
What is the FV of $50,000 invested in 9 years if I can earn 5%?
$48,163.47
$32,230.45
$75,566.48
$77,566.41
Assume that interest rates on 20-year Treasury and
corporate bonds with different ratings, all of which are noncallable, are as
follows:
T-bond = 7.72% A = 9.64%
AAA = 8.72%
BBB = 10.18%
The differences in rates among these issues were most probably caused primarily
by:
|
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|
|||
|
|||
|
|||
|
Hide Feedback
Correct
|
The price sensitivity of a bond to
a given change in interest rates is generally greater the longer the bond's
remaining maturity.
|
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Correct
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Correct.
|
A call provision gives bondholders
the right to demand, or "call for," repayment of a bond. Typically,
companies call bonds if interest rates rise and do not call them if interest
rates decline.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
Assume that all interest rates in the economy
decline from 10% to 9%. Which of the following bonds would have the largest percentage
increase in price?
|
|||
|
|||
|
|||
|
|||
|
Hide Feedback
Correct
A 10-year bond pays an annual coupon, its YTM is
8%, and it currently trades at a premium. Which of the following statements is
CORRECT?
|
|||
|
|||
|
|||
|
|||
|
Hide Feedback
Correct
|
Because short-term interest rates
are much more volatile than long-term rates, you would, in the real world,
generally be subject to much more price risk if you purchased a 30-day bond
than if you bought a 30-year bond.
|
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Correct
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Correct.
|
Sinking funds are provisions
included in bond indentures that require companies to retire bonds on a
scheduled basis prior to their final maturity. Many indentures allow the
company to acquire bonds for sinking fund purposes by either (1) purchasing
bonds on the open market at the going market price or (2) selecting the bonds
to be called by a lottery administered by the trustee, in which case the
price paid is the bond's face value.
|
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Correct
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Correct.
A 12-year bond has an annual coupon of 9%. The
coupon rate will remain fixed until the bond matures. The bond has a yield to
maturity of 7%. Which of the following statements is CORRECT?
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|
|||
|
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|
|||
|
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Correct
|
A bond has a $1,000 par value,
makes annual interest payments of $100, has 5 years to maturity, cannot be
called, and is not expected to default. The bond should sell at a premium if
market interest rates are below 10% and at a discount if
interest rates are greater than 10%.
|
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|
There is an inverse relationship
between bonds' quality ratings and their required rates of return. Thus, the
required return is lowest for AAA-rated bonds, and required returns increase
as the ratings get lower.
|
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Which of the following statements is CORRECT?
|
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|
|||
|
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|
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|
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Correct
Three $1,000 face value, 10-year, noncallable,
bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an
8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual
coupon. Bond 10 sells at par. Assuming that interest rates remain constant for
the next 10 years, which of the following statements is CORRECT?
|
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|
|||
|
|||
|
|||
|
Hide Feedback
Correct
Which of the following statements is CORRECT?
|
|||
|
|||
|
|||
|
|||
|
Hide Feedback
Correct
Which of the following statements is CORRECT?
|
|||
|
|||
|
|||
|
|||
|
Hide Feedback
Correct
A 15-year bond with a face value of $1,000
currently sells for $850. Which of the following statements is CORRECT?
|
|||
|
|||
|
|||
|
|||
|
Hide Feedback
Correct
|
The annual report contains four
basic financial statements: the income statement, the balance sheet, the cash
flow statement, and the statement of stockholders' equity.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
Solution
Correct Response
true
|
On the balance sheet, total assets
must always equal the sum of total liabilities and equity.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
Solution
Correct Response
true
|
The income statement shows the
difference between a firm's income and its costs—i.e., its profits—during a
specified period of time. However, not all reported income comes in the form
of cash, and reported costs likewise may not be consistent with cash outlays.
Therefore, there may be a substantial difference between a firm's reported
profits and its actual cash flow for the same period.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
Solution
Correct Response
true
|
The balance sheet represents a
snapshot in time, whereas the income statement reports on operations over a
period of time.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
Solution
Correct Response
true
|
EBIT, often referred to as
operating income, stands for "earnings before interest and taxes."
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
Solution
Correct Response
true
6. Chapter TF, Section .03, Problem 011
§
|
Consider
the following balance sheet for Games Inc. Because Games has $800,000 of
retained earnings, we know that the company would be able to pay cash to buy
an asset with a cost of $200,000.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hide Feedback
Correct
Check My Work Feedback
Correct.
