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Finance
Q:
In calculating the weighted average cost of capital, the values used for D, E and V are:
A. book values
B. liquidating values
C. market values
D. none of the above
Q:
_________________________ is the risk that the economy of the market area they service may take a down turn in the future.
Q:
The after-tax weighted average cost of capital (WACC) is calculated as:
A. WACC = rD (D/V) + rE (E/V); (where V = D + E)
B. WACC = rD (1 - TC)(D/V) + rE (E/V); (where V = D + E)
C. WACC = rD (D/V) + rE (1 - TC)(E/V); (where V = D + E)
D. None of the above
Q:
_________________________ is the risk that the bank will have to sell part of its investment portfolio before their maturity for a capital loss.
Q:
The after-tax weighted average cost of capital is determined by:
A. Multiplying the weighted average after tax cost of debt by the weighted average cost of equity
B. Adding the weighted average before tax cost of debt to the weighted average cost of equity
C. Adding the weighted average after tax cost of debt to the weighted average cost of equity
D. Dividing the weighted average before tax cost of debt to the weighted average cost of equity
Q:
The most aggressive investment maturity strategy calls for the bank to continually shift the maturities of its securities in responses to changes in interest rates and is called the __________________.
Q:
Total market value of a firm (V): [D = market value of debt; E = market value of equity]
A. V = D + E
B. V = D + E + tax shield effect of debt
C. V = D + E + tax shield effect of debt-Present value of bankruptcy costs
D. None of the given ones
Q:
_________________________ are the way the federal, state and local governments guarantee the safety of their deposits with banks.
Q:
Capital budgeting decisions that include both investment and financing decisions can be analyzed by:
I) Adjusting the present value
II) Adjusting the discount rate
III) Ignoring financing mix
A. I only
B. II only
C. III only
D. I and II only
Q:
A(n) _________________________ is a security where the interest portion of the security is sold separately from the principal portion of the security.
Q:
Explain the impact of government loan guarantees on corporate financing.
Q:
The investment maturity strategy which calls for the bank to have one half of its investment portfolio in very short term assets and one half of its investment portfolio in long term assets is known as the _________________________ .
Q:
Explain the pecking order theory of capital structure.
Q:
Debt instruments issued by cities, states and other political entities and which are exempt from federal taxes are collectively known as _________________________ .
Q:
A(n) _________________________ is a security issued by the federal government which has less than one year to maturity when it is issued.
Q:
Briefly explain the trade-off theory of capital structure.
Q:
Discuss some examples of the conflicts of interest that may arise between bondholders and stockholders when a firm is in financial distress.
Q:
The Investment Function in Banking and Financial-Services Management
Q:
The Dakota National Bank has purchased a security issued by the state of Tennessee that has 20 years to maturity. What type of security have they purchased?
A) Commercial Paper
B) Bankers Acceptance
C) Corporate Bond
D) Certificate of Deposit
E) Municipal Bond
Q:
Briefly explain bankruptcy costs.
Q:
The Goodknight Company has issued securities with 45 days to maturity. What type of security have they issued?
A) Commercial Paper
B) Bankers Acceptance
C) Corporate Bond
D) Certificate of Deposit
E) Municipal Bond
Q:
How does Modigliani-Miller's proposition I is modified when taxes and financial distress costs are considered?
Q:
State how the present value of tax shield is changed when personal taxes are included.
Q:
The Wesson Wisconsin State Bank has purchased a bank-qualified municipal bond with a yield of 7.5%. This bank had to borrow funds to make this purchase at a cost of 6%. This bank is in the 25% tax bracket. What is the net after-tax return on this bank-qualified municipal bond?
A) 7.5%
B) 2.7%
C) 3.0%
D) 1.5%
E) None of the above
Q:
What is the relative tax advantage of debt when corporate and personal taxes are considered?
Q:
The Carey State Bank has purchased a bank-qualified municipal bond with a yield of 6%. This bank has had to borrow funds to make this purchase at a cost of 5.25%. This bank is in the 40% tax bracket. What is the net after-tax return on this bank-qualified municipal bond?
A) 6.00%
B) .75%
C) 2.85%
D) 2.43%
E) None of the above
Q:
Discuss the basic idea behind Miller's arguments about debt and taxes.
