Finance Exam #2

A 30-year mortgage loan is a A. Long-Term Liability. B. Current Liability. C. Current Asset. D. Long-T erm Asset.

A

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2007 and 2008? A. The company is having difficulties selling its product. B. The company has reduced its debt. C. The company has added a major new asset in terms of plant and equipment. D. The company has experienced a significant rise in its market value.

A

The firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period. A. True B. False

A

The timeline shown below best describes which of the following situations? Date (Months) 0 1 2 3 4 5 Cash Flows -$250 -$250 -$250 -$250 -$250 -$250 a. You make payments of $250 per month for six months. b. You receive payments of $250 per month for six months. c. You make payments of $250 per month for five months. d. You receive payments of $250 per month for five months.

A

When computing a present value, which of the following is TRUE? A. You should adjust the discount rate to match the time period of the cash flows. B. You should adjust the future value to match the present value. C. You should adjust the time period to match the present value. D. You should adjust the cash flows to match the time period of the discount rate.

A

Which of the following best describes the annual percentage rate? A. The quoted annual interest rate which considered with the compounding period gives the effective interest rate B. The effective annual rate after compounding is taken into account C. The discount rate when compounded more than once a year or less than once a year D. The discount rate when it is divided by the number of times it is compounded in a year

A

Which of the following is not an operating expense? A. Interest expense B. Depreciation and amortization C. Selling, general, and administrative expenses D. Research and development

A

Which of the following is the LEAST likely explanation for a firm's high ROE? A. The firm is growing. B. The firm is able to find investment opportunities that are very profitable. C. The firm has very efficient use of its assets. D. The firm enjoys high sales margins.

A

Which of the following statements is NOT CORRECT? a. A time line is meaningful only if all cash flows occur annually. b. Timelines are useful for visualizing complex problems prior to doing actual calculations. c. Timelines can be constructed even in situations where some of the cash flows occur annually but others occur quarterly. d. Timelines can be constructed for annuities where the payments occur at either the beginning or the end of periods. e. The cash flows shown on a time line can be in the form of annuity payments, but they can also be uneven amounts.

A

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet? A. The depreciation over the last year in the value of the vehicles owned by the company B. Revenue received for the delivery of items that have not yet been delivered C. A loan which must paid back in two years' time D. Prepaid rent on the offices occupied by the company

B

A printing company prints a brochure for a client, and then bills them for this service. At the time the printing company's financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded? A. The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows. B. The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows. C. The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows. D. The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows.

B

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company? A. Investors may consider this firm to be a growth company. B. Investors believe the company's assets are not likely to be profitable its market value is worth less than its book value. C. The firm's market value is more than its book value. D. The value of the firm's assets is greater than their liquidation value.

B

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows? A. as an outflow under Operating Activities B. as an outflow under Investment Activities C. as an outflow under Financial Activities D. The acquisition would not be recorded on the statement of cash flows.

B

Assume both investment X and investment Y have the same risk. Which of the following statements is CORRECT regarding the present value of these investments? Year Investment X Investment Y 1 $5,000 $11,000 2 $7,000 $9,000 3 $9,000 $7,000 4 $11,000 $5,000 a. Investment X has a higher present value. b. Investment Y has a higher present value. c. Investment X and Investment Y have the same present value, since the total of the cash flows is the same for both. d. No comparison can be made - we need to know the interest rate to calculate the present value.

B

Below are portions of the balance sheet and income statement for two companies in 2008. Based upon this information, which of the following statements is most likely to be true? Firm A: Assets Current assets Fixed assets Total assets Firm A: Total sales Cost of sales Gross Profit 4 10 14 12 -5 7 Firm B: Assets Current assets 7 Fixed assets 7 Total assets 14 Firm B: Total sales 12 Cost of sales -7 Gross Profit 5 indicate that firm A is generating greater revenue per dollar of assets than ratios indicate that firm A is generating fewer sales for the assets they A. Asset turnover ratios firm B. B. Fixed asset turnover employ than firm B. C. Both asset turnover ratios and fixed asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B. D. Fixed asset turnover ratios indicate that firm A is generating more sales for the assets they employ than firm B.

B

Cash is a A. Long-T erm Asset. B. Current Asset. C. Current Liability. D. Long-Term Liability.

