Finance Test 2

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5) A bond with short maturity has less "interest rate risk" than a bond with long maturity when all other features—coupon interest rate, par value, and interest payment frequency—are the same.

TRUE

1) Coupon interest rate on a bond represents the percentage of the bond's par value that will be paid annually, typically in two equal semiannual payments, as interest.

TRUE

1) The value of a bond that pays semiannual interest is greater than that on an otherwise equivalent annual coupon interest paying bond.

TRUE

1) Valuation is the process that links risk and return to determine the worth of an asset.

TRUE

1) Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific price and hold it until maturity.

TRUE

10) Subordination means that subsequent creditors agree to wait until all claims of the senior debt are satisfied.

TRUE

10) The required return on a bond is likely to differ from the stated interest rate for either of two reasons: 1) economic conditions have changed, causing a shift in the basic cost of long-term funds, or 2) the firm's risk has changed.

TRUE

11) Restrictive covenants place operating and financial constraints on the borrower.

TRUE

13) In a bond indenture, the term "security interest" refers to collateral pledged against the bond.

TRUE

14) High-quality (high-rated) bonds provide lower returns than lower-quality (low-rated) bonds.

TRUE

14) Longer the maturity, higher is the cost of a bond.

TRUE

15) There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders.

TRUE

18) Any Ba rated bond or lower would be considered speculative or "junk."

TRUE

19) As a bond approaches maturity, the price of the bond will approach its par value until, the bond is worth its face value at maturity.

TRUE

2) Interest rate risk is the risk that results from the changes in interest rates and thereby impact the bond value.

TRUE

2) Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.

TRUE

2) The yield to maturity on a bond with a current price equal to its par or face value, will always be equal to the coupon interest rate.

TRUE

20) Debentures such as convertible bonds are unsecured bonds that only the most creditworthy firms can issue.

TRUE

22) Since a putable bond gives its holder the right to "put the bond" at specified times or because of specified actions by the issuing firm, the bond's yield would be lower than that of an otherwise equivalent non-putable bond.

TRUE

24) Since the issuer of zero (or low) coupon bonds can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures (or is called), its cash flow each year is increased by the amount of the tax shield provided by the interest deduction.

TRUE

25) The market price of a callable bond will not generally exceed its call price, except in the case of a convertible bond.

TRUE

27) A bond issued by an American company that is denominated in Swiss Francs and sold in Switzerland would be an example of a foreign bond.

TRUE

28) A foreign bond is a bond issued by a foreign corporation or government and is denominated in the investor's home currency and sold in the investor's home market.

TRUE

29) A Eurobond is a bond issued by an international borrower and sold to investors in countries with currencies other than the country in which the bond is denominated.

TRUE

3) If a bond's required return always equals its coupon interest rate, the bond's value will remain at par until it matures.

TRUE

3) In the valuation process, the higher the risk, the greater is the required return.

TRUE

3) When the required return is different from the coupon interest rate and is constant until maturity, the value of the bond will approach its par value as it nears maturity.

TRUE

4) When a bond's required return is greater than its coupon interest rate, the bond value will be less than its par value.

TRUE

4) When a bond's value differs from par, its yield to maturity will differ from its coupon interest rate.

TRUE

5) Restrictive covenants, coupled with standard debt provisions, help the lender to monitor the borrower's activities to ensure efficient use of funds.

TRUE

5) The value of an asset is determined by discounting the expected cash flows back to its present value, using an appropriate discount rate.

TRUE

5) To sell a callable bond, the issuer must pay a higher interest rate than on an otherwise equivalent noncallable bond.

TRUE

5) Yield to call represents the rate of return that investors earn if they buy a callable bond at a specific price and hold it until it is called back and they receive the call price, which would be set above the bond's par value.

TRUE

6) Duration measures the sensitivity of a bond's prices to changing interest rates.

TRUE

7) In a bond indenture, subordination is the stipulation that subsequent creditors agree to wait until all claims of the senior debt are satisfied.

TRUE

8) A conversion feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.

TRUE

8) Increases in the basic cost of long-term funds or in risk will raise the required return on a bond.

TRUE

8) The bond indenture identifies any collateral pledged against a bond and specifies how it is to be maintained.

TRUE

9) The call option in a bond has a greater chance of being exercised (to the detriment of the bondholder) if market interest rates have fallen since the bond was issued.

TRUE

9) To carry out systematic retirement of bonds, a corporation makes semiannual or annual payments that are used to retire bonds by purchasing them in the marketplace.

TRUE

12) IBM stock will experience greater trading activity (in terms of the number of shares traded on a given day) compared to IBM bonds.

TRUE 1

28) The rule-setting body, which authorizes generally accepted accounting principles is the ________. A) IFRS B) FASB C) SEC D) Federal Reserve System

B

40) To finance a new line of product, the Tangshan Toys has issued a bond with a par value of $1,000, coupon rate of 8 percent, and maturity of 30 years. Compute the price of the bond if the opportunity cost is 11 percent.

Coupon payment = 1,000 × 0.08 = $80 Using financial calculator: PMT= 80, I=11, N=30, FV=1000, CPT PV= $739.19

31) In an effort to analyze Clockwork Company finances, Jim realized that he was missing the company's net profits after taxes for the current year. Find the company's net profits after taxes using the following information. Return on total assets = 2% Total asset turnover = 0.5 Cost of goods sold = $105,000 Gross profit margin = 0.30

Sales = Cost of goods sold/(1 - Gross profit margin) = 105,000/(1 - 0.30) = $150,000 Total assets = Sales/(Total asset turnover) = 150,000/0.50 = $300,000 Net profits after taxes = (ROA) × (Total assets) = (0.02) × (300,000) = $6,000

69) Sunshine Corporation had a retained earnings balance of $850,000 at the beginning of 2015. By the end of 2015, the company's retained earnings balance stood at $950,000. During 2015, the company earned $245,000 as net profits after paying its taxes. The company was then able to pay its preferred stockholders a sum of $45,000. Compute the common stock dividend per share in 2015 assuming 10,000 shares of common stock outstanding.

$10

12) A record collector has agreed to sell her entire collection to a historical museum in three years at a price of $100,000. The current risk-free rate is 7 percent. At what price should she value her collection today?

$100,000(1.07)-3 = $81,630

30) A wealthy industrialist wishes to establish a $2,000,000 trust fund which will provide income for his grandchild into perpetuity. He stipulates in the trust agreement that the principal may not be distributed. The grandchild may only receive the interest earned. If the interest rate earned on the trust is expected to be at least 7 percent in all future periods, how much income will the grandchild receive each year?

$2,000,000 × 0.07 = $140,000

42) Tangshan Coal Inc. just issued a 10 percent, 25-year bond with a $1,000 par value that pays interest semiannually. (a) How much can the investor expect in annual interest (in dollars)? (b) How much can the investor expect in interest every six months (in dollars)? (c) How much can the investor expect in par value at the end of the 25th year?

(a) $100 (b) $50 (c) $1,000

41) Ria's Doll Company has an outstanding preferred issue of stock with a par value of $100 and an annual dividend of 10 percent (of par). Similar risk preferred stocks are yielding an 11.5 percent annual rate of return. (a) What is the current value of the outstanding preferred stock? (b) What will happen to price as the risk-free rate increases? Explain.

(a) Current value of the outstanding preferred stock = $100 × 0.10 / 0.115 = $86.96 (b) As the risk-free rate increases, the required rate of return will increase and the price will drop.

51) Given the financial data for New Electronic World, Inc. (NEW), compute the following measures of cash flows for the NEW for the year ended December 31, 2015. (a) Operating cash flow (b) Free cash flow

(a) OCF= EBIT - Taxes + Depreciation OCF = $30,000 - $8,000 + $3,000 = $25,000 (b)FCF = OCF - Net fixed asset investment (NFAI) - Net current asset investment (NCAI) NFAI = Change in net fixed assets + Depreciation = ($24,000 -$ 22,000) + 3,000 = $5,000 NCAI= Change in current assets - change in (Accounts payable + Accruals) = ($99,000 - $87,000) - ($32,000 - $26,000) = $6,000 FCF = $35,000 - $5,000 - $6,000 = $14,000

Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of $150,000 during 2015. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2014 is shown below. From your preparation of the pro forma income statement, answer the following multiple choice questions. Income stmt 4200000 3570000 630000 210000 420000 1) The pro forma net profits after taxes for 2015 are ________ 2) The pro forma cost of goods sold for 2015 is ________. 3) The pro forma operating expenses for 2015 are ________. 4) The pro forma accumulated retained earnings account on the balance sheet is projected to be ______

1) 207000 2)3825000 3)225000 4)57000

50) China America Manufacturing has a beta of 1.50, the risk-free rate of interest is currently 12 percent, and the required return on the market portfolio is 18 percent. The company plans to pay a dividend of $2.45 per share in the coming year and anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2001-2003 period. 2014-2.32 2013-2.21 2012-2.10 1)Estimate the value of China America Manufacturing's stock. 2)Growth rate of dividends:

1) = 0.12 + 1.50 (0.18 - 0.12) = 0.21 2) (2.32/2.1)^(1/2) -1=.0511% 2.45/(.21-.0511) = 15.42

The financial analyst for Sportif, Inc. has compiled sales and disbursement estimates for the coming months of January through May. Historically, 75 percent of sales are for cash with the remaining 25 percent collected in the following month. The ending cash balance in January is $3,000. Jan-5000-6000 Feb-6000-7000 Mar-10000-4000 Apr-10000-5000 May-10000-5000 1)The total cash receipts for April are ________. 2)The net cash flow for February is ______ 3) The firm has a negative net cash flow in the month(s) of ? 4) The ending cash balance for March is ? 5) The ending cash balance for February is ? 6) At the end of May, the firm has an ending cash balance of ? 7) The firm has a total financing requirement of ___ for the period from February through May. 8) If a pro forma balance sheet dated at the end of May was prepared from the information presented, the marketable securities would total ___

1)10000 2)-1250 3)January and February 4)6750 5)1750 6) 7)0 8)16750

SV-3060 acrec-500 intexp-126 totopexp-600 Accpay-240 COGS-1800 prefstckdiv-18 taxrt-40% shrscomm-1000 1)The firm's earnings available to common shareholders for 2014 is ________. 2)The firm's earnings per share for 2014 is ________. 3)The firm's net profit after taxes for 2014 is ________.

1)302.40 2).3024 3)320.40

A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro forma balance sheet for cash and profit planning purposes for the coming year ended December 31, 2015. Using the percent-of-sales method and the following financial data, prepare the pro forma balance sheet in order to answer the following multiple choice questions. (a) The firm estimates sales of $1,000,000. (b) The firm maintains a cash balance of $25,000. (c) Accounts receivable represents 15 percent of sales. (d) Inventory represents 35 percent of sales. (e) A new piece of mining equipment costing $150,000 will be purchased in 2010. Total depreciation for 2010 will be $75,000. (f) Accounts payable represents 10 percent of sales. (g) There will be no change in notes payable, accruals, and common stock. (h) The firm plans to retire a long term note of $100,000. (i) Dividends of $45,000 will be paid in 2015. (j) The firm predicts a 4 percent net profit margin. 1) The pro forma total current assets amount is ________. 2) The pro forma net fixed assets amount is ________. 3) The pro forma current liabilities amount is ________.( 4) The pro forma total liabilities amount is ________. 5) The pro forma accumulated retained earnings amount is ________. 6) The external financing required in 2015 will be ________. 7) General Talc Mines may prepare to 8) The external funds requirement results primarily from ________. 9) If General Talc Mines cannot raise the external financing required through traditional credit channels, the firm may ________.

1)525000 2)575000 3)500000 4)550000 5)130000 6)240000 7)arrange for a loan equal to the external funds requirement 8)retirement of debt and purchase of fixed assets 9) sell common stock

Balance Sheet 2015-2014 800-600 200-200 1200-1000 2000-1800 3000-2800 1000-800 2000-2000 6200-5600 200-100 800-900 100-100 2000-1500 500-500 blah 6200-5600 Net profit ATax-150 1)Largest Single Source of funds? 2)Common Stock dividends in 2015 amounted to? 3)Firm may have increased long term debts to finance? 4)The firm____ Fixed assets worth ____? 5) Firm's cash flow from operating activities is? 6) The depreciation expense for 2015 is?

1)increase in long term debt 2)50 3)increase in current assets 4)purchased: 200 5)50 6)200

11) During her four years at college, Hayley received the following amounts of money at the end of each year from her grandmother. She deposited her money in a savings account paying 6 percent rate of interest. How much money will Hayley have on graduation day? 1-100 2-200 3-300 4-400

1061.90

14) Inventory for CEE in 2013 was ________ 15) Notes payable for CEE in 2013 was _______ 16) Accounts receivable for CEE in 2013 was ________. 17) Net fixed assets for CEE in 2013 were ________. 18) Total assets for CEE in 2013 were ________. 19) Long-term debt for CEE in 2013 was ________.

14)27500 15)10609 16)19861 17)45481 18)97345 19)30763

16) The current ratio for Dana Dairy Products in 2013 was ________. 17) Since 2012, the liquidity of Dana Dairy Products ________. 18) The net working capital for Dana Dairy Products in 2013 was ________. 19) The inventory turnover for Dana Dairy Products in 2013 was ________. 20) The inventory management at Dana Dairy Products ________ since 2012 21) The average collection period for Dana Dairy Products in 2013 was ________. 22) If Dana Dairy Products has credit terms which specify that accounts receivable should be paid in 25 days, the average collection period ________ since 2012. 23) Dana Dairy Products had a ________ degree of financial leverage than the industry standard, resulting in ________. 24) The debt ratio for Dana Dairy Products in 2013 was ________. 25) Dana Dairy Products' gross profit margin was inferior to the industry standard. This may have resulted from ________. 26) The gross profit margin and net profit margin for Dana Dairy Products in 2013 were ________. 27) The return on total assets for Dana Dairy Products for 2013 was ________. 28) The return on equity for Dana Dairy Products for 2013 was ________. 29) Which of the following mathematical expressions represents the modified DuPont formula relative to Dana Dairy Products' 2013 performance?

