FIN201 TEST 1

Which one of the following statements related to annuities and perpetuities is correct?

A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

Which business form is best suited to raising large amounts of capital?

Corporation

A business created as a distinct legal entity and treated as a legal "person" is called a(n):

Corporation.

Which one of the following statements is correct?

Corporations can have an unlimited life.

Agency problems are most associated with:

Corporations.

Which one of the following will increase the cash flow from assets, all else equal?

Decrease in the change in net working capital

Which one of these will increase the present value of a set amount to be received sometime in the future?

Decrease in the interest rate

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.

Decrease in the quick ratio

Which one of these identifies the relationship between the return on assets and the return on equity?

DuPont identity

Which one of the following accurately describes the three parts of the DuPont identity?

Equity multiplier, profit margin, and total asset turnover

The DuPont identity can be used to help managers answer which of the following questions related to a company's operations?

I. How many sales dollars are being generated per each dollar of assets? II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generating per dollar of sales?

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

Income statement

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

The decision to issue additional shares of stock is an example of:

a capital structure decision.

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent?

annual

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate.

annual percentage

The book value of a firm is:

based on historical cost.

Financial managers should strive to maximize the current value per share of the existing stock to:

best represent the interests of the current shareholders.

As the degree of financial leverage increases, the:

probability a firm will encounter financial distress increases.

Decisions made by financial managers should primarily focus on increasing the:

shareholders

Corporate dividends are:

taxable income of the recipient even though that income was previously taxed.

A perpetuity is defined as:

unending equal payments paid at equal time intervals.

An example of a capital budgeting decision is deciding:

whether or not to purchase a new machine for the production line.

Which one of the following is a current asset?

Accounts receivable

Which one of the following terms is defined as the management of a firm's long-term investments?

Capital budgeting

Which one of the following ratios is a measure of a firm's liquidity?

Quick Ratio

Which one of the following is a correct formula for computing the return on equity?

ROA × Equity multiplier

Which one of the following statements concerning a sole proprietorship is correct?

The owner of a sole proprietorship is personally responsible for all of the company's debts.

Renee invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple interest.

Which one of the following statements concerning a sole proprietorship is correct?

The life of a sole proprietorship is limited.

The cash flow related to interest payments less any net new borrowing is called the:

capital spending cash flow.

Which one of the following terms is defined as the mixture of a firm's debt and equity financing?

capital structure

The cash flow related to interest payments less any net new borrowing is called the:

cash flow to creditors.

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

compound interest.

Net working capital is defined as:

current assets minus current liabilities.

Steve just computed the present value of a $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the:

discount rate.

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

discounting

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

discounting.

One disadvantage of the corporate form of business ownership is the:

double taxation of distributed profits.

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

Relationships determined from a company's financial information and used for comparison purposes are known as:

financial ratios.

Capital structure decisions include determining:

how much debt should be assumed to fund a project.

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

interest on interest.

Your goal is to have $1 million in your retirement savings on the day you retire. To fund this goal, you will make one lump sum deposit today. If you plan to retire _____ rather than _____ and earn a _____ rate of interest, then you can deposit a smaller lump sum today.

later; sooner; high

Decisions made by financial managers should primarily focus on increasing the:

market value per share of outstanding stock.

Which one of the following best states the primary goal of financial management?

maximize the current value per share