Arizona State University (ASU) FIN 300 Fundamentals of Finance Exam 2 Practice Test

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• Which statement about the reinvestment rate choice in MIRR is true?
• What is the key difference between an ordinary annuity and an annuity due, and how does it affect present value?
• In the debt beta formula Beta_L = Beta_U * [1 + (D/E)*(1 - Tc)], what does D/E represent?
• In MIRR, what reinvestment rate is used for interim cash flows?
• What is the present value of a perpetuity paying PMT each year starting next year?
• Which description best fits a descending (inverted) yield curve?
• What is the relation between maturity, interest rate risk, and yield to maturity?
• How do you calculate the cost of equity using the Dividend Discount Model (DDM) with constant growth?
• Which statement best explains why MIRR is preferred over IRR?
• What is the formula for the cash conversion cycle (CCC)?
• Which statement describes the relationship between risk and return?
• Distinguish between independent and mutually exclusive projects in capital budgeting.
• Which bond category is priced above par value due to a higher coupon than the market rate?
• A common shortcoming of the coefficient of variation and the Sharpe ratio is that they fail to account for what?
• What is the present value formula for a single future cash flow received t years from now at discount rate r?
• When forecasting cash flows for capital budgeting, what are sunk costs and cannibalization?
• What term is another name for the face value of a financial instrument?
• A bond that trades above par value due to a coupon higher than the market rate is termed what?
• How does reinvestment rate assumption affect the IRR calculation?
• Which statement is true about the geometric (compounded) average return?
• What is the effective annual rate (EAR) when the nominal APR is 8% compounded monthly?
• Which definition best describes yield to maturity?
• Bonds with low risk of default that are rated Baa (BBB) or above.
• Which factor is NOT typically considered when choosing between debt and equity financing?
• Which sequence describes the steps to value a bond or asset?
• Which form of market efficiency is the strongest?
• If higher inflation is forecast, what happens to the yield curve?
• For a given change in interest rates, prices of lower-coupon bonds change more than prices of higher-coupon bonds. Which statement is correct?
• Which statement about the real rate of interest is correct?
• Which distribution is described as symmetric and bell-shaped, fully described by its mean and standard deviation?
• Which bonds sell at par value when coupon rate equals market rate?
• What is the significance of the Capital Asset Pricing Model (CAPM) in estimating Re?
• What is a key limitation of IRR when evaluating non-conventional cash flows?
• Which of the following is a type of corporate bond?
• The interest rate at which the present value of the bond's actual cash flows equals its price is called what?
• Which two measures are commonly used to quantify risk in finance?
• What are variance and standard deviation used for?
• Which measure captures nondiversifiable, systematic (market) risk?
• The measure that captures market risk, which cannot be diversified away, is:
• Which risk explains why callable bonds often offer higher yields than non-callable bonds?
• Bonds that sell at prices above par value are known as which type?
• What is the NPV decision rule?
• In finance, which term refers to the rate that the buyer wants (the real rate)?
• Which term describes the current market rate, including real rate, yield to maturity, and I/Y?
• The portfolio of all assets.
• Which statement describes the initial cash flow impact when net working capital increases?
• The highest grade bonds have the lowest default risk and are rated which of the following?
• What is the total return on an asset over a specific holding period called?
• The interest payments made to bondholders are called:
• Which statement correctly describes how changes in net working capital affect cash flow for a project?
• What is the formula for the present value of a cash flow with continuous compounding at rate r?
• How is the price of a plain-vanilla bond calculated given face value F, annual coupon C, yield y, and n years to maturity?
• What is the formula for the profitability index (PI) and its interpretation?
• If a bond has a coupon rate of 6%, par value 1,000, and yields 5%, will its price be above or below par?
• The amount on which interest is calculated and that is owed to the bondholder when a bond reaches maturity.
• Which firms are the three dominant credit rating agencies?
• It is a useful measure for comparing risk and return for individual stocks. What is it used for?
• What is the price of a bond with face value 1,000, annual coupon 60, yield to maturity 5%, and 10 years to maturity?