B

If all amounts shown above are in millions of dollars, what were AOS Industries' retained earnings for 2008? A. $1.3 million B. $1.7 million C. $2.1 million D. $5.4 million

B

The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time (ignore preferred stock). A. True B. False

B

What is a firm's gross profit? A. The difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by the firm in a given period B. The difference between sales revenues and the costs associated with those sales. C. The difference between sales revenues and cash expenditures associated with those sales. D. All of the above

B

What, typically, is used to calculate the opportunity cost of capital on a risk-free investment? A. The best available expected return offered in any investment available in the market B. The interest rate on U.S. Treasury securities with the same term C. The interest rate of any investments alternatives that are available D. The best rate of return offered by U.S. Treasury securities

B

Which of the following is a way that the Operating Activity section of the statement of cash flows adjusts Net Income from the balance sheet? A. It subtracts all expenses and costs related to the firm's operating activities. B. It adds all non-cash entries related to the firm's operating activities. C. It adds the cash that flows from investors to the firm. D. It removes the cash used for investment purposes.

B

Which of the following statements regarding a 30-year monthly payment amortized (fixed-payment) mortgage with a nominal (simple) annual interest rate of 10% is CORRECT? A. The monthly payments will decline over time. B. A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. C. The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity. D. The amount representing interest in the first payment would be higher if the nominal annual interest rate were 7% rather than 10%. E. Exactly 10% of the first monthly payment represents interest.

B

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT? A. The annual payments would be larger if the interest rate were lower. B. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan. C. The proportion of each payment that represents interest would be lower if the interest rate were lower. D. The last payment would have a higher proportion of interest than the first payment. E. The proportion of interest versus principal repayment would be the same for each of the 7 payments.

C

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet? A. Commercial paper held by the company B. The inventory of chemicals used to produce the drugs made by the company C. A patent for a drug held by the company D. The cash reserves of the company

C

A lender lends $10,000, which is to be repaid in annual payments of $2,000 in the 6 subsequent years. Which of the following shows the timeline of the loan from the lender's perspective? a. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 -$10,000 $2000 $2000 $2000 $2000 $2000 b. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 0 $2000 $2000 $2000 $2000 $2000 c. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 -$10,000 $2000 $2000 $2000 $2000 $2000 $2000 d. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 -$10,000 $2000 $4000 $6000 $8000 $10,000 $12,000

C

Gross profit is calculated as A. T otal sales - Cost of sales - Selling, general, and administrative expenses - Depreciation and amortization B. T otal sales - Cost of sales - Selling, general, and administrative expenses C. T otal sales - Cost of sales D. none of the above

C

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in stockholders' equity between 2007 and 2008? A. The company is very profitable because it is obviously collecting receivables faster. B. The company is selling its property, plant and equipment, which may result in a long-term deficiency in production capacity. C. The company's net income in 2008 was negative. D. No conclusions can be drawn regarding stockholders' equity without additional information.

C

Samantha enters a rental agreement for bedroom furniture. She will pay $60 per month for one year. Which of the following shows the timeline of her payments if the first payment is a month from now? a. Date (Months) 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flows -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 b. Date(Months) 0 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flows -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 c. Date (Months) 0 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flows 0 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 d. Date (Months) 0 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flows -$60 -$120 -$180 -$240 -$300 -$360 -$480 -$540 -$600 -$660 -$720 -$780 -$840

C

The major components of common stockholders' equity are: A. Cash, common stock, and paid-in surplus B. Common stock, paid-in surplus, and net income C. Common stock, paid-in surplus, and retained earnings D. Common stock, liabilities, and retained earnings

C

The timeline shown below best describes the cash flow of which of the following people? Date (years) 0 1 2 3 4 Cash Flows -$3500 $1000 $1000 $1000 $1000 a. Joe, who puts down $3500 to buy a car, and then makes annual payments of $1000 b. Harry, who borrows $3500, and then receives an annual payment of $1000 c. Karen loans a friend $3500. The friend then pays back the loan in four annual installments of $1000 d. Leo, who borrows $3500, and then pays back the loan in four annual payments of $1000

C

Which of the following amounts would NOT be included on the left side of a balance sheet? A. The value of government bonds held by the company B. The cash held by the company C. The amount of deferred tax liability held by the company D. The amount of money owed to the company by customers who have not yet paid for goods and services they have received

C

Which of the following balance sheet equations is INCORRECT (assume there is no preferred stock)? A. Assets - Liabilities = Shareholders' Equity B. Assets = Liabilities + Shareholders' Equity C. Assets - Current Liabilities = Long Term Liabilities D. Assets - Current Liabilities = Long Term Liabilities + Shareholders' Equity