Post Submission Feedback
Note that the firm has only $50,000 of cash. It
would have to either sell assets or borrow $150,000 to pay cash for the new
asset. That might not be possible.
Solution
Correct Response
false
7. Chapter TF, Section .03, Problem 014
§
|
The
value of any asset is the present value of the cash flows the asset is
expected to provide. The cash flows a business is able to provide to its investors
is its free cash flow. This is the reason that FCF is so important in
finance.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
Solution
Correct Response
true
8. Chapter TF, Section .03, Problem 012
§
|
Typically,
the statement of stockholders' equity starts with total stockholders' equity
at the beginning of the year, adds net income, subtracts dividends paid, and
ends with total stockholders' equity at the end of the year. Over time, a
profitable company will have earnings in excess of the dividends it pays out,
resulting in a substantial amount of retained earnings shown on the balance
sheet.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
Solution
Correct Response
true
9. Chapter TF,
Section .03, Problem 018
§
|
The
balance sheet measures the flow of funds into and out of various accounts
over time, while the income statement measures the firm's financial position
at a point in time.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
Solution
Correct Response
false
10. Chapter TF, Section .03, Problem 026
§
|
To
estimate the cash flow from operations, depreciation must be added back to
net income because depreciation is a non-cash charge that has been deducted
from revenue in the net income calculation.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
Solution
Correct Response
true
- The higher the interest rate the higher the FV.
- T
True
- F
False
- Question 2
This is a question on the Finance quiz.
- T
True
- F
False
- Question 3
What is my monthly mortgage payment on a $200,000 mortgage with a 5%
interest rate on a 30-year mortgage?
$1,074
$13,010
$1,084
$556
- Question 4
What is the FV of a series of $7,000 annual payments over 10 years if I
can earn 9%?
$107,350.51
$106,350.51
$115,922.06
$115,350.51
- Question 5
The lower the discount rate the lower my PV on a series of future
payments?
- T
True
- F
False
- Question 6
The further out I receive a FV, the higher the PV.
- T
True
- F
False
- Question 7
The higher the rate earned the fewer number of years it will take to get
to a given future value
- T
True
- F
False
- Question 8
The higher the future payments the higher my PV all else equal?
- T
True
- F
False
- Question 9
What is the PV of a series of $5,000 annual payments over 5 years if the
discount rate is 8%?
$19,964
$25,000
$29,333
Need more information
- Question 10
The higher the discount rate or interest rate the lower my PV.
- T
True
- F
False
- Question 11
What rate of return did I earn if I invest $50,000 and receive $75,000
seven years later?
5.69% per year
5.96% per year
6.5% per year
5.69% per month
- Question 12
The more money I invest the higher the Future Value (FV)
- T
True
- F
False
- Question 13
Essentially, the value of stocks and bonds is the discounted value of
their cash flows or dividends?
- T
True
- F
False
- Question 14
How much would I pay for a lump sum of $15,000 in 3 years if my required
return is 10%?
$11,269,72
$1,126.972
$12,269.27
$10,102.22
- Question 15
How many years will it take to generate $500,000 if I can invest $50,000
now and invest $5,000 annually at a rate of8%?
22 Years
23 Years
20 Years
21 Years
- Question 16
To calculate a loan payment I must adjust my number of periods and my
interest rate to reflect the payment terms (monthly, quarterly)
- T
True
- F
False
- Question 17
What is the PV of $40,000 received in 5 years if the rate or return or
discount rate is 6%?
$29,890.33
$28,980.33
$29,980.33
$26,980.33
- Question 18
What is the FV of $10,000 in 5 years at a 7% rate of return?
-$14,025.52
$1,4025.52
$14,025.52
$14,125.52
- Question 19
The more time I have to invest the lower my FV
- T
True
- F
False
- Question 20
What is the FV of $50,000 invested in 9 years if I can earn 5%?
