Finance 260 Midterm

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:

A. will be less than 12.9 percent. B. can either be less than or equal to 12.9 percent. C. is 12.9 percent. D. can either be greater than or equal to 12.9 percent. E. will be greater than 12.9 percent.

All else held constant, the book value of owners' equity will decrease when:

A. the market value of inventory increases. B. dividends exceed net income for a period. C. cash is used to pay an accounts payable. D. a long-term debt is repaid. E. taxable income increases.

Shareholders' equity is best defined as:

A. the residual value of a firm. B. positive net working capital. C. the net liquidity of a firm. D. cash inflows minus cash outflows. E. the cumulative profits of a firm over time

Shareholders' equity is equal to:

A. total assets plus total liabilities. B. net fixed assets minus total liabilities. C. net fixed assets minus long-term debt plus net working capital. D. net working capital plus total assets. E. total assets minus net working capital.

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:

A. aggregating. B. discounting. C. simplifying. D. compounding. E. extrapolating.

A local magazine is offering a $5,000 grand prize to one lucky winner. The prize will be paid in five annual payments of $1,000 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 8 percent on your money?

A. $ 4,823.45 B. $ 4,622.88 C. $ 3,992.71 D. $ 4,312.13 E. $ 3,312.13

Moonlight Industries just signed a sales contract with a new customer. JK will receive annual payments in the amount of $50,000, $96,000, $123,000, and $138,000 at the end of Years 1 to 4, respectively. What is this contract worth at the end of Year 4 if the firm earns 3.75 percent on its savings?

A. $ 443,571.88 B. $ 348,457.72 C. $ 431,417.66 D. $ 412,264.53 E. $ 424,786.07 FV = ($50,000 ×1.03753 ) + ($96,000 ×1.03752 ) + ($123,000 ×1.03751 ) + $138,000 = $424,786.07

Krystal plans to save $500 at the end of Year 1, $600 at the end of Year 2, and $800 at the end of Year 3. If she earns 2.8 percent on her savings, how much money will she have saved at the end of Year 3?

A. $1,676.51 B. $1,714.97 C. $1,945.19 D. $1,785.66 E. $1,878.69 FV = ($500 ×1.0282) + ($600 ×1.0281) + $800 = $1,945.19

You would like to establish a trust fund that would provide annual scholarships of $100,000 forever. How much would you have to deposit today in one lump sum to achieve this goal if you can earn a guaranteed 4.5 percent rate of return?

A. $1,678,342 B. $1,800,000 C. $2,413,435 D. $1,620,975 E. $2,222,222 The lump sum deposit must be the present value of a constant perpetuity. Formula 1 applies. P = $100,000/.045 = $2,222,222

Retreaded Tires plans to save $23,500, $24,500, $26,500, and $28,000 at the end of each year for Years 1 to 4, respectively. If it earns 2.1 percent on its savings, how much will the firm have saved at the end of Year 4?

A. $100,878.30 B. $102,140.20 C. $105,608.11 D. $104,174.00 E. $111,860.57 FV = ($23,500 ×1.0213 ) + ($24,500 ×1.0212 ) + ($26,500 ×1.0211 ) + $28,000 = $105,608.11

You have $12,500 you want to invest for the next 30 years. You are offered an investment plan that will pay you 7 percent per year for the next 10 years and 9.5 percent per year for the last 20 years. How much will you have at the end of the 45 years?

A. $101,516.38 B. $119,874.49 C. $151,018.51 D. $190,253.91 E. $209,092.54 Future value = $12,500 × (1 + .07)10 × (1 + .095)20 = $151,018.51

32. Use the following tax table to answer this question: Taxable Income Tax Rate $ - $ 9,525 10% $ 9,525 $ 38,700 12% $ 38,700 $ 82,500 22% $ 82,500 $ 157,500 24% $ 157,500 $ 200,000 32% $ 200,000 $ 500,000 35% $ 500,000 + 37% Mongoose Enterprises LLC has taxable income of $630,000. How much does it owe in taxes?

