Fin 320 exam 1 combined 2

Which one of the following accounts is most liquid?

Accounts receivable

capital budgeting

the process of planning and managing a firm's long-term assets

bookbuilding

the process of polling potential investors

Which one of the following qualifies as an annuity?

Auto loan payment

5.05%

Goshen Industrial Sales has sales of $487,600, total equity of $367,700, a profit margin of 5.1 percent, and a debt-equity ratio of .34. What is the return on assets? 5.89 percent 5.05 percent 6.76 percent 8.80 percent 7.33 percent

More frequent compounding leads to:

Higher EARs

The right side

On which side of the balance sheet do liabilities appear?

The present value of an annuity due is equal to the present value of a ___ annuity multiplied by (1 + r).

Ordinary

stock return (capital gain yield)

Pt+1-Pt/Pt

CAPM

RF-B(MR-RF)

Increase the time period

The future value of a lump sum investment will increase if you: decrease the interest rate. decrease the number of compounding periods. increase the time period. decrease the time period. decrease the lump sum amount.

The individual investor's optimal portfolio is designated by:

The point of tangency with the indifference curve and the capital allocation line.

which one of the following had the least negative returns for the period 1926-2014?

Treasury Bills

In almost all multiple cash flow calculations, it is implicitly assumes that the cash flows occur at the __ of each period.

end

Wa for mvp

sdb/sda+sdb

The measure of risk in a Markowitz efficient frontier is:

standard deviation of returns.

buying on margin

the act of taking advantage of broker's call loans. this means the investor borrows part of the purchase price of the stock from a broker

The separation property refers to the conclusion that

the determination of the best risky portfolio is objective and the choice of the best complete portfolio is subjective.

firm's gross profit

the difference between sales revenues and the costs

bid-ask spread

the difference between the bid and ask prices

direct search market

the least organized market. buyers and sellers must seek each other out directly. (sale of a used refrigerator)

Wilson's Realty has total assets of $46,800, net fixed assets of $37,400, current liabilities of $6,100, and long-term liabilities of $24,600. What is the total debt ratio?

0.66 Total debt ratio = total debt/total assets = (current liabilities + long-term liabilities)/total assets = ($6,100 + $24,600)/$46,800 = 0.66

Find the future value of an annuity of 100 per year for 10 years at 10 percent per year.

1,593.74

The future value of an annuity due of 100 per year for 10 years at 10% per year is:

1,753.12 100[(1.10^10 -1)/ .10] [1.10]

what three things are the financial manager concerned with?

1. Capital Structure 2. Working capital management 3. Capital budgeting

Reasons corporations are the most important form of businesses:

1. Corporations can sue and be sued 2. Corporations are separate legal entities 3. Corporations can enter contracts

Business finance is concerned with:

1. How to finance long-term investments 2. Which long-term investment to make 3. How to manage day-to-day finances of the firm

three main questions to be addressed if you want to start your own business

1. How will everyday financial activities be handled? 2. Where will long-term financing be obtained to pay for investments? 3. What long term investments should be made?

Basic Areas of Finance

1. Investments 2. Financial Institutions 3. International Finance 4. Corporate Finance

sole proprietorship truths

1. Limited to the life of the proprietor 2. Simple to form, requires no formal charter, and few govt regulations must be satisfied in most industries

a general partnership has which of the following characteristics:

1. all the partners share in gains or losses of the partnership 2. each owner has unlimited liability for all firm debts

AD corporation has a ROE of 20% on total equity of 800,000. AD generated 1.6 million in sales on 2.7 million in assets. A DuPont decomposition of ROE shoes the 20% ROE is from a ____% profit margin

10 ROE= NI/SLS x SLS/TA x TA/CE

Vera's has earnings per share of $3 and dividends per share of 1.20. The stock sells for 30 a share. What is the PE ratio?

10 times 30/3

Mike's Place has total assets of $123,800, a debt-equity ratio of 0.75, and net income of $7,100. What is the return on equity?

10.04 percent Return on equity = net income/total equity Return on equity = ($7,100/$123,800) *(1 + 0.75) = 10.04 percent

Briar Patch Fruits has sales of $529,600, cost of goods sold of $408,350, depreciation of $25,400, and interest expense of $9,100. The tax rate is 35 percent. What is the times interest earned ratio?

10.53

You have a loan with an APR of 14.7 percent with monthly compounding. What is the actual interest rate you are paying on this loan?

15.73 percent EAR = [1 + (0.147 /12)]12 - 1 = 15.73 percent

A credit card charges 1.5 percent interest each month. What is the EAR?

19.56% (1.015)^12 -1

Precision Engineering invested $110,000 at 6.5 percent interest, compounded annually for 4 years. How much interest on interest did the company earn over this period of time?

2,911.30

Assume earnings before interest and taxes of $38,218 and net income of $14,042. The tax rate is 34 percent. What is the times interest earned ratio?

2.26

A firm has an operating profit (EBIT) of 600 on sales of 1,000. Interest expense is 250 and taxes are 120. What is the times interest earned ratio?

2.40 600/250

Fresh Foods has sales of $213,600, total assets of $198,700, a debt-equity ratio of 1.43, and a profit margin of 4.8 percent. What is the equity multiplier?

2.43

The bike shop paid $1,990 in interest and $1,850 in dividends last year. The times interest earned ratio is 2.2 and the depreciation expense is $520. What is the value of the cash coverage ratio?

2.46 EBIT = 2.2 X 1,990= $4,378; Cash coverage ratio (4378+520)/1990=2.46

Your grandparents just gave you a gift of $15,000. You are investing this money for 12 years at 6 percent simple interest. How much money will you have at the end of the 12 years?

25,800 Future value = $15,000 + ($15,000 × 0.06 × 12) = $25,800

A firm with a 26 percent return on equity earned ____ cents in profit for every one dollar in shareholders' equity

26

Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year? Assume a 365-day year.

26.78 days

If the quoted interest rate is 2% per month (12 months in a year), what is the EAR?

26.82% (1.02)^12 -1

How long will it take 40 to grow to 240 at an interest rate of 6.53% compounded annually?

28.33 years

City Plumbing has inventory of $287,800, equity of $538,800, total assets of $998,700, and sales of $1,027,400. What is the common-size percentage for the inventory account?

28.82 percent

Alice has 20,000 in an account that pays 8% per year. Alice wants to withdraw equal amounts at the end of the next 10 years. How much will Alice receive each year?

2980.59

Belk Department Store charges a daily rate of 0.01 percent on its store credit cards. What interest rate is the company required by law to report to potential customers?

36.50 percent

Days' sales in receivables is given by the following ratio:

365/ receivables turnover

You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 14.3 percent interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan?

6.37 years

jenny needs to borrow $5,500 for four years. the loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?

6.5% simple interest

Wiggle Pools has total equity of $358,200 and net income of $47,500. The debt-equity ratio is .68 and the total asset turnover is 1.2. What is the profit margin?

6.58 percent

For the most recent year, Wilson Enterprises had sales of $689,000, cost of goods sold of $492,300, depreciation expense of $61,200, additions to retained earnings of $48,560, and dividends per share of $2.18. There are 12,000 shares of common stock outstanding and the tax rate is 35 percent. What is the times interest earned ratio?

6.59

Adell Furniture has a profit margin of 8.2 percent and a dividend payout ratio of 40 percent. What is the plowback ratio?

60.00 percent Plowback ratio = addition to retained earnings/net income, but also Dividend payout ratio = 1 - b b = 1 - dividend payout ratio = 1- 0.40 = 0.60

What is the future value of 100 deposited each year for 2 years beginning next year, then 200 deposited for the next two years if you can earn 6% per year?

643.46

A firm has inventory of $46,500, accounts payable of $17,400, cash of $1,250, net fixed assets of $318,650, long-term debt of $109,500, and accounts receivable of $16,600. What is the common-size percentage of the equity?

66.87 percent

Rock construction has current assets of 45 million, total liabilities and equity of 67 million, and sales of 59 million. How would current assets be expressed on a common-size balance sheet?

67% 45m/67m

What is the present value of an annuity that makes payments of 100 per year for ten years if the first payment is made immediately and the discount rate is 10 percent per year?