$48,163.47
$32,230.45
$75,566.48
$77,566.41
Assume that interest rates on 20-year Treasury and
corporate bonds with different ratings, all of which are noncallable, are as
follows:
T-bond = 7.72% A = 9.64%
AAA = 8.72%
BBB = 10.18%
The differences in rates among these issues were most probably caused primarily
by:
|
|||
|
|||
|
|||
|
|||
|
Hide Feedback
Correct
|
The price sensitivity of a bond to
a given change in interest rates is generally greater the longer the bond's
remaining maturity.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
|
A call provision gives bondholders
the right to demand, or "call for," repayment of a bond. Typically,
companies call bonds if interest rates rise and do not call them if interest
rates decline.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
Assume that all interest rates in the economy
decline from 10% to 9%. Which of the following bonds would have the largest percentage
increase in price?
|
|||
|
|||
|
|||
|
|||
|
Hide Feedback
Correct
A 10-year bond pays an annual coupon, its YTM is
8%, and it currently trades at a premium. Which of the following statements is
CORRECT?
|
|||
|
|||
|
|||
|
|||
|
Hide Feedback
Correct
|
Because short-term interest rates
are much more volatile than long-term rates, you would, in the real world,
generally be subject to much more price risk if you purchased a 30-day bond
than if you bought a 30-year bond.
|
Hide Feedback
Correct
Check My Work Feedback
Correct.
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Sinking funds are provisions
included in bond indentures that require companies to retire bonds on a
scheduled basis prior to their final maturity. Many indentures allow the
company to acquire bonds for sinking fund purposes by either (1) purchasing
bonds on the open market at the going market price or (2) selecting the bonds
to be called by a lottery administered by the trustee, in which case the
price paid is the bond's face value.
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A 12-year bond has an annual coupon of 9%. The
coupon rate will remain fixed until the bond matures. The bond has a yield to
maturity of 7%. Which of the following statements is CORRECT?
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A bond has a $1,000 par value,
makes annual interest payments of $100, has 5 years to maturity, cannot be
called, and is not expected to default. The bond should sell at a premium if
market interest rates are below 10% and at a discount if
interest rates are greater than 10%.
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There is an inverse relationship
between bonds' quality ratings and their required rates of return. Thus, the
required return is lowest for AAA-rated bonds, and required returns increase
as the ratings get lower.
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Which of the following statements is CORRECT?
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Three $1,000 face value, 10-year, noncallable,
bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an
8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual
coupon. Bond 10 sells at par. Assuming that interest rates remain constant for
the next 10 years, which of the following statements is CORRECT?
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Which of the following statements is CORRECT?
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Which of the following statements is CORRECT?
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A 15-year bond with a face value of $1,000
currently sells for $850. Which of the following statements is CORRECT?
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3. Chapter TF, Section .01, Problem 005
A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.
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4. Chapter TF, Section .01, Problem 001
In most corporations, the CFO ranks under the CEO.
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5. Chapter TF, Section .01, Problem 014
The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.
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6. Chapter TF, Section .01, Problem 016
Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.
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7. Chapter TF, Section .01, Problem 017
In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."
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8. Chapter TF, Section .01, Problem 023
A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock's market price would equal its intrinsic value.
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9. Chapter TF, Section .01, Problem 026
For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.
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10. Chapter MC, Section .01, Problem 046
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1. Chapter TF, Section .03, Problem 001
The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and the statement of stockholders' equity.
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2. Chapter TF, Section .03, Problem 004
On the balance sheet, total assets must always equal the sum of total liabilities and equity.
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3. Chapter TF, Section .03, Problem 007
The income statement shows the difference between a firm's income and its costs—i.e., its profits—during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.
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4. Chapter TF, Section .03, Problem 008
The balance sheet represents a snapshot in time, whereas the income statement reports on operations over a period of time.
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5. Chapter TF, Section .03, Problem 009
EBIT, often referred to as operating income, stands for "earnings before interest and taxes."
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6. Chapter TF, Section .03, Problem 011
Consider the following balance sheet for Games Inc. Because Games has $800,000 of retained earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000.
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7. Chapter TF, Section .03, Problem 014
The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.
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8. Chapter TF, Section .03, Problem 012
Typically, the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year, adds net income, subtracts dividends paid, and ends with total stockholders' equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, resulting in a substantial amount of retained earnings shown on the balance sheet.
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9. Chapter TF, Section .03, Problem 018
The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.
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10. Chapter TF, Section .03, Problem 026
To estimate the cash flow from operations, depreciation must be added back to net income because depreciation is a non-cash charge that has been deducted from revenue in the net income calculation.
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T-bond = 7.72% A = 9.64%
AAA = 8.72% BBB = 10.18%
The differences in rates among these issues were most probably caused primarily by:
The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity. |
A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline. |
Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond. |
Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final maturity. Many indentures allow the company to acquire bonds for sinking fund purposes by either (1) purchasing bonds on the open market at the going market price or (2) selecting the bonds to be called by a lottery administered by the trustee, in which case the price paid is the bond's face value. |
A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%. |
There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower. |
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