A. $141,750 B. $$154,800 C $198,790 D. $220,500 E. $233,100 EXPLANATION This question requires the student to apply the concept of the marginal rates of taxation appearing on a progressive income tax schedule. Here is how the tax calculation is made. The first $9,525 is taxed at the rate of 10% The next tax bracket is defined as ($38,700 - $9,525) = $29,175. That amount is taxed at the rate of 12%. Total tax = .10($9,525) + .12($29,175) + .22($43,800) + .24($75,000) + .32($42,500) + .35(300,000) + .37(630,000-500,000) = $198,790

Jorge is considering an investment that will pay $4,650 a year for five years, starting one year from today. What is the maximum amount he should pay for this investment if he desires a rate of return of 9.0 percent?

A. $17,736.81 B. $18,566.10 C. $15,064.70 D. $18,086.88 E. $20,859.52 Jorge should not pay more than the discounted present value of the cash flow. It is calculated by recognizing that it is the present value of a constant annuity. See formula (5) attached. Pv = C = [ 1/r - 1/ r(1+r)^r] 𝑃V = $4,650/ 1 + .09 + $4,650/ (1+.09)^2+$4,650/(1 + .09)^3 + $4,650/(1 + .09)^4 + $4,650/ (1 + .09)^5 = $18,086

You want to have $32,000 for a down payment on a house 5 years from now. If you can earn 4.3 percent, compounded annually on your savings, how much do you need to deposit today to reach your goal?

A. $25,925.58 B. $28,179.77 C. $21,639.73 D. $21,970.21 E. $24,625.44 Present value = $32,000/(1 + .043)5 = $25,925.58

You have just made your first $5,000 contribution to your retirement account. Assuming you earn a rate of return of 5 percent and make no additional contributions, what will your account be worth when you retire in 35 years? What if you wait for 5 years before contributing?

A. $26,335.37; $23,011.60 B. $27,311.20; $29,803.04 C. $27,311.20; $22,614.08 D. $27,580.08; $21,609.71 E. $31,241.90; $32,614.08 Future value 35 years = $5,000 × (1 + .05)35 = $27,580.08 Future value 30 years = $5,000 × (1 + .05)30 = $21,609.71

Your grandfather started his own business 52 years ago. He opened an investment account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 5.73 percent annually. Today, his account is valued at $289,209.11. How much did your grandfather save every three months assuming he saved the same amount each time?

A. $284.02 B. $328.67 C. $331.09 D. $226.78 E. $262.25 FV = C [ (1+r)^r-1/r] FV = $289,209.11 = C ×{[1 + (.0573 / 4)]208 - 1} / (.0573 / 4) Solving for $C we have C = $226.78

Travis invests $5,500 today into a retirement account. He expects to earn 9.2 percent, compounded annually, on his money for the next 13 years. After that, he wants to be more conservative, so only expects to earn 6 percent, compounded annually. How much money will he have in his account when he retires 25 years from now, assuming this is the only deposit he makes into the account?

A. $29,411.20 B. $34,747.80 C. $34,616.56 D. $41,919.67 E. $42,003.12 Future value = $5,500 × (1 + .092)13 × (1 + .06)(25−13) = $34,747.80

Theodoro has just received an insurance settlement of $18,500. She wants to save this money until her daughter goes to college. If she can earn an average of 5.2 percent, compounded annually, how much will she have saved when her daughter enters college 9 years from now?

A. $29,662.53 B. $30,485.41 C. $30,931.28 D. $29,431.45 E. $29,195.33 Future value = $18,500 × (1 + .052)9 = $29,195.33

Twelve years from now, you will be inheriting $60,000 What is this inheritance worth to you today if you can earn 6.0 percent interest, compounded annually?

A. $29,818.16 B. $29,945,94 C. $58,419.0550,112.92 D. $61,798.4750,100.00 E. $53,003.15 Present value = $60,000/(1 + .06)12 = $29,818.16

Your coin collection contains ten 1949 silver dollars. If your grandparents purchased the coins for their face value when they were new, how much will your collection be worth when you retire in 2065, assuming the coins appreciate at an annual rate of 5.1 percent?

A. $3,440.63 B. $2,329.29 C. $3,348.98 D. $3,205.64 E. $2,644.29 Future value = $10 × (1 + .051)(2065−1949) = $3,205.64

What is the future value of $25 a week for 40 years at 8.5 percent interest? Assume the first payment occurs at the end of this week.

