FIN 540 Week 11 Final Exam – Strayer NEW


Chapters 24 Through 30






     1.   A central question that must be addressed in bankruptcy proceedings is whether the firm's inability to meet scheduled interest payments results from a temporary cash flow problem or from a potentially permanent problem caused by falling asset values.



     2.   In the event of bankruptcy under the federal bankruptcy laws, debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders. Moreover, in a bankruptcy all debtholders are treated equally as a single class of claimants.



     3.   The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.



     4.   The primary test of feasibility in a reorganization is whether the firm's fixed charges after reorganization can be covered by its projected cash flows.



     5.   Bankruptcy plays no role in settling labor disputes and product liability suits. Such issues are outside the bounds of bankruptcy law and are covered by other statutes.



     6.   Bankruptcy laws have been used to help reach settlements in major product liability lawsuits. By using financial projections to show that contingent claims against the company jeopardize its existence, agreements are reached, partially satisfying claimants, and allowing the firm to continue operating.



     7.   Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments, a bankruptcy case cannot begin until the firm actually defaults on a scheduled payment.



     8.   One of the actions that can be taken in bankruptcy under the standard of feasibility is to replace existing management with a new team if the quality of management is judged to have been substandard.







     1.   The slope of the SML is determined by the value of beta.




     2.   If you plotted the returns of Selleck & Company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on Selleck's stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.




     3.   If the returns of two firms are negatively correlated, then one of them must have a negative beta.



     4.   A stock with a beta equal to −1.0 has zero systematic (or market) risk.



     5.   It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.


     6.   In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.



     7.   If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the low standard deviation stock.




     8.   The CAPM is a multi-period model which takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.



     9.   The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions.



   10.   The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero.



   11.   We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.



   12.   Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation.






     1.   Real options exist when managers have the opportunity, after a project has been implemented, to make operating changes in response to changed conditions that modify the project's cash flows.




     2.   Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds.



     3.   The option to abandon a project is a real option, but a call option on a stock is not a real option.




     4.   Real options are most valuable when the underlying source of risk is very low.




     5.   Real options affect the size, but not the risk, of a project's expected cash flows.







     1.   The credit period is the amount of time it takes to do a credit search on a potential customer.



     2.   Credit standards refer to the financial strength and importance of a potential customer to the firm required in order to qualify for credit.



     3.   The collection process, although sometimes difficult, is a fairly inexpensive component of doing business.



     4.   The collection process, although sometimes difficult, is also expensive in terms of out-of-pocket expenses.


     5.   Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.



     6.   When deciding whether to offer a discount for cash payment, a firm must balance the profits from additional sales with the lost revenues from the discount.



     7.   The primary reason to monitor aggregate accounts receivable is to see if customers, on average, are paying more slowly.



     8.   DSO analysis of accounts receivable is the most robust way to see if customers are, on average, paying more slowly, because it is unaffected by seasonal changes in sales.




     9.   If sales are seasonal, the days sales outstanding will fluctuate from month to month, even if the amount of time customers take to pay remains unchanged.



   10.   The percentage aging schedule of accounts receivable is the most robust way to see if customers are, on average, paying more slowly, because it is unaffected by seasonal changes in sales.



   11.   The uncollected balances schedule is constructed at the end of a quarter by dividing the dollar amount of remaining receivables from each month in that quarter by that month's sales.






     1.   The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.



     2.   The easier a firm's access to borrowed funds the higher its precautionary balances will be, in order to protect against sudden increases in interest rates.



     3.   For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.



     4.   A just-in-time system is designed to stretch accounts payable as long as possible.



     5.   If a company increases its safety stock, then its EOQ will go up.



     6.   If a company increases its safety stock, then its average inventory will go up.








     1.   Under a defined contribution plan, employees agree to contribute some percentage of their salaries, up to 20 percent, to the firm's pension fund.


     2.   If employees have a right to receive pension benefits even if they leave the company prior to retirement, their pension rights are said to be vested.




     3.   From a pure cost standpoint, a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.



     4.   The performance measurement of stock portfolio managers must recognize the risk inherent in the investment portfolio. One way to incorporate risk into performance measurement is to examine the portfolio's alpha, which measures the vertical distance of the portfolio's return above or below the Security Market Line.







     1.   The primary goal of investor-owned firms is shareholder wealth maximization, while the primary goal of not-for-profit firms is typically stated in terms of some mission; for example, to provide health care services to the communities served.



     2.   Not-for-profit firms have fund capital in place of equity capital. Since fund capital does not have to provide a return to stockholders, the appropriate cost of fund capital in a cost of capital estimate is zero.



     3.   Since not-for-profit firms do not pay taxes, they receive no tax benefits whatsoever from using debt financing.



     4.   The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.




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  • Item #: FIN540W11E

FIN 540 Week 11 Final Exam – Strayer NEW

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