675.90 100[(1- 1/1.10^10) / .10] [1.10]

Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value?

7 percent interest, compounded annually

Al's Markets earns $.12 in profit for every $1 of equity and borrows $.65 for every $1 of equity. What is the firm's return on assets?

7.27 percent

BC Corporation has net income of 176,000, sales of 1,982,000 and total assets of 2.24 million. What is the return on assets?

7.86% 176,000/ 2.24m

Oil Field Services has net income of $120,400, total assets of $1,219,000, total equity of $694,100, and total sales of $1,521,700. What is the common-size percentage for the net income?

7.91 percent

According to the liquidity premium​ theory, a steep yield curve may be an indicator of A. expectations of a significant increase in inflation. B. lower future short−term interest rates. C. an upcoming recession. D. an economic slowdown.

A

All of the following are examples of risky mortgages that became more common in the 2000s EXCEPT A. mortgages requiring down payments of at least​ 20%. B. adjustable−rate mortgages with low rates for a few years and then higher rates in later years. C. subprime mortgages. D. alt-A mortgages.

A

All of the following took place during the economic crisis that began in 2007​ EXCEPT: A. unlike​ households, most businesses still had easy access to funds B. the financial system was disrupted C. large portions of the U.S. economy were cut off from the funds they needed to thrive D. there was a devastating decline in the production of goods and services throughout the economy

A

Almost every time that there has been an inverted yield​ curve, what took place within one​ year? A. recession B. financial crisis C. rising inflation D. higher bond yields

A

An agent who arranges a transaction between a buyer and a seller of equity securities is called a: A. broker. B. floor trader. C. capitalist. D. principal. E. dealer.

A

An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a: A. floor trader. B. exchange customer. C. specialist. D. floor broker. E. market maker.

A

13.4 Using the WACC to Value a Project 1) When a firm is evaluating the purchase of a business that is unrelated to its current business, *it is appropriate to use the current WACC* of the firm that is purchasing the business.

Answer: FALSE

2) Internal financing is more costly than external financing because of issuance costs.

Answer: FALSE

2) The fact that the *interest paid on debt is a tax-deductible expense* increases the cost of debt financing.

Answer: FALSE

3) One should *use accounting-based book values* rather than *market values* of debt and equity to determine the weights for the different sources of capital.

Answer: FALSE

1) A firm's cost of debt is the rate of interest it would have to pay to refinance its existing debt.

Answer: TRUE

1) The costs of *external financing* must be *deducted* from the net present value (NPV) of a project to evaluate if it is worth undertaking.

Answer: TRUE

13.5 Project-Based Costs of Capital 1) Firms that have *many divisions with different lines* of business *do not use* a company-wide *WACC* to evaluate projects.

Answer: TRUE

2) To attract capital from outside investors, a firm must *offer potential investors an expected return* that is commensurate with the level of risk that they can bear.

Answer: TRUE

Which of the following would a company wish to compare its ratios against?

Aspirant companies, peer companies, major competitors, its own historical ratios

According to the liquidity premium theory A. investors are indifferent between short and long maturities. B. investors prefer shorter to longer maturities. C. investors prefer longer to shorter maturities. D. investors are more interested in the tax treatment of bonds than they are in the liquidity of bonds.

B

Which of the following is NOT a financial​ intermediary? A. Allstate Insurance Company B. NASDAQ C. Vanguard Total Stock Market Index Fund D. Bank of America

B

Which of the following is NOT a key financial service provided by the financial​ system? A.liquidity B.profitability C.risk sharing D.information

B

Which of the following is NOT considered to be an operating expense on the income statement? A) administrative expenses and overhead B) corporate taxes C) salaries D) depreciation and amortization

B

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

B

The risk premium of corporate bonds typically increases A. when the risk premium on treasury bonds increases. B. when the average price of corporate bonds increase. C. when the interest rates on corporate bonds decreases. D. during a recession.

D

Your parents spent $6,200 to buy 500 shares of stock in a new company 13 years ago. The stock has appreciated 9 percent per year on average. What is the current value of those 500 shares?

$19,007.99 Future value = $6,200 × (1 + 0.09)13 = $19,007.99

You just won a prize and will receive $2,400 two years from today. What is this prize worth to you today at a discount rate of 8.00 percent?

$2,057.61 PV $2,400 / 1.082 = $2,057.61

Rick is planning to invest the following amounts at 6 percent interest. How much money will he have saved at the end of year 3? Year 1 500 Year 2 800 Year 3 900

$2,309.80

Alexa plans on saving $3,000 a year and expects to earn an annual rate of 10.25%. How much will she have in her account at the end of 45 years?

$2,333,572

You are scheduled to receive annual payments of $5,100 for each of the next 7 years. The discount rate is 10%. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

$2,483

Nadine is retiring at age 62 and expects to live to age 85. On the day she retires, she has $402,000 in her retirement savings account. She is somewhat conservative with her money and expects to earn 6% during her retirement years. How much can she withdraw from her retirement savings each month if she plans to spend her last penny on the morning of her death?

$2,688.77

BR Trucking has total sales of $911,300, a total asset turnover of 1.1, and a profit margin of 5.87 percent. Currently, the firm has 18,500 shares outstanding. What are the earnings per share?

$2.89

You would like to give your daughter $75,000 towards her college education 17 years from now How much money must you set aside today for this purpose if you can earn 8% on your investments?

$20,270.17

You have $5,000 you want to invest for the next 45 years. You are offered an investment plan that will pay you 6 percent per year for the next 15 years and 10 percent per year for the last 30 years. How much will you have at the end of the 45 years? How much will you have if the investment plan pays you 10 percent per year for the first 15 years and 6 percent per year for the next 30 years?

$209,092.54; $119,959.94 Future value A = $5,000 × (1 + 0.06)15 × (1 + 0.10)30 = $209,092.54 Future value B = $5,000 × (1 + 0.10)15 × (1 + 0.06)30 = $119,959.94

Amish Bakery needs $210,000 today to fund a new project. The project will not produce any cash flows for two years and thus the firm agreed to a two-year, pure discount loan at 7.5 percent interest. How much will the firm owe on this loan at the time it must be repaid?

$242,681.25

You want to have $45,000 in cash to buy a car 4 years from today. You expect to earn 4.5 percent, compounded annually, on your savings. How much do you need to deposit today if this is the only money you save for this purpose?

$37,735.26 Present value = $45,000/(1 + 0.045)4 = $37,735.26

You will receive $5,900 a year for nineteen years with the first payment received today. What are these payments worth to you today at a discount rate of 17 percent, compounded annually?

$38,549.72 PV Annuity due = $5,900 × [(1 - 1 / 1.1719) / 0.17] × (1.17) = $38,549.72

Today, you have $3,464 in your savings account. How much will this account be worth 5 years from now if you earn 4.80 percent, compounded annually? Assume you do not deposit or withdraw any funds.

$4,379.09 FV = $3,464 × 1.0485 = $4,379.09

You grandmother has promised to give you $2,800 at the end of this year and $3,300 at the end of next year. What is this promise worth to you today at a discount rate of 17 percent?

$4,803.86 PV = ($2,800 / 1.17) + ($3,300 / 1.172) = $4,803.86

If today is year 0, what is the future value of the following cash flows 10 years from now? Assume an interest rate of 7.8 percent per year. Year 2 8,500 Year 3 9,300 Year 6 7,100

$40,822.55

Currently, you are earning an annual salary of $43,200. How much will your salary be 5 years from now if you receive annual raises of 4.6 percent?

$54,093.14 FV = $43,200 × 1.0465 = $54,093.14

Today, you earn a salary of $36,000. What will be your annual salary twelve years from now if you earn annual raises of 3.6%?

$55,032.54 Future value = $36,000 × (1 + .036)^12 = $55,032.54

The Undergrounds Coffee Shop has total assets of $85,300 and an equity multiplier of 1.53. What is the debt-equity ratio?