A. $441,710.03 B. $414,361.08 C. $469,727.15 D. $350,003.14 E. $335,221.18 The student should recognize that the annual interest rate of 8.5% must be converted into a weekly rate. Formula 6 applies: FV = $25 × {[1 + (.085 / 52)]2,080 - 1} / (.085 / 52) = $441,710.03

Leann will receive $ 95,000 a year for 7years, starting today. If the rate of return is 6.8 percent, what are these payments worth today?

A. $568,346.72 B. $531,019.80 C. $ 550,630.68 D. $564,009.27 E. $518,571,80 PV = $95,000 × ({1 - [1 / (1 + .068)7 ]} / .068) × (1 + .068) -> PV = $550,630.68

Tiger Trucking Company is considering a project that will produce cash inflows of $18,000 at the end of Year 1, $32,000 in Year 2, and $45,000 in Year 3. What is the present value of these cash inflows at a discount rate of 9 percent?

A. $65,615.21 B. $70,181.89 C. $78.195.78 D. $78,485.76 E. $87,112.15 PV = ($18,000/1.09) + ($32,000/1.092 ) + ($45,000/1.093 ) = $78.195.78

You are scheduled to receive $5,000 in two years. When you receive it, you will invest it at 6.5 percent per year. How much will your investment be worth eight years from now?

A. $7,295.71 B. $8,274.98 C. $6,850.43 D. $10,665.75 E. $7,302.27 Future value = $5,000 × (1 + .065)(8 − 2) = $7,295.71

Kurt will receive $1,200 a month for five years from an insurance settlement. The first payment was received today. If he invests the full amount of each payment at a guaranteed 6.15 percent rate, how much will he have saved at the end of the five years?

A. $76,003.18 B. $88,219.97 C. $91,388.71 D. $84,478.33 E. $95,115.16 FV = $1,200 × ({[1 + (.0615 / 12)]60- 1} / (.0615 / 12))x [1 + (.0615)] = $84,478.33

Ten years ago, you deposited $5,500 into an account. Five years ago, you added an additional $2,500 to this account. You earned 6.5 percent, compounded annually, for the first 5 years and 5.0 percent, compounded annually, for the last 5 years. How much money do you have in your account today?

A. $8,666.67 B. $11,391.09 C. $12,149.62 D. $12,808.09 E. $13,042.61 Future value = {[$5,500 × (1 + .065)5 ] + $2,500} × (1 + .05)5 = $12,808.09

A firm has earnings before interest and taxes of $27,130, net income of $16,220, and taxes of $5,450 for the year. While the firm paid out $31,600 to pay off existing debt it then later borrowed $42,000. What is the amount of the cash flow to creditors?

A. -$14,040 B. $0 C. -$4,660 D. $14,040 E. $4,660 This question requires the student to understand how the interest payment may be inferred from the accounting entities stated in the question EBIT = earnings before interest and taxes Net Income = EBIT - Interest - Taxes The accounting statements can be combined and rearranged to read: Interest = EBIT - Net Income - Taxes Interest = $27,130 -16,220 -5,450 = $5,460 Cash flow to creditors = Interest payments + (Period reduction of debt - Period increase in debt) cash flow to creditors = $5,740 + 31,600-42,000 = -$4,660

Allyba Dance Supply has total assets of $550,000 and total debt of $295,000. What is the equity multiplier?

A. .46 B. 1.0 C. 1.075 D. 1.86 E. 2.16 Equity multiplier = $550,000 / ($550,000 - 295,000) = 2.16

The Bike Shoppe has total assets of $536,712 and an equity multiplier of 1.36. What is the debt-equity ratio?

A. .68 B. .24 C. 1.24 D. .36 E. .1.36 Debt-equity ratio = 1.36 − 1 = .36

A firm has total assets of $638,727, current assets of $203,015, current liabilities of $122,008, and total debt of $348,092. What is the debt-equity ratio?

A. 1.03 B. 1.20 C. 1.31 D. 1.43 E. .87 This question requires the student to recognize that the deb-equity ratio is defined as Debt/ Equity . However, stockholders equity is calculated as total assets - total debt. Debt-equity ratio = $348,092 / ($638,727 − $348,092) = 1.20

Healthy Foods has a book value per share of $32.68, earnings per share of $3.09, and a price earnings ratio of 16.8. What is the market-to-book ratio?