• A measure of how the returns on two assets covary is:
• What is a call provision in a bond?
• What is the IRR decision rule?
• What are the basic forms of market efficiency?
• HPR is the abbreviation for which investment measure?
• What is the measure of how certain you are that you will receive a particular return?
• Reducing risk by investing in two or more assets whose values do not always move in the same direction at the same time is:
• What is the after-tax cost of debt if Rd = 7%, Tc = 30%?
• What is the Enterprise Value in corporate finance?
• If a bond's coupon rate equals its yield, what is the price relative to par?
• Which statement about the value of the debt tax shield is true as corporate tax rate Tc changes?
• Which description best matches investment-grade bonds?
• What is the present value of an ordinary annuity with annual payment PMT for n periods at rate r?
• Which statement describes zero coupon bonds?
• What is the Payback Period metric and its primary limitation?
• What is a measure of the uncertainty associated with an outcome?
• Which statistical measure is the square root of the variance?
• Which term describes market-wide risk that cannot be eliminated through diversification?
• Investors primarily care about which type of risk because diversification cannot eliminate it?
• In a no-growth Dividend Discount Model, what is P0?
• If the continuously compounded rate r increases, what happens to the present value of a fixed future amount FV?
• Historical market performance indicates that, on average, annual returns have been higher for riskier securities.
• If a bond's coupon rate is higher than its yield, the bond's price will be what relative to face value, and when is this likely?
• Which statement about yield curves is true?
• What is the formula for the debt beta effect on levered equity beta: Beta_L = Beta_U * [1 + (D/E)*(1 - Tc)]?
• What is the Current Ratio and Quick Ratio?
• What is included in incremental cash flows related to taxes and depreciation?
• Bonds rated below BBB are generally categorized as
• The return from the best alternative investment with similar risk that an investor gives up when making a certain investment is called what?
• Bonds rated below Baa (or BBB) by rating agencies; often called speculative-grade bonds, high-yield bonds, or junk bonds.
• The annual coupon payment divided by the bond's face value is called:
• Given net income of 200 and dividends of 40, which statement correctly states the payout and retention ratios?
• In the Gordon Growth Model, P0 = D1 / (Re - g). If D1 = 2, Re = 0.10, and g = 0.04, what is P0?
• Bond prices are inversely related to interest rate movements. Which statement is true?
• What is the typical face value (par value) of corporate bonds?
• Which option correctly states the after-tax cost of debt in WACC when Rd, Tc are given?
• What happens to the after-tax cost of debt when the corporate tax rate increases?
• In bond valuation, what determines the discount rate?
• In the Gordon Growth Model, with D1 = 4, Re = 0.08, and g = 0.03, what is P0?
• Investment-grade bonds are rated within which range?
• Which statistic is most suitable for comparing risk per unit of return across different stocks?
• What are incremental cash flows and why are sunk costs excluded?
• Bond covenants are best described as what?
• Which expression represents the weighted average cost of capital (WACC) when using market value weights E and D, cost of equity Re, and after-tax cost of debt Rd(1 - Tc)?
• What does a profitability index of 1.25 indicate?
• A term commonly used to refer to nondiversifiable, or systematic, risk.
• Debt instruments that pay interest in amounts that are fixed for the life of the contract.
• The annual yield that takes compounding into account is called the effective annual yield; which abbreviation is used to denote this concept?
• What is the Discounted Payback Period?
• Why is diversification effective in reducing risk?
• Average compounded return earned by an investor.
• Flat yield curves imply what about future rate changes?
• What does Asset Turnover measure?
• What is yield to maturity (YTM) conceptually?
• Which statement about Payback Period limitations is true?
• A measure of the risk associated with an investment for each 1 percent of expected return is:
• What are the three categories of financial statement analysis ratios often covered in FIN 300?
• Systematic risk is risk that cannot be diversified away and affects the entire market.
• Which description best fits an ascending (normal) yield curve?
• Uncertainty about future bond values that is caused by the unpredictability of interest rates.