0.53 EM = TA/TE or EM = 1+ Debt-equity ratio Debt-equity ratio = 1.53 - 1 = 0.53

AD Corporation has a return on equity of 20% on total equity of 800,000. AD generated of 1.6 million in sales on 2.7 million in assets. A DuPont decomposition of ROE shoes the 20% return on equity is from a(n) ____ total asset turnover ratio.

0.59 TAT = SLS/TA

$2,503

Last year, The Pizza Joint added $6,230 to retained earnings from sales of $104,650. The company had costs of $87,300, dividends of $2,500, and interest paid of $1,620. Given a tax rate of 34 percent, what was the amount of the depreciation expense? $2,407 $1,908 $2,503 $3,102 $3,414

when a corporation is formed, it is granted which of the rights?

Legal powers to sue, ability to issue stock, provincial citizenship for jurisdictional purposes

42.83 days

Leisure Products has sales of $738,800, cost of goods sold of $598,200, and accounts receivable of $86,700. How long on average does it take the firm's customers to pay for their purchases? Assume a 365-day year. 8.65 days 11.28 days 25.01 days 42.83 days 45.33 days

Ability of a firm to pay the interest on its debt

The cash coverage ratio is used to evaluate the: Liquidity of a firm Speed at which a firm generates cash Length of time that a firm can pay its bills if no additional cash becomes available Ability of a firm to pay the interest on its debt Relationship between the firm's cash balance and its current liabilities

$32,055

The Toy Store has beginning retained earnings of $28,975. For the year, the company earned net income of $4,680 and paid dividends of $1,600. The company also issued $3,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

false

The balance sheet shows the assets, liabilities, and stockholdersʹ equity of a firm over a given length of time

The CAPM implies that investors require a higher return to hold highly volatile securities.

False. Investors require a risk premium only for bearing systematic (undiversifiable or market) risk. Total volatility, as measured by the standard deviation, includes diversifiable risk.

The standard deviation of the portfolio is always equal to the weighted average of the standard deviations of the assets in the portfolio.

False. The portfolio standard deviation equals the weighted average of the component-asset standard deviations only in the special case that all assets are perfectly positively correlated. Otherwise, as the formula for portfolio standard deviation shows, the portfolio standard deviation is less than the weighted average of the component-asset standard deviations. The portfolio variance is a weighted sum of the elements in the covariance matrix, with the products of the portfolio proportions as weights.

Stocks with a beta of zero offer an expected rate of return of zero.

False. β = 0 implies E(r) = rf, not zero.

The ratios that are based on financial statement values and used for comparison purposes are called:

Financial Ratios

Which of the following are the primary ways used to perform financial calculations today?

Financial calculator and spreadsheet functions

Long-term solvency ratios are also known as:

Financial leverage ratios

Use of debt in its capital structure

Financial leverage refers to a firm's ___.

Use of debt in its capital structure

Financial leverage refers to a firm's___.

Which of the following are traditional financial ratio categories

Financial leverage, turnover, profitability ratios

false

Financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firmʹs assets and the financing of those assets, and a prediction of the firmʹs future performance.

Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property?

It is a legally defined, artificial entity that is separate from its owners.

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow?

It will have no effect on the future value.

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

It will increase

22.70 days

Jessica's Sports Wear has $38,100 in receivables and $523,700 in total assets. The total asset turnover rate is 1.17 and the profit margin is 7.3 percent. How long on average does it take to collect the receivables? Assume a 365-day year. 26.91 days 19.45 days 11.68 days 31.07 days 22.70 days

9.13

Kessler, Inc. has accounts receivable of $31,600, total assets of $311,500, cost of goods sold of $208,400, and a capital intensity ratio of 1.08. What is the accounts receivables turnover rate?

Stacey deposits $5,000 into an account that pays 2% interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5% interest, compounded annually. At the end of 3 years:

Kurt will have a larger account value than stacey will.

Which of the following is NOT a key element in strategic planning as it is described in the text a. The statement of the corporation's scope. b. The statement of cash flows. c. The statement of corporate objectives. d. The corporation's strategies. e. The mission statement.

The statement of cash flows

Which of the following statements is CORRECT? a. If a firm's assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm's AFN to be negative. b. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm's actual AFN must, mathematically, exceed the previously calculated AFN. c. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio. d. Dividend policy does not affect the requirement for external funds based on the AFN equation. e. The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.

The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

The total asset turnover ratio will increase

Product

The total production costs incurred in a period are called ___ costs.

Marginal

The___ tax rate is the tax rate paid on the next dollar of income.

You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio.

Then: βp = (0.75 × 1) + (0.25 × 0) = 0.75 False. Your portfolio should be invested 75% in the market portfolio and 25% in T-bills.

Which one of the following features distinguishes an ordinary annuity from an annuity due?

Timing of the annuity payments

What is the goal of the corporation?

To maximize sharevalue

Why is a dollar received today worth more than a dollar received in the future?

Today's dollar can be reinvested, yielding a greater amount in the future and inflation will make a dollar in the future worth less than a dollar today

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

Total Asset Turnover

Which ratio is called the "big picture ratio"

Total Asset Turnover

Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship?

Total asset turnover

A common-size balance sheet expresses accounts as a percentage of ___

Total assets

Common-size balance sheets express each account value as a percentage of which one of the following?

Total assets

A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage

True

A firm's AFN must come from external sources. Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock

True

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset

True

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects

True

As a firm's sales grow, its current assets also tend to increase. For instance, as sales increased the firm's inventories generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneous liabilities that reduce AFN ride from transactions brought on by sales increases

True

As long as a firm does not pay out 100% of its earnings, the firms annual profit that is retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm's expansion

True

Dollar amounts received at different points in time cannot be compared in absolute terms.

True

Firms with high capital intensity ratios have found ways to lower this ratio permitting them to achieve a given level of growth with fewer assets and consequently less external capital. For example, just-in-time inventory systems, multiple shifts for labor, and outsourcing production are all feasible ways for firms to reduce their capital intensity ratios.

True

If a firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100%, and if it wants to hold all financial ratios constant, then for any positive growth rate in sales, it will require external financing

True

If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk - free profit.

True

In general, if an action increases a firm's value by providing benefits with a value greater than any costs involved, then that action is good for the firm's investors.

True

One of the first steps in arriving at a firm's forecasted financial statements is a review of industry-average operating ratios relative to these same ratios for the firm to determine whether changes to the ratios need to be made

True

One of the necessary steps in the financial planning process is a forecast of financial statements under each alternative version of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios

True

The AFN equation assumes that the ratios of assets and liabilities to sales remain constant over time. However, this assumption can be relaxed when we use the forecasted financial statement method. Three conditions where constant ratios cannot be assumed are economies of scale, lumpy assets, and excess capacity.

True

The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market.

True

The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements

True

The first, and most critical, step in constructing a set of forecasted financial statements is the sales forecast

True

Assets - Current liabilities = Long-term liabilities

Which of the following balance sheet equations is INCORRECT?

to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business

Which of the following best describes why a firm produces financial statements?

The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is the difference between the assets and the liabilities

Which of the following best describes why the left and right sides of a balance sheet are equal?

a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals

Which of the following firms would be expected to have a high ROE based on that firmʹs high profitability?

a grocery store chain that has very high turnover, selling many multiples of its assets per year

Which of the following firms would be expected to have a high ROE?

It includes cash inflows from services rendered

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?

corporate taxes

Which of the following is NOT considered to be an operating expense on the income statement?

the statement of activities

Which of the following is NOT one of the financial statements that must be produced by a public company?

by forcing companies to audit financial statements they release

Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?

It adds all non-cash entries related to a firmʹs operating activities

Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet?

the firm is growing

Which of the following is the LEAST likely explanation for a firmʹs high ROE?

Readers of even fraudulent financial statements can spot signs of a firmʹs financial health, if those statements are read fully and with care

Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom?

The balance sheet reports liabilities on the left-hand side

Which of the following statements regarding the balance sheet is INCORRECT?