A. 1.08 B. 1.59 C. 1.99 D. 2.47 E. 2.16 Market-to-book ratio = ($3.09 ×16.8)/$32.68 = 1.59

You're trying to save to buy a new car valued at $46,650. You have $40,000 today that can be invested at your bank. The bank pays 4.2 percent compound annual interest on its accounts. How long will it be before you have enough to buy the car for cash? Assume the price of the car remains constant.

A. 1.17 years B. 2.12 years C. 1.06 years D. 1.61 years E. 3.73 years This question requires the student to recognize that the waiting time (symbolized by t) is found as the solution to an equation: Future value (i.e. the price of the car at the date of purchase) = present value of investment x (1+r)t $46,650 = $40,000 𝑥 (1 + .042)t (1 + .042)𝑡 = $46,650/ $40,000 𝑙n[(1 + .042)𝑡] = 𝑙n[ $46,650/ $40,000] = ln(1.16625) 𝑡 × ln(1.042) = ln(1.16625) 𝑡 = ln(1.16625)/ ln(1.042) = 0.15379/ 0.04114 = 3.738 years

Assume the total cost of a college education will be $325,000 when your child enters college in 16 years. You presently have $40,000 to invest and do not plan to invest anything further. What annual rate of interest must you earn on your investment to cover the entire cost of your child's college education?

A. 12.65 percent B. 10.40 percent C. 13.99 percent D. 14.62 percent E. 11.08 percent This question requires the student to recognize that the interest rate is found as the solution of an equation: Future value = Present value x (1+r)t Here the future value of a college education 16 years into the future is $325,00 and t = 16. Plugging these values into the equation we have: $325,000 = $40,000 × (1 + r)16 (1 + r)16 = 325,000/40,000 1+r = 16 √325,000/40,000 r= 13.99

A firm has sales of $311,000 and net income of $31,600. The price-sales ratio is 3.24 and market price is $36 per share. How many shares are outstanding?

A. 20,608 B. 27,990 C. 28,356 D. 30,515 E. 31,011 Price-sales ratio is defined as: Market price per share / Sales per share Sales per share can be calculated as Sales / number of shares = $311,000 / number of shares Price-sales ratio = 3.24 = $36/($311,000/Outstanding shares). Solving this equation for the number of shares we have outstanding shares = 27,990

Jessica's Sports Wear has $38,100 in receivables and $523,700 in total assets. The total asset turnover rate is 1.17 and the profit margin is 7.3 percent. How long on average does it take to collect the receivables? Assume a 365-day year.

A. 26.91 days B. 19.45 days C. 11.68 days D. 31.07 days E. 22.70 days Days' sales in receivables = 365 / [(1.17 × $523,700) / $38,100] = 22.70 days

Last year, a firm earned $67,800 in net income on sales of $934,600. Total assets increased by $62,000 and total equity increased by $43,500 for the year. No new equity was issued and no shares were repurchased. What is the retention ratio?

A. 29.62 percent B. 35.84 percent C. 56.25 percent D. 70.38 percent E. 64.16 percent This question requires the student to recognize that the "retention ratio" is synonymous with the "plow back ratio." The increase in equity represents the allocation of net income not distributed to stockholders as dividends, i.e. the portion of net income allocated to retained earnings. Retention ratio = Plowback ratio = Retained earnings/ Net Income Plowback ratio = $43,500/$67,800 = .6416, or 64.16 percent

You expect to receive $5,000 at graduation one year from now. Your plan is to invest this money at 6.5 percent, compounded annually, until you have $50,000. At that time, you plan to travel around the world. How long from now will it be until you can begin your travels

A. 36.57 years B. 31.08 years C. 34.55 years D. 32.08 years E. 37.57 years FV = PV (1 + r)t $50,000 = $5,000 × (1 + .065)𝑡\𝑡 Solving for t using logarithms 𝑡 = 𝑙n ($50,000/$5,000)/ ln(1.065) = 2.30259/0.06297 = 36.57 𝑦ear The amount of $50,000 will be available 36.57 years after the initial investment. However, the initial investment will be 1 year from today, when the graduation gift is received. Thus the world travel begins 36.57 years +1 year = 37.57 years from now.

Which one of the following has the highest effective annual rate?

