Assets I

The stock market: Primary market: the market in which new securities are originally sold to investors. Secondary market: the market in which new securities are originally sold to investors. Secondary market: the market in which securities are traded among investors. None of the above is correct.

As for the functions of the stock market: Liquidity function: have nothing to do with the ability to turn an investment back into cash when needed. Valuation function: one of the financial objective of a company is to minimize the current market value of shareholders’ investment (value of shares on the market). Savings protection against inflation function: in theory, variable-income securities (stocks), at least in the long-run, are increased in proportion to inflation. None of the above is correct.

As far as share value is concerned: The issue value is the price at which the company issuing shares or bond securities offers them on the market. Theoretical value: is the value that theoretically should have a share after a capital increase, once a dilution effect has occurred. The accounting value: is obtained dividing the “shareholders equity” (capital stock + retained earnings – fictitious assets) by the number of shares. All above are correct.

The intrinsic value of a share: Actual value of the future financial flows, can be derived as: dividends. Actual value of the future financial flows, can be derived as: dividends, profits because of a capital increase. Actual value of the future financial flows, can be derived as: dividends, profits because of a capital increase, and gains for selling the security. None of the above is correct.

Definitions of cost of capital: Is the weighted average of the costs of equity of a company. Is the maximum return expected by the investors to compensate them for the risks of keeping their investment in an entity. Is the rate of return that an investor expects to receive from an alternative investment bearing a similar risk. Is the yield rate that must not to be achieved to ensure that the value of the company and the market price of the ordinary shares does not fall.

Stock Exchange indexes: The price index only considers price movements (capital gains or losses) of the securities that make up the index. The total return index does not include dividends realized over a given period of time. The total return index does not include dividends. The price index include dividends realized over a given period of time.

The theoretical value of a share: Is the value that theoretically should have. Is the value that theoretically should have a share after a capital increase, once a dilution effect has occurred. Is the value that theoretically should have a share after a capital increase. Is the value that theoretically should have a share after a capital increase, without taking into account the dilution effect.

In order to correct the individual index of a security according to a capital increase, we have to take into account: Only the theoretical value of the share. Only the theoretical value of the share after a capital increase. Only the value of the subscription right. The theoretical value of the share after a capital increase and the value of the subscription right.

Rate of return at expiration: Refers to an investment that than have not expired. Refers to an investment that has already expired. Is calculated retrospectively on the basis of historical data of the final investment and subsequent income flows. Is calculated retrospectively on the basis of data of the final investment.

The required rate of return: Refers to the future return on an investment made at the present time. The higher the risk, the lower return the investor will require of the financial investment. Refers to the current return on an investment made at the present time. The lower the risk, the higher return the investor will require of the financial investment.

Which of the following form of compensation is most likely to align the interests of managers and shareholders?. A fixed salary. A salary linked to company profits. A salary that is paid partly in the form of the company’s share. All above are correct.

When a corporation fails, the maximum that can be lost by an individual shareholder is: The amount of their initial investment. The amount of their share of the profits. Their proportionate share required to pay the corporation’s debts. The amount of their personal wealth.

If the Z-score model of a firm is equal to 2.5, it means that: It is a non-bankrupt firm. None is correct. It is a bankrupt firm. The firm has a high solvency ratio.

Assume that a dividend has just been paid in the company YYE, S.A. of €6/share. It is expected that the dividends grow at an average rate of 2%. If the market price of the shares of the company is €35, what is the required rate of the return by shareholders?. 19.00%. 17.49%. 19.49%. None is correct.

Select the incorrect answer regarding the balancing item in financial planning models: The dividends could become the balancing item in a financial planning model. If the firm commits to a fixed amount of dividends and decides that it will issue a fixed amount of new equity, the debt will be the balancing item in a financial planning model. The balancing item is the variable that adjusts to maintain the consistency of a financial plan. New equity issues can never become the balancing item in a financial planning model.

A firm can achieve a higher internal growth rate if: It plows back a high proportion of its earnings (a high plowback ratio). It has a high debt-to-asset ratio. All are correct. It has a high dividend payout ratio.

The company EED, S.A. has had one stock issue in which it sold 10,000 shares to the public at €9 per share (€3 par value per share). The net common equity is €145,000. What is the additional paid-in capital and the retained earnings?. The additional paid-in capital is €90,000 and the retained earnings, €75,000. The additional paid-in capital is €60,000 and the retained earnings, €55,000. None is correct. The additional paid-in capital is €90,000 and the retained earnings, €55,000.

Concerning the constant-growth dividend discount model, select the correct answer: Among the main problems of the model, we do not find the problem of estimating the market value of shares in unlisted companies. The model calculates the present value of the stream of cash flows that the shareholder expects to receive, both in term of dividends and also in terms of the differential in the share price at the time of sale. Among the main problems of the model, we find the calculation of the average annual growth rate that could be calculated multiplying the plowback ratio by the return on assets (ROA). If the company does not pay dividends, we use earnings per share ratio instead of the dividend.

The natural financial goal of the firm is: To maximize the wealth of the firm’s current owners. To maximize the market value of the company. To optimize the value of the cash invested by the owners. All are correct.

What is the effective annual interest rate or annually compounded rate of a bank loan at a simple annual interest rate of 4% (0.33% monthly)?. 0.33%. 4.07%. It is not possible to calculate it. 4.00%.

Sensitivity analysis evaluates projects by: Ensuring that the project sponsor has the proper incentives. Testing for interrelated variables. Forecasting changes in interest rates that would increase financing costs. Recording profitability changes while changing one variable at a time.

Concerning the company valuation method based on equity, select the correct option: The equity’s value is obtained by multiplying the annual net income by a ratio called PER. This method establishes that a company’s value is equal to the value of its net assets plus the value of its goodwill. This method seeks to determinate the company’s value by estimating the cash flows that will be generated in the future and then discounting them at a discount rate. This method seeks to determinate the company’s value by estimating the value of its assets.

Select the incorrect option regarding the cost of capital: It is the minimum rate of return to which the financial sources that make up the economic structure of the company must be remunerated. It is the expected rate of return that investors demand from the company’s assets and operations. It is the minimum acceptable rate of return for capital investment. It is calculated using the WACC formula.

If a firm obtains a new line of credit that enables it to avoid stretching payables to its suppliers, what will be the effect on the cash conversion cycle?. The cash conversion cycle will increase, because the accounts payable period will diminish. The cash conversion cycle will not be modified. Depending on the situation, the cash conversion cycle could increase or decrease. The cash conversion cycle will decrease, because the accounts payable period will disminish.

Which of the following is not a suitable tool in project analysis under uncertainty?. Break-even analysis. All are suitable tools. Sensitivity analysis. Scenario analysis.

The financial manager: Oversees the work of all intermediate managers in the company. Assumes general management responsibilities and becomes a member of the board. Takes final decisions on large investment projects. Is responsible for organizing and supervising the capital budgeting process autonomously and alone, without the collaboration of other managers.

Select the incorrect answer regarding the preferred stock: Preferred stock promises a series of fixed payments to the investor, like debt. Preferred stock rarely confers full voting privileges. If the company goes out of business, the preferred stockholders get in the queue after the debtholders but before the common stockholders. If the company goes out of business, the preferred stockholders get in the queue before the debtholders and before the common stockholders.