Any one of the partners can be held solely liable for all of the partnership's debt

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

Semi-strong form market efficiency states that the value of a security is based on:

all publicly available information

shelf registration

allows firms to register securities and gradually sell them to the public for two years following the initial registration. they can be sold on short notice with little additional paperwork since they are already registered. they can be sold in small amounts without incurring substantial flotation costs.

hostile takeover

an individual or an organization-sometimes known as a corporate raider- can purchase a large fraction of the compan's stock and in doing so get enough votes to replace the board of directors and the CEO

over-the-counter (OTC) market

an informal network of brokers and dealers who negotiate sales of securities. thousands of brokers register with the SEC as security dealers. dealers quote prices at which they are willing to buy or sell securities. a broker then executes a trade by contacting a dealer listing an attractive quote

limit buy (sell) order

an order specifying a price at which an investor is willing to buy or sell a security

An annuity with payments beginning immediately rather than at the end of the period is called an ___

annuity due

Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

annuity due

arbitrage opportunity

any situation in which it is possible to make a profit without taking any risk or making any investment

enterprise value

assesses the value of the underlying business assets, unencumbered by debt and seperate from any cash and marketable securities (market value of equity+debt-cash)

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

balance sheet

correlation

barometer of the degree to which the returns share common risk. when the correlation equals o, they are uncorrelated. the closer the correlation to -1 the returns tend to move in opposite directions

In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is

beta

the amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the:

beta coefficient

The price at which a dealer will purchase a bond is called the _____ price.

bid price

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

bid-ask spread

implicit part of trading costs

bid-ask spread and price concession an investor may be forced to make for trading in quantities greater than those associated with the posted bid or asked prices

speculative bonds, junk bonds, high-yield bonds

bonds in the bottom five categories because their likelihood of defualt is high and so promise higher yields

investment-grade bonds

bonds in the the top four categories because of their low default risk

explicit part of trading costs

broker's commission

market orders

buy or sell orders that are to be executed immediately at current market prices

how is ownership transferred in a corporation?

by gifting or selling shares of stock

Which of the following statements regarding arbitrage and security prices is INCORRECT? A) We call the price of a security in a normal market the no-arbitrage price for the security. B) In financial markets it is possible to sell a security you do not own by doing a short sale. C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds. D) The general formula for the no-arbitrage price of a security is Price(security) = PV(all cash flows paid by the security).

c

The effective annual rate (EAR) takes into account the ___ of interest that occurs within a year

compounding

electronic communication networks (ECNs)

computer networks that allow direct trading without the need for market makers. allow participants to post market and limit orders over computer networks. the limit order book is available to all participants. these are true trading systems, not merely price quotation systems. +direct crossing of trades without using a broker-dealer system eliminates the bid-ask spread +trades are automatically crossed at a modest cost, typically less than a penny per share +ECNs are attractive as well because of the speed with which a trade can be executed +these systems offer investors considerable anonymity in their trades

agency problem

conflict of interest between an agent and a principal

scenario analysis

considers the effect on NPV of changing multiple project parameters

officer responsible for corporate tax reporting

controller

officer responsible for corporate tax reporting:

controller

the federal government taxes which of the following?

corporate earnings and shareholder dividends

controller

corporate officer who is responsible for accurate financial accounting of the firm's activities and tax reporting and payments

rab

correlation coif

Rab

cov ab/sbxsa NOT GIVEN

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:

debenture

a stock is expected to return 13% in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which of the following will lower the overall expected rate of return on this stock?

decrease in the probability of an economic boom

When reviewing a balance sheet, the Assets are listed from top to bottom in order of:

decreasing liquidity

Currently, you are expecting a payment of $5,000 three years from today and you have a discount rate of 6.5 percent. Which one of the following will increase the present value of this payment, all else held constant?

decreasing the discount rate to 6 percent

Dexter, Inc. has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first three years. This provision is referred to as the _____ provision.

deferred call

Russels has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first 5 years following issuance. This provision is referred to as the ____________ provision

deferred call

operating expense

depreciation and amortization, selling, general, and administrative expenses, research and development

margin

describes securities purchased with money borrowed in part from a broker. the net worth of the investor's account. the brokers borrow money from banks at the call money rate to finance these purchases. they then charge their clients that rate plus a service charge for the loan all securities purchased on margin must be maintained with the brokerage firm in street name because the securities are collateral for the loan (current initial margin requirement is 50%)

how much to invest in risky asset

desired return-risk free/portfolio return-risk free

If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85.

false

It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.

false

Partnerships are the most common type of business firm in the world.

false

Raising new capital by issuing bonds is an example of a commercial banking activity.

false

The fact that corporations' shares are easily traded within the market has a net effect of acting as a disincentive for managers to favor the interests of shareholders over their own interests.

false

To enable costs and benefits to be compared they are typically converted into cash value at the time the benefit is received.

false

Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements.

false

The ratios that are based on financial statement values and used for comparison purposes are called:

financial ratios

initial public offering (IPO)

first sale of stock by a formerly private company. Later, the firm may go back to the public and issue additional shares

The expected return-beta relationship

is the most familiar expression of the CAPM to practitioners. refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. assumes that investors hold well-diversified portfolios.

The variance of a portfolio of risky securities

is the weighted sum of the securities' variances and covariances.

Time value of money tables are not as common as they once were because

it is easier to use inexpensive financial calculators instead and they are available for only a relatively small number of interest rates

whcih one of the following had the second highest distribution for the period 1926-2014?

large company stocks

blocks

large transactions in which at least 10,000 shares of stock are bought or sold

The cash ratio is used to evaluate the:

length of time that a firm can pay its bills if no additional cash becomes available.

If a company has inventory, the quick ratio will always be ___ the current ratio

less than

An ordinary annuity consists of a ___ stream of cash flows for a fixed period of time

level

An ordinary annuity consists of a(n)__ stream of cash flows for a fixed period of time.

level

in a limited partnership, a limited partner's liability for business debts is ___

limited to their cash contribution to the partnership

Given an investment amount and a set rate of interest, the ___ the time period, the ___ the future value

longer; greater

smh overpriced or underpriced

look at original return and the result of Ei and if it is greater than the return it is overpriced and lies below the line if it is the same then it lies on the SML and is properly priced

if the borrowing rate is higher what happens to the sharpe ratio

lower the Sharpe ratios of levered portfolios

x*

lower variance a or b-(saxsb)(rab) all divided by a variance plus b variance -(2)(saxsb)(rab) invest the answer amount into the higher variance stock and the rest into the left over one

The lower the standard deviation of returns on a security, the _____________________ the expected rate of return and the __________________ the risk

lower; lower

the amount of tax paid on the next whole dollar of income, refers to which type of tax?

marginal tax

primary market

market for new issues of securities

2 types of orders

market orders and orders contingent on price

unsystematic risk can be defined by all the following except:

market risk

According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of

market risk.

The price-earnings ratio is a ___ ratio.

market value

dealer markets

markets in which traders specializing in particular assets buy and sell for their own accounts. dealers specialize in various assets, purchase these assets for their own accounts, and later sell them for a profit from their inventory. bid-ask-spread is the dealers' profit. these markets save traders on search costs because market participants can easily look up the prices at which they can buy or sell to dealers

variance

measures the variability in returns by taking the differences of the returns from the average return and squaring those differences

The concept of the time value of money is based on the priciple that a dollar today is worth ___ a dollar promised at some time in the future

more than

The rate of return an investor earns on a bond prior to adjusting for inflation is called the:

nominal rate

real rate

nominal rate-inflation rate

inside information

nonpublic knowledge about a corporation possessed by corporate officers, major owners, or other individuals with privileged access to information about the firm definition of insiders can be ambiguous distinction between legal private information and illegal inside information can be fuzzy

I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.

on capital allocation line

II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.

on capital allocation line

III) Investors choose the portfolio that maximizes their expected utility.

on capital allocation line

Which of the following are real-world examples of annuities?

preferred stock dividends, mortgages, pensions and leases

The current value of a future cash flow discounted as the appropriate rate is called the ___ value

present

The formula for the ___ value interest factor of an annuity is [1-1 /( 1 +r)^t] / r

present

With discounting, the resulting value is called the ___ value; while with compounding the result is called the ___ value

present; future

Whenever a good trades in a competitive market, the ________ determines the value of the good.

price

private placement

primary offerings in which shares are sold directly to a small group of institutional or wealthy investors for private firms to raise funds

Amortization is the process of paying off loans by regularly reducing the ___.

principal

The original amount of a loan is termed the loan ___

principal

The original amount of the loan is called the

principal

discount brokers

provide "no-frills" services. they buy and sell securities, hold them for safekeeping, offer margin loans, facilitate short sales, and that is all. the only info they provide about the securities they handle is price quotations

Important mechanism used by unhappy stockholders to replace current management

proxy fight

stop-buy orders

specify that a stock should be bought when its price rises above a limit. these trades often accompany short sales and are used to limit potential losses from the short position

When adding real estate to an asset allocation program that currently includes only stocks, bonds, and cash, which of the properties of real estate returns affect portfolio risk?

standard deviation and correlation with other assets

standard deviation of portfolio given amt in risky and risky sd

standard deviation x amount in risky

expected return of x

sum of x returns given/n

The owner of the trading license who trades on the floor of the NYSE for his or her personal account is called a:

supplemental liquidity provider

In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is

systematic risk.