A. 6 percent compounded annually B. 6 percent compounded semiannually C. 6 percent compounded quarterly D. 6 percent compounded daily E. 6 percent compounded every 2 years

Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money?

A. 6 percent interest for 3 years B. 12 percent interest for 5 years C. 7 percent interest for 9 years D. 8 percent interest for 9 years E. 6 percent interest for 10 years ANSWERS A. $1.00 invested at 6% interest compounded for 3 years = $1.19 B. $1.00 invested at 12% interest compounded for 5 years = $1.76 C. $1.00 invested at 7% interest compounded for 9 years = $1.83 D. $1.00 invested at 8% interest compounded for 9 years = $1.99 E. $1.00 invested at 6% interest compounded for 10 years = $1.79

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

A. A decrease in the total asset turnover B. A decrease in the capital intensity ratio C. An increase in days' sales in receivables D. A decrease in the profit margin E. A decrease in the inventory turnover rate

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

A. ABC company B. Any corporation, other than the ABC Company C. Any institutional shareholder D. Any private individual shareholder E. Only officers and directors of ABC Company

Which one of the following statements is correct?

A. All secondary markets are dealer markets. B. All secondary markets are broker markets. C. All stock trades between existing shareholders are primary market transactions. D. All stock transactions are secondary market transactions. E. All over-the-counter sales occur in dealer markets.

Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have?

A. Amortized B. Complex C. Pure discount D. Lump sum E. Interest-only

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?

A. BEC B. SED C. BID D. SIC E. SBC

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

A. DuPont rate B. External growth rate C. Sustainable growth rate D. Internal growth rate E. Cash flow rate

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

A. Fixed expenses B. Marginal tax rate C. Net capital spending D. Inventory E. Depreciation

Outdoor Gear reduced its general and administrative costs this year. This cost improvement will increase which of the following ratios? I. Profit margin II. Return on assets III. Total asset turnover IV. Return on equity

A. I and II only B. I and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV

Sweet Candies reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity

A. I and II only B. II and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV

Maria is the sole proprietor of an antique store that is located in a rented warehouse. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and apply the proceeds to the debt II. Sell the lighting fixtures from the building and apply the proceeds to the debt III. Withdraw funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt

A. I only B. III only C. I and II only D. I, II, and III only E. I, III, and IV only

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?

A. Income statement B. Balance sheet C. Common-size income statement D. Common-size balance sheet E. Statement of cash flows

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

A. Increase in interest paid B. Increase in fixed costs C. Increase in depreciation expense D. Decrease in the tax rate E. Decrease in sales

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?

A. Interest-only B. Pure discount C. Compound D. Amortized E. Complex

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

A. International finance B. Financial institutions C. Corporate finance D. Capital management E. Personal finance

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?

A. International finance B. Private placements C. Corporate finance D. Capital management E. Investments

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

A. Limited partnership B. Corporation C. Sole proprietorship D. General partnership E. Public company

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

A. Maximize net income given the current resources of the firm B. Decrease long-term debt to reduce the risk to the owner C. Minimize the tax impact on the proprietor D. Maximize the market value of the equity E. Minimize the reliance on fixed costs

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

A. No new external financing of any kind B. No new debt but additional external equity equal to the increase in retained earnings C. New debt and external equity in equal proportions D. New debt and external equity, provided the debt-equity ratio remains constant E. No new external equity and a constant debt-equity ratio

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

A. Organizational B. Structural C. Formative D. Agency E. Territoria

Which one of the following is the correct formula for the current value of $600 invested today at 5 percent interest for 6 years?

A. PV = $600/ [(1 + .06) × 5] B. PV = $600/ [(1 +.05) × 6] C. PV = $600/ (.06 × 5) D. PV = $600 / (1 + .05)6 E. PV = $600 / (1 + .06)5

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?

A. Positive operating cash flow B. Negative cash flow from assets C. Positive net income D. Negative operating cash flow E. Positive cash flow to stockholders

Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why?

