FI 393 Study Guide - Final Guide: Initial Public Offering, Cash Flow, Interest

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harlequinsalmon729

19 Jul 2019

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A corporation that is owned by few individuals who are typically associated with the firm"s management. Publicly owned corporation a corporation that is owned by a relatively large number of individuals who are not actively involved in the firms management. The act of selling stock to the public at large by a closely held corporation, or its principal to stock holders. The market for stocks of companies that are in the process of going public. An important tool used in time value analysis, graphical representation used to show timings of cash flows. Future value (fv) the amount to which a cash flow will grow over a given period of time when compounded at a given interest rate. The value today of a future cash flow or series of cash flows. The arithmetic process of determining the final value of a cash flow or series of cash flows when compounded interest is applied.

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Which of the following statements is NOT CORRECT? a. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. b. Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. c. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. d. It is possible for a firm to go public and yet not raise any additional new capital. e. When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held."

1. (TCO D) Which of the following statements is NOT CORRECT? (a) When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held." (b) "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. (c) Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. (d) When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. (e) It is possible for a firm to go public and yet not raise any additional new capital. 2. (TCO D) Europa Corporation is financing an ongoing construction project. The firm will need $5,000,000 of new capital during each of the next three years. The firm has a choice of issuing new debt or equity each year as the funds are needed, or issue only debt now and equity later. Its target capital structure is 40 percent debt and 60 percent equity, and it wants to be at that structure in three years, when the project has been completed. Debt flotation costs for a single debt issue would be 1.6 percent of the gross debt proceeds. Yearly flotation costs for three separate issues of debt would be 3.0 percent of the gross amount. Ignoring time value effects, how much would the firm save by raising all of the debt now, in a single issue, rather than in three separate issues? (a) $79,425 (b) $83,606 (c) $88,006 (d) $92,406 (e) $97,027

QUESTION 1 The time value of money refers to the issue of: A. what the value of the stream of future cash flows is today. B. why a dollar received tomorrow is worth more than a dollar received today. C. what the time required to double an amount of money. D. why people prefer to consume things at some time in the future rather than today.

QUESTION 2 The process of converting an amount given at the present time into a future value is called: A. annualizing. B. discounting. C. compounding. D. capital budgeting. 2 points

QUESTION 3 Juan Vinson is planning to buy a house in five years. He is looking to invest $25,000 today in an index mutual fund that will provide him a return of 12 percent annually. How much will he have at the end of five years? (Round to the nearest dollar.) A. $45,000 B. $28,000 C. $44,059 D. $28,530 2 points

QUESTION 4 Which of the following statements is true with respect to the present value of a future amount? A. The higher the discount rate, the higher the present value of a single sum for a given time period. B. The relation between present value and time is exponential. C. The greater the time period, the higher the present value of a single sum for a given interest rate. D. The lower the discount rate, the lower the present value of a single sum for a given time period. 2 points

QUESTION 5 Which of the following statements is true of the rule of 72? A. It can be used to determine the amount of time it takes to double an investment. B. It is fairly accurate for interest rates between 25 and 50 percent. C. It states that the time to double your money (TDM) approximately equals 72/i, where i represents the years it takes to double your investment. D. It can be used to estimate approximate compound interest earned for a period of 72 days. 2 points

QUESTION 6 The present value of future cash flows are computed by multiplying future value with the: A. discounting factor. B. compound factor. C. interest rate. D. number of periods. 2 points

QUESTION 7 The present value of multiple cash flows is: A. greater than the sum of the cash flows. B. equal to the sum of all the cash flows. C. less than the sum of the cash flows. D. higher or lower than the cash flows depending on the interest rate. 2 points

QUESTION 8 Cash flows associated with annuities are considered to be: A. an uneven cash flow stream. B. a constant cash flow stream. C. a mix of constant and uneven cash flow streams. D. a cash flow stream with decreasing trend. 2 points

QUESTION 9 The annuity transformation method is used to transform: A. a present value annuity to a future value annuity. B. a present value annuity to an annuity due. C. an ordinary annuity to an annuity due. D. a perpetuity to an annuity. 2 points

QUESTION 10 The true cost of borrowing is the: A. annual percentage rate. B. effective annual rate. C. quoted interest rate. D. periodic rate.

FI 393 Study Guide - Final Guide: Initial Public Offering, Cash Flow, Interest

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