IRR investment rule

take any investment opportunity whose IRR exceeds the opportunity cost of capital. Turn down any opportunity whose IRR is less than the opportunity cost of capital. Dangerous to use IRR in cases where you are choosing between projects, or anytime when your decision to accept or reject ne project would affect your decision on another project

yield curve

tends to be inverted prior to recessions and to be steep coming out of a recession

for a risky security to have a positive expected return but less than the overall market, the security must have a beta:

that is > 0 but not < 1

payback period

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

What is a shareholder's liability limited to?

the amount the shareholder invested in the corporation

The standard deviation of a two-asset portfolio is a linear function of the assets' weights when

the assets have a correlation coefficient equal to one.

diversification

the averaging out of risks in a large portfolio

opportunity cost of capital

the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted

NASDAQ stock market

the computer-linked price quotation and trade execution system. allows for electronic execution of trades at quoted prices without the need for direct negotiation, and the vast majority of trades are executed electronically

The market risk, beta, of a security is equal to

the covariance between the security's return and the market return divided by the variance of the market's returns.

a firm's net income

the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period, the last or "bottom" line of the income statement, a measure of the firm's profitability over a given period

IRR

the discount rate that sets the net present value of the cash flows equal to zero; used to determine how sensitive your analysis to errors are

broker's call loans

the easy access to a source of debt financing that investors have when purchasing securities

Portfolio theory as described by Markowitz is most concerned with:

the effect of diversification on portfolio risk.

leverage

the extent to which a firm relies on debt as a source of financing

MACRS depreciation

the firm first categorizes assets according to their recovery period and based on the recoery period MACRS depreciation tables assign a fraction of the purchase price that he firm can recover each year

inside quotes

the highest buy and lowest sell orders

in return standard deviation space for risk averse investors what offers the greatest utility

the highest indifference curve

firm commitment

the issuing firm sells the securities to the underwriting syndicate for the public offering price less a spread that serves as compensation to the underwriters

if no abnormal profits can be made

the market is efficient

a firm's capital structure

the mix of debt and equity

Because of ___ and ___, interest rates are often quoted in many different ways

tradition; legislation

Because of __ and ____, interest rates are often quoted in many different ways

traditions; legislation

Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors.

true

In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.

true

Price-earnings ratios tend to be high for fast-growing firms.

true

The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly.

true

The principal goal of the financial manager is to maximize the wealth of the stockholders.

true

partnership

two or more owners

treasury bills

u.s. government bonds with a maturity of up to one year are zero-coupon bonds

which one of the following best exemplifies unsystematic risk

unexpected increase in the varaible costs for a firm

A note is a(n):

unsecured debt that is generally payable within the next 10 years

stock options

used to encourage managers to maximize the value of the stock

full-service brokers

usually depend on a research staff that prepares analyses and forecasts of general economic as well as industry and company conditions and often makes specific buy or sell recommendations

NPV Decision Rule

when making an investment decision, take the alternative with the highest NPV. Choosing this alternative is equivalent to receiving its NPV in cash today.

agency problem

when managers, despite being hired as the agents of shareholders, put their own self-interest ahead of the interests of those shareholders

valuation principle

when the value of the benefits exceeds the value of the costs, the decision will increase the market value of the firm

why do investors buy securities on margin?

when they wish to invest an amount greater then their own money allows. this allows them to achieve greater upside potential, but they also expose themselves to greater downside risk.

mutually exclusive projects

when you choose any one project that excludes you from taking other projects

Cannibalization

within a company when sales of a new product displace sales of an existing product

The market-required rate of return on a bond that is held for its entire life is called the:

yield to maturity

All else held constant, the present value of the bond increases when the:

yield to maturity decreases

Compute lowest possible standard deviation? what do you need to find?

you need to find the MPV MINIMUM VARIANCE PORTFOLIO

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

zero

According to the Capital Asset Pricing Model (CAPM), fairly priced securities have

zero alphas.

Inventory is purchased with cash

A firm's liquidity level decreases when: inventory is purchased with cash. inventory is sold on credit. inventory is sold for cash. an account receivable is collected. proceeds from a long-term loan are received.

Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent.

PV = $600/(1 + 0.07)6

Cost of goods sold

Product costs are usually shown in the income statement under the heading of ____.

The firm's actual cash flows

What is the most important item that can be extracted from financial statements?

Which of the following situations is best described by the timeline shown below?

You make payments of $250 per month for six months.

The capital asset pricing model assumes

all investors are price takers and have the same holding period.

an organization must prepare ____ and bylaws when forming a corporation

articles of incorporation

The price at which an investor can purchase a bond from a dealer is called the _____ price.

asked price

current ratio

current assets/current liabilities

Increasing shareholder wealth means increasing the _____.

current common stock value

The capital gains yield equals which one of the following?

dividend growth rate

equilibrium price

dividend/return

to find the mvp what do you need to find?

expected returns, standard deviations, correlation coefficient

portfolio return

w1r1 + w2r2

we can only use abnormal profits to justify an inefficient market when

we know if the profits exist on a risk adjusted basis

estimated return of portfolio

weight of a x estimated return of a + weight of b x estimated return of b

discretionary account

when customers take the ultimate leap of faith and allow a full-service broker to make buy and sell decisions for them. the broker can buy and sell respecified securities whenever deemed fit

interest expense

which of the following is NOT an operating expense?

Alpha Co. has interest expense of 1.2 million, total assets of 84 million, sales of 76 million, long term debt of 16.4 million, and net income of 12.1 million. How will interest expense be recorded in the common-size income statement?

1.58% 1.2/76

The common stock of The Burger Hut is selling for $16.25 a share. The company has earnings per share of $0.42 and a book value per share of $9.28. What is the market-to-book ratio?

1.75 Market-to-book ratio = market value/book values = $16.25/$9.28 = 1.75

Allison's Trees has total assets of $846,200 and total debt of $367,500. What is the equity multiplier?

1.77

Smith Industries currently has $293,000 saved towards the purchase of a new $329,000 machine. How long does the firm need to wait to purchase this machine for cash if the firm does not save any more money and earns 6.50 percent on its savings?

1.84 years $329,000 = $293,000 × (1.065)t; t = 1.84 years

Wilberton's has total assets of $537,800, net fixed assets of $412,400, long-term debt of $323,900, and total debt of $388,700. If inventory is $173,900, what is the current ratio?

1.94

Which formula below represents a present value factor?

1/ (1+r) ^t

Spring Falls Gifts has sales of $680,300, total assets of $589,100, and a profit margin of 4.3 percent. What is the return on assets?

4.97 percent

Alpha Star's net income is 300 on 2,000 of sales. The company has 5,000 in assets and equity of 3,000. The firm paid out 125 in cash dividends. What is the dividend payout ratio?

41.67%

Jake owes $3,400 on his credit card. He is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 13.9 percent. How much longer will it take him to pay off this balance if he makes monthly payments of $50 rather than $60?

41.79 months

Leisure Products has sales of $738,800, cost of goods sold of $598,200, and accounts receivable of $86,700. How long on average does it take the firm's customers to pay for their purchases? Assume a 365-day year.

