FIN 317 Week 11 Final Exam – Strayer
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Chapters 7 Through 15
Part 1: Chapters 7 Through 11
Part 2: Chapters 12 Through 15
CHAPTER 7
TYPES
AND COSTS OF FINANCIAL CAPITAL
True-False
Questions
1. The accounting emphasis on accrued revenue
and expenses and depreciation is the same emphasis as that of finance managers.
2. Traditional accounting does not focus on the
implicit cost of equity that is the required capital gains to complement
dividends. However, evaluation methods
exist to determine this value by financial managers.
3. Formal historical accounting procedures
include explicit records of debt (interest and principal) and dividend capital
costs.
4. Public financial markets are markets for the
creation, sale and trade of illiquid securities having less standardized
negotiated features.
5. A venture’s “riskiness” in terms of poor
performance or failure is usually very high during the maturity stage of its
life cycle.
6. A venture’s “riskiness” in terms of poor
performance or failure is usually high to moderate during the rapid-growth
stage of its life cycle.
7. First-round financing during a venture’s
survival stage comes primarily from venture capitalists and investment banks.
8. Startup financing usually comes from
entrepreneurs, business angels, and investment bankers.
9.
Commercial banks provide liquidity-stage
financing for ventures in the rapid-growth stage of their life cycles.
10. A venture’s “riskiness” in terms of the
likelihood of poor performance or failure decreases as it moves from its
development stage through to its rapid-growth stage.
11. A nominal interest rate is an observed or
stated interest rate.
12. The “real interest rate” (RR) is the interest
one would face in the absence of inflation, risk, illiquidity, and any other
factors determining the appropriate interest rate.
13. The risk-free interest rate is the interest
rate on debt that is virtually free of inflation risk.
14. Inflation premium is the rising prices not
offset by increasing quality of goods being purchased.
15. “Default-risk” is the risk that a borrower
will not pay the interest and/or the principal on a loan.
16. The “prime rate” is the interest rate charged
by banks to their highest default risk business customers.
17. Bond ratings reflect the inflation risk of a firm’s
bonds.
18. The relationship between real interest rates
and time to maturity when default risk is constant is called the term structure
of interest rates.
19. The graph of the term structure of interest
rates, which plots interest rates to time to maturity is called the yield
curve.
20. Liquidity premiums reflect the risk
associated with firms that possess few liquid assets.
21. Subordinated debt is secured by a venture’s
assets, while senior debt has an inferior claim to a venture’s assets.
22. Early-stage ventures tend to have large
amounts of senior debt relative to more mature ventures.
23. Investment risk is the chance or probability
of financial loss on one’s venture investment, and can be assumed by debt,
equity, and founding investors.
24. A venture with a higher expected return
relative to other ventures will necessarily have a higher standard deviation or
returns.
25. Historically, large-company stocks have
averaged higher long-term returns than small-company stocks.
26. The coefficient of variation measures the
standard deviation of a venture’s return relative to its expected return.
27. Closely held corporations are those companies
whose stock is traded over-the-counter.
28. Typically, the stocks of closely held
corporations aren’t publicly traded.
29. Organized exchanges have physical locations
where trading takes place, while the over-the-counter market is comprised of a
network of brokers and dealers that interact electronically.
30. Market cap is determined by multiplying a
firm’s current stock price by the number of shares outstanding.
31. The excess average return of long-term
government bonds over common stock is called the market risk premium.
32. The weighted average cost of capital is simply
the blended, or weighted cost of raising equity and debt capital.
33. Venture capital holding period returns (all
stages) for the 10-year period ending in 2012 were about the same as the
returns on the S&P 500 stocks.
Multiple-Choice
Questions
1. Which one of the following markets involve
liquid securities with standardized contract features such as stocks and bonds?
a. private financial market
b. derivatives market
c. commodities market
d. real estate market
e. public financial market
2. Which of the following markets involve direct
two-party negotiations over illiquid, non-standardized contracts such as bank
loans and direct placement of debt?
a. primary market
b. secondary market
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