C

Which of the following best describes why firms produce financial statements? A. to use as a tool when planning future investments within the firm B. to provide a means of enticing new investors to a firm C. to provide interested parties, both inside and outside the company, with an overview of the short and long term financial condition of a business D. to show what activities the company has undertaken in the previous financial year, and what activities are planned for the near future

C

Which of the following statements is CORRECT, assuming positive interest rates and other things held constant? A. An annuity that makes 5 payments of $250 each, with the first payment starting today, has a lower present value than that of a similar annuity (5 payments of $250 each) that makes its first payment one year from today. B. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. C. A typical investment's nominal (simple) annual interest rate will always be equal to or less than its effective annual rate. D. If an investment pays 10% nominal annual rate, compounded annually, its effective annual rate will be greater than 10%. E. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will have the higher future value if you leave the funds on deposit.

C

WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldCom's financial statements more attractive to investors? A. By decreasing depreciation B. By reducing capital expenditures C. By raising its reported earnings D. By boosting its cash flows

C

Your bank account pays a 6% APR. The interest is compounded quarterly. Which of the following statements is CORRECT? A. The effective quarterly rate of interest is 1.5% and the EAR is 3%. B. The effective quarterly rate of interest is 6% and the EAR is greater than 6%. C. The effective quarterly rate of interest is 1.5% and the EAR is greater than 6%. D. The effective quarterly rate of interest is 3% and the EAR is 6%. E. The effective quarterly rate of interest is 6% and the EAR is also 6%.

C

A tenant leases a building for $48,000 per year. She signs a 5-year rental agreement that states that she will pay $24,000 every 6 months for the next 5 years. Which of the following is the timeline for her rental payments, assuming she makes the rental payment at the beginning of each six-month period? a. Date (years) 0 1 2 3 4 5 Cash Flows ('000) -$48 -$48 -$48 -$48 -$48 -$48 b. Date (years) 0 1 2 3 4 5 Cash Flows ('000) $48 $48 $48 $48 $48 $48 c. Date (years) 0 1/2 1 1 1/2 2 2 1/2 3 3 1/2 4 4 1/2 5 Cash Flows ('000) $24 $24 $24 $24 $24 $24 $24 $24 $24 $24 $24 d. Date (years) 0 1/2 1 1 1/2 2 2 1/2 3 3 1/2 4 4 1/2 5 Cash Flows('000) -$24 -$24 -$24 -$24 -$24 -$24 -$24 -$24 -$24 -$24 0

D

AOS Industries' raised the most money in 2008: A. from investment activities B. by sale of stock C. from its operations D. by issuing debt

D

Accounts payable is a A. Long-Term Liability. B. Current Asset. C. Long-T erm Asset. D. Current Liability.

D

If the above balance sheet is for a retail company, how has the company's leverage changed between 2007 and 2008? A. The company has experienced a very significant decrease in its leverage. B. The company has experienced a significant decrease in its leverage. C. The company has experienced no significant change in its leverage. D. The company has experienced a significant increase in its leverage.

D

The table below shows the APR for four investment alternatives. Which offers the highest EAR? A. Investment A B. Investment B C. Investment C D. Investment D

D

What is a firm's net income? A. The difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by the firm in a given period B. The last or "bottom" line of the income statement C. A measure of the firm's profitability over a given period D. All of the above

D

Which of the following is true of AOS Industries' operating cash flows? A. It collected more cash from its customers than they charged. B. It sold more inventory than it bought. C. It charged more on its accounts payable back than it paid back. D. All of the above are true.

D

Which of the following statements is FALSE? A. The investor's opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted. B. Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk. C. The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. D. For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.

D

Which of the following statements regarding the balance sheet is INCORRECT? A. The balance sheet provides a snapshot of the firm's financial position at a given point in time. B. The balance sheet lists the firm's assets, liabilities, and equity. C. The balance sheet reports stockholders' equity on the right-hand side. D. The balance sheet reports liabilities on the left-hand side.

D

Which of the following bank accounts has the highest effective annual return? A. An account that pays 8% APR with monthly compounding. B. An account that pays 8% APR with annual compounding. C. An account that pays 7% APR with daily (365-day) compounding. D. An account that pays 7% APR with monthly compounding. E. An account that pays 8% APR with daily (365-day) compounding.

E

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series. a. True b. False

False

In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements. A. True B. False

False

A growing perpetuity where the rate of growth is greater than the discount rate will have an infinitely large present value (PV). a. True b. False

True

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal (simple) annual rate on the deposit (or loan). A. True B. False

True

Dollar amounts received at different points in time cannot be compared in absolute terms. a. True b. False

True

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal. A. True B. False

True