42.83 days

Delmont Movers has a profit margin of 6.2 percent and net income of $48,900. What is the common-size percentage for the cost of goods sold if that expense amounted to $379,000 for the year?

48.05 percent COGS common-size percentage = COGS/total assets = COGS/(net income/profit margin) = $379,000/($48,900/0.062) = 48.05 percent

Tom's Hardware has inventory of $318,000, equity of $421,800, total assets of $647,700, and sales of $687,400. What is the common-size percentage for the inventory account?

49.10 Inventory common-size percentage = inventory/total assets = $318,000/$647,700 = 49.10 percent

AD Corporation had net income of 300,000 and paid out 125,000 in cash dividends to stockholders. The firm's retention ratio is ____?

58

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

6 percent compounded monthly

KBJ has total assets of $613,000. There are 21,000 shares of stock outstanding with a market value of $13 a share. The firm has a profit margin of 6.2 percent and a total asset turnover of 1.08. What is the price-earnings ratio?

6.65

UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate?

6.90 times

Today, you borrowed $6,200 on your credit card to purchase some furniture. The interest rate is 14.9%, compounded monthly. How long will it take you to pay off this debt assuming that you do not charge anything else and make regular monthly payments of $120?

6.93 SOLVE FOR N= 83.14. 83.14 MONTHS/12=6.93 YEARS

Joshua's Antiques has a total asset turnover rate of 1.2, an equity multiplier of 1.4, a profit margin of 5 percent, a retention ratio of 0.8, and total assets of $120,000. What is the sustainable growth rate?

7.20 percent

Turner's return on equity is 12 percent and its retention ratio is 60 percent. What is its sustainable growth rate?

7.76% (.12 * .60) / (1 - .12 * .60)

Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?

8 percent simple interest

Assume the total cost of a college education will be $285,000 when your child enters college in 22 years. You presently have $35,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

10.00 percent $285,000 = $35,000 × (1 + r)22; r = 10.00 percent

Today, you borrowed $22,000 at 10 percent interest. The loan is to be repaid in five equal annual payments. How much of the third payment will be interest?

$1,443.26 $22,000 = C × (1 - 1 / 1.105) / 0.10 = $5,803.54

Suppose Gallinger Corp. has the following characteristics: Shares outstanding: 1,000,000 Current share price: $10 Total debt: $1,000,000 Total cash: $500,000 Based on the formula above, what is the enterprise value of Gallinger Corp.?

$10,500,000 Enterprise value = total market value of stock + book value of all liabilities - cash = ($1,000,000 × $10) + $1,000,000 - $500,000 = $10,500,000

Fast Kars has a return on equity of 22.3 percent, a profit margin of 14.2 percent, and total equity of $467,000. What is the net income?

$104,141

World Exports has total assets of $938,280, a total asset turnover rate of 1.18, a debt-equity ratio of .47, and a return on equity of 18.7 percent. What is the firm's net income?

$119,359.43

A firm has total debt of $4,850 and a debt-equity ration of 0.57. What is the value of the total assets?

$13,358.77 Total equity = 4850/0.57= $8,508.77 Total assets= $4,850 + $8,508.77 = $13,358.77

Today, you signed the papers for a 6-year pure discount loan with a 8 percent interest rate. If you have to repay $22,000 at the end of the loan term, how much cash did you receive today? Interest will compound annually.

$13,863.73 PV = $22,000 / 1.086 = $13,863.73

Travis invests $10,000 today into a retirement account. He expects to earn 8 percent, compounded annually, on his money for the next 26 years. After that, he wants to be more conservative, so only expects to earn 5 percent, compounded annually. How much money will he have in his account when he retires 38 years from now, assuming this is the only deposit he makes into the account?

$132,827.88 Future value = $10,000 × (1 + 0.08)26 × (1 + 0.05)(38 - 26) = $132,827.88

You borrow $165,000 to buy a house. The mortgage rate is 4.5% and the loan is 30 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?

$135,971 N= 30X12 I/Y=4.5/12 PV=165,000 SOLVE FOR PMT (836.03) Total interest = (PMT X 30 X 12) - 165,000 = 135,971

How much will you have saved at the end of 3 years if you save $4,400 at the end of each year for three years, compounded annually at 18 percent interest?

$15,718.56 FV = ($4,400 × 1.182) + ($4,400 × 1.181) + $4,400 = $15,718.56

Alfa Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. If the required return on this investment is 4.75 percent, how much will you pay for the policy?

$210,526.32

Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,400 on the first day of each year, starting immediately and continuing for 20 years. What is the value of this inhertance today if the applicable discount rate is 6.75%?

$27,677.34 N=20 I/Y=6.75 PMT= 2400BGN SOLVE FOR PV

The Closet Shoppe has total sales of $713,200 and a profit margin of 5.8 percent. Currently, the firm has 12,500 shares outstanding. What are the earnings per share?

$3.31

Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is 34%. The firm does not have any interest expense. What is the operating cash flow?

$309,076 Earnings before interest and taxes = $1,349,800 - $903,500 - $42,700 = $403,600 Tax= $403,600 x .34 = $137,224 Operating cash flow = $403,600 + $42,700 - $137,224 = $309,076

You are borrowing $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at 8.6% interest. What is the amount of each payment?

$366.05

You agree to repay 1,200 in 2 weeks for a 1,000 payday loan. What is your EAR assuming that there are 52 weeks in a year?

11,347.55% (1200/1000)^26 -1

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?

12 years Approximate time period = 72/6 = 12 years

Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan?

12.00 percent

Mercier United has net income of $128,470. There are currently 32.67 days' sales in receivables. Total assets are $1,419,415, total receivables are $122,306, and the debt-equity ratio is .40. What is the return on equity?

12.67 percent

The Rainbow Company has total sales of $713,200 and a profit margin of 8.5 percent. Currently, the firm has 12,500 shares outstanding. What are the earnings per share?

$4.85 Earnings per share = net income/shares outstanding Net income = sales* profit margin Earnings per share = (0.085 * $713,200)/12,500 = $4.85

If a company's balance sheet shows $400 in cash, 100 in inventory and 200 in current liabilities, its cash ratio is

2.0 400/200

BK Trucking has total equity of 25,380 and 1,500 shares outstanding. Its stock is currently selling at 38 dollars per share. What is the market-to-book ratio?

2.25 38/ (25,830/1,500)

A firm had operating profit (EBIT) of 300,000 on sales of 500,000. Interest expense was 125,000 and taxes were 60,000. The company has a times interst earned ratio of

2.40 300,000/125,000

ABD common stock is selling for $36.08 a share. The company has earnings per share of $.34 and a book value per share of $12.19. What is the market-to-book ratio?

2.96

In what year was SARBOX enacted by congress?

2002

A new financial services company just opened in your town. To attract customers, it is offering a "9-11" loan special. The company will lend $9 today in exchange for a payment of $11 one year from today. What is the APR on this loan?

22.22 percent

If a firm's sales are growing at 5% per year, how long will it take for the firm's sales to triple?

22.5 years

Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every three months?

$443.13

What is the future value of $6,200 invested for 23 years at 9.25% compounded annually?

$47,433.47

Slaughter Industries just signed a sales contract with a new customer. What is this contract worth as of the end of year 4 if the following payments will be received and the firm earns 6 percent on its savings? Year 1 84000 Year 2 113000 Year 3 125000 Year 4 130000

$489,512.14

Your grandmother is gifting you $125 a month for four years while you attend college to earn your bachelor's degree. At a 6.5 discount rate, what are these payments worth to you on the day you enter college?

$5,270.94 N= 4x12 I/Y= 6.5/12 PMT=125

What is the present value of the following cash flow stream discounted at 6%? $100 in years in 1 years and 2 followed by $200 in years 3 and 4

$509.68

Western Hardwoods has total equity of $318,456, a profit margin of 3.79 percent, an equity multiplier of 1.68, and a total asset turnover of .97. What is the amount of the firm's sales?

$518,956

You have $1,100 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually?

24.57 percent $3,300 = $1,100 × (1 + r)5; r = 24.57 percent

What is the present value of an ordinary annuity that pays 100 per year for three years if the interest rate is 10 percent per year?