A. Project 1, because the annual cash flows are greater by $4,000 than those of Project 2 B. Project 1, because the present value of its cash inflows exceeds those of Project 2 by $14,211.62 C. Project 2, because the total cash inflows are $72,000 greater than those of Project 1 D. Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33 E. It does not matter as both projects have almost identical present values. Formula 5 is applicable PV1 = $52,000 ×{1 -[1 / (1 + .15)6 ]} / .15 = $196,793.10 PV2 = $48,000 ×{1 -[1 / (1 + .15)8 ]} / .15 = $215,391.43 Difference = $215,391.43 - 196,793.10 = $18,598.33

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

A. Receivables turnover B. Equity multiplier C. Profit margin D. Return on assets E. Total asset turnover

Donovan's would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?

A. Return on assets B. Net income C. Retention ratio D. Dividend payout ratio E. Return on equity

All else held constant, which one of the following will decrease if a firm increases its net income?

A. Return on assets B. Profit margin C. Return on equity D. Price-sales ratio E. Price-earnings ratio

The DuPont identity can be accurately defined as:

A. Return on equity × Total asset turnover × Equity multiplier. B. Equity multiplier × Return on assets. C. Profit margin × Return on equity. D. Total asset turnover × Profit margin × Debt-equity ratio. E. Equity multiplier × Return on assets × Profit margin.

Which one of the following applies to a general partnership?

A. The firm's operations must be controlled by a single partner. B. Any one of the partners can be held solely liable for all of the partnership's debt. C. The profits of the firm are taxed as a separate entity. D. Each partner's liability for the firm's debts is limited to each partner's investment in the firm. E. The profits of a general partnership are taxed the same as those of a corporation.

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?

A. The present value of Annuity A is equal to the present value of Annuity B. B. Annuity B will pay one more payment than Annuity A will. C. The future value of Annuity A is greater than the future value of Annuity B. D. Annuity B has both a higher present value and a higher future value than Annuity A. E. Annuity A has a higher future value but a lower present value than Annuity B.

Which one of the following statements concerning annuities is correct?

A. The present value of an annuity is equal to the cash flow amount divided by the discount rate. B. An annuity due has payments that occur at the beginning of each time period. C. The future value of an annuity decreases as the interest rate increases. D. If unspecified, you should assume an annuity is an annuity due. E. An annuity is an unending stream of equal payments occurring at equal intervals of time.

Which one of these is a perpetuity?

A. Trust income of $1,200 a year forever B. Retirement pay of $2,200 a month for 20 years C. Lottery winnings of $1,000 a month for life D. Car payment of $260 a month for 60 months E. Rental payment of $800 a month for one year

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:

A. a corporate takeover. B. a capital structure issue. C. a working capital decision. D. an agency conflict. E. a compensation issue.

Operating cash flow is defined as:

A. a firm's net profit over a specified period of time. B. the cash that a firm generates from its normal business activities. C. a firm's operating margin. D. the change in the net working capital over a stated period of time. E. the cash that is generated and added to retained earnings.

Net working capital includes:

A. a land purchase. B. an invoice from a supplier. C. non-cash expenses. D. fixed asset depreciation. E. the balance due on a 15-year mortgage

Production equipment is classified as:

A. a net working capital item. B. a current liability. C. a current asset. D. a tangible fixed asset. E. an intangible fixed asset.

Net working capital decreases when:

A. a new 3-year loan is obtained with the proceeds used to purchase inventory. B. a credit customer pays his or her bill in full. C. depreciation increases. D. a long-term debt is used to finance a fixed asset purchase. E. a dividend is paid to current shareholders

Limited liability companies are primarily designed to:

A. allow a portion of their owners to enjoy limited liability while granting the other portion of their owners control over the entity. B. provide the benefits of the corporate structure only to foreign-based entities. C. spin off a wholly owned subsidiary. D. allow companies to reorganize themselves through the bankruptcy process. E. provide limited liability while avoiding double taxation.

Anna pays .85 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the:

A. annual percentage rate. B. simplified rate. C. quoted rate. D. stated rate. E. effective annual rate.

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:

A. average tax rate. B. variable tax rate. C. marginal tax rate. D. fixed tax rate. E. ordinary tax rate

When conducting a financial analysis of a firm, financial analysts:

A. cannot use accounting information as it is historical. B. rely solely on accounting information. C. frequently use accounting information. D. ignore accounting information but do use marketing information. E. assume the future will be a repeat of the past as reflected in the firm's accounting reports.