16).91 17)has deteriorated 18)-1425 19)20 20)has improved slightly 21)32.5 22)has remained same 23)lower;lower return on equity 24)55% 25)high cost of goods sold 26)13% and .9% respect. 27).9% 28)5.6% 29)5.6(ROE) = 2.5(ROA) × 2.22(Financial leverage multiplier)

66) Colonial Furniture's net profits before taxes for 2015 totaled $354,000. The company's total retained earnings were $338,000 for 2014 year-end and $389,000 for 2015 year-end. Colonial is subject to a 26 percent tax rate. What was the cash dividend declared by Colonial Furniture in 2015?

210960

68) Ag Silver Mining, Inc. has $500,000 of earnings before interest and taxes at the year end. Interest expenses for the year were $10,000. The firm expects to distribute $100,000 in dividends. Calculate the earnings after taxes for the firm assuming a 40 percent tax on ordinary income.

294000

L-1000-9-5-6 M-100-10-8-10 N-500-18-17-15 34) (a)Calculate the current value of Bond L. (b)What will happen to the value/price as the bond approaches maturity? 35) Calculate the current value of Bond M 36) Calculate the current value of Bond M if the time of maturity is six years. 37) (a)Calculate the current value of Bond N. (b) What will happen to value/price as the bond approaches maturity?

34)(a)Using Financial calculator:CPT PV = $1,126.08 (b)The bond price will decrease and come closer to par. 35) $100. 36)The bond is at par, or $100, because the annual coupon interest rate is equal to the required rate of return. 37)CPT PV = $590.71 (b)The bond price will decrease and come closer to par.

2014-2.89 2013-2.53 2012-2.22 2011-1.95 2010-1.71 2009-1.5 Xiao Xin owns stock in a company which has paid the annual dividends shown in 47)Calculate the growth rate of these dividends. 48) Calculate the estimated dividend for 2015. 49) The required return is assumed to be 17 percent. Using the Gordon model, calculate the per share value of the stock for 2014.

47)(2.89 / 1.5)^1/5 - 1 = 0.14 = 14% 48)= ($2.89) × (1.14) = $3.29 49)3.29/(.17-.14)=109.67

67) On December 31, 2014, Bradshaw Corporation had $485,000 as an ending balance for its retained earnings account. During 2015, the corporation declared a $3.50/share dividend to its stockholders. The company has 35,000 shares of common stock outstanding. When the books were closed for 2015 year end, the corporation had a final retained earnings balance of $565,000. What was the net profit earned by Bradshaw Corporation during 2015?

565000

Ford-11-july31/14-65.50-?-104-10-5100 64) Based on the table 6.1, on this trading day, the number of Ford bonds which changed hands was ___ 65) Based on the Table 6.1, assume this bond's face value is $1,000. What is the bond's current market price? 66) Based on the Table 6.1, what is the last yield for this bond?

64)5,100,000 65)655 66)16.8%

12) You have provided your friend with a service worth $8,500. Your friend offers you the following cash flow instead of paying $8,500 today. Should you accept his offer if your opportunity cost is 8 percent? 1-4000 2-3000 3-2000 4-1000

8598

13) A corporate financial analyst must calculate the value of an asset which produces year-end annual cash flows of $0 the first year, $2,000 the second year, $3,000 the third year, and $2,500 the fourth year. Assuming a discount rate of 15 percent, what is the value of this asset?

= $0/(1.15)1 + $2,000/(1.15)2 + $3,000/(1.15)3 + $2,500/(1.15)4 = $4,914

10) A firm with a gross profit margin which meets industry standard and a net profit margin which is below industry standard must have excessive ________. A) general and administrative expenses B) cost of goods sold C) dividend payments D) principal payments

A

10) Find the present value of the following stream of a firm's cash flows, assuming that the firm's opportunity cost is 14 percent. 1-5-20000 6-10-35000 A) $131,068 B) $ 19,830 C) $ 14,850 D) $120,820

A

10) Tangshan Industries has issued a bond which has a $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in ten years and currently sells for $1,250. Using this information, the yield to maturity on the Tangshan Industries bond is ________. A) 10.79 percent B) 11.39 percent C) 12.19 percent D) 13.29 percent

A

10) ________ ratio measures a firm's ability to pay contractual interest payments. A) Times interest earned B) Fixed-payment coverage C) Debt D) Average payment period

A

11) A firm with a low return on total assets can improve its return on equity, all else remaining the same, by ________. A) increasing its debt ratio B) increasing its total asset turnover C) decreasing its debt ratio D) decreasing its total asset turnover

A

11) If a United States Savings bond can be purchased for $29.50 and has a maturity value of $100 at the end of 25 years, what is the annual rate of return on the bond? A) 5 percent B) 6 percent C) 7 percent D) 8 percent

A

11) In comparing an ordinary annuity and an annuity due, which of the following is true? A) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity. B) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due. C) The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due. D) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.

A

11) The rate of interest actually paid or earned, also called the annual percentage rate (APR), is the ________ interest rate. A) effective B) nominal C) discounted D) continuous

A

11) ________ measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted. A) Net profit margin B) Operating profit margin C) Gross profit margin D) Earnings available to common shareholders

A

12) Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 3? A) $1,900 B) $1,200 C) $1,500 D) $2,100

A

14) The future value of $200 received today and deposited for three years in an account which pays semiannual interest of 8 percent is ________. A) $253.00 B) $252.00 C) $158.00 D) $134.66

A

15) The annual rate of return is referred to as the ________. A) discount rate B) marginal rate C) risk-free rate D) marginal cost

A

15) The future value of an ordinary annuity of $2,000 each year for 10 years, deposited at 12 percent, is ________. A) $35,098 B) $20,000 C) $39,310 D) $11,300

A

15) The key outputs of the short-term financial planning process are the ________. A) cash budget, pro forma income statement, and pro forma balance sheet B) sales forecast and capital assets journal C) sales forecast and schedule of changes in working capital D) income statement, balance sheet, and source and use statement

A

17) An A rated bond should provide investors with a higher yield than an otherwise identical B rated bond.

FALSE

15) Using the DuPont system of analysis, holding other factors constant, an increase in financial leverage will result in ________. A) an increase in the return on equity B) a decrease in the gross profit margin C) an increase in the gross profit margin D) an increase in retained earnings

A

16) If the only information you are given about Ryan Corporation, a large public company in business for many years, is that it has a current ratio of 2.9, what could you infer from this? A) It can meet the short-term obligations without any difficulty. B) You could determine that Ryan has a liquidity problem because Ryan's current ratio is greater than 2 which is the rule of thumb for the current ratio. C) Nothing, you would also need the current ratio's from the last few years of the S&P 500 Index. D) You could determine that Ryan has an activity problem because Ryan's current ratio is greater than 2 which is the rule of thumb for the current ratio.

A

16) P/E ratio measures the ________. A) market value of the stock to earnings per share B) intrinsic value of the stock to earnings per share C) book value of the stock to earnings per share D) market price of the stock to retained earnings

A

16) The legal contract setting forth the terms and provisions of a corporate bond is a(n) ________. A) indenture B) debenture C) loan document D) promissory note

A

17) Book value per share is the ratio of ________. A) common stock equity to number of outstanding common shares B) retained earnings to number of outstanding common shares C) fixed assets to number of outstanding common shares D) total liabilities to number of outstanding common shares

A

17) Danno is trying to decide which of two bonds to buy. Bond H is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying annual interest. Bond F is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying semiannual interest. The market required return for each bond is 10 percent. When using present value to determine the prices of the bonds, Danno will find that ________. A) there is no difference in price B) the price of F is greater than H C) the price of H is greater than F D) he needs more information before determining the prices

A

17) Once sales are forecasted, ________ must be generated to estimate required raw materials. A) a production plan B) a cash budget C) an operating budget D) a pro forma statement

A

18) A(n) ________ is a paid individual, corporation, or a commercial bank trust department that acts as a third party to a bond indenture. A) trustee B) investment banker C) bond issuer D) bond rating agency

A

18) Which of the following is an example of noncash charges? A) depreciation B) accruals C) interest expense D) dividends paid

A

19) Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent. A) $656.82 B) $835.45 C) $845.66 D) $2,201.08

A

19) Present and prospective shareholders are mainly concerned with a firm's ________. A) risk and return B) profitability C) leverage D) liquidity

A

19) ________ ratios are a measure of the speed with which various accounts are converted into sales or cash. A) Activity B) Liquidity C) Debt D) Profitability

A

20) An external sales forecast is based on ________. A) the relationships between a firm's sales and certain key economic indicators such as GDP and consumer confidence B) a buildup, or consensus of sales forecasts through a firm's own sales channels C) the prediction of a firm's sales over a given period through the analysis of the sales trends of its competitors D) developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales

A

21) An internal forecast is based on ________. A) a buildup, or consensus, of sales forecasts through a firm's own sales channels, adjusted for additional factors such as production capabilities B) the relationships between a firm's sales and certain economic indicators C) the prediction of a firm's sales over a given period through surveys sent to financial analysts D) developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales

A

22) ________ analysis involves comparison of current to past performance and the evaluation of developing trends. A) Time-series B) Cross-sectional C) Marginal D) Break-even

A

23) The cash flows from operating activities section of the statement of cash flows includes ________. A) labor expense B) proceeds from the sale of fixed assets C) principal paid D) dividends paid

A

23) What is the rate of return on an investment of $124,090 if the company expects to receive $10,000 per year for the next 30 years? A) 7 percent B) 4 percent C) 6 percent D) 5.5 percent

A

23) Which of the following is used to analyze a firm's financial performance over different years? A) time-series analysis B) break-even analysis C) gap analysis D) marginal analysis

A

24) A firm has projected sales in May, June, and July of $100, $200, and $300, respectively. The firm makes 20 percent of sales for cash and collects the balance one month following the sale. The firm's total cash receipts in July is ________. A) $220 B) $200 C) $180 D) $140

A

25) In preparing a cash budget, the ________ seasonal and uncertain a firm's cash flows, the ________ the number of budgeting intervals it should use. A) more: greater B) more: fewer C) less: greater D) less: fewer

A

25) When the required return is constant and equal to the coupon rate, the price of a bond as it approaches its maturity date will ________. A) remain at par B) increase C) decrease D) change depending on whether it is a discount or premium bond

A

26) The key input to any cash budget is ________. A) the sales forecast B) the production plan C) the pro forma balance sheet D) the current tax laws

A

26) Time-series analysis is often used to ________. A) assess developing trends B) correct errors of judgment C) evaluate the value of a firm or its assets D) standardize results

A

27) A beach house in Southern California now costs $350,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 20 years before Eric and Karinna retire from successful careers in commercial art. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the beach house upon retirement? A) $11,472 B) $4,323 C) $79,977 D) $17,350

A

29) An analyst should be careful when conducting ratio analysis to ensure that ________. A) the overall performance of a firm is not judged on a single ratio B) the role of inflation is ignored C) ratios being compared should be calculated using financial statements dated at different points in time during the year D) different accounting procedures are used

A

30) Julian is considering purchasing the stock of Pepsi Cola because he really loves the taste of Pepsi. What should Julian be willing to pay for Pepsi today if it is expected to pay a $2 dividend in one year and he expects dividends to grow at 5 percent indefinitely? Julian requires a 12 percent return to make this investment. A) $28.57 B) $29.33 C) $31.43 D) $43.14

A

30) Xiao Li wishes to accumulate $50,000 by the end of 10 years by making equal annual end-of-year deposits over the next 10 years. If Xiao Li can earn 5 percent on her investments, how much must she deposit at the end of each year? A) $3,975 B) $6,475 C) $5,000 D) $4,513

A

31) A firm's total asset turnover increased from 0.75 to 0.90. Which of the following is true about the given data? A) Its assets have been efficiently used to derive the optimum level of sales. B) Its assets have been efficiently used to derive the optimum level of net income. C) Its assets have been efficiently used to derive the minimum level of net income. D) Its assets have been efficiently used to derive the minimum level of gross profit.

A

31) Harry Corporation's common stock currently sells for $180 per share. Harry just paid a dividend of $10.18 and dividends are expected to grow at a constant rate of 6 percent forever. If the required rate of return is 12 percent, what will Harry Corporation's stock sell for one year from now? A) $190.64 B) $187.04 C) $195.40 D) $179.84

A

31) Inflation can distort ________. A) book value of inventory costs B) market value of revenue C) market value of sales D) book value of revenue

A

31) The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity. A) call B) conversion C) put D) swap

A

31) Which of the following affects the cost of a bond? A) maturity of a bond B) dividend policy C) fixed assets purchased from the proceeds of bond issue D) money market regulations

A

32) A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________ when the stated rate of interest is less than the required return, and ________ when the stated rate of interest is equal to the required return. A) at a premium: at a discount: equal to the par value B) at a premium: equal to the par value: at a discount C) at a discount: at a premium: equal to the par value D) equal to the par value: at a premium: at a discount

A

32) A firm with a total asset turnover that is lower than industry standard but with a current ratio that meets industry standard must have excessive ________. A) fixed assets B) inventory C) accounts receivable D) debt

A

32) Tangshan China Company's stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan's dividend growth rate assuming that dividends are expected to grow at a constant rate forever? A) 8% B) 9% C) 10% D) 11%

A

32) To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will default, the lender typically ________. A) charges a higher interest rate on long-term loans B) reserves the right to change the terms of the loan at any time C) includes excessively restrictive debt provisions D) reserves the right to demand immediate payment at any time

A

33) If a corporate bond is issued with a coupon rate that varies directly with the required return, the price of the bond will ________. A) equal the face value B) be less than the face value C) be greater than the face value D) be greater than or less than the face value depending on how interest rates vary

A

34) In October, a firm had an ending cash balance of $35,000. In November, the firm had a net cash flow of $40,000. The minimum cash balance required by the firm is $25,000. At the end of November, the firm had ________. A) an excess cash balance of $50,000 B) an excess cash balance of $75,000 C) required total financing of $15,000 D) required total financing of $5,000