Q:
The Roy State Bank has just purchase a portfolio of asset backed securities. What type of risk do these securities have that other securities do not have?
A) Credit risk
B) Interest rate risk
C) Business risk
D) Call risk
E) Prepayment risk
Q:
State Modigliani-Miller's proposition I corrected to include corporate income taxes.
Q:
Moodys Investor Service has added the numbers 1, 2 and 3 to some of their ratings. What type of risk are these ratings attempting to measure?
A) Credit risk
B) Interest rate risk
C) Business risk
D) Call risk
E) Prepayment risk
Q:
Briefly explain how interest tax shields contribute to the value of stockholders' equity.
Q:
The Caldwell National Bank has purchased a bond that pays a coupon rate of 10.5%. They are a little concerned because they believe rates will decrease in the future and they will not be able to reinvest the coupon payments at the same rate. What type of risk are they concerned about?
A) Credit risk
B) Interest rate risk
C) Business risk
D) Call risk
E) Prepayment risk
Q:
A firm bankrupt from excess use of debt, which receives government bailout funds and government loan guarantees is incentivized to issue more high risk debt.
Q:
The Terrell State Bank is a small bank located in Guyman, Oklahoma. All of their loans are agriculture and small business loans in Guyman. They want to buy a municipal bond from the state of South Carolina. What type of risk are they likely trying to reduce with this purchase?
A) Credit risk
B) Interest-rate risk
C) Business risk
D) Call risk
E) Prepayment risk
Q:
The existing tax code encourages a preference for equity over debt in corporate financing.
Q:
The Dillinger State Bank has purchased a bond from the Interstate Manufacturing Company that has 15 years to maturity and has a coupon rate of 12.5%. Market interest rates have recently declined to 8% and the Dillinger State Bank is worried that the Interstate Manufacturing Company will retire the bond and issue new ones with a lower coupon rate. What type of risk is the Dillinger State Bank worried about?
A) Credit risk
B) Interest-rate risk
C) Business- risk
D) Call risk
E) Prepayment risk
Q:
The pecking order theory implies that firms prefer internal to external financing.
Q:
The Sheets Savings and Loan Association has purchased a bond that has a coupon rate of 7.5% and a face value of $1000. It has 5 years to maturity and is selling in the market for $1063. The bond makes annual coupon payments. What is the duration of this bond?
A) 7.50 years
B) 5.00 years
C) 4.65 years
D) 4.37 years
E) None of the above
Q:
According to the trade-off theory, more profitable firms should have more debt and thus the highest debt ratios.
Q:
The Johnson National Bank has purchased a bond that has a coupon rate of 5.5% and a face value of $1000. It has 4 years to maturity and is selling in the market for $917. The bond makes annual coupon payments. What is the duration of this bond?
A) 3.38 years
B) 3.68 years
C) 4.00 years
D) 5.50 years
E) None of the above
Q:
Risk shifting, refusing to contribute equity and playing for time are some of the consequences of firms facing bankruptcy.
Q:
Financial distress always results in bankruptcy.
Q:
The Johnson National Bank has purchased a bond that has a coupon rate of 5.5% and a face value of $1000. It has 4 years to maturity and is selling in the market for $917. The bond makes annual coupon payments. What is the yield to maturity on this bond?
A) 5.5%
B) 4.0%
C) 1.5%
D) 8%
E) None of the above
Q:
The Farmer National Bank has purchased a bond that has a coupon rate of 11.5% and a face value of $1000. It has 16 years to maturity and is selling in the market for $1309.80. The bond makes annual coupon payments. The Farmer National Bank plans on selling this bond at the end of 8 years for $1071. What is the holding period return on this bond?
A) 7%
B) 8%
C) 11.5%
D) 16%
E) None of the above
Q:
The right to default is valuable for the stockholders of firms.
Q:
57. When cost of financial distress is included, the value of a levered firm is given by: Value of levered firm = Value (all equity financed) + PV (tax shield) - PV (costs of financial distress).
Q:
The Farmer National Bank has purchased a bond that has a coupon rate of 11.5% and a face value of $1000. It has 16 years to maturity and is selling in the market for $1309.80. The bond makes annual coupon payments. What is the yield to maturity on this bond?
