Exam 1 Corporate Finance
What is the present value of an ordinary annuity that pays $100 per year for 20 years if the interest rate is 10 percent per year?
$100{[1 - (1/(1.10)20)]/0.10}
Assume Zoe Corporation's plant capacity will allow for sales of $250 million and last year's sales were $180 million. Zoe's current gross plant and equipment total is $340 million. You project sales growth of 20% in the upcoming year.What total should you forecast for Zoe's plant and equipment on your pro forma balance sheet?
$340 million
You will receive a bonus of $5,000 in one year's time, and would like to take a loan against it now. What is the formula that shows how much you can borrow if you plan to use the entire amount to pay back the loan and your interest rate is 3%?
$5,000/1.03
The Tax Cuts and Jobs Act of 2017 set the corporate tax rate to be ______ regardless of the level of taxable income.
21%The more debt a firm has, the greater its: degree of financial leverage
A firm with a 26 percent return on equity earned ______ cents in profit for every one dollar in shareholders' equity.
26
To find the present value of an annuity of $100 per year for 5 years at 10 percent per year using the tables, look up the present value interest factor which is ______ and multiply that by ______.
3.7908; $100
Which of the following is the simplest form of loan?
A pure discount loan
What does stockholders' equity represent?
A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities.)
Which compounding interval will result in the lowest future value assuming everything else is held constant?
Annual
Which two of the following groups are most interested in liquidity ratios?
Bankers
Which of the following are examples of short-run fixed costs?
Bond interest
How is the inventory turnover ratio computed?
Cost of goods sold/Inventory
The use of financial leverage can:
Increase the chance of financial distress and business failure.
True or false: The formula for the present value interest factor for annuities is Annuity present value factor = {1-[1/(1+r)t]}r
TRUE
When is revenue recognized on an income statement?
When the earnings process is virtually completed
When using a financial calculator to find the interest rate, you may use the inputs N, PMT, and PV to find 1/
Y
The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____.
[1 − (1/1.0820)]/.08
The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______.
[1 − (1/1.1030)]/.10]
The formula for the ___________ present value is C × [(1 − Present value factor)/r].
annuity
The future value factor is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.
annuity
An annuity due is a series of payments that are made ____.
at the beginning of each period
A lump sum payment to pay off the balance of a partially amortized loan is called a ______, payment.
balloon or bullet
A useful way of standardizing financial statements is to choose a ____ and then express each item relative to the _____.
base year; base amount
The alternative sustainable growth rate formula, growth equals ROE times b, is correct only when total equity is taken from the _____
beginning of period balance sheet
Residual value is the amount left over after paying ________________.
bondholders
Financial statements report:
book values
When calculating the future value of multiple cash flows using a spreadsheet, you must:
calculate the future value of each cash flow then add the compounded values together
When calculating the present value of multiple cash flows using a spreadsheet, you must:
calculate the present value of each cash flow then add the discounted values together
The ratio of total assets to sales is known as the _____.
capital intensity ratio
The total of cash flow to creditors and cash flow to stockholders is called _____.
cash flow from assets
Accounting profit ____ cash flow.
differs from
A common-base year financial statement presents items relative to a certain base, which is the _____.
dollar amount of each item during a common base year
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.
end
The debt-equity ratio expresses the total debt divided by total equity, while the ____________ multiplier expresses the total assets divided by the total equity.
equity
The formula for total _________ is total liabilities and equity minus total debt.
equity
The passage of the Tax Cuts and Jobs Act of 2017 was to make the federal corporate tax rate in the United States a _____ tax.
flat
The formula for the ______ value interest factor of an annuity is {1-[1/(1+r)t]r}.
future
Holding too many liquid assets can be harmful for a firm because such assets are generally _____.
less profitable
A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time.
level
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.
liquidity
Most investments involve _____ cash flows.
multiple
Cash generated from a firm's normal business activities is called _____.
operating cash flow
The short run for a firm is the period of time during which ______.
output can vary and some costs are fixed
When using the spreadsheet (Excel) function for finding the PV of an annuity, it's a good idea to enter the ______ as a negative value.
payment
One of the most important uses of financial statement information within the firm is:
performance evaluation
The _____ ratio is equal to 1 minus the dividend payout ratio.
plowback
When a company has negative earnings for an extended period of time, analysts will often resort to the:
price-sales ratio
Accountants usually distinguish between _____ costs and _____ costs.
product; period
To use a present value of an annuity table to find the present value of an annuity factor, search the _____ for the number of periods and the _____ for the rate.
row; column
In general, revenue should be recognized at the time of
sale
A common-size income statement helps compare financial results over time by controlling for changes in ______.
sales
What should you keep in mind when examining an income statement?
time and costs
Which of the following is the correct representation of the cash coverage ratio?
(EBIT+ Non-cash expenses)/Interest expense
Which of the following is the correct representation of the total debt ratio?
(Total assets - Total equity)/(Total assets)
Cal's Market has return on equity (ROE) of 15 percent. What does this mean?