A

34) The Public Company Accounting Oversight Board (PCAOB) ________. A) is a not-for-profit corporation that oversees auditors of public corporations B) is a not-for-profit corporation that oversees managers of public corporations C) is a for-profit corporation that oversees auditors of public corporations D) is a for-profit corporation that oversees managers of public corporations

A

34) The ________ in the capital market is the basis for determining a bond's coupon interest rate. A) cost of money B) weighted average cost of capital C) bond's face value D) average coupon interest rate

A

36) Danny Joe borrows $10,500 from the bank at 11 percent annually compounded interest to be repaid in six equal annual installments. The interest paid in the first year is ________. A) $1,155 B) $2,481 C) $ 144 D) $1,327

A

36) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of $500. At the end of August, the firm ________. A) required total financing of $500 B) had an excess cash balance of $5,500 C) had an excess cash balance of $500 D) required total financing of $2,500

A

37) A(n) ________ provides a financial summary of a firm's operating results during a specified period. A) income statement B) balance sheet C) statement of cash flows D) statement of retained earnings

A

37) The current yield on a bond is measured by ________. A) the annual interest payment divided by the current price B) the annual interest payment divided by the par value C) the annual interest payment divided by the maturity value D) the annual interest payment divided by the yield to maturity

A

38) A corporation sold a fixed asset for $100,000. This is ________. A) an investment cash flow and a source of funds B) an operating cash flow and a source of funds C) an operating cash flow and a use of funds D) an investment cash flow and a use of funds

A

38) Aunt Butch borrows $19,500 from the bank at 8 percent annually compounded interest to be repaid in 10 equal annual installments. The interest paid in the third year is ________. A) $1,336.00 B) $1,560.14 C) $2,906.11 D) $1,947.10

A

39) Entertainer's Aid plans five annual colossal concerts, each in a different nation's capital. The concerts will raise funds for an endowment which would provide the World Wide Hunger Fund with $3,000,000 per year into perpetuity. The endowment will be given at the end of the fifth year. The rate of interest is expected to be 9 percent in all future periods. How much must Entertainer's Aid deposit each year to accumulate to the required amount? A) $5,569,749 B) $3,333,333 C) $1,830,275 D) $8,568,980

A

39) Operating profit is ________. A) gross profit minus operating expenses B) sales revenue minus cost of goods sold C) earnings before depreciation and taxes D) sales revenue minus depreciation expense

A

43) How long would it take for Nico to save an adequate amount for retirement if he deposits $40,000 per year into an account beginning one year from today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement? A) 12.2 years B) 15.7 years C) 14.5 years D) 16.5 years

A

47) Calculate a firm's free cash flow if it has net operating profit after taxes of $60,000, depreciation expense of $10,000, net fixed asset investment requirement of $40,000, a net current asset requirement of $30,000 and a tax rate of 30%. A) $0 B) $30,000 C) -$30,000 D) $60,000

A

47) On ________, the stated interest rate is adjusted periodically within stated limits in response to changes in specified money or capital market rates. A) a floating rate bond B) a zero coupon bond C) a mortgage bond D) an equipment trust certificate

A

5) The present value of a $25,000 perpetuity at a 14 percent discount rate is ________. A) $178,571 B) $285,000 C) $350,000 D) $219,298

A

5) ________ are projected financial statements. A) Pro forma statements B) Statements of retained earnings C) Cash budgets D) Cash flow statements

A

51) Convertible bonds are normally ________. A) debentures B) income bonds C) zero coupon bonds D) mortgage bonds

A

58) A firm's year-end retained earnings balances are $670,000 and $560,000, for 2014 and 2015 respectively. The firm paid $10,000 in dividends in 2015. The firm's net profit after taxes in 2015 was ________. A) -$100,000 B) -$110,000 C) $100,000 D) $110,000

A

6) An annuity with an infinite life is called a(n) ________. A) perpetuity B) primia C) option D) deep discount

A

6) The present value of $100 received at the end of year 1, $200 received at the end of year 2, and $300 received at the end of year 3, assuming an opportunity cost of 13 percent, is ________. A) $ 453 B) $ 416 C) $1,181 D) $ 500

A

6) The weakness of the judgmental approach to preparing a pro forma balance sheet is ________. A) the assumption that the values of certain accounts can be forced to take on desired levels B) the assumption that the firm faces linear total revenue and total operating cost functions C) the assumption that the firm's past financial condition is an accurate predictor of its future D) ease of calculation and preparation

A

60) A firm has a year-end retained earnings balance of $220,000 for 2014. The firm reported net profits after taxes of $50,000 and paid dividends of $30,000 in 2015. The firm's retained earnings balance at 2015 year end is ________. A) $240,000 B) $250,000 C) $270,000 D) $300,000

A

62) Information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements can be found on ________. A) the notes to the financial statements B) the statement of retained earnings C) the proxy statement D) the management discussion and analysis (MD&A)

A

63) A foreign bond is issued by a(n) ________. A) foreign corporation or government and is denominated in the investor's home currency and sold in the investor's home market B) corporation or government and is denominated in the investor's foreign currency and sold in the foreign market C) international borrower and sold to investors in countries with currencies other than the local currency D) international borrower and sold to investors in countries with currencies in which the bond is denominated

A

7) Short-term financial plans and long-term financial plans generally cover periods ranging from ________ years and ________ years, respectively. A) one to two: two to ten B) five to ten: ten to twenty C) zero to one: five to ten D) one to ten: ten to fifteen

A

7) The modified DuPont formula relates the firm's return on total assets (ROA) to its ________. A) return on equity (ROE) B) operating leverage multiplier C) net profit margin D) total asset turnover

A

8) A firm plans to retire outstanding bonds in the next planning period. Which of the following gets affected? A) pro forma income statement and pro forma balance sheet B) previous year income statement and previous year balance sheet C) previous year income statement and statement of retained earnings D) pro forma income statement and proxy statement

A

8) Find the present value of the following stream of a firm's cash flows, assuming that the firm's opportunity cost is 25 percent. 1-5000 2-25000 3-14000 A) $27,168 B) $35,200 C) $34,074 D) $32,281

A

8) ________ is a term used to describe the magnification of risk and return introduced through the use of fixed-cost financing, such as preferred stock and debt. A) Financial leverage B) Operating leverage C) Fixed-payment coverage D) Benchmarking

A

9) Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent but with interest compounded monthly. Account B has an annual percentage rate of 7.45 percent with interest compounded continuously. Which account provides the highest effective annual return? A) Account A B) Account B C) Both provide the same effective annual return D) We don't have sufficient information to make a choice

A

9) Cash flows directly related to production and sale of a firm's products and services are called ________. A) cash flow from operating activities B) cash flow from investment activities C) cash flow from financing activities D) cash flow from equity activities

A

9) The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for ________ purposes. A) tax B) financial reporting C) budget D) cost accounting

A

9) The future value of $100 received today and deposited at 6 percent for four years is ________. A) $126 B) $ 79 C) $124 D) $116

A

16) If you expect to retire in 30 years, live on $50,000 per year and expect the inflation to average 3% over the next 30 years, what amount of annual income will you need to live at the same comfort level in 30 years? A) $121,363 B) $$95,000 C) $20,599 D) $51,500

A AACSB Tag: Reflective Thinking Skills

12) The percent-of-sales method of developing a pro forma income statement forecasts sales and other line items as a ________. A) percentage of projected sales B) percentage of average sales over a period C) percentage of projected total assets D) percentage of average total assets over a period

A Diff: 1

45) Which of the following is a fixed asset? A) land B) accounts payable C) accruals D) notes payable

A Diff: 1

18) If the expected return is above the required return on an asset, rational investors will ________. A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return B) buy the asset, which will drive the price down and cause the expected return to reach the level of the required return C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return D) sell the asset, since price is expected to decrease

A Diff: 2

24) Nico is the new assistant branch manager of a larger Florida-based bank and the branch manager has asked him a question to test his knowledge. The question he asked is which rate should the bank advertise on monthly-compounded loans, the nominal annual percentage rate or the effective annual percentage rate? Which rate should the bank advertise on quarterly-compounded savings accounts? Explain. As a consumer, which would you prefer to see and why?

A bank would rather advertise the annual percentage rate on loans since this rate appears to be lower and the effective annual rate. With respect to savings accounts, the bank would advertise the effective rate since this rate will be higher than the annual percentage rate (APR). As a consumer, the effective rate is the more important rate since it represents the rate actually paid or earned.

11) In the basic valuation model, risk is generally incorporated into the ________. A) cash flows B) timing C) discount rate D) total value

C

38) A bond rated Aaa according to Moody's, is considered ________. A) a high grade bond B) a prime quality bond C) an upper medium grade bond D) a medium grade bond

B

23) Assume you have a choice between two deposit accounts. Account X has an annual percentage rate of 12.25 percent but with interest compounded monthly. Account Y has an annual percentage rate of 12.20 percent with interest compounded continuously. Which account provides the highest effective annual return?

Account X EAR = [1 + - 1 = 12.96% Account Y EAR = - 1 = 12.75% Choose X

38) Ashley is planning to attend college when she graduates from high school 7 years from now. She anticipates that she will need $10,000 at the beginning of each of the four college years to pay for tuition and fees, and have some spending money. Ashley has made an arrangement with her father to do the household chores if her dad deposits $3,500 at the end of each year for the next 7 years in a bank account paying 8 percent interest. Will there be enough money in the account for Ashley to pay for her college expenses? Assume the rate of interest stays at 8 percent during the college years.

At the beginning of the first year of college: PV = 10,000 + (10,000/0.08) × [1-1/(1.08)3] = 10,000 + 25,770.96 = $35,770.96 PMT = $3,500, r= 8%, n = 7 FVA = 3,500{[(1.08)7-1]/0.08} = 3,500(8.923) = $31,230 Ashley will need $4,541 (= $35,770.96 -$ 31,230) additional money to pay for her college education.

0) Cash flows associated with the purchase and sale of fixed assets and business interests are called cash flow from ________. A) operating activities B) investment activities C) financing activities D) equity activities

B

10) In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________. A) overstate costs and overstate profits B) overstate costs and understate profits C) understate costs and overstate profits D) understate costs and understate profits

B

10) Other things being equal, a decrease in total asset turnover will result in ________ in the return on total assets. A) an increase B) a decrease C) no change D) an undetermined change

B

10) The future value of $200 received today and deposited at 8 percent for three years is ________. A) $248 B) $252 C) $158 D) $200

B

10) The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate. A) effective B) nominal C) discounted D) continuous

B

19) A ________ is a restrictive provision in a bond indenture, providing for the systematic retirement of the bonds prior to their maturity. A) redemption clause B) sinking-fund requirement C) conversion feature D) subordination clause

B

10) The value of any asset is the ________. A) sum of all future cash flows it is expected to provide over the relevant time period B) sum of the present values of all future cash flows it is expected to provide over the relevant time period C) present value of the sum of all future cash flows it is expected to provide over the relevant time period D) sum of all compounded future cash flows it is expected to provide over the relevant time period

B

11) Corporate bonds have a ________. A) face value of $5,000 B) market price of $1,000 C) specified coupon rate paid annually D) par value of $1,000

B

12) The ________ of a business firm is measured by its ability to satisfy its short-term obligations as they come due. A) activity B) liquidity C) debt D) profitability

B

12) The amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount is called ________. A) future value B) present value C) future value of an annuity D) compounded value

B

12) The future value of a $2,000 annuity due deposited at 8 percent compounded annually for each of the next 10 years is ________. A) $28,974 B) $31,291 C) $14,494 D) $13,420

B

12) ________ consider proposed fixed-asset outlays, research and development activities, marketing and product development actions, capital structure, and major sources of financing. A) Short-term financial plans B) Long-term financial plans C) Pro forma statements D) Cash budgeting

B

13) A type of long-term financing used by both corporations and government entities is ________. A) common stocks B) bonds C) preferred stocks D) retained earnings

B

13) Janice would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at $15,000, and she has 5 years to accumulate this money. How much must Janice deposit annually in an account paying 10 percent interest in order to have enough money to send her parents on the cruise? A) $1,862 B) $2,457 C) $3,000 D) $2,234

B

13) The future value of $100 received today and deposited in an account for four years paying semiannual interest of 6 percent is ________. A) $450 B) $127 C) $889 D) $134

B

13) ________ generally reflect(s) the anticipated financial impact of planned long-term actions. A) A cash budget B) Strategic financial plans C) Operating financial plans D) A pro forma income statement

B

14) Financial leverage multiplier is the ratio of ________. A) current assets to common stockholders' equity B) total assets to common stockholders' equity C) total assets to total debt D) current assets to current liabilities

B

14) The future value of an ordinary annuity of $1,000 each year for 10 years, deposited at 3 percent, is ________. A) $11,808 B) $11,464 C) $ 8,530 D) $10,000

B

14) Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 11 is ________. A) $3,000 B) $4,000 C) $0 D) $6,000

B

15) For firms with high fixed costs, the percent-of-sales approach for preparing a pro forma income statement tends to ________. A) overestimate profits when sales are increasing B) underestimate profits when sales are increasing C) underestimate profits when assets are increasing D) overestimate profits when assets are increasing

B

15) Given a financial manager's preference for faster receipt of cash flows, ________. A) a longer depreciable life is preferred to a shorter one B) a shorter depreciable life is preferred to a longer one C) the manager is not concerned with depreciable life, because depreciation is a noncash expense D) the manager is not concerned with depreciable life, because once purchased, depreciation is considered a sunk cost

B

15) The future value of an annuity of $1,000 each quarter for 10 years, deposited at 12 percent compounded quarterly is ________. A) $17,549 B) $75,401 C) $93,049 D) $11,200

B

16) In general, ________. A) a longer depreciable life is preferred, because it will result in a faster receipt of cash flows B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows C) a shorter depreciable life is preferred, because management can then purchase new assets, as the old assets are written off D) a longer depreciable life is preferred, because management can postpone purchasing new assets, since the old assets still have a useful life

B

16) Nico makes annual end-of-year payments of $5,043.71 on a four-year loan with an interest rate of 13 percent. The original principal amount was ________. A) $24,450 B) $15,000 C) $3,100 D) $20,175

B

16) The value of a bond is the present value of its interest payments plus ________. A) future value of its par value B) present value of its par value C) its face value D) present value of interest payment

