Fin 3150 Exam 1-5

Which one of the following is an ordinary annuity, but not a perpetuity?

$25 paid weekly for 1 year, starting one week from today

Kessler Cleaners has accounts receivable of $28,943, total assets of $387,600, cost of goods sold of $317,400, and a capital intensity ratio of .97. What is the accounts receivable turnover rate?

13.81

City Plumbing has inventory of $287,800, equity of $538,800, total assets of $998,700, and sales of $1,027,400. What is the common-size percentage for the inventory account?

28.82 percent

Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value?

4 percent interest, compounded annually

Galaxy Sales has sales of $938,300, cost of goods sold of $764,500, and inventory of $123,600. How long on average does it take the firm to sell its inventory?

59.01 days

Allison's Trees has total assets of $846,200 and total debt of 367,500. What is the equity multiplier?

846200/846200-367500= 1.77

Which one of the following parties can sell shares of ABC stock in the primary market?

ABC company

Which of the following statements is true?

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity

Which one of the following statements concerning annuities is correct?

An annuity due has payments that occur at the beginning of each time period.

Which one of the following will increase cash flow from assets for a tax paying firm, all else constant?

An increase in depreciation

Which one of the following will increase the cash flow from assets for a tax-paying firm all else constant?

An increase in depreciation

You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?

Annuity B has both a higher present value and a higher future value than Annuity A.

Which one of the following applies to a general partnership?

Any one of the partners can be held solely liable for all of the partnership's debt.

Which one of the following statements concerning the balance sheet is correct?

Assets are listed in descending order of liquidity.

Which one of following qualifies as an annuity payment?

Auto loan payment

Which one of the following situations is most apt to create an agency conflict?

Basing management bonuses on the length of employment

Which one of the following actions will increase the current ratio all else held constant? Assume the current ratio is greater than 1.0

Cash payment of an account payable

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0

Cash payment of an account payable

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Common-size income statement

Which one of these transactions will increase the liquidity of a firm?

Credit sale of inventory at cost

Motor Works has total assets of $919,200, long-term debt of $264,500, total equity of $466,900, net fixed assets of $682,800, and sales of $1,021,500. The profit margin is 6.2 percent. What is the current ratio?

Current ratio = ($919,200 - 682,800) / ($919,200 - 264,500 - 466,900) = 1.26

Which one of the following will increase the profit margin of a firm all else held constant

Decrease in the tax rate

An increase in which one of the following will operating cash flow for a profitable, tax-paying firm?

Depreciation

Working capital management includes which one of the following?

Determining which customers will be granted credit

A firm has sales of $811,000 for the year. The profit margin is 5.1 percent and the retention ratio is 56 percent. What is the common-size percentage for the dividends paid?

Dividends paid common-size percentage = [$811,000 ×.051 × (1 - .56)] / $811,000 = .0224, or 2.24 percent

Which one of the following can be classified as an annuity but not as a perpetuity?

Equal annual payments for life

The DuPont identity can be accurately defined as

Equity multiplier × Return on assets.

Which one of the following is a capital structure decision?

Establishing the preferred debt-equity level

Which one of the following is a working capital decision?

How much cash should the firm keep in reserve?

Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002?

Increase the protections against corporate fraud

Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount?

Increasing the interest rate

All else held constant, the future value of a lump sum investment will decrease is the

Interest is changed to simple interest from compound interest

Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?

Interest only

City Plumbing has inventory of $287,800, equity of $538,800, total assets of $998,700, and sales of $1,027,400. What is the common-size percentage for the inventory account?

Inventory common-size percentage = $287,800/$998,700 = .2882, or 28.82 percent

Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years:

Kurt will have a larger account value than Stacey will.

Which one of the following is an advantage of being a limited partner?

Losses limited to capital invested

What is the primary goal of financial management for a sole proprietorship?

Maximize the market value of the equity

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

No new external equity and a constant debt-equity ratio

Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

Noncash item

The Jones Brothers recently established a trust fund that will provide annual scholarships of 12,000 indefinitely. These annual scholarships are

Perpetuity

Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued?

Positive cash flow to stockholders

Which one of the following is the abbreviation for the U.S government coding system that classifies a firm by its specific type of business operations?

SIC

Jessica invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?

She could have the same future value and invest less than $2,000 initially if she could earn more than 6.5 percent interest.

Capital budgeting includes the evaluation of which of the following?

Size, timing, and risk of future cash flows

Which one of the following correctly defines a common chain of command within a corporation?

The controller reports directly to the chief financial officer.

Which of the following statements is true?

The future value is directly related to the interest rate

You are comparing three investments, all of which pay $100 a month and have an interest rate of 8 percent. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?

The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.

Briar Patch Fruits has sales of $529,600, cost of goods sold of $408,350, depreciation of $25,400, and interest expense of $9,100. The tax rate is 35 percent. What is the times interest earned ratio?