Cal's generated $.15 in profit for every $1 of book value of equity.
Which of the following are often left out of most financial planning models?
Cash flow size, risk, and timingIf sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______. increase
Cash flow to ____________ is interest paid less net new borrowing.
Creditors
Long-term solvency ratios are also called financiaL ______ Ratios
Leverage
The five categories of financial ratios include short-term solvency, long-term solvency, asset management, profitability, and ______ value ratios.
Market
Which of the following are traditional financial ratio categories?
Market value ratios
Which one of the following complies with GAAP?
Matching revenues with expenses
When using a financial calculator to determine the number of payments on a loan, you may use the inputs I/Y, PMT, and PV to solve for _____.
N
You may use which of the following sets of inputs together to solve for the present value of an annuity using a financial calculator?
N, I/Y, PMT, PV
Which one of the following is the correct equation for computing return on assets (ROA)?
Net income/Total assets
Which one of the following is the correct equation for computing return on assets (ROA)?
Net income/Total assetsA single cash flow is also known as a: Lump Sum
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.
One YearThe present value of a series of ________ cash flows is the amount you would need today to exactly duplicate those future cash flows. Future
The difference between the total assets and total liabilities is shareholders' or
Owner's Equity
Which of the following spreadsheet (Excel) functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year?
PV(0.1,10,-100,0,)
Which are true concerning product costs?
Product costs are reported as costs of goods sold and Product costs contain both fixed and variable costs.
How is income defined?
Revenue minus expenses
On which side of the balance sheet do liabilities appear?
Right
The current ratio shows the relationship between ____.
current assets and current liabilities
The present value of a series of future cash flows is the amount you would need today to _____.
exactly duplicate those future cash flows
The matching principle of GAAP requires revenues be matched with _____.
expenses
Long-term solvency ratios are also known as:
financial leverage ratios
The information needed to compute the profit margin can be found on the ____.
income statement
The purpose of a(n) ______ is to measure performance over a set period of time.
income statement
The cash ratio adds noncash expenses back to the EBIT to determine its ability to meet its ________________ obligations, while the TIE is based on EBIT.
interest
The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes a ___ time to sell.
long
Total capitalization equals total equity plus total:
long-term debt
The APR is also called the _____ rate and it differs from the EAR.
stated
The formula for the present value of an annuity due is _____.
(1 + r) × (PV of an ordinary annuity)
True or false: The APR is always the same as the EAR.
FALSE
The cash flow identity reflects the fact that:
a firm generates cash through its various activities.
The inventory______________is calculated as the COGS divided by the inventory.
turnover
The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.
uneven
If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.
10%
Which of the following are included in the fixed asset portion of a balance sheet?
Buildings and Trademarks
Which of the following processes can be used to calculate future value for multiple cash flows?
Compound the accumulated balance forward one year at a time
In the standard present and future value tables, and in all the default settings on a financial calculator, the assumption is that cash flows occur at the ___________ of each period.
End
Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $100 per year for 10 years at 15%?
Enter 100 for PMT, 10 for N, and 15 for I/Y. Solve for FV.
Which of the following is the formula for the future value of an annuity?
FV = C((1+r)t−1r)
Which of the following show the inputs you would use in a financial calculator to compute the present value of $100 per year for 30 years if the discount rate is 5%?
In your financial calculator, enter 100 for PMT, 30 for N, and 5 for I/Y. Solve for PV.
Period costs are the costs that are allocated to a specific ______.
Interval of time
A(n) _____ is a measurable value that shows how effectively a company is achieving a business objective.
KPI
A ______ performance indicator is a measurable value that shows how effectively a company is achieving business objectives.
Key
What is the main difference between the cash coverage ratio and the times interest earned ratio?
Noncash expenses
Which of the following are real-world examples of annuities?
Pensions
The price-sales ratio is calculated as the price per _________ divided by the sales per
Share
Common-size statements are used for comparing firms with differing ____.
Sizes
When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum.
lump
The last (residual) claimants to be paid by a firm are the ______.
stockholders
The EBITDA ratio is similar in spirit to:
the PE ratio
When looking at the income statement, the financial manager should keep in mind GAAP, cash versus noncash items, and
time and costs.
A common-size balance sheet expresses accounts as a percentage of ______.
total assets
Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $400 per year for 10 years at 5%?
Enter 400 for PMT, 10 for N, and 5 for I/Y. Solve for FV.
How frequently does continuous compounding occur?
Every instant
True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.
FALSE
What are two ways to calculate a balloon payment?
Find the present value of the payments remaining after the loan term
In finance, the value of a firm depends on its ability to generate ______.
cash flows
You owe $1,200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of this month, which of the following show the steps you will apply using a financial calculator to solve for the number of months will it take to pay off your credit card?
Enter −50 for PMT, 1,200 for PV, and 1.5 for I/Y. Solve for N.
Product
costs include such things as raw materials, direct labor expense, and manufacturing overhead.
Return on equity (ROE) is a measure of _____.
profitability