B

17) A debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms is called a(n) ________. A) common stock B) corporate bond C) indenture D) preferred stock

B

17) If expected return is less than required return on an asset, rational investors will ________. A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return D) buy the asset, since price is expected to increase

B

17) If the present value of a perpetual income stream is increasing, the discount rate must be ________. A) increasing B) decreasing C) changing unpredictably D) increasing proportionally

B

18) Ashley owns stock in a company which has consistently paid a growing dividend over the last five years. The first year Ashley owned the stock, she received $1.71 per share and in the fifth year, she received $2.89 per share. What is the growth rate of the dividends over the last five years? A) 7 percent B) 11 percent C) 12 percent D) 5 percent

B

19) A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of $230,000. The firm should prepare to ________. A) repurchase common stock totaling $230,000 B) arrange for a loan of $230,000 C) do nothing: the balance sheet balances D) invest in marketable securities totaling $230,000

B

19) Julian was given a gold coin originally purchased for $1 by his great-grandfather 50 years ago. Today the coin is worth $450. The rate of return realized on the sale of this coin is approximately equal to ________. A) 7.5% B) 13% C) 9% D) 18%

B

19) Which of the following is a source of cash flows? A) increase in marketable securities B) increase in accounts payable C) decrease in notes payable D) repurchase of stock

B

20) A generous benefactor to a local ballet plans to make a one-time endowment that would provide the ballet with $150,000 per year into perpetuity. The rate of interest is expected to be 5 percent for all future time periods. How large must the endowment be? A) $ 300,000 B) $3,000,000 C) $ 750,000 D) $1,428,571

B

20) Bond indentures include restrictive covenants.These provisions protect the bondholders against ________. A) increase in inflation rate B) increase in borrower's risk C) decrease in liquidity risk D) maturity risk

B

20) Nico Corporation has cost of goods sold of $300,000 and inventory of $30,000, then the inventory turnover is ________ and the average age of inventory is ________. A) 36.5: 10 B) 10: 36.5 C) 36.0: 10 D) 30: 36.0

B

20) ________ is a noncash charge. A) Labor expense B) Depreciation C) Salaries D) Rent

B

21) The rate of return earned on an investment of $50,000 today that guarantees an annuity of $10,489 for six years is approximately ________. A) 5% B) 7% C) 10% D) 12%

B

21) ________ analysis involves the comparison of different firms' financial ratios at the same point in time. A) Time-series B) Cross-sectional C) Marginal D) Technical

B

21) ________ may indicate a firm is experiencing stockouts and lost sales. A) Average payment period B) Inventory turnover ratio C) Average collection period D) Quick

B

22) If the coupon rate of a bond is equal to its required rate of return, then ________. A) the current value is not equal to par value B) the current value is equal to par value C) the maturity value is equal to par value D) the current value is equal to maturity value

B

22) Mary will receive $12,000 per year for the next 10 years as royalty for her work on a finance book. What is the present value of her royalty income if the opportunity cost is 12 percent? A) $120,000 B) $ 67,800 C) $ 38,640 D) $ 72,560

B

22) The cash flows from operating activities section of the statement of cash flows includes ________. A) principal received B) cost of raw materials C) dividends paid D) stock repurchases

B

22) What is the rate of return on an investment of $16,278 if the company expects to receive $3,000 per year for the next 10 years? A) 18 percent B) 13 percent C) 8 percent D) 3 percent

B

23) The ________ measures the activity, or liquidity, of a firm's stock of goods. A) average collection period B) inventory turnover ratio C) average payment period D) total asset turnover ratio

B

23) The purpose of the debt covenant that prohibits borrowers from entering into certain types of leases is to ________. A) protect the lender by controlling the risk and marketability of the borrower's security investments alternatives B) limit the amount of fixed-payment obligations C) ensure a cash shortage does not cause an inability to meet current obligations D) limit the annual cash dividends paid by the firm

B

24) Which of the following is true of benchmarking? A) It is an analysis in which a firm's ratio values are analyzed to project the fundamental values of the assets for upcoming years or business cycle. B) It is an analysis in which a firm's ratio values are compared with those of a key competitor or with a group of competitors that it wishes to emulate. C) It is an analysis in which a firm's financial performance over time is evaluated using financial ratio analysis. D) It is a financial statement analysis technique which combines cross-sectional and time-series analyses.

B

25) You have been offered a project paying $300 at the beginning of each year for the next 20 years. What is the maximum amount of money you would invest in this project if you expect 9 percent rate of return to your investment? A) $ 2,738 B) $ 2,985 C) $15,347 D) $ 6,000

B

26) Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is ________. A) $28.00 B) $56.00 C) $22.40 D) $18.67

B

26) Which of the following is a cash inflow? A) a decrease in accounts payable B) a decrease in accounts receivable C) an increase in dividend payment D) a decrease in accrued liabilities

B

27) A firm's annual stockholders' report ________. A) is only accessible to the shareholders of the firm B) summarizes and documents the firm's financial activities during the past year C) documents the list of all investors who bought the firm's shares during the past year D) summarizes and documents the firm's financial plan and budgets during the past year

B

27) In ratio analysis, a comparison to a standard industry ratio is made to isolate ________ deviations from the norm. A) greater than average B) negative C) marginal D) standard

B

27) Which of the following ratios is difficult for the creditors of a firm to analyze from the published financial statements? A) debt equity ratio B) average payment period C) quick ratio D) total asset turnover

B

27) ________ means that subsequent creditors agree to wait until all claims of the are senior debt satisfied before having their claims satisfied. A) Security interest B) Subordination C) Sinking fund requirement D) Bond indenture

B

28) Cash disbursements include ________. A) amortization expense B) rent payments C) depreciation expense D) depletion

B

28) Which of the following is a limitation of ratio analysis? A) Financial ratios cannot reveal certain specific aspects of a firm's financial position. B) Ratios that reveal large deviations from the norm merely indicate the possibility of a problem. C) It is difficult to access audited financial statements for ratio analysis. D) Ratio analysis assumes that inflation has no effect on a firm's business.

B

28) Which of the following line items of the statement of cash flows must be obtained from the income statement? A) accruals in current liabilities B) interest expenses C) accounts receivable D) cash dividends paid on both preferred and common stocks

B

28) Xiao Xin is planning to accumulate $40,000 by the end of 5 years by making 5 equal annual deposits. If she plans to make her first deposit today and can earn an annual compound rate of 9 percent on her investment, how much must each deposit be in order to accumulate the $40,000? A) $ 6,132 B) $ 6,684 C) $23,844 D) $ 9,434

B

29) An example of a standard debt provision is to ________. A) limit the corporation's annual cash dividend payments B) pay taxes and other liabilities when due C) restrict the corporation from disposing of fixed assets D) maintain a minimum level of liquidity

B

29) If the required return is greater than the coupon rate, a bond will sell at ________. A) par B) a discount C) a premium D) book value

B

3) Find the future value at the end of year 3 of the following stream of cash flows received at the end of each year, assuming the firm can earn 17 percent on its investments. 1-3000 2-6000 3-9000 A) $20,724 B) $20,127 C) $23,550 D) $23,350

B

30) ABC company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 5 percent, then ________. A) bond D will have a greater change in price B) bond E will have a greater change in price C) the price of the bonds will be constant D) the percentage price change for the bonds will be equal

B

30) The ________ ratio indicates the efficiency with which a firm uses its assets to generate sales. A) inventory turnover B) total asset turnover C) quick D) current asset turnover

B

30) The analyst should be careful when analyzing ratios that ________. A) pre-audited statements are used B) right interpretation of the ratio value is made C) financial data being compared need not be uniform D) inflation will not affect while comparing older to newer firms

B

31) A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total cash receipts in November is ________. A) $1,000 B) $100 C) $700 D) $400

B

31) The stockholders' annual report must include ________. A) common-size financial statements B) an income statement C) an advance tax statement D) the margin of safety report

B

32) A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total expected cash receipts in January is ________. A) $700 B) $2,100 C) $1,900 D) $300

B

32) Detta borrows $20,000 from the bank. For a five-year loan, the bank requires annual end-of-year payments of $4,878.05. The annual interest rate on the loan is ________. A) 6 percent B) 7 percent C) 8 percent D) 9 percent

B

32) The ________ feature allows bondholders to change each bond into stated number of shares of stock. A) call B) conversion C) put D) swap

B

32) Without adjustment, inflation may tend to cause ________ firms to appear more efficient and profitable than ________ firms. A) larger: smaller B) older: newer C) smaller: larger D) newer: older

B

33) In April, a firm had an ending cash balance of $35,000. In May, the firm had total cash receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firm is $25,000. At the end of May, the firm had ________. A) an excess cash balance of $25,000 B) an excess cash balance of $0 C) required financing of $10,000 D) required financing of $25,000

B

33) Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. Assuming Tangshan China's most recent dividend was $5.50, what is the required rate of return on Tangshan's stock? A) 7.3% B) 8.4% C) 9.5% D) 10.6%

B

33) The size of a loan and its issuance costs (as a percentage of the amount borrowed) are ________. A) not related B) inversely related C) independent D) perfectly positively correlated

B

33) ________ allow bondholders to purchase a certain number of shares of the firm's common stock at a specified price over a certain period of time. A) Call options B) Stock purchase warrants C) Debentures D) Put options

B

34) Otto is planning for his son's college education to begin ten years from today. He estimates the end-of-the-year tuition, books, and living expenses to be $10,000 per year for a four-year degree. How much must Otto deposit today, at an interest rate of 12 percent, for his son to be able to withdraw $10,000 per year for four years of college? A) $12,880 B) $ 9,780 C) $40,000 D) $18,950

B

35) Stock purchase warrants are instruments that give their holders ________. A) the obligation to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time B) the right to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time C) the obligation to sell a certain number of shares of the issuer's preferred stock at a specified price over a certain period of time D) the right to sell a certain number of shares of the issuer's preferred stock at a specified price over a certain period of time

B

36) Total assets less net fixed assets equals ________. A) gross assets B) current assets C) depreciation D) liabilities and equity

B

38) One way a firm can reduce the amount of cash it needs in any month is to ________. A) slow down the payment of receivables B) delay the payment of wages C) accrue taxes D) speed up payment of accounts payable

B

4) Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________. A) understate profits when sales are decreasing B) understate profits when sales are increasing C) overstate profits when sales are increasing D) neither understate nor overstate profits

B

41) Operating profit is known as ________. A) earnings after interest and taxes B) earnings before interest and taxes C) earnings before depreciation and taxes D) earnings after tax

B

41) Which of the following represents a cash flow from operating activities? A) dividends paid B) increase or decrease in current liabilities C) increase or decrease in fixed assets D) repurchasing stock

B

41) ________ is used to finance "rolling stock"-airplanes,trucks,boats,railroad cars. A) Income bonds B) Equipment trust certificates C) Collateral trust bonds D) Subordinated debentures

B

42) Earnings available for common stockholders is calculated as net profits ________. A) before taxes minus preferred dividends B) after taxes minus preferred dividends C) after taxes minus common dividends D) before taxes minus common dividends

B

43) For the year ended December 31, 2014, a corporation had cash flow from operating activities of $20,000, cash flow from investment activities of -$15,000, and cash flow from financing activities of -$10,000. The statement of cash flows would show a ________. A) net increase of $5,000 in cash and marketable securities B) net decrease of $5,000 in cash and marketable securities C) net decrease of $15,000 in cash and marketable securities D) net increase of $25,000 in cash and marketable securities

B

43) Stated interest rate under ________ is adjusted periodically within stated limits in response to changes in specified money market or capital market rates. A) junk bonds B) floating rate bonds C) extendible notes D) putable bonds

B

44) What annual rate of return would Jia need to earn if she deposits $20,000 per year into an account beginning one year from today in order to have a total of $1,000,000 in 30 years? A) 2.3% B) 3.3% C) 1.3% D) 4.3%

B

44) ________ are popular vehicle used to finance mergers and takeovers. A) Income bonds B) Junk bonds C) Floating rate bonds D) Convertible debentures

B

45) A firm has just ended the calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. One possible problem this firm may face is ________. A) low profitability B) insolvency C) inability to receive credit D) high leverage

B

46) A(n) ________ is issued with no or very low coupon and sells significantly below its par value. A) income bond B) zero or low coupon bond C) mortgage bond D) subordinated debenture

B

48) The ________ represents a summary statement of a firm's financial position at a given point in time. A) income statement B) balance sheet C) statement of cash flows D) statement of retained earnings

B

48) ________ are commonly issued in the reorganization of a failed or failing firm. A) Floating rate bonds B) Income bonds C) Mortgage bonds D) Equipment trust certificates

B

49) NICO Corporation had net current assets of $2,000,000 at the end of 2015 and $1,800,000 at the end of 2014. In addition, NICO had net spontaneous current liabilities of $1,000,000 in 2015 and $1,500,000 in 2014. Using this information, NICO's net current asset investment for 2014 was ________. A) $700,000 B) -$300,000 C) $300,000 D) -$700,000

B

49) ________ bonds are characterized by interest payments that are required only when earnings are available. A) Floating rate B) Income C) Mortgage D) Junk

B

5) The ________ is used by financial managers as a structure for dissecting a firm's financial statements to assess its financial condition. A) statement of cash flows B) DuPont system of analysis C) break-even analysis D) technical analysis

B

5) The present value of $1,000 received at the end of year 1, $1,200 received at the end of year 2, and $1,300 received at the end of year 3, assuming an opportunity cost of 7 percent, is ________. A) $2,500 B) $3,044 C) $6,516 D) $2,856

B

54) ________ have a short maturities, typically one to five years, and which can be renewed for a similar period at the option of their holders. A) Floating rate bonds B) Extendible notes C) Putable bonds D) Junk bonds

B

55) Paid-in capital in excess of par represents the amount of proceeds ________. A) in deficit of the par value from the original sale of common stock B) in excess of the par value from the original sale of common stock C) in excess of the par value from the current value of common stock D) in excess of the par value from the intrinsic value of common stock

B

55) Payment of interest required only when earnings are made available from which to make a payment is characteristic of a(n) ________. A) floating rate bond B) income bond C) mortgage bond D) equipment trust certificate

B

58) When issuing a(n) ________ the issuer can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures. A) junk bond B) zero coupon bond C) floating rate bond D) extendible note

B

59) A firm's year-end retained earnings balances are $320,000 and $400,000, for 2014 and 2015 respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm's dividend payment for 2015 is ________. A) $0 B) $20,000 C) $80,000 D) $100,000

B

6) The process that links risk and return in order to determine the worth of an asset is termed ________. A) securitization B) valuation C) discounting D) compounding

B

60) ________ are claims that are not satisfied until those of the creditors holding certain (senior) debts have been fully satisfied. A) Convertible debentures B) Subordinated debentures C) Mortgage bonds D) Collateral trust bonds

B

7) In the next planning period, a firm plans to change its policy of all cash sales and initiate a credit policy requiring payment within 30 days. The statements that will be directly affected immediately are the ________. A) pro forma income statement, balance sheet, and cash budget B) pro forma balance sheet and cash budget C) cash budget and statement of retained earnings D) pro forma income statement and pro forma balance sheet

B

7) The present value of a $20,000 perpetuity at a 7 percent discount rate is ________. A) $186,915 B) $285,714 C) $140,000 D) $325,000

B

7) The return expected from an asset is fully defined by its ________. A) risk and cash flow B) cash flow and timing C) discount rate D) beta

B

8) The key inputs to the valuation process include ________. A) returns and risk B) cash flow, cash flow timing, and risk C) cash flows and discount rate D) returns, discount rate, and risk

B

8) ________ is the amount earned on a deposit that has become the part of the principal at the end of a specified time period. A) Discount interest B) Compound interest C) Primary interest D) Future value

B

9) A firm with a low net profit margin can improve its return on total assets by ________. A) increasing its debt ratio B) increasing its total asset turnover C) decreasing its fixed asset turnover D) decreasing its total asset turnover

B

9) What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent interest annually? A) 8.5 percent B) 9.3 percent C) 12.0 percent D) 13.2 percent

B

9) ________ measures the percentage of profit earned on each sales dollar before interest and taxes but after all costs and expenses. A) Net profit margin B) Operating profit margin C) Gross profit margin D) Earnings available to common shareholders

B

14) The two basic measures of liquidity are ________. A) inventory turnover and current ratio B) current ratio and quick ratio C) gross profit margin and ROE D) current ratio and total asset turnover

B Diff: 1

15) A ________ ratio is commonly used to assess owners' appraisal of the share value. A) debt B) price/earnings C) return on equity D) return on total assets

B Diff: 1

22) If an inventory turnover is divided into 365, it becomes a measure of ________. A) financial efficiency B) the average age of the inventory C) sales turnover D) the average collection period

B Diff: 1

32) The 2002 Sarbanes-Oxley Act was designed to ________. A) limit the compensation that could be paid to corporate CEOs B) eliminate the many disclosure and conflict-of-interest problems of corporations C) provide uniform international accounting standards D) provide the guidelines to minimize the tax

B Diff: 1

56) Firm ABC had operating profits of $100,000, taxes of $17,000, interest expense of $34,000, and preferred dividends of $5,000. What was the firm's net profit after taxes? A) $66,000 B) $49,000 C) $44,000 D) $83,000

B Diff: 2

63) FASB Standard No. 52 mandates that U.S.-based companies must translate their foreign-currency-denominated assets and liabilities into dollars using the ________. A) historical rate B) current rate C) average rate D) rate prescribed by the SEC

B Question Status: Revised

22) Jeanne has just graduated from high school and has received an award for $5,000. She would like to deposit the money in an interest earning account until she graduates from college (i.e., four years from now). In her search for the highest interest earning account, she has narrowed the list down to the following two accounts: 1) bank A pays 9 percent interest compounded annually, and 2) bank B pays 8 percent interest compounded semiannually. Which is the better offer, and how much will Jeanne have upon graduation from college?

Bank A: n = 4, r = 9%, m = 1 FV = 5,000{[(1.09)4-1]/.09} = $7,057 Bank B: n = 4, r= 8%, m = 2 FV = 5,000{[1.04)8-1]/.04} = $6,842 Jeanne should deposit her money in Bank A and she will have $7,057 upon her graduation from college.

) $100 is received at the beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is ________. A) $1,536 B) $ 672 C) $ 727 D) $1,245

C

10) A corporation ________. A) must use the straight-line depreciation method for tax purposes and double declining depreciation method financial reporting purposes B) can use straight-line depreciation method for tax purposes and MACRS depreciation method financial reporting purposes C) can use different depreciation methods for tax and financial reporting purposes D) must use different depreciation method for tax purposes, but strictly mandated depreciation methods for financial reporting purposes

C

10) Dan plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 10 years. If Dan can earn 10 percent on his contributions, how much will he have at the end of the tenth year? A) $12,290 B) $20,000 C) $31,874 D) $51,880

C

10) Which of the following would be the least likely to utilize a cash budget? A) top management B) middle management C) public investors D) lenders

C

11) The depreciable value of an asset, under MACRS, is the ________. A) current cost B) current cost minus salvage value C) the original cost plus installation D) the original cost plus installation costs, minus salvage value

C

11) The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is ________. A) $236 B) $699 C) $ 42 D) $ 75

C

11) What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity? A) 11 percent B) 12 percent C) 13 percent D) 14 percent

C

12) Bonds are ________. A) a series of perpetual short-term debt instruments B) a form of equity financing that pays interest C) long-term debt instruments used to raise large sums of money D) a hybrid form of financing used to raise large sums of money from a diverse group of lenders

C

12) The future value of $200 received today and deposited at 8 percent compounded semiannually for three years is ________. A) $380 B) $158 C) $253 D) $252

C

12) The higher, the value of ________ ratio, the better able a firm is to fulfill its interest obligations. A) dividend payout B) average collection period C) times interest earned D) average payment period

C

12) The three basic ratios used in the DuPont system of analysis are ________. A) net profit margin, total asset turnover, and return on investment B) net profit margin, total asset turnover, and return on equity C) net profit margin, total asset turnover, and equity multiplier D) net profit margin, financial leverage multiplier, and return on equity

C

12) What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent? A) $604 B) $1,090 C) $1,060 D) $1,073

C

13) Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity? A) 12.00% B) 13.99% C) 14.54% D) 15.25%

C

13) The financial leverage multiplier is an indicator of how much ________ a corporation is utilizing. A) operating leverage B) long-term debt C) total debt D) total assets

C

13) ________ measures the return earned on the common stockholders' investment in the firm. A) Net profit margin B) Price/earnings ratio C) Return on equity D) Return on total assets

C

14) Adam borrows $4,500 at 12 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year payment is ________. A) $ 942 B) $1,125 C) $1,482 D) $2,641

C

14) In general, firms that are subject to a high degree of ________, relatively short production cycles, or both, tend to use shorter planning horizons. A) profitability B) financial certainty C) operating uncertainty D) financial planning

C

14) The future value of a dollar ________ as the interest rate increases and ________ the further in the future an initial deposit is to be received. A) decreases: decreases B) decreases: increases C) increases: increases D) increases: decreases

C

14) The percent-of-sales method to prepare a pro forma income statement assumes a firm has no fixed costs. Therefore, the use of the past cost and expense ratios generally tends to ________ profits when sales are increasing. A) accurately predict B) overstate C) understate D) have no effect on

C

15) A firm has a current ratio of 1: in order to improve its liquidity ratios, this firm might ________. A) improve its collection practices by providing extended credit policy B) improve its collection practices and pay accounts payable, thereby decreasing current liabilities and decreasing the current and quick ratios C) decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios D) increase inventory, thereby increasing current assets and the current and quick ratios

C

15) Rational buyers and sellers use their assessment of an asset's risk and return to determine its value. Relative to this concept, which of the following is true? A) To a buyer the asset's value represents the minimum price that he or she would pay to acquire it. B) To a seller the asset's value represents the maximum sale price. C) To a buyer the asset's value represents the maximum price that he or she would pay to acquire it. D) To a seller the asset's value represents the price at which he acquired the asset.

C

16) A college received a contribution to its endowment fund of $2 million. It can never touch the principal, but can use the earnings. At an assumed interest rate of 9.5 percent, how much can the college earn to help its operations each year? A) $95,000 B) $19,000 C) $190,000 D) $18,000

C

16) According to the efficient market hypothesis, prices of actively traded stocks ________. A) can be under- or over-valued in an efficient market B) can only be under-valued in an efficient market C) do not differ from their true values in an efficient market D) can only be over-valued in an efficient market

C

16) In a period of rising sales utilizing past cost and expense ratios (percent-of-sales method), when preparing pro forma financial statements and planning financing, will tend to ________. A) understate retained earnings and understate the additional financing needed B) overstate retained earnings and overstate the additional financing needed C) understate retained earnings and overstate the financing needed D) overstate retained earnings and understate the financing needed

C

16) Key inputs to short-term financial planning are ________. A) cash flow statements and income statement B) pro forma financial statements C) sales forecasts, and operating and financial data D) leverage analysis and pro forma income statement

C

16) What is the highest effective rate attainable with a 12 percent nominal rate? A) 12.00% B) 12.55% C) 12.75% D) 12.95%

C

17) A firm's operating cash flow (OCF) is defined as ________. A) gross profit minus operating expenses B) gross profit minus depreciation C) EBIT times one minus the tax rate plus depreciation D) EBIT plus depreciation

C

17) Gina has planned to start her college education four years from now. To pay for her college education, she has decided to save $1,000 a quarter for the next four years in a bank account paying 12 percent interest. How much will she have at the end of the fourth year? A) $ 1,574 B) $19,116 C) $20,157 D) $16,000

C

17) Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8 percent interest rate. The original principal amount was ________. A) $31,000 B) $30,000 C) $25,000 D) $20,000

C

17) The depreciable value of an asset, under MACRS, is ________. A) the full cost excluding installation costs B) the full cost minus salvage value C) the full cost including installation costs D) the full cost including installation costs adjusted for the salvage value

C

17) Under the judgmental approach for developing a pro forma balance sheet, the "plug" figure required to bring the statement into balance may be called the ________. A) cash balance B) retained earnings C) external financing required D) accounts receivable

C

18) A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for ________ today. A) $1,000 B) $716.67 C) $840.73 D) $1,123.33

C

18) How much would Sophie have in her account at the end of 10 years if she deposit $2,000 into the account today if she earned 8 percent interest and interest is compounded continuously? A) $4,317 B) $4,134 C) $4,451 D) $4,521

C

18) Ratios provide a ________ measure of a company's performance and condition. A) definitive B) gross C) relative D) absolute

C

18) The ________ method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while external financing is used as a balancing, or plug, figure. A) percent-of-sales B) accrual C) judgmental D) cash

C

20) Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold? A) $11,212 B) $12,393 C) $15,505 D) $18,880

C

20) Preferred stock is valued as if it were a ________. A) fixed-income obligation B) bond C) perpetuity D) common stock

C

20) The primary concern of creditors when assessing the strength of a firm is its ________. A) profitability B) leverage C) short-term liquidity D) share price

C

21) A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The required return on the preferred stock has been estimated to be 16 percent. The value of the preferred stock is ________. A) $64 B) $16 C) $25 D) $50

C

21) A generous philanthropist plans to make a one-time endowment to a renowned heart research center which would provide the facility with $250,000 per year into perpetuity. The rate of interest is expected to be 8 percent for all future time periods. How large must the endowment be? A) $2,314,814 B) $2,000,000 C) $3,125,000 D) $3,000,000

C

22) A firm has to pay a dividend of $1.20 per share till perpetuity, a zero growth rate of dividends, and a required return of 10 percent. The value of the firm's preferred stock is ________. A) $120 B) $10 C) $12 D) $100

C

22) A firm's final sales forecast is usually a function of ________. A) its net income B) the salesperson's estimates of demand C) internal and external factors in combination D) its accounts receivable

C

22) The purpose of the debt covenant that requires maintaining a minimum level of net working capital is to ________. A) protect the lender by controlling the risk and marketability of the borrower's security investment alternatives B) limit the amount of fixed-payment obligations C) ensure a cash shortage does not cause an inability to meet current obligations D) limit the annual cash dividends paid by the firm

C

23) A firm has an issue of preferred stock outstanding that has a par value of $100 and a 4% dividend. If the current market price of the preferred stock is $50, the yield on the preferred stock is ________. A) 4.00% B) 6.00% C) 8.00% D) 12.00%

C

23) Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________. A) par: premium B) discount: par C) discount: premium D) coupon: premium

C

24) A local brokerage firm is offering a zero-coupon certificate of deposit for $10,000. At maturity, three years from now, the investor will receive $14,000. What is the rate of return on this investment? A) 14 percent B) 13 percent C) 12 percent D) 11 percent

C

24) A(n) ________ is useful in evaluating credit policies. A) average payment period B) current ratio C) average collection period D) inventory turnover ratio

C

24) James plans to fund his individual retirement account, beginning today, with 20 annual deposits of $2,000, which he will continue for the next 20 years. If he can earn an annual compound rate of 8 percent on his deposits, the amount in the account upon retirement will be ________. A) $19,636 B) $91,524 C) $98,846 D) $21,207

C

25) A local bank is offering a zero-coupon certificate of deposit for $25,000. At maturity, three years from now, the investor will receive $32,000. What is the rate of return on this investment? A) 3 percent B) 6 percent C) 9 percent D) 12 percent

C

25) The ________ ratio may indicate poor collections procedures or a relaxed credit policy. A) average payment period B) inventory turnover C) average collection period D) quick

C

25) The purpose of the restrictive debt covenant that prohibits the sale of accounts receivable is to ________. A) assure the lender that additional borrowing is constrained B) limit the amount of fixed-payment obligations C) limit the realization of current assets to cash D) limit the payment of annual cash dividends

C

26) Interest rate risk and the time to maturity have a relationship that is best characterized as ________. A) constant B) varying C) direct D) inverse

C

27) A firm has experienced a constant annual rate of dividend growth of 9 percent on its common stock and expects the dividend per share in the coming year to be $2.70. The firm can earn 12 percent on similar risk involvements. The value of the firm's common stock is ________. A) $22.50/share B) $9/share C) $90/share D) $30/share

C

27) If the required return is less than the coupon rate, a bond will sell at ________. A) par B) a discount C) a premium D) book value

C

27) Of the following components of a cash budget, generally the easiest to estimate would be the ________. A) cash sales B) cash receipts C) cash disbursements D) month-to-month short-term borrowing

C

27) Which of the following is a cash outflow? A) an increase in accounts payable B) a decrease in notes receivable C) an increase in accounts receivable D) an increase in accrued liabilities

C

28) Nico Corporation has annual purchases of $300,000 and accounts payable of $30,000, then average purchases per day are ________ and the average payment period is ________. A) 36.5: 821.9 B) 36.0: 833.3 C) 821.9: 36.5 D) 833.3: 36.0

C

29) A projected excess cash balance for a month may be ________. A) financed with short-term securities B) financed with long-term securities C) invested in marketable securities D) invested in long-term securities

C

29) Accounting practices and procedures used to prepare financial statements are called ________. A) SEC B) IFRS C) GAAP D) IRB

C

29) ________ are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm. A) Employees B) Stockholders C) Lenders and suppliers D) Auditors

C

3) A weakness of the percent-of-sales method of preparing a pro forma income statement is ________. A) that it forecasts income and then expresses the various income statement items as percentages of projected income B) the assumption that the firm faces linear total revenue and total operating cost functions C) the assumption that the firm's past financial condition is an accurate predictor of its future D) the difficulty faced in calculation and preparation of such statements

C

30) As the financial leverage multiplier increases, this may result in ________. A) an increase in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases B) an increase in the net profit margin and return on investment, due to the increase in interest expense as debt increases C) a decrease in the net profit margin and return on investment, due to the increase in interest expense as debt increases D) a decrease in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases

C

30) If a firm expects short-term cash surpluses, it can plan ________. A) long-term investments B) short-term borrowing C) short-term investments D) leverage decisions

C

30) The cost of a long-term debt generally ________ that of a short-term debt. A) is less than B) is equal to C) is greater than D) is less than or equal to

C

31) Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or repurchase stock are called cash flow from ________. A) operating activities B) investment activities C) financing activities D) miscellaneous activities

C

31) Dorothy borrows $10,000 from the bank. For a four-year loan, the bank requires annual end-of-year payments of $3,223.73. The annual interest rate on the loan is ________. A) 9 percent B) 10 percent C) 11 percent D) 12 percent

C

33) A firm with a total asset turnover lower than industry standard may have ________. A) excessive debt B) excessive interest costs C) insufficient sales D) insufficient fixed assets

C

33) Which of the following groups of ratios primarily measure risk? A) liquidity, activity, and profitability B) liquidity, profitability, and market C) liquidity, activity, and debt D) activity, debt, and profitability

C

35) Aunt Tilly borrows $3,500 from the bank at 12 percent annually compounded interest to be repaid in four equal annual installments. The interest paid in the first year is ________. A) $ 152 B) $ 277 C) $ 420 D) $1,152

C

35) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of $500. The ending cash balance for August totals ________. A) $1,500 B) $5,500 C) $2,500 D) $3,500

C

35) Jia's Fashions recently paid a $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually thereafter. Based on this information, how much should Jia's Fashions common stock sell for today if her required return is 10.5%? A) $54.90 B) $60.80 C) $59.16 D) $69.30

C

36) A $1,000, 8% bond sells for 980. $1,000 is called the ________. A) current value B) market value C) par value D) auction value

C

39) A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is considered as ________. A) an investment cash flow B) a financing cash flow C) a financing cash flow and investment cash flow, respectively D) a financing cash flow and operating cash flow, respectively

C

39) The riskiness of publicly traded bond issues is rated by independent agencies. According to Moody's rating system, an Aaa bond and a Caa bond are ________ and ________ respectively. A) speculative: investment grade B) prime quality: medium grade C) prime quality: speculative D) medium grade: lowest grade

C

4) Find the future value at the end of year 3 of the following stream of cash flows received at the end of each year, assuming the firm can earn 8 percent on its investments. 1-10000 2-16000 3-19000 A) $45,000 B) $53,396 C) $47,944 D) $56,690

C

4) The DuPont system merges the income statement and balance sheet into two summary measures of profitability, ________. A) net profit margin, and return on total assets B) net profit margin, and return on equity C) return on total assets, and return on common equity D) net profit margin, and price/earning ratio

C

4) The ________ is utilized to value preferred stock. A) capital asset pricing model B) arbitrage pricing model C) zero-growth model D) Black-Scholes model

C

4) Which of the following is true of annuities? A) An ordinary annuity is an equal payment paid or received at the beginning of each period. B) An annuity due is a payment paid or received at the beginning of each period that increases by an equal amount each period. C) An annuity due is an equal stream of cash flows is paid or received at the beginning of each period. D) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period.

C

40) A wealthy art collector has decided to endow her favorite art museum by establishing funds for an endowment which would provide the museum with $1,000,000 per year for acquisitions into perpetuity. The art collector will give the endowment upon her fiftieth birthday 10 years from today. She plans to accumulate the endowment by making annual end-of-year deposits into an account. The rate of interest is expected to be 6 percent in all future periods. How much must the art collector deposit each year to accumulate to the required amount? A) $1,575,333 B) $ 736,000 C) $1,264,466 D) $ 943,396

C

40) A(n) ________ gives purchasers inflation protection. A) zero-coupon bond B) junk bond C) floating rate bond D) income bond

C

42) Deeply discounted bond that pays no coupon interest is a ________. A) junk bond B) floating rate bond C) zero coupon bond D) subordinated debenture

C

42) For the year ended December 31, 2014, a corporation had cash flow from operating activities of -$10,000, cash flow from investment activities of $4,000, and cash flow from financing activities of $9,000. The statement of cash flows would show a ________. A) net decrease of $3,000 in cash and marketable securities B) net decrease of $5,000 in cash and marketable securities C) net increase of $3,000 in cash and marketable securities D) net increase of $5,000 in cash and marketable securities

C

42) How many years would it take for Jughead to save an adequate amount for retirement if he deposits $2,000 per month into an account beginning today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement? A) 13 years B) 16 years C) 15 years D) 12 years

C

43) Which of the following is a current liability? A) accounts receivable B) cash C) notes payable D) inventory

C

44) For the year ended December 31, 2014, a corporation had cash flow from operating activities of $12,000, cash flow from investment activities of - $10,000, and cash flow from financing activities of $4,000. The statement of cash flows would show a ________. A) net decrease of $18,000 in cash and marketable securities B) net decrease of $6,000 in cash and marketable securities C) net increase of $6,000 in cash and marketable securities D) net increase of $2,000 in cash and marketable securities

C

44) Which of the following represents a current asset? A) automobiles B) buildings C) marketable securities D) equipment

C

45) A(n) ________ is secured by real estate. A) income bond B) debenture C) mortgage bond D) subordinated debenture

C

45) What annual rate of return would Grandma Zoe need to earn if she deposits $1,000 per month into an account beginning one month from today in order to have a total of $1,000,000 in 30 years? A) 4.55% B) 5.28% C) 5.98% D) 6.23%

C

46) Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%. A) $35,000 B) $700,000 C) $70,000 D) $45,000

C

46) The net value of fixed assets is also called its ________. A) market value B) par value C) book value D) intrinsic value

C

49) The statement of cash flows ________. A) shows the financial position of a firm at a given point of time B) summarizes all the purchase and sale of fixed assets and raw materials C) provides insight into a firm's operating, investment, and financing cash flows D) classifies a firm's cash flows as operating, investing, financing, and other activities

C

5) Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________. A) understate profits when sales are decreasing and overstate profits when sales are increasing B) understate profits, no matter what the change in sales, as long as fixed costs are present C) understate profits when sales are increasing and overstate profits when sales are decreasing D) overstate profits, no matter what the change in sales, as long as fixed costs are present

C

50) ________ are debt rated Ba or lower by Moody's or BB or lower by Standard & Poor's and are commonly used by rapidly growing firms to obtain growth capital, most often to finance mergers and takeovers. A) Subordinated debentures B) Mortgage bonds C) Junk bonds D) Equipment trust certificates

C

53) ________ are secured by stock and/or bonds that are owned by the issuer. A) Mortgage bonds B) Equipment trust certificates C) Collateral trust bonds D) Subordinated debentures

C

54) On the balance sheet, net fixed assets represent ________. A) gross fixed assets at cost minus depreciation expense B) gross fixed assets at market value minus depreciation expense C) gross fixed assets at cost minus accumulated depreciation D) gross fixed assets at market value minus accumulated deprecation

C

57) A significant portion of the return on a zero coupon bond is in the form of ________. A) interest and gain in value B) interest C) gain in value D) tax reduction

C

6) For an investor who plans to purchase a bond maturing in one year, the primary consideration should be ________. A) retained earnings B) face value C) yield to maturity D) net income

C

6) The key inputs for preparing pro forma income statements using the simplified approaches are the ________. A) sales forecast for the preceding year and financial statements for the coming year B) sales forecast for the coming year and the cash budget for the preceding year C) sales forecast for the coming year and financial statements for the preceding year D) cash budget for the coming year and sales forecast for the preceding year

C

62) The decision to refund a callable bond ________. A) should be made only if interest rates have increased B) is a net working capital decision C) is a capital budgeting decision D) is an investing decision

C

7) If transportation costs were a huge portion of a firm's expenses and the firm expected gas prices to increase greatly in the next year, then in preparing its pro forma income statement the firm should ________. A) use the percentage of transportation costs from last year's sales B) decrease the percentage of transportation costs from the percentage of last year's sales C) increase the percentage of transportation costs from the percentage of last year's sales D) double the percentage of transportation costs from the percentage of last year's sales

C

7) The ________ is a popular approach for evaluating profitability in relation to sales by expressing each item on the income statement as a percent of sales. A) retained earnings statement B) common-size balance sheet C) common-size income statement D) profit and loss statement

C

7) Yield to maturity on a bond with price equal to its par value will ________. A) be less than the coupon rate B) be more than the coupon rate C) always be equal to the coupon rate D) be less than or equal to the coupon rate depending on the required return

C

8) A(n) ________ is an annuity with an infinite life making continual annual payments. A) amortized loan B) principal C) perpetuity D) APR

C

8) Allocation of the historic costs of fixed assets against the annual revenue they generate is called ________. A) arbitraging B) securitization C) depreciation D) amortization

C

8) In the DuPont system of analysis, the return on equity is equal to ________. A) (net profit margin) × (total asset turnover) B) (stockholders' equity) × (financial leverage multiplier) C) (return on total assets) × (financial leverage multiplier) D) (return on total assets) × (total asset turnover)

C

8) What is the current price of a $1,000 par value bond maturing in 9 years with a coupon rate of 8 percent, paid annually, that has a YTM of 9 percent? A) $700 B) $945 C) $940 D) $1,062

C

8) ________ indicates the percentage of each sales dollar remaining after the firm has paid for its goods. A) Net profit margin B) Operating profit margin C) Gross profit margin D) Earnings available to common shareholders

C

9) Less certain a cash flow, the ________ the risk, and ________ the present value of the cash flow. A) lower: higher B) lower: lower C) higher: lower D) higher: higher

C

9) Pro forma financial statements are used for ________. A) cash budgeting B) preparing financial statements C) profit planning D) auditing

C

12) If a United States Savings bond can be purchased for $14.60 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond? A) 6 percent B) 7 percent C) 8 percent D) 9 percent

C AACSB Tag: Analytic Skills

28) You are planning to purchase the stock of Ted's Sheds Inc. and you expect it to pay a dividend of $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You expect to sell the stock for $100 in 3 years. If your required return for purchasing the stock is 12 percent, how much would you pay for the stock today? A) $75.45 B) $77.24 C) $81.52 D) $85.66

C Diff: 1

57) Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34 percent, and it paid preferred stock dividends of $50,000. There were 100,000 shares outstanding and no interest expense. What was Candy Corporation's earnings per share? A) $3.91 B) $4.52 C) $7.42 D) $7.59

C Diff: 2

23) The key input to the short-term financial planning process is ________. A) the audit report B) the pro forma balance sheet C) the sales forecast D) the pro forma income statement

C Question Status: Revised AACSB Tag: Analytic Skills

46) The Oxford Heating Company has been very successful in the past four years. Over these years, it paid common stock dividend of $4 in the first year, $4.20 in the second year, $4.41 in the third year, and its most recent dividend was $4.63. The company wishes to continue this dividend growth indefinitely. What is the value of the company's stock if the required rate of return is 12 percent?

Constant growth rate, g = ($4.63 / $4.00)1/3 - 1 = 0.04996, g = 5% P = D5 / (r - g) = 4.63 (1 + 0.05) / (0.12 - 0.05) = $69.45

43) Yantai Food, Inc. has issued a bond with par value of $1,000, a coupon rate of 9 percent that is paid semi-annually, and that matures in 10 years. What is the value of the bond if the required rate of return is 12 percent?

Coupon payment = 1,000 × 0.09 = $90 Semi-annual coupon payment = 90/2 =$45 Using financial calculator: PMT= 45, I=6, N=20, FV=1000, CPT PV = $827.95

39) To expand its business, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?

Coupon payment = 1,000 × 0.10 = $100 1) Using Financial calculator: PMT=100, N=10, I=8, FV=1000, CPT PV = $1,134.20 2) $1,000 since coupon rate and required rate of return are equal. 3) Using Financial calculator: PMT=100, N=10, I=12, FV=1000, CPT PV = $887

41) Zhen Yi Computers has an outstanding issue of bond with a par value of $1,000, paying 12 percent coupon rate semi-annually. The bond was issued 25 years ago and has 5 years to maturity. What is the value of the bond assuming 14 percent rate of interest?

Coupon payment = 1,000 × 0.12 = $120 Semi-annual coupon payment = 120/2 = $60 Using financial calculator: PMT= 60, I=7, N=10, FV=1000, CPT PV = $929.76

10) The time value concept/calculation used in amortizing a loan is ________. A) future value of a dollar B) future value of an annuity C) present value of a dollar D) present value of an annuity

D

11) The percentage-of-sales method of preparing pro forma income statements assumes that ________. A) sales are fixed B) all costs inversely vary with sales C) all costs are independent D) all costs are variable

D

11) The primary purpose in preparing pro forma financial statements is ________. A) for cash planning B) to ensure the ability to pay dividends C) to reduce risk D) for profit planning

D

11) ________ ratio indicates that a firm will be able to meet interest obligations due on outstanding debt. A) Debt-to-equity B) Interest turnover C) Total assets turnover D) Times interest earned

D

12) ________ measures the overall effectiveness of management in generating profits with its available assets. A) Total asset turnover B) Price/earnings ratio C) Return on equity D) Return on total assets

D

13) The best way to adjust for the presence of fixed costs when using the simplified approach for pro forma income statement preparation is ________. A) to proportionately vary the fixed costs with the change in sales B) to adjust for projected fixed-asset outlays C) to disproportionately vary the costs with the change in sales D) to break the firm's historical costs into fixed and variable components

D

13) The future value of a $10,000 annuity due deposited at 12 percent compounded annually for each of the next 5 years is ________. A) $36,050 B) $63,530 C) $40,376 D) $71,152

D

13) The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is ________. A) $ 50 B) $200 C) $518 D) $ 77

D

13) The two categories of ratios that should be utilized to assess a firm's true liquidity are the ________. A) liquidity and market ratios B) liquidity and profitability ratios C) market and debt ratios D) liquidity and activity ratios

D

13) Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 5 is ________. A) $10,000 B) $12,000 C) $21,000 D) $ 9,000

D

14) A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and common stockholders' investment of $750,000 has a return on equity of ________. A) 20 percent B) 15 percent C) 3 percent D) 4 percent

D

14) The value of a bond is the present value of the ________. A) dividends and maturity value B) interest and dividend payments C) maturity value D) interest payments and maturity value

D

15) A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today. A) $1,000 B) $805.20 C) $1,115.50 D) $1,268.40

D

15) Jia borrows $50,000 at 10 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year loan payment is ________. A) $10,774 B) $12,500 C) $14,340 D) $15,773

D

17) Which of the following is true of current ratio? A) The more predictable a firm's cash flows, the higher the acceptable current ratio. B) A higher current ratio indicates a higher return on equity. C) The more predictable a firm's current ratio, the higher the current liabilities. D) A higher current ratio indicates a greater degree of liquidity.

D

18) The present value of an ordinary annuity of $350 each year for five years, assuming an opportunity cost of 4 percent, is ________. A) $288 B) $1,896 C) $1,750 D) $1,558

D

18) Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has an estimated salvage value of $25,000, is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 1? A) $15,000 B) $12,750 C) $11,250 D) $22,000

D

18) Which of the following is excluded when calculating quick ratio? A) accounts receivable B) accounts payable C) cash D) inventory

D

19) The present value of an ordinary annuity of $2,350 each year for eight years, assuming an opportunity cost of 11 percent, is ________. A) $ 1,020 B) $27,869 C) $18,800 D) $12,093

D

2) $1,200 is received at the beginning of year 1, $2,200 is received at the beginning of year 2, and $3,300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is ________. A) $ 6,700 B) $17,072 C) $12,510 D) $ 8,142

D

20) A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of negative $250,000. The firm may prepare to ________. A) sell common stock totaling $250,000 B) arrange for a loan of $250,000 C) do nothing: the balance sheet balances D) invest in marketable securities totaling $250,000

D

20) Alexis owns stock in a company which has consistently paid a growing dividend over the last 10 years. The first year Alexis owned the stock, she received $4.50 per share and in the 10th year, she received $4.92 per share. What is the growth rate of the dividends over the last 10 years? A) 15 percent B) 14.8 percent C) 12.2 percent D) 9.3 percent

D

21) In the statement of cash flows, retained earnings are handled through the adjustment of ________. A) "Revenue" and "Cost" accounts B) "Current Assets" and "Current Liabilities" accounts C) "Depreciation" and "Purchases" accounts D) "Net Profits After Taxes" and "Dividends Paid" accounts

D

21) Which of the following is a restrictive covenant? A) to maintain satisfactory accounting records B) to pay the taxes due C) to supply audited financial statements D) to impose fixed asset restrictions

D

21) Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. This firm's bonds are currently selling for $1,091.96. If interest is paid annually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par? A) 5.78% B) 6.88% C) 6.50% D) 6.71%

D

23) To pay for her college education, Gina is saving $2,000 at the beginning of each year for the next eight years in a bank account paying 12 percent interest. How much will Gina have in that account at the end of 8th year? A) $16,000 B) $17,920 C) $24,600 D) $27,552

D

24) The cash flows from financing activities section of the statement of cash flows includes ________. A) labour expense B) cost of raw materials C) purchase of long-term assets D) dividends paid

D

24) The price of a bond with a fixed coupon rate and the required return have a relationship that is best described as ________. A) perfect positive correlation B) constant C) direct D) inverse

D

24) The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to ________. A) protect the lender by controlling the risk and marketability of the borrower's security investment alternatives B) limit the amount of fixed-payment obligations C) ensure a cash shortage does not cause an inability to meet current obligations D) prevent the firm from liquidation and ensure its ability to repay the debt

D

25) Cross-sectional ratio analysis is used to ________. A) correct expected problems in operations B) isolate the causes of problems C) provide conclusive evidence of the existence of a problem D) measure relative performance of a firm with its peers

D

25) In the Gordon model, the value of a common stock is the ________. A) net value of all assets which are liquidated for their exact accounting value B) actual amount each common stockholder would expect to receive if the firm's assets are sold C) present value of a non-growing dividend stream D) present value of a constant growing dividend stream

D

25) The three categories of a firm's statement of cash flows are ________. A) cash flow from operating activities, cash flow from investment activities, and cash flow from noncash activities B) cash flow from operating activities, cash flow from noncash activities, and cash flow from financing activities C) cash flow from equity activities, cash flow from investment activities, and cash flow from financing activities D) cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities

D

26) A ski chalet at Peak n' Peak now costs $250,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 10 years before Chris and Julie retire from successful investment banking careers. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the ski chalet upon retirement? A) $ 8,333 B) $13,572 C) $25,005 D) $22,109

D

26) ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would likely be considered poor if its average collection period was ________. A) 30 days B) 36 days C) 44 days D) 57 days

D

26) The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to ________. A) maintain a minimum level of liquidity B) limit the amount of fixed-payment obligations C) ensure a long-run cash shortage does not cause an inability to meet current obligations D) protect the original lender in the priority of claims during liquidation

D

28) The purpose of the restrictive debt covenant that limits the distribution of profits to shareholders is to ________. A) assure the lender that additional borrowing is constrained or may be subordinated to the original loan B) limit the amount of fixed-payment obligations C) ensure a cash shortage does not cause an inability to meet current obligations D) avoid default of payments to bondholders

D

28) When the required return is constant but different from the coupon rate, the price of a bond as it approaches its maturity date will ________. A) remain constant B) increase C) decrease D) approach par

D

29) Smith Corporation's common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What is the required rate of return? A) 10% B) 12% C) 13% D) 14%

D

29) Zheng Sen wishes to accumulate $1 million by the end of 20 years by making equal annual end-of-year deposits over the next 20 years. If Zheng Sen can earn 10 percent on his investments, how much must he deposit at the end of each year? A) $ 14,900 B) $ 50,000 C) $117,453 D) $ 17,460

D

30) The federal regulatory body governing the sale and listing of securities is called the ________. A) IRS B) FASB C) GAAP D) SEC

D

31) Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________. A) $791.00 B) $1,000 C) $1,052.24 D) $1,113.00

D

33) The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called ________. A) the McCain-Feingold Act B) the Harkins-Oxley Act C) the Sarbanes-Harkins Act D) the Sarbanes-Oxley Act

D

33) Thelma is planning for her son's college education to begin five years from today. She estimates the yearly tuition, books, and living expenses to be $5,000 per year for a four-year degree, assuming the expenses incur only at the end of the year. How much must Thelma deposit today, at an interest rate of 8 percent, for her son to be able to withdraw $5,000 per year for four years of college? A) $20,000 B) $13,620 C) $39,520 D) $11,270

D

34) Daniel Custom Cycles' common stock currently pays no dividends. The company plans to begin paying dividends beginning 3 years from today. The first dividend will be $3.00 and dividends will grow at 5 percent per year thereafter. Given a required return of 15 percent, what would you pay for the stock today? A) $25.33 B) $18.73 C) $29.86 D) $22.68

D

34) The ________ ratios are primarily used as measures of return. A) liquidity B) activity C) debt D) profitability

D

37) Rita borrows $4,500 from the bank at 9 percent annually compounded interest to be repaid in three equal annual installments. The interest paid in the third year is ________. A) $277.95 B) $405.00 C) $352.00 D) $147.00

D

37) Which of the following represents a way of coping with uncertainty in a cash budget? A) careful estimation of cash budgets outputs B) developing a pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales C) always using the prior year's data for estimates of the future D) using scenario analysis, or "what if" approach, to analyze cash flows under a variety of circumstances

D

38) Gross profit is ________. A) operating profits minus depreciation B) operating profits minus cost of goods sold C) sales revenue minus operating expenses D) sales revenue minus cost of goods sold

D

4) The primary purpose in preparing pro forma financial statements is ________. A) for cash planning B) to ensure the ability to pay dividends C) for risk analysis D) for profit planning

D

40) Net profit after taxes is ________. A) gross profits minus operating expenses B) sales revenue minus cost of goods sold C) EBITDA minus interest D) EBIT minus interest and taxes

D

40) Which of the following is a cash flow from financing activities? A) purchase of a long-term asset B) decrease in accounts payable C) increase in accounts payable D) repurchasing stock

D

41) How long would it take for you to save an adequate amount for retirement if you deposit $40,000 per year into an account beginning today that pays 12 percent per year if you wish to have a total of $1,000,000 at retirement? A) 12.2 years B) 10.5 years C) 14.8 years D) 11.5 years

D

46) What effective annual rate of return (EAR) would Rayne need to earn if she deposits $1,000 per month into an account beginning one month from today in order to have a total of $1,000,000 in 30 years? A) 5.98% B) 6.55% C) 4.87% D) 6.14%

D

47) Retained earnings on the balance sheet represents the ________. A) net profit after taxes B) amount of proceeds in excess of the par value received from the original sale of common stock C) net profit after taxes minus preferred dividends D) cumulative total of all earnings reinvested in the firm

D

48) NICO Corporation had net fixed assets of $2,000,000 at the end of 2015 and $1,800,000 at the end of 2014. In addition, the firm had a depreciation expense of $200,000 during 2015 and $180,000 during 2014. Using this information, NICO's net fixed asset investment for 2015 was ________. A) $20,000 B) $0 C) $380,000 D) $400,000

D

50) When preparing the retained earnings statement, ________ is(are) subtracted in order to derive at the ending balance of retained earnings. A) net profits after taxes B) interest expense C) depreciation D) dividends

D

52) A debenture is ________. A) a bond secured by specific assets that any firm can issue B) a secured bond that is secured by unspecified assets C) a secured bond issued by startup firms D) an unsecured bond that only creditworthy firms can issue

D

56) A putable bond gives the bondholder ________. A) the right to sell the bond back to the corporation at a discount B) the right to sell the bond back to the corporation at a stated premium C) the right to redeem the bond back to the corporation at the current market value D) the right to redeem the bond back to the corporation at par

D

59) High-risk, high-yield junk bonds have declined in popularity over time due to ________. A) the decline in mergers and takeovers, which these bonds were used to finance B) the declining need of growth capital C) the stabilizing of interest rates D) a number of major defaults on these bonds

D

6) In the DuPont system of analysis, the return on total assets (asset) is equal to ________. A) (return on equity) × (financial leverage multiplier) B) (return on equity) × (total asset turnover) C) (net profit margin) × (fixed asset turnover) D) (net profit margin) × (total asset turnover)

D

6) Two frequently cited ratios of profitability that can be read directly from the common-size income statement are ________. A) the earnings per share and the return on total assets B) the gross profit margin and the earnings per share C) the gross profit margin and the return on total assets D) the gross profit margin and the net profit margin

D

61) A firm's year-end retained earnings balance are $670,000 and $560,000 for 2014 and 2015, respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm paid dividends of ________ in 2015. A) $10,000 B) $100,000 C) $110,000 D) $210,000

D

61) Bonds that can be redeemed at par at the option of their holders either at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt are called ________. A) zero coupon bonds B) junk bonds C) floating-rate bonds D) putable bonds

D

7) Find the present value of the following stream of a firm's cash flows, assuming that the firm's opportunity cost is 14 percent. 1-10000 2-35000 3-24000 A) $121,256 B) $ 69,000 C) $ 60,513 D) $ 51,903

D

8) The key aspects of a financial planning process are ________. A) cash planning and investment planning B) operations planning and investment planning C) investment planning and profit planning D) cash planning and profit planning

D

9) A firm plans to depreciate a five year asset in the next planning period. The statements that will be directly affected are the ________. A) pro forma income statement, pro forma balance sheet, and cash budget B) pro forma balance sheet, cash budget, and statement of retained earnings C) cash budget and pro forma balance sheet D) pro forma income statement and pro forma balance sheet

D

9) Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have at the end of the twentieth year? A) $19,292 B) $14,938 C) $40,000 D) $144,104

D

9) Find the present value of the following stream of a firm's cash flows, assuming that the firm's opportunity cost is 9 percent. 1-5 -10000 6-10-16000 A) $ 13,252 B) $141,588 C) $ 10,972 D) $ 79,345

D

9) ________ ratio measures the proportion of total assets financed by the firm's creditors. A) Total asset turnover B) Inventory turnover C) Current D) Debt

D

35) The stockholder's report includes ________. A) an estimated interest cost report B) an estimated dividend report C) a break-even sales report D) a statement of retained earnings

D Diff: 1

as a result, it would be worthwhile for investors should spend time searching for mispriced (over- or under-valued) stocks. C) At any point in time, security prices fully reflect all internal information available about the firm and its securities, and these prices are insensitive to new information. D) Since stocks are fully and fairly priced, it follows that investors should not waste their time trying to find and capitalize on miss-priced (undervalued or overvalued) securities.

D Diff: 1 Topic: The Efficient-Market Hypothesis Learning Obj.: LG 4 Learning Outcome: F-01

43) The Bradshaw Company's most recent dividend was $6.75. The historical dividend payment by the company shows a constant growth rate of 5 percent per year. What is the maximum you would be willing to pay for a share of its common stock if your required rate of return is 8 percent?

D1 = $6.75 × (1 + 0.05) = $7.0875 P = D1 / (r - g) = $7.0875/(0.08 - 0.05) = $236.25

42) Ted has 10 shares of Grand Company. Based on the company's dividend policy, Ted will receive a total of $450 a year in perpetuity. What is the value of each share if the rate of interest is 8 percent?

Dividend per share = $450 / 10 = $45 P = D / r = 45 / 0.08 = $562.50

1) A call premium is the amount by which the call price exceeds the market price of the bond.

FALSE

10) A call feature in a bond allows the issuer the opportunity to repurchase bonds at a stated price prior to maturity, and this option has a greater chance of being exercised (to the benefit of the bondholder) if market interest rates have fallen since the bond was issued.

FALSE

11) A conversion feature in a bond has a greater chance of being exercised (to the detriment of the bondholder) if market interest rates have risen since the bond was issued.

FALSE

12) In a bond indenture, the term "security interest" refers to the fact that most firms that issue bonds are required to establish sinking fund provisions to protect bondholders.

FALSE

15) The lower a bond's default risk, the higher is the interest rate.

FALSE

16) Any bond rated Aaa through Caa according to Moody's, would be considered investment grade debt.

FALSE

2) Stock purchase warrants are instruments that give their holder the right to purchase a certain number of shares of the firm's common stock at the market price over a certain period of time.

FALSE

2) The value of an asset depends on the historical cash flow(s) up to the present time.

FALSE

21) Putable bonds give the bondholders an option to sell the bond at a price higher than par value by the amount of one year interest payment when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt.

FALSE

23) With subordinated debentures, payment of interest by a firm is required only when earnings are available.

FALSE

26) Floating-rate bonds are bonds that can be redeemed at par at the option of their holder either at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt.

FALSE

3) A call feature is a feature included in all corporate bonds and allows the issuer to repurchase bonds at the market price prior to maturity.

FALSE

3) A company's bonds will experience more trading activity (in terms of the number of bonds traded on a given day) compared to its stock.

FALSE

3) Standard debt provisions specify certain record keeping and general business practices that must be ensured by the bond issuer.

FALSE

30) A Eurobond bond is a bond denominated in Euros.

FALSE

4) A trustee is a paid party representing the bond issuer in the bond indenture.

FALSE

4) Bondholders will convert their convertible bonds into shares of stock only when the conversion price is greater than the market price of the stock.

FALSE

4) The level of risk associated with a given cash flow positively affects its value.

FALSE

6) The conversion feature of a bond is a feature that is included in all corporate bond issues that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity.

FALSE

6) The restrictive debt covenant that imposes fixed assets is to guarantee fixed-payment obligations by maintaining a specified level of fixed assets.

FALSE

7) A call feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.

FALSE

7) The shorter the amount of time until a bond's maturity, the more responsive is its market value to a given change in the required return.

FALSE

9) A bond will sell at a premium when its required return rises above its coupon interest rate.

FALSE

21) Calculate the future value of $10,000 received today and deposited for six years in an account which pays interest of 12 percent compounded quarterly.

FV = 10,000{[(1.12/4)6×4-1]/.12/4}=10,000{[(1.03)24-1]/.03} = $20,328

19) Aunt Tillie has deposited $33,000 today in an account which will earn 10 percent annually. She plans to leave the funds in this account for seven years earning interest. If the goal of this deposit is to cover a future obligation of $65,000, what recommendation would you make to Aunt Tillie?

FV = 33,000(1.1)7 = $64,308 Aunt Tillie will only have $64,308 at the end of seven years under the stated arrangement. She must find an account with a higher interest rate or deposit a larger sum today. The amount Aunt Tillie should invest today to receive $65,000 after 7 years, PV = 65,000 / (1.1)7 = $33,355.28

20) Calculate the future value of $6,490 received today and deposited for five years in an account which pays interest of 14 percent compounded semiannually.

FV = 6,490{[(1.14/2)5×2-1]/.14/2} =6,490{[(1.07)10-1]/.07}= $12,766

27) Calculate the future value of an annuity of $5,000 each year for eight years, deposited at 6 percent.

FV = CF[(1 + r)n - 1] / r = $5,000[(1.06)8 - 1] / 0.06 = $49,487.34

17) Calculate the future value of $4,600 received today if it is deposited at 9 percent for three years.

FV = PV (1+ r)n = $4,600(1.09)3 = $5,957

32) Given the following balance sheet, income statement, historical ratios and industry averages, calculate the Pulp, Paper, and Paperboard, Inc. financial ratios for the most recent year. Analyze its overall financial situation for the most recent year. Analyze its overall financial situation from both a cross-sectional and time-series viewpoint. Break your analysis into an evaluation of the firm's liquidity, activity, debt, and profitability.

LIQUIDITY: The liquidity of the firm is on target with the industry standard in 2013 and is stable. ACTIVITY: Inventory and accounts receivable management has deteriorated since 2012 and is inferior when compared to the industry standard. The low inventory turnover may be caused by overstocking and/or obsolete inventories. The high average collection period may have resulted from poor collections procedures or from relaxed credit terms. Further investigation is necessary to determine the cause of the variances. DEBT: The firm has less debt than the industry average. The trend since 2011 has been toward reducing the debt ratio. The firm, therefore, is subject to less financial risk than any other firm in the industry. PROFITABILITY: Although the gross profit margin is inferior to the industry average, the operating and net profit margin far exceed the standards, boosting return on total assets and return on equity. The trend in the gross profit margin is unfavorable and may either be caused by a slide in product prices or an escalation in cost of sales. The cause of the poor gross profit margin should be investigated. Overall, the firm needs to focus attention on inventory and accounts receivable management and the cause of the poor gross profit margin. In general, the firm is in good financial condition. 2013: 1.67,.96,7.0,42,2.1,53%,5.5,18.3%,5.1%,2.5,%,5.21%,11.2%

44) Gong Li has recently inherited $10,000 and is considering purchasing 10 bonds of the Lucky Corporation. The bond has a par value of $1,000 with 10 percent coupon rate and will mature in 10 years. Does Gong Li have enough money to buy 10 bonds if the required rate of return is 9 percent?

No. Since the required rate of return (9%) is less than the bond's coupon rate (10%), the bond's price is greater than its par value ($1,000). Thus, the total price of 10 bonds is greater than $10,000.

33) Jia has just won a $20 million lottery, which will pay her $1 million at the end of each year for 20 years. An investor has offered her $10 million for this annuity. She estimates that she can earn 10 percent interest, compounded annually, on any amounts she invests. She asks your advice on whether to accept or reject the offer. What will you tell her? (Ignore Taxes)

P = ($1,000,000/0.1) × [1-(1/(1.1)203= $8,514,000 $10,000,000 > $8,514,000

38) Aunt Tilly's Fur Company has been experiencing several years of financial difficulty and, thus, has considered maintaining its dividend payment at $2.50 indefinitely. What is the value of its common stock if the required rate of return is 8.5 percent?

P = D / r = $2.50 / 0.085 = $29.41

36) The board of directors of Ride World, Inc. has declared $5.00 common stock dividend and accepted a plan to freeze the dividend at $5 per year indefinitely. What is the value of the Ride World's common stock if the required rate of interest is 15 percent?

P = D / r = $5 / 0.15 = $33.33

37) Jia's Kitchen Stuff has recently sold 1,000 shares of preferred stock. What is the value of the stock assuming 10 percent required rate of return and a preferred dividend of $6.75?

P = D / r = $6.75 / 0.10 = $67.50

44) Tina's Medical Equipment Company paid $2.25 common stock dividend last year. The company's policy is to allow its dividend to grow at 5 percent per year indefinitely. What is the value of the stock if the required rate of return is 8 percent?

P = D1 / (r - g) = $2.25 × (1 + 0.05) / (0.08 - 0.05) = $78.75

39) In response to the stock market's reaction to its dividend policy, the Nico's Toy Company has decided to increase its dividend payment at a rate of 4 percent per year. The firm's most recent dividend is $3.25 and the required rate of interest is 9 percent. What is the maximum you would be willing to pay for a share of the stock?

P = D1 / (r - g) = 3.25 × (1 + 0.04) / (0.09 - 0.04) = $67.60

51) Julie's X-Ray Company paid $2.00 per share in common stock dividends last year. The company's policy is to allow its dividend to grow at 5 percent for 4 years and then the rate of growth changes to 3 percent per year from year five and on. What is the value of the stock if the required rate of return is 8 percent?

P1-=7.46 D5= 2.43(1+.03)=2.5 P2= {2.5/(.08-.03)}x{1/(1+.08)^4}=36.81

52) Compute the value of a share of common stock of Lexi's Cookie Company whose most recent dividend was $2.50 and is expected to grow at 3 percent per year for the next 5 years, after which the dividend growth rate will increase to 6 percent per year indefinitely. Assume 10 percent required rate of return.

P1=10.31 D6=2.90 (1 + 0.06) = $3.07 P2= 3.07/(.1-.06) × 1/(1+.1)^5 = $47.69 Value of stock=47.66+10.32= 57.99

36) Nico is 30 years old and will retire at age 65. He will receive retirement benefits, but the benefits are not going to be enough to make a comfortable retirement life for him. Nico has estimated that an additional $25,000 a year over his retirement benefits will allow him to have a satisfactory life. How much should Nico deposit today in an account paying 6 percent interest to meet his goal? Assume Nico will have 15 years of retirement.

PMT = $25,000, n = 15, r = 6% PV(65) = (25,000/.06) × [1-1/(1.06)15] = $242,806 FV = $242,806, n = 35, r = 6% P(30) = 242,800(1.06)-35 = 242,800(0.130) = $31,590

28) Calculate the present value of an annuity of $3,900 each year for four years, assuming an opportunity cost of 10 percent.

PV = (3,900/0.1)[1-(1/(1.1)4)] = $12,363

26) Calculate the present value of a $10,000 perpetuity at a 6 percent discount rate.

PV = 10,000/0.06 = $166,667

29) Dottie has decided to set up an account that will pay her granddaughter (Lexi) $5,000 a year indefinitely. How much should Dottie deposit in an account paying 8 percent annual interest?

PV = 5,000/0.08 = $62,500

18) Calculate the present value of $89,000 to be received in 15 years, assuming an opportunity cost of 14 percent.

PV = 89,000(1.14)-15 = $12,469

34) Mr. Jackson has been awarded a bonus for his outstanding work. His employer offers him a choice of a lump-sum of $5,000 today, or an annuity of $1,250 a year for the next five years. Which option should Mr. Jackson choose if his opportunity cost is 9 percent?

PVA = ($1,250/0.09) × [1-1/(1.09)5] = $4,862.06 Mr. Jackson should choose a lump-sum of $5,000 today.

31) Nico establishes a seven-year, 8 percent loan with a bank requiring annual end-of-year payments of $960.43. Calculate the original principal amount.

PVA = (960.43/0.08)[1-(1/(1.08)7)] = $5,000

37) You have been given a choice between two retirement policies as described below. Policy A: You will receive equal annual payments of $10,000 beginning 35 years from now for 10 years. Policy B: You will receive one lump-sum of $100,000 in 40 years from now. Which policy would you choose? Assume rate of interest is 6 percent.

Policy A: present value of the annuity at the beginning of the 35 years from now: PVA = (10,000/0.06) × [1-1/(1.06)10] = $73,600 Policy B: present value of the lump-sum at the beginning of the 35 years from now: PV = 100,000(1.06)-5 = $74,726

35) In their meeting with their advisor, Mr. and Mrs. O'Rourke concluded that they would need $40,000 per year during their retirement years in order to live comfortably. They will retire 10 years from now and expect a 20-year retirement period. How much should Mr. and Mrs. O'Rourke deposit now in a bank account paying 9 percent to reach financial happiness during retirement?

The amount of money required at the beginning of the retirement period is: n = 20, i = 9% PVA = (CF/r) × [1-1/(1+r)n] = (40,000/.09) × [1-1/(1.09)20]= $365,142 n = 10, i = 9% PV = 365,142(1.09)-10 = $154,239.85

40) Uncle Tim's Inventions has an expected dividend next year of $3.60 and a required return of 12 percent. Assuming the dividends will be paid indefinitely, calculate the value of a share of common stock assuming a zero growth rate of dividends.

The value of a share of common stock = 3.60/.12= $30

45) Angel recently purchased a block of 100 shares of Hayley's Optical common stock for $6,000. The stock is expected to provide an annual cash flow of dividends of $400 indefinitely. Assuming a discount rate of 8 percent, how does the price Angel paid compare to the value of the stock?

The value of the stock is = 400/.08= $5,000

47) Janice borrows $25,000 from the bank at 15 percent to be repaid in 10 equal annual installments. Calculate the end-of-year payment.

Use financial calculator: PV=25,000, I=15, FV=0, N=10, CPT PMT: $4,981.30

14) What is the value of an asset which pays $200 a year for the next 5 years and can be sold for $1,500 at the end of five years from now? Assume that the opportunity cost is 10 percent.

Using Financial calculator: FV=1500, PMT=200, N=5, I=10, CPT PV = -1689.54 The value of the asset = $1,689.54

38) Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?

Using financial calculator: PMT=$70, N=20, FV=1000, I=6, CPT PV = $1,114.70

48) The following table presents the Sally's Silly Service Company's net earnings for the past six years. Compute the growth rate in the company's earnings. 2002-2659 2001-2500 2000-2370 1999-2100 1998-1890 1997-1728

g = (FV/PV)1/n-1, n = 5, FV=2659, PV=1728 g = (2659/1728)1/5-1=.09=9%


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