A) 11.5%
B) 16%
C) 8%
D) 12.21%
E) None of the above
Q:
The Price Perpetual Bank has purchased a bond that has a coupon rate of 5.5% and a face value of $1000. It has 11 years to maturity and is selling in the market for $887.52. The bond makes annual coupon payments. The Price Perpetual Bank is planning on selling this bond at the end of 5 years for $1036.50. What is the holding period return on this bond?
A) 5.5%
B) 7%
C) 11%
D) 9%
E) None of the above
Q:
When (1 - Tp) = (1 - TpE)(1 - TC), corporate and personal taxes cancel to make debt policy irrelevant.
Q:
The Price Perpetual Bank has purchased a bond that has a coupon rate of 5.5% and a face value of $1000. It has 11 years to maturity and is selling in the market for $887.52. The bond makes annual coupon payments. What is the yield to maturity on this bond?
A) 7%
B) 5.5%
C) 11%
D) 4.70%
E) None of the above
Q:
Personal taxes on interest income and equity income will always increase the advantage of debt to a firm.
Q:
The Stumbaugh State Bank is thinking about purchasing a corporate bond that has a yield of 9%. This bank has a marginal tax rate of 40%. What is the after-tax yield on this bond?
A) 15%
B) 9%
C) 5.4%
D) 3.6%
E) None of the above
Q:
The value of a levered firm is given by:
Value of levered firm = Value (all equity financed) + (TC) * (D) This assumes that the debt is perpetual debt.
Q:
The Ferson National Bank is thinking about purchasing a municipal bond that has a yield of 5.5%. This bank has a marginal tax rate of 30%. What is the after-tax yield on this bond?
A) 7.86%
B) 5.5%
C) 3.85%
D) 1.65%
E) None of the above
Q:
52. MM's Proposition I corrected for corporate taxes states that: Value of levered firm = Value (all equity financed) + PV tax shield.
Q:
The Lancaster State Bank is thinking about purchasing a corporate bond that has a yield of 8.5%. This bank has a marginal tax rate of 25%. What is the after-tax yield on this bond?
A) 11.33%
B) 8.5%
C) 6.375%
D) 2.125%
E) None of the above
Q:
The present value of the interest tax shield is the same regardless of whether the firm plans to borrow permanently or temporarily.
Q:
The investment maturity strategy which calls for the bank to put all of their investment assets into very long term securities is called the:
A) Front-end-loaded maturity policy
B) Back-end-loaded maturity policy
C) Ladder or spaced maturity policy
D) Barbell investment portfolio strategy
E) Rate expectation approach
Q:
Under the trade off theory, how will a government loan guarantee impact financing?
A. Prefer to issue debt
B. Prefer to issue stock
C. Prefer internal money
D. No impact
Q:
Which of the following is a characteristic of Treasury bills?
A) They are coupon instruments
B) They are the short term debt instruments issued by major corporations
C) They are discount securities
D) They have more risk than other money market securities
E) All of the above are characteristics of Treasury bills
Q:
What signal is sent to the market when a firm decides to issue new stock to raise capital?
A. Bond markets are overpriced
B. Bond markets are underpriced
C. Stock price is too low
D. Stock price is too high
Q:
A bank that is concerned that the economic conditions of the market area they serve may take a downturn with falling demand for loans and higher bankruptcies in the areas is concerned about which of the following things?
A) Business risk
B) Liquidity risk
C) Tax exposure
D) Credit risk
E) Inflation risk
Q:
Financial slack includes:
I) Cash
II) Marketable securities
III) Readily salable real assets
IV) Ready access to debt markets or bank loans
A. I only
B. IV only
C. III only
D. I, II, III, and IV
Q:
A financial institution that is concerned about the possibility that the purchasing power of both the interest income and principal income will decline on a loan is concerned about which of the following things?
A) Business risk
B) Liquidity risk
C) Tax exposure
D) Credit risk
E) Inflation risk
Q:
According to Rajan and Zingales study, debt ratios of individual companies depend on:
I) Size: Large firms have higher debt ratios.
II) Tangible assets: Firms with high ratios of fixed assets to total assets have higher debt ratios.
III) Profitability: More profitable firms have lower debt ratios.
IV) Market to book: Firms with higher ratios of market-to-book value have lower debt ratios.