Times interest earned ratio = ($529,600 - 408,350 - 25,400) / $9,100 = 10.53

Which one of the following features distinguishable an ordinary annuity from an annuity due?

Timing of the annuity payments

Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 6.3 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?

To compute the initial loan amount, you must use a monthly interest rate.

Which one of these is a perpetuity?

Trust income of $1,200 a year forever

Which one of the following will increase the present value of a lump sum future amount to be received in 15 years?

a decrease in the interest rate

The potential conflict of interest between a firms owners and its managers is referred to as which type of conflict?

agency

The shareholders of Weil's Markets would benefit if the firm were to be acquired by Better Foods. However, Weil's board of directors rejects the acquisition offer. This is an example of:

an agency conflict

A 30-year home mortgage is a classic example of:

an ordinary annuity

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?

annuity

Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

annuity due

Probably the least effective means of aligning management goals with shareholder interests is:

automatically increasing management salaries on an annual basis.

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

average tax rate

The financial statement that summarizes a firms accounting value as of a particular date is called the

balance sheet

Which one of the following functions is generally a responsibility assigned to the corporate treasurer?

capital expenditures

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's:

capital structure

Jenna has been promoted and is now in charge of all external financing. In other words, she is in charge of:

capital structure management

Which one of the following has nearly the same meaning as free cash flow ?

cash flow from assets

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:

charge interest annually.

Net working capital is defined as:

current assets minus current liabilities

All else held constant, the present value of an annuity will decrease if you:

decrease the annuity payment

The interest rate used to compute the present value of a future cash flow is called the:

discount rate

Computing the present value of a future cash flow to determine what that cash flow is worth today is called:

discounted cash flow valuation

Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called:

discounting

Cash flow to stockholders is defined as:

dividends paid minus net new equity raised

The ratios that are based on financial statement values and used for comparison purposes are called

financial ratios

When conducting a financial analysis of a firm, financial analysts

frequently use accounting information.

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the:

future value

Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts?

general partnership

A common-size balance sheet helps financial managers determine:

if changes are occurring in a firm's mix of assets.

The stated interest rate is the interest rate expressed

in terms of the interest payment made each period.

All else held constant, the future value of an annuity will increase if you:

increase the time period

The future value of a lump sum investment will increase if you

increase the time period

The present value of a lump sum future amount

increases as the interest rate decreases.

The present value of a lump sum future amount:

increases as the interest rate decreases.

Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called:

interest on interest

Cash flow to creditors is defined as:

interest paid minus net new borrowing

Jamie is employed as a currency trader in the Japanese yen market. Her job falls into which one of the following areas of finance?

international finance

The relationship between the present value and the investment time period is best described as

inverse

If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas?

investments

The market value of a firms fixed assets

is equal to the estimated current cash value of those assets

The cash ratio is used to evaluate the:

length of time that a firm can pay its bills if no additional cash becomes available.

Cash flow to creditors increases when:

long-term debt is repaid.

cash flow to creditors increases when

long-term debt is repaid.

The primary goal of financial management is most associated with increasing the

market value of the firm

cash flow from assets is defined as

operating cash flow minus the change in net working capital minus net capital spending.

Paid-in surplus is classified as:

owner's equity

Limited Liability Company (LLC)

prefers its profits be taxed as personal income to its owners.

Katlyn needs to invest $5,318 today in order for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318?

present value

Financial Statement Analysis

provides useful information that can serve as a basis for forecasting future performance.

Leon is the owner of a corner store. Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due.

quick ratio

A negative cash flow to stockholders indicates a firm:

received more from selling stock than it paid out to shareholders.

An income statement prepared according to GAAP

records expenses based on the matching principle.

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

remain constant, regardless of the investment time period.

Net income increases when:

revenue increases

If a firm has an inventory turnover of 15, the firm:

sells its entire inventory an average of 15 times each year.

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?

sole proprietorship

The matching principle states that

the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

The primary goal of financial management is to maximize

the market value of existing stock.

The Wood Shop generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship?

total asset turnover

Common-size financial statements present all balance sheet account values as a percentage of:

total assets

A firm has inventory of $46,500, accounts payable of $17,400, cash of $1,250, net fixed assets of $318,650, long-term debt of $109,500, and accounts receivable of $16,600. What is the common-size percentage of the equity?

total assets = Total liabilities and equity = $1,250 + 16,600 + 46,500 + 318,650 = $383,000 Equity common-size percentage = ($383,000 - 17,400 - 109,500) / $383,000 = .6687, or 66.87 percent

Tower Pharmacy pays out a fixed percentage of its net income to its shareholders in the form of annual dividends. Given this, the percentage shown on a common-size income statement for the dividend account will:

vary in direct relation to the net profit percentage.

South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Northern Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:

will be greater if you invest with Northern Bank.

The daily financial operations of firm are primarily controlled by managing the

working capital