248.69 100{[1 - (1/(1.10)^3)]/.10}

High Road Transport has a current stock price of $5.60. For the past year, the company had net income of $287,400, total equity of $992,300, sales of $1,511,000, and 750,000 shares outstanding. What is the market-to-book ratio?

4.23

A​ "primary market" is a market A. in which newly issued claims are sold to buyers by borrowers. B. in which newly issued claims are sold by savers to borrowers. C. for government securities. D. for debt by large or​ "primary" corporations.

A

Bond ratings A. are published by private bond−rating agencies. B. are published monthly by the federal government and are based on publicly available information. C. are published annually by the federal government and are based on publicly available information. D. are published annually by the federal government and are based largely on information contained in corporate tax returns.

A

Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.25 over the next 3 years, respectively. Beginning 4 years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth to you if you require a 12.5 percent rate of return on similar investments? A. $42.92 B. $43.40 C. $45.12 D. $45.88 E. $46.50

A

Electronics, Inc. common stock returned a nifty 22.68 percent rate of return last year. The dividend amount was $0.25 a share which equated to a dividend yield of 0.84 percent. What was the rate of price appreciation for the year? A. 21.84 percent B. 22.38 percent C. 22.60 percent D. 22.87 percent E. 23.52 percent

A

1.19

Aardvaark & Co. has sales of $291,200, cost of goods sold of $163,300, net profit of $11,360, net fixed assets of $154,500, and current assets of $89,500. What is the total asset turnover rate?

5) The *relative proportion of debt, equity, and other securities* that a firm has outstanding constitute its A) asset ratio. B) current ratio. C) capital structure. D) none of the above

Answer: CC) capital structure.

21) The *after-tax cost* of equity is ________ the *pretax cost of equity*. A) higher than B) lower than C) the same as D) none of the above

Answer: CC) the same as

1) The *WACC does not depend on the risk* of a company's line of business.

Answer: FALSE

Which one of the following is the electronic system used by the NYSE for directly transmitting orders to specialists? A. OTCDOT B. SuperDOT C. Instinet D. Internet E. Floornet

B

Liza donated money to her alma mater to establish a scholarship trust fund. How much did Liza contribute if the trust fund earns $65,500 in interest annually at a rate of 12.5 percent? Assume the entire interest earned is paid out in scholarships each year while the principal amount is never spent.

$524,000 PV = $65,500 / 0.125 = $524,000

If the appropriate discount rate for the following cash flows is 11.7 percent per year, what is the present value of the cash flows? Year 1 21,600 Year 2 25,900 Year 3 38,700 Year 4 16,200

$78,270.77

Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?

(1 + quoted rate / m) ^m - 1

standard deviation of x

(given return-exp, return)^2 for all of them) then divide all by n-1 and then square the whole thing

free cash flow

(rev-costs-dep) x (1-tax rate) +De Dep-CapEx-Change in NWC

3) How do the shareholders of most corporations exercise their control of that corporation? A) by voting on issues that concern them B) by electing members of a board of directors C) by vetting the decisions of the board of directors D) by providing oversight of the day to day running of the corporation Answer:

...B) by electing members of a board of directors

25) Which of the following organization forms has the most revenue? A) S corporation B) limited partnership C) C corporation D) limited liability company Answer:

...C) C corporation

The market portfolio has a beta of

1

1.56%

Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes is equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34 percent? -2.43 percent 1.56 percent 3.33 percent -5.29 percent -6.11 percent

Which one of the following occupations best fits in to the area of corporate finance?

Chief Financial Officer

Which one of the following is the quoted price of a bond?

Clean price

The effective annual rate (EAR) takes into account the __ of the interest that occurs within a year.

Compounding

The process of accumulating interest in an investment over time to earn more interest is called

Compounding

Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called:

Compounding

A perpetuity in Canada is frequently referred to as which one of the following?

Consul

In the United​ States, monetary policy is carried out by A.Congress and the President acting together. B. the President. C. Congress. D. the Federal Reserve System.

D

Tower Pharmacy pays out a fixed percentage of its net income to its shareholders in the form of annual dividends. Given this, the percentage shown on a common-size income statement for the dividend account will:

vary in direct relation to the net profit percentage.

If a firm wants to maintain its ratios at their existing levels, then if it has a positive sales growth rate of any amount, it will require some amount of external funding

False

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

No new equity and a constant debt-equity ratio

r*

Sb/Sa smaller over larger

Assets + liabilities

Shareholder' equity equals____.

Net fixed assets minus long-term debt plus net working capital

Shareholders' equity is equal to: total assets plus total liabilities. net fixed assets minus total liabilities. net fixed assets minus long-term debt plus net working capital. net working capital plus total assets. total assets minus net working capital.

The capital intensity ratio is generally defined as follows: a. The percentage of liabilities that increase spontaneously as a percentage of sales. b. The ratio of sales to current assets. c. The ratio of current assets to sales. d. The amount of assets required per dollar of sales, or A0*/S0. e. Sales divided by total assets, i.e., the total assets turnover ratio.

The amount of assets required per dollar of sales, or A0*/S0.

the line tangent to the efficient frontier of risky securities drawn from the risk-free rate.

The capital allocation line provided by a risk-free security and N risky securities is

Creditors and equity investors

The cash flow identity states that cash flow from assets equals cash flows to ___.

United States

The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board?

Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of .6. Which of the following statements is most accurate?

The expected rate of return will be higher for the stock of Kaskin, Inc., than that of Quinn, Inc.

What does it mean when a firm has a days' sales in receivables of 45?

The firm collects its credit sales in 45 days on average

Capital Structure

The relative proportions of debt, equity, and other securities that a firm has outstanding.

Both fixed and variable

The short run is a period when there are ___ costs.

auditor

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________.

The mission statement is a statement of the firm's overall purpose

True

Establishing the preferred debt-equity level

Which one of the following is a capital structure decision? Determining the optimal inventory level Establishing the preferred debt-equity level Selecting new equipment to purchase Setting the terms of sale for credit sales Determining when suppliers should be paid

Equity multiplier

Which one of the following is a measure of long-term solvency? Price-earnings ratio Profit margin Equity multiplier Receivables turnover Quick ratio

Copyright

Which one of the following is an intangible fixed asset? Copyright Inventory Machinery Account receivable Building

Basing management bonuses on the length of employment

Which one of the following situations is most apt to create an agency conflict? Compensating a manager based on his or her division's net income Giving all employees a bonus if a certain level of efficiency is maintained Hiring an independent consultant to study the operating efficiency of the firm Basing management bonuses on the length of employment Laying off employees during a slack period

There must be at least one general partner

Which one of the following statements about a limited partnership is correct? All partners have their losses limited to their capital investment in the partnership. All partners are treated equally. There must be at least one general partner. Equity financing is easy to obtain and unlimited. Any partner can transfer his or her ownership interest without ending the partnership.

Making a payment on a long-term debt

Which one of the following will decrease the net working capital of a firm?

III) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.

c

balance sheet, income statement, statement of cash flows, statement of stockholder's equity

four financial statements that all public companies must product

2 kinds of brokers

full-service ("account executives" or "financial consultants") or discount brokers

net present value involves discounting an investments:

future cash flows

standard portfolio deviation of two assets

given as SP

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

had to decrease

A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm:

has positive networking capital

treasury notes

have original maturities from one to ten years

treasury bonds

have original maturities of more than ten years

An annuity due is a series of payments that begin ___

immediately

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will

increase

When finding the present or future value of an annuity using a spreadsheet (Excel), the ___ should be entered as a decimal.

interest rate

The relationship between the present value and the investment time period is best described as:

inverse

which of the following areas of finance is concerned with financial asset allocation

investments

if investor a tolerates more risk for the same reward as investor b, what does this mean

investor b is more risk averse

The expected return of a portfolio of risky securities

is a weighted average of the securities' returns.