• Which statement best describes fixed-income securities?
• The CAPM formula Re = Rf + Beta*(Rm - Rf) is used to estimate which financial metric?
• Which statement about the profitability index is true?
• How does higher fixed costs affect a firm’s break-even point via operating leverage?
• What is the difference between FCFF and FCFE in firm valuation?
• Which entities are typically required to purchase only investment-grade securities?
• Which factors influence the choice between debt and equity financing beyond cost?
• Which statistic best describes dispersion of returns around the mean for normally distributed data?
• What is the difference between a Dividend Discount Model (DDM) with constant growth and a no-growth model?
• ROA and ROE and how they differ?
• An average of the possible returns from an investment, where each return is weighted by the probability that it will occur, is called what?
• Compared to non-callable bonds, callable bonds tend to have which characteristics?
• A model describing the relation between risk and expected return for an asset is:
• In the Gordon Growth Model, with D1 = 4, Re = 0.08, and g = 0.02, what is P0?
• In CAPM, the expected return of an asset increases with its exposure to systematic risk measured by:
• A perpetuity pays PMT = 120 each year; the required return is r = 6%. What is its present value?
• Which statement defines the Dividend Payout Ratio and the Retention Ratio?
• What does the market risk premium represent?
• Which term describes debt securities that pay fixed payments until maturity?
• The yield measure that matches the present value of a bond's cash flows to its price is called realized yield.
• Risk that cannot be eliminated through diversification is called what?
• What is the collection of assets an investor owns?
• A bond price scenario where the price is above par is called:
• What does CIP stand for in bond terminology?
• How does debt financing create a tax shield and affect firm value?
• In CAPM, beta measures which?
• Capital Budgeting equation for the Profitability Index using NPV?
• The return earned in an average period is called:
• Which components constitute the cash conversion cycle?
• What does the payback period ignoring time value imply for project selection?
• Which metric measures performance by comparing excess return to total risk using standard deviation?
• For a given change in interest rates, prices on longer-term bonds change more than prices of shorter-term bonds. True statements are often tested. Which option best reflects this?
• What happens with convertible bonds if the stock's market value rises sufficiently?
• A higher Times Interest Earned (TIE) ratio indicates:
• Which interpretation is correct for a Profitability Index greater than 1?
• Which risk can be eliminated through diversification?
• Which graph represents the term structure of interest rates with term to maturity on the horizontal axis and yield on the vertical axis?
• Which of the following is NOT a factor shaping the yield curve?
• The square root of the variance is known as what?
• A measure of the return per unit of risk for an investment is which ratio?
• What is the price of a zero-coupon bond with face value 5,000, yield 3%, and 20 years to maturity?
• Which ratio measures a firm's ability to cover its interest payments, computed as EBIT divided by Interest Expense?
• How is the cost of equity Re calculated using the Gordon growth model with D0 and g?
• What is the primary purpose of bond ratings published by rating agencies?
• What is a key feature of convertible bonds?
• Which type of risk do investors primarily care about?
• A current ratio significantly above 1 usually indicates what about liquidity?
• When interest rates decline, which type of bonds are more likely to be called?
• Which term is commonly used to refer to nondiversifiable risk?
• Which statement best describes incremental cash flows as related to taxes and depreciation?
• What is the process called when mortgage loans with similar characteristics are pooled and the cash flows are sold to investors?
• Which investment type has the smallest standard deviation and the smallest average return, according to historical market performance?
• Variance measures which characteristic of a distribution?
• What is the price of a zero-coupon bond with face value F, yield y, and t years to maturity?
• Bondholders typically hold which type of claims against a company's assets?
• IRR may have multiple or no valid solutions when cash flows are non-conventional.
• Which statement describes vanilla bonds or debentures?
• HPR stands for which measure?
• If a bond's coupon rate is less than its yield, the price will be less than the face value. What is this bond called?
• Which statement about yield to maturity is true?
• What is the correct future value formula for an initial amount PV earning an annual rate r over n years?
• Bonds that sell at prices below par value are called: