C708 v4 Modules and Chapter Quiz

True or False: Bond markets and stock markets are two types of money markets.

False - Bond markets and stock markets are two types of capital markets.

Which concept describes the underlying driver behind all finance?

Fund management and asset allocation

Which answer is not a true statement regarding the valuation process?

Valuation is a forward-looking process, so historical data is unimportant.

You plan to invest $100,000 in a 3 year Certificate of Deposit that has a simple interest rate of 5%. What is its future value?

$115,000 - FV = $100,000 + (3 × 5% × $100,000) = $115,000.

You plan to invest $100,000 in a 3 year Certificate of Deposit that has a 5% compound interest rate. What is its future value?

$115,763 - FV = $100,000 × 1.053 = $115,763 Using Calculator: N = 3, I/Y = 5, PV = 100,000. [CPT] FV = $115,763.

What is the future value in 30 years of $100,000 invested today in a savings account earning a 1% simple interest rate every year (rounded up to the nearest dollar)?

$130,000 - FV = $100,000 + (30 × 1% x $100,000) = $130,000.

What is the future value in 30 years of $100,000 invested today in a savings account earning a 1% compound interest rate every year (rounded up to the nearest dollar)?

$134,785 - FV = $100,000 × 1.0130 = $134,785 Using Calculator: N = 30, I/Y = 1, PV = 100,000. [CPT] FV = $134,785.

You have $300,000 that you want to invest in a one year Certificate of Deposit (CD) with a 4% annual interest rate. What will be the value of that CD in a year?

$312,000 - FV = $300,000 × 1.04 = $312,000 Using Calculator: N = 1, I/Y = 4, PV = 300,000. [CPT] FV = $312,000.

You own a perpetuity that pays $1000 in the first year. It has a 5% annual interest rate and a 2% annual growth rate. What is the present value of the perpetuity?

$33,333 - PVGP = A1/(i - g) = $1000/(0.05 - 0.02) = $33,333.

An investment portfolio has a 30% chance of earning $125,000 in a year, a 40% chance of earning $50,000, a 15% chance of earning nothing and 15% chance of losing $20,000. What is its expected return?

$54,500 - Expected return = (30% × $125,000) + (40% × $50,000) + (15% × 0) + (15% × -$20,000) = $54,500.

A firm has projected current assets to be $205 million, fixed assets to be $605 million, current liabilities to be $188 million, long-term debt to be $461 million, and owner's equity to be $106 million. Given this information, what is the discretionary financing need?

$55 million

What is the present value of $100,000 that will be received 5 years from today if you face a 10% compound interest rate every year (rounded up to the nearest dollar)?

$62,092 - PV = $100,000/(1.105) = $62,092 Using Calculator: N = 5, I/Y = 10, FV = 100,000. [CPT] PV = $62,092.

A company had $1 million in sales last year, $1.5 million in sales this year, and projected net income of $250,000. It has $5 million of its assets tied to sales, $3 million in sales-affected liabilities, and a retention ratio of 0.3. What is its AFN?

$925,000 - The correct formula to calculate AFN is: Projected increase in assets - spontaneous increase in liabilities - any increase in retained earnings.

You expect to receive a payment of $1 million in a year. The annual interest rate is 5%. What is the present value of the future payment?

$952,381 - PV = $1 million/(1.05) = $952,381 Using Calculator: N = 1, I/Y = 5, FV = $1 million. [CPT] PV = $952,381

During a fiscal year, a company has $20,000,000 in revenue. Its operating expenses are $17,000,000. What is the company's operating margin?

0.15. Operating margin = EBIT/Revenue. We calculate EBIT = Revenue - Operating expenses = $20,000,000 - $17,000,000 = $3,000,000. Hence, Operating Margin = $3,000,000/$20,000,000 = 0.15.

Last year T&J Inc. reported total assets of $250 million, equity of $120 million, net income of $50 million, dividends of $15 million, and retained earnings of $35 million. What is T&J Inc.'s sustainable growth rate?

29.17%. SGR = ROE (1-b) = (50/120) x [1- (15/50)] = 29.17%

A company has assets of $2,000,000, net sales of $3,000,000, and $1,500,000 in equity. Its net income is $10,000,000. What is its return on equity?

6.667. Return on Equity = Net Income/Equity = $10,000,000/$1,500,000 = 6.667.

A portfolio has $70,000 of bonds and $30,000 of stock. The bonds are 80% likely to have a 10% return and 20% likely to have a 0% return. The stock is 50% likely to have a 20% return and 50% likely to have a 10% loss. What is the expected return?

7.1% - Expected return on bonds = (80% × 10%) + (20% × 0) = 8% Expected return on stock = (50% × 20%) + (50% × -10%) = 5% Overall expected return = ( 70/100 × 8%) + (30/100 × 5%) = 7.1%

A portfolio is composed of 30% stock, 20% bonds, and 50% mutual funds. The stock is expected to have a 10% return, the bonds a 5% return and the mutual funds a 7% return. What is the expected return of the portfolio?

7.5% - Expected return = (30% × 10%) + (20% × 5%) + (50% × 7%) = 7.5%.

Suppose a firm has a net profit margin of 15%, sales of $155 million, assets of $312 million, and owner's equity of $223. If the dividend payout ratio is 10%, what is the firm's sustainable growth rate?

9.38% - GR = ROE (1-b) = [0.15 x (155/312) x (312/223)] x (1-0.1) = 9.38%

A US Treasury security matures in 4 years. What type of treasury is it?

A bill. U.S. Treasury bills are short term instruments with maturities between 1-5 years.

Which answer best defines financial statements in general?

A collection of reports that describes a company's financial activities to a third party. Financial statements are a collection of reports about an organization's financial results, financial condition, and cash flows.

A bond pays a coupon rate equal to the LIBOR rate plus 0.30%. The coupon rate is recalculated every three months. What type of bond is this?

A floating rate note. Floating rate notes (FRNs, floaters) have a variable coupon that is linked to a reference rate of interest, such as LIBOR or Euribor. For example, the coupon may be defined as three month USD LIBOR + 0.20%. The coupon rate is recalculated periodically, typically every one or three months.

Of the following car financing options, which one would you prefer while assuming that you prefer paying the least amount of dollars and that you face a 10% annual compound interest rate on all your financial decisions?

A lump-sum payment of $20,000 in two years from today. N = 2, I/Y = 10, FV = 20,000. [CPT] PV = $16,529.

Which prediction based on a description of the yield curve is not correct?

A normal yield curve suggests that interest rates will remain the same in the future.

A US Treasury security matures in 7 years. What type of security is it?

A note. U.S. Treasury notes are medium-term instruments with maturities between 6-12 years.

Which description accurately describes a primary market?

A primary market refers to the market where securities are created. Securities are created within a primary market.

Which answer best summarizes how the fields of accounting, finance, and economics relate to each other?

Accounting is backwards looking, finance projects forward, and economics studies cause and effect.

Which answer does not give a correct definition of the basic type of financial ratio described?

Activity ratios are concerned with shareholder audiences. Activity ratios are used to gauge the ability of a business to convert various asset, liability and capital accounts into cash or sales.

Which example is not a correct definition of a basic type of financial ratios?

Activity. Activity ratios are financial analysis tools used to gauge the ability of a business to convert various asset liability and capital accounts into cash or sales.

Which answer does not describe a step in constructing a multi-step income statement?

Add all revenues, then subtract all expenses.

Which answer best describes a type of financial market?

All of these answers Derivative markets Capital markets Money markets **All of these answers

Which answer is a reason why a person would study finance?

All of these answers To better understand the economic environment To apply financial concepts to business situations To improve management of personal finances ** All of these answers. A person would study finance to improve management of personal finances, apply financial concepts to business situations, and to better understand the economic environment.

Suppose a company is planning to increase its dividend payout ratio next year. Given this information, which of the following cases do you expect to occur in the upcoming year?

An increase in discretionary financing needed.

Which answer is the correct definition of the accounting equation?

Assets = Liabilities + Owner's Equity. The accounting equation is: Assets = Liabilities + Shareholder Equity. The balance sheet is a complex display of this equation, showing that the total assets of a company are equal to the total of liabilities and shareholder equity.

Which answer is not a cost to the investor that is included in the calculation of an investment's interest rate?

Brokerage commissions and fees

Which answer is not a type of ratio used in financial statement analysis?

Business ratio

Which of the following is not an example of benchmarking using ratio analysis?

Calculate the company's current ratio by comparing its current assets with its current liabilities.

A company needs funds to expand its business by purchasing new equipment. Which financial market should the company use to raise money?

Capital market

Which of the following is not a component of the Cash Flow Statement?

Cash Flow from Sales.

The percentage of sales forecasting method is used by management to forecast which of the following?

Cash needed to finance future sales growth.

Which of the following is the correct order of how assets should be presented on a balance sheet?

Cash; accounts receivable; inventory; property, plant, and equipment (PPE).

Which answer option is not a job function associated with a corporate finance department?

Ensuring that the financial statements accurately reflect the firm's performance. Financial statement preparation is a function of accounting department.

Financial Ratios help to identify some of the financial strengths and weaknesses of a company. What are two ways that the ratios provide for making meaningful comparisons of a firm's financial data?

Examining ratios across time to identify trends and comparing the firm's ratios with those of other firms.

True or False: Insider trading occurs when a member of an establishment uses information readily available to the public in an attempt to increase his/her wealth through buying or selling stock.

False

Company X has decided to merge with another business. It is planning on preparing a pro forma income statement. Which condition should be included in the pro forma statement?

How much the merged company's income tax expense will increase All of these answers If the merged company will have increased Research & Development (R&D) expenses How much the company's revenues will increase due to the merger **All of these answers

Financial markets can address which problem faced by a company's management?

Information asymmetry

Which option is an adequate method to reduce an investor's risk through diversification?

Invest in a broad pool of US and international stocks and bonds. Risk can be diversified away by investing in a broad pool of assets.

In the bond market, firms raise debt financing directly from

Investors.

Which description is not a drawback of using return on assets in a financial analysis?

It does not measure how effective the company is at using its assets to generate profit. ROA is a measure of the effectiveness of managing your assets to generate returns.

Which of the following is not a statistical forecasting method?

Judgmental

Which answer is not a requirement for a financial manager to carry out his or her responsibilities?

Knowing with certainty what the business cash flows will be in the future. Financial managers deal with uncertainty as a routine part of their responsibilities.

In the percent-of-sales forecasting method, which balance sheet items are not assumed to increase proportionately with sales?

Long-term debt. Long-term debt is a non-spontaneous account and will not increase proportionately with sales.

Which answer is not a responsibility of a financial manager?

Maintaining the company's financial system. This is the responsibility of a financial accounting manager and not the finance manager.

What is a disadvantage of a partnership?

Personal assets of owners are not protected. The liability of the partners for the debts of the business is unlimited.

What are the three central components of business ethics?

Personal, professional, and corporate. Personal ethics are moral principles that guide a person's behavior. Professional ethics are values, practices, and policies that shape the choices made by decision-makers on behalf of their organizations. Corporate/business ethics describe the application of ethical values to business activities.

What does the principal agent problem refer to?

Potential conflicts of interest between shareholders and managers of a company. The problem of motivating one party (the agent) to act on behalf of another (the principal) is known as the principal-agent problem.

A company issues a bond with the provision that it may pay off the debt early. Which type of risk is this bond subject to?

Prepayment risk. The buyer of the bond will lose the right to future interest payments if the company pays off the debt early.

Which answer best summarizes why there may be a difference between a company's pretax income and taxable income?

Pretax income is based on revenue recognition; taxable income is based on the company's cash flow. Pretax operating income is a measure of a company's operating efficiency because it only takes into account expenses that are directly related to ongoing business operations.

According to the Example Case from the Essential Reading section, a CEO was charged with which crime from the Securities and Exchange Commission (SEC)?

Providing a friend with confidential information about his company's merger

Which answer is not one of the four basic GAAP principles?

Revenue should be recorded when realized or realizable and when cash is received. Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product has been sold or a service has been performed, regardless of when the cash is actually received.

You are considering investing in the common stock of a major US Corporation. Which answer is an example of systematic risk?

Risk resulting from a general decline in the US stock markets. This illustrates a risk exposure that affects all companies in the market and is thus an example of systematic risk.

Government bonds have lower interest rates than do actively traded corporate bonds of the same maturity because the default premium is lower for government bonds. This illustrates which of the major factors influencing market interest rates?

Risks of investment. Because the lower risk of default on the government bond results in that bond having a lower interest rate.

Which answer best describes a characteristic of a corporation?

Shareholders are generally not personally liable for the business's obligations and liabilities. The corporation is a separate taxable entity from its owners. All of these answers are correct. The corporation must have an elected board of directors. **All of these answers are correct.

Which answer is a factor that contributes to the conflict of interest between a company's bondholders and its shareholders?

Shareholders generally want the company to pursue riskier projects; bondholders do not. All of these answers are correct. Shareholders are only paid if the company makes a profit, bondholders are paid regardless. Shareholders have a vote in how the company conducts its business; bondholders generally do not. **All of these answers are correct.

The most common measure of risk in finance is the

Standard Deviation.

Which answer is not a factor that influences market interest rates?

Stock market activity

The risk that remains after an investor has extensively diversified his portfolio is primarily

Systematic Risk

Which statement accurately describes systematic risk?

Systematic risk is what provides a stock's "risk premium."

Which answer describes a characteristic of a sole proprietorship?

Taxes are filed as personal income. A sole proprietorship pays income taxes by including the business income on the owner's personal tax return

Which answer does not represent how finance is used in organizations?

To maximize short-term profit

Which description is not a benefit associated with using the DuPont Equation?

The DuPont equation is very useful in analyzing any business regardless of industry. The DuPont equation components are relative measures that differ by industry.

Which regulation's primary purpose is to ensure that buyers of securities receive complete and accurate information before they invest?

The Securities Act of 1933

Which answer gives the best example of a factor that can be determined through an analysis of a company's financial statements?

The company's creditworthiness The company's profitability The accuracy of the company's tax returns All of these answers **All of these answers. A complete set of financial statements is used to give readers an overview of the financial results and condition of a business.

Which of the following is an example of trend analysis?

The company's current gross profit margin is compared with its gross profit margin from past years.

Which answer is an example of a stakeholder in a company?

The company's shareholders The company's employees All of these The company's suppliers **All of these - The company's employees, the company's suppliers, and the company's shareholders are all stakeholders in the company.

Which statement regarding shareholder and market value is correct?

The idea of maximizing market value is related to the idea of maximizing shareholder value. When business managers try to maximize the wealth of their firm, they are actually trying to increase their stock price. As the stock price increases, the individual who holds the stock wealth increases.

Which statement regarding financial forecasting is correct?

The most difficult aspect of preparing a financial forecast is predicting revenue.

Which answer is not a characteristic of a sole proprietorship?

The owner must file a separate tax return for the business.

Which statement accurately describes a shareholder's preemptive rights?

The right to retain their proportional ownership in a company should it issue another stock offering. The term "preemptive right" is specific to the right to purchase additional shares before they are made available to the public.

Which yield curve theory is based on the premises that financial instruments of different terms are not substitutable and therefore the supply and demand in the markets for short-term and long-term instruments is determined largely independently?

The segmented market hypothesis.

True or False: A person buying Barnes and Noble stock from an investor who owns shares in Barnes and Noble is participating in a primary market.

The statement is false. If a person buys Barnes and Noble stock from an investor who owns shares in Barnes and Noble then he/she is participating in a secondary market, not a primary market.

True or False: A financial institution is a company involved in the business of dealing with monetary transactions, such as loans, investments and deposits.

The statement is true. A financial institution is a company involved in the business of dealing with monetary transactions, such as loans, investments, and deposits.

True or False: Company directors and high-level executives, ("insiders"), are legally permitted to buy and sell shares of the company that they work for.

The statement is true. Insiders are legally permitted to buy and sell shares of the companies they work for. However, these transactions must be properly registered with the Securities and Exchange Commission (SEC).

True or False: One of the main functions of financial markets is matching those who need capital with those who have capital.

The statement is true. One of the main functions of financial markets is matching those who need capital with those who have capital.

Which answer gives a definition of finance?

The study of fund management and asset allocation over time

When crowding out occurs, investment spending decreases. What causes this phenomenon?

The total money supply is increased, increasing interest rates. Crowding out is a phenomenon occurring when expansionary fiscal policy causes interest rates to rise, thereby reducing investment spending.

Which answer is a legal characteristic of a general partnership?

There must be at least two business owners.

Which statement does not accurately describe the Sarbanes-Oxley Act of 2002?

This act was amended by the Maloney Act, which authorized the formation and registration of national securities associations to supervise the conduct of their members subject to the oversight of the SEC.

According to the Insider Trading Act of 1988, the SEC is allowed to order a penalty of up to how much of the profit of the guilty parties?

Three times the profit

True or False: The U.S. Financial System is composed of financial institutions and markets that allow the exchange of funds between lenders, investors, and borrowers.

True

Which answer is the best example of a noncash item that would be included on the income statement?

Unrealized losses from investments Write down of inventory Depreciation and Amortization All of these answers **All of these answers

What type of risk can an investor reduce through the process of diversification?

Unsystematic risk

Which answer is not a correct description of a type of yield curve?

When long-term yields fall below short-term yields, the curve is flat.

Which of the following describes the relationship between present value and future value?

When one increases, the other increases, assuming all variables are constant. - A higher cash flow today would result in a higher amount in the future and vice versa.

Which factor is not something a corporation must consider when making an investment decision?

Whether you can accurately calculate the guaranteed return on the investment

A bond makes only one payment—the payment of the face value on the maturity date. The bond is sold at a discount. What type of bond is this?

Zero-coupon bond. Zero-coupon bonds are those that pay no coupons and thus have a coupon rate of 0%. Such bonds make only one payment-the payment of the face value on the maturity date. Normally, to compensate the bondholder for the time value of money, the price of a zero-coupon bond will always be less than its face value on any date before the maturity date. The bondholder receives the full principal amount on the redemption date. An example of zero coupon bonds is Series E savings bonds issued by the U.S. government.

The balance sheet is the only financial statement which

applies to a single point in time of a business's calendar year. The balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.

The cost of money is not related to the concept of

depreciation. Depreciation is an expense related to the value of an asset and is not affected by how the asset is financed.

In using the percentage of sales forecasting method, the assumption is that

inventories will increase proportionately with sales.