A protective covenant:

limits the actions of the borrower.

secondary market

market for already-existing securities

According to the Capital Asset Pricing Model (CAPM), overpriced securities have

negative alphas.

earnings per share

net income/shares outstanding; diluted eps: adding to the number of shares outstanding the possible increase in the number of shares from the exercise of stock options the firm has awarded

will diversifying between two perfectly positively correlated assets make a greedy risk averse investor well off

no

can an investors indifference curves overlap

no because they are parallel

if you have two perfectly positively correlated assets should you diversify

no there is no additional benefit

pair trading

normal price relations between pairs of stocks seem temporarily disrupted and offer small profit opportunities as they move back into alignment

road shows

once the SEC has commented not eh registration statement and a preliminary prospectus has been distributed to interested investors, the investment bankers organize these to travel around the country to publicize the imminent offering

The equity multiplier is equal to:

one plus the debt-equity ratio.

payback investment rule

only accept a project if its cash flows pay back its initial investment within a prespecified. not as reliable as NPV rule because it ignores the time value of money, ignores cash flows after the payback period, and lacks a decision criterion grounded in economics

slope of best cal

optimal risky portfolio ER-Rf/SD for example upside down y

A call provision grants the bond issuer the:

option of repurchasing the bonds prior to maturity at a prespecified price.

3 trading systems employed in the US

over-the-counter dealer markets, electronic communication networks, and specialist markets

NASDAQ

over-the-counter market in which a collection of dealers or market makers aare connected by computer networks and telephones

shareholders

owners of a corporation

A registered form bond is defined as a bond that:

pays coupon payments directly to the owner of record.

C/r is the formula for the present value of a(n)___

perpetuity

NYSE

physical stock market only one has one match maker

Stock A companies 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

portfolio weight

According to the Capital Asset Pricing Model (CAPM), underpriced securities have

positive alphas.

The formula for the present value of an annuity due is:

(1+r) x (PV of an ordinary annuity)

Borrowers who stated but did not document their incomes are referred to​ as: A. alt A B. securitized C. adjustable D. subprime

A

Which of the following is a perpetuity?

A constant stream of cash flows forever

current liability

Accounts payable is a ________.

1.5 The Stock Market 1) The *shares of private corporations* are traded on a stock market. Answer:

FALSE

Which of the following processes can be used to calculate the future value of multiple cash flows?

Calcultate the FV of each cash flow first and then add them up. Compound the accumulated balance forward one year at a time

2)* Financial decisions* require that you weigh alternatives in *strictly monetary terms*. Answer:

FALSE

You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?

Cash coverage ratio = 2.6; debt-equity ratio = .3

Interest paid minus net new borrowing

Cash flow to creditors equals:

Dividends paid minus net new equity raised

Cash flow to stockholders equals: ____

current asset

Cash is a ________.

A firm decides to make a decision that decreases their liquidity. What decision did the firm just make?

Cash purchase of inventory

Which one of the following generally pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?

Cumulative preferred

Big Falls Tours just paid a dividend of $1.55 per share. The dividends are expected to grow at 30 percent for the next 8 years and then level off to a 7 percent growth rate indefinitely. What is the price of this stock today given a required return of 15 percent? A. $67.54 B. $69.90 C. $72.47 D. $77.67 E. $78.19

D

Currently, a three−year Treasury note pays​ 4.75%. Assuming that your tax rate is​ 20%, what is the minimum interest rate that you would you need to earn on a tax−free municipal bond in order to buy it​ instead? A. ​0.95% B. ​5.7% C. ​15.25% D. ​3.8%

D

Denver Shoppes will pay an annual dividend of $1.46 a share next year with future dividends increasing by 4.2 percent annually. What is the market rate of return if the stock is currently selling for $38.90 a share? A. 6.55 percent B. 7.13 percent C. 7.46 percent D. 7.95 percent E. 8.29 percent

D

Economists define liquidity as A.the difference between the return on the asset and the return on a long−term U.S. Treasury bond. B.the difference between the total demand for an asset and the total supply of the asset. C.the fraction the asset makes up of an​ investor's portfolio. D. the ease with which an asset can be exchanged for money.

D

Financial securities that represent partial ownership of a corporation are known as A.coupons. B.bonds. C.dividends. D.stocks

D

Increases the potential return to the shareholders

Financial leverage:

Which of the following is the overarching principle that a financial manager should follow when making decisions?

Decisions should increase the value of the firm to its investors.

What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount?

Dividend growth model

Based on ROE and the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?

Dividend policy, profit margin and financial policy

The dividend growth model: I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point in time. III. can be used to value zero-growth stocks. IV. requires the growth rate to be less than the required return. A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV

E

Which of the following is the appropriate Excel function to convert a quoted rate of 12% compounded quarterly to an EAR?

EFFECT (0.12,4)

The general formula for ____ is (1 + quoted rate / m) ^m - 1

EAR

Which of the following is not a way to amortize a loan?

Fixed interest payments only

When borrowing and lending at a risk-free rate are allowed, which capital allocation line (CAL) should the investor choose to combine with the efficient frontier?

I) The one with the highest reward-to-variability ratio. II) The one that will maximize his utility. III) The one with the steepest slope.

which one of the following statements is correct?

If the internal rate of return equals the required return, the net present value will equal zero.

Provide limited liability while avoiding double taxation

Limited liability companies are primarily designed to: allow a portion of its owners to enjoy limited liability while granting the other portion of its owners control over the entity. provide the benefits of the corporate structure to foreign-based entities. spin-off a wholly-owned subsidiary. allow companies to reorganize themselves through the bankruptcy process. provide limited liability while avoiding double taxation.

Suppose you expect to receive 5,000 in one year, 4,300 in two years and an additional 5,000 in three years. Match each present value amount to the corresponding cash flow assuming a discount rate of 17%.

PV of year 1: 5,000/1.17= 4,273.50 PV of year 2: 4,300/ (1.17) ^ 2 = 3,141.21 PV of year 3: 5,000 / (1.17)^ 3 = 3,121.85

A tangible fixed asset

Production equipment is classified as: a net working capital item. a current liability. a current asset. a tangible fixed asset. an intangible fixed asset.

Return on assets (ROA) is a measure of ___

Profitability

Return on equity (ROE) is a measure of ____.

Profitability

common risk

Risk that is linked across outcomes.

Cost of Equity

Risk-Free Rate + Equity Beta X Market Risk Premium

Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations?

SIC

The profit margin is equal to net income divided by

Sales

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

Sinking fund

Capital Budgeting includes the evaluation of which of the following?

Size, timing, and the risk of future cash flows

Standard deviation and beta both measure risk, but they are different in that beta measures

Standard deviation and beta both measure risk, but they are different in that beta measures only systematic risk while standard deviation is a measure of total risk.

$80,485.65

Sunshine Rentals has a debt-equity ratio of .67. The return on assets is 8.1 percent, and total equity is $595,000. What is the net income? $82,147.09 $81,311.29 $80,485.65 $78,887.02 $83,013.69

False

T/F: For financial analysis, financial statements and accounting numbers are more important than cash flows.

True

T/F: Operating cash flow does not reflect depreciation or interest.

Which one of the following statements is correct?

The EAR, rather than the APR, should be used to compare both investment and loan options.

Expenses

The GAAP matching principle requires revenues it be matched with:

9.98

The Green House has a profit margin of 5.6 percent on sales of $311,200. The firm currently has 15,000 shares of stock outstanding at a market price of $11.60 per share. What is the price-earnings ratio?

An agency issue is more apt to develop when:

The control of a firm is separated from the firm's ownership

Costs and benefits must be put in common terms if they are to be compared.

True

In the excel setup of a loan amortization problem, which of the following occurs?

To find the principal payment each month, you subtract the dollar interest payment from the fixed payment. The payment is found with =PMT (rate, nper, -pv, 0)

false

Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements

$48,490.76

Use the following tax table to answer this question: Taxable income: 0-50,000 @ 15% 50-75,000 @ 25% 75-100,000 @ 34% 100-335,000 @ 39% 335-10,000,000 @ 34% The Stone Inn earned $167,284 in taxable income for the year. How much tax does the company owe on this income?

$29,400

Wes Motors has total assets of $98,300, net working capital of $11,300, owners' equity of $41,600, and long-term debt of $38,600. What is the value of the current assets? $21,600 $18,100 $28,900 $29,400 $6,800

To measure performance over a set period of time

What is the purpose of the income statement?