V) Market structure: Firms with monopoly power have higher debt ratios.
A. I and II only
B. I, II and III only
C. I, II, III and IV only
D. I, II, III, IV and V
Q:
A security which was created by the Treasury to protect against inflation risk is called a(n):
A) CMO
B) FNMA
C) GNMA
D) TIPS
E) CD
Q:
The pecking order theory of capital structure implies that:
I) Risky firms will end up borrowing more
II) Firms prefer internal finance
III) Firms prefer debt to equity when external financing is required
A. I only
B. II only
C. II and III only
D. III only
Q:
The pecking order theory of capital structure predicts that:
A. If two firms are equally profitable, the more rapidly growing firm will borrow more, other things equal
B. Firms prefer equity to debt financing
C. Risky firms will end up borrowing less
D. Risky firms will end up borrowing more
Q:
A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are made annually and this bond has a face value of $1000. This bond is selling in the market for $862. If this bond is sold at the end of four years for $1046, what is the holding period return on this bond?
A) 6.5 percent
B) 12 percent
C) 9 percent
D) 6 percent
E) None of the above
Q:
The trade-off theory of capital structure predicts that:
A. Unprofitable firms should borrow more than profitable ones
B. Safe firms should borrow more than risky ones
C. Rapidly growing firms should borrow more than mature firms
D. Increasing leverage increases firm value
Q:
A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are made annually and this bond has a face value of $1000. This bond is selling in the market for $862. What is the yield to maturity on this bond?
A) 6.5 percent
B) 10 percent
C) 8.5 percent
D) 9 percent
E) None of the above
Q:
Inclusion of restrictions in the bond contract leads to:
A. Higher agency costs
B. Higher bankruptcy costs
C. Higher interest costs
D. None the above
Q:
A bond has six years to maturity and has a coupon rate of 7.5 percent. Coupon payments are made annually and this bond has a face value of $1000. This bond is selling in the market for $1127. What is the yield to maturity on this bond?
A) 7.5 percent
B) 5 percent
C) 11.5 percent
D) 2.5 percent
E) None of the above
Q:
When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends, these will result in:
I) no action by debtholders since these are equity holder concerns
II) positive agency costs, as bondholders impose various restrictions and covenants, which will diminish firm value
III) investments of the same risk class that the firm is in
A. I only
B. II only
C. III only
D. I and III only
Q:
One of the indirect costs to bankruptcy is the incentive toward under investment. Following this strategy may result in:
I) the firm always choosing projects with the positive NPVs
II) stockholders turning down low risk low return but positive NPV projects
III) stockholders would declare and receive high cash dividends
A. I only
B. II only
C. III only
D. II and III only
Q:
Which of the following would not be considered a bank qualified municipal security?
A) A Columbia County general obligation bond to modernize the county fire department.
B) A Bucks County general obligation bond to build a new sewer plant.
C) A City of San Marcos general obligation bond to pay for street repairs.
D) A City of Chicopee general obligation bond to pay for a new city jail.
E) A Treasury bond to finance government debt.
Q:
When faced with financial distress; managers of firms acting on behalf of their shareholders' interests will:
A. favor issuing large quantity of low quality debt to low quantity of high quality debt
B. favor paying high dividends to the shareholders
C. delay the onset of bankruptcy as long as they can
D. all of the above
Q:
When faced with financial distress; managers of firms acting on behalf of their shareholders' interests will:
A. favor high risk, high return projects even if they have negative NPV
B. refuse to invest in low risk, low return projects with positive NPVs
C. delay the onset of bankruptcy as long as they can
D. all of the above
Q:
Suppose a bank has found bank qualified municipal bonds which have a nominal gross rate of return of 8 percent and that it can borrow funds needed for this purchase at a rate of 6.25 percent. This bond is in the 35 percent tax bracket. What is the net after-tax return on this bond?
A) 5.20 percent
B) 3.5 percent
C) 1.75 percent
D) 0 percent
E) None of the above
Q:
Risk shifting implies:
A. When faced with bankruptcy, managers tend to invest in high risk, high return projects
B. When faced with bankruptcy, managers do not invest more equity capital
C. When faced with bankruptcy; managers may make accounting changes to conceal the true extent of the problem
D. All of the above