Cash flow to stockholders is defined as:

A. cash flow from assets plus cash flow to creditors. B. operating cash flow minus cash flow to creditors. C. dividends paid plus the change in retained earnings. D. dividends paid minus net new equity raised. E. net income minus the addition to retained earnings.

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

A. compounding. B. factoring. C. time valuation. D. simple cash flow valuation. E. discounted cash flow valuation.

The primary goal of financial management of a corporation is to maximize:

A. current profits. B. market share. C. current dividends. D. the market value of existing stock. E. revenue growth.

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

A. decrease both the interest rate and the time period. B. increase the time period. C. decrease the present value. D. decrease the payment amount. E. decrease the interest rate.

Net capital spending is equal to:

A. ending net fixed assets minus beginning net fixed assets plus depreciation. B. beginning net fixed assets minus ending net fixed assets plus depreciation. C. ending net fixed assets minus beginning net fixed assets minus depreciation. D. ending total assets minus beginning total assets plus depreciation. E. ending total assets minus beginning total assets minus depreciation.

The issuer of a security must be involved in all _____ transactions involving that security.

A. exchange-listed B. secondary market C. over-the-counter D. dealer market E. primary market

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

A. had to increase. B. had to decrease. C. remained constant. D. could have either increased, decreased, or remained constant. E. was unaffected as the changes occurred in the firm's current accounts.

Cash flow to creditors is defined as

A. interest paid minus net new borrowing. B. interest paid plus net new borrowing. C. operating cash flow minus net capital spending minus the change in net working capital. D. dividends paid plus net new borrowing. E. cash flow from assets plus net new equity.

A firm's liquidity level decreases when:

A. inventory is purchased with cash. B. inventory is sold on credit. C. inventory is sold for cash. D. an account receivable is collected. E. proceeds from a long-term loan are received.

A limited liability company (LLC):

A. is a hybrid between a sole proprietorship and a partnership. B. prefers its profits be taxed as personal income to its owners. C. that meets the IRS criteria to be an LLC will be taxed like a corporation. D. provides limited liability for some, but not all, of its owners. E. cannot be created for professional service firms, such as accountants and attorneys.

In a general partnership, each partner is personally liable for:

A. only the partnership debts that he or she personally created. B. his or her proportionate share of all partnership debts regardless of which partner incurred that debt. C. the total debts of the partnership, even if he or she was unaware of those debts. D. the debts of the partnership up to the amount he or she invested in the firm. E. all personal and partnership debts incurred by any partner, even if he or she was unaware of those debts

Paid-in surplus is classified as:

A. owners' equity. B. net working capital. C. a current asset. D. a cash expense. E. long-term debt.

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

A. prime rate. B. current rate. C. discount rate. D. compound rate. E. simple rate.

An employee has a claim on the cash flows of Martin's Machines. This claim is defined as a claim by one of the firm's:

A. residual owners. B. shareholders. C. financiers. D. provisional partners. . E. stakeholders.

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

A. sells its entire inventory every 15 days. B. stocks its inventory only once every 15 days. C. delivers inventory to its customers every 15 days. D. sells its inventory by granting customers 15 days' of free credit. E. sells its entire inventory an average of 15 times each year.

Cash flow from assets is defined as:

A. the cash flow to shareholders minus the cash flow to creditors. B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders. C. operating cash flow minus the change in net working capital minus net capital spending. D. operating cash flow plus net capital spending plus the change in net working capital. E. cash flow to shareholders minus net capital spending plus the change in net working capital.

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:

A. will be less than 12.9 percent. B. can either be less than or equal to 12.9 percent. C. is 12.9 percent. D. can either be greater than or equal to 12.9 percent. E. will be greater than 12.9 percent.

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is

A. zero percent. B. 100 percent. C. equal to the ROA. D. negative. E. infinite

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:

A. zero percent. B. 100 percent. C. equal to the ROA. D. negative. E. infinite.

Which one of the following statements correctly applies to a sole proprietorship?

A.The business entity has an unlimited life. B. The ownership can easily be transferred to another individual. C. The owner enjoys limited liability for the firm's debts. D. Debt financing is easy to arrange in the firm's name. E. Obtaining additional equity is dependent on the owner's personal finances.

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

A.dollar amount of each sale. B. traffic flow within the firm's stores. C. the fixed costs while lowering the variable costs. D. firm's liquidity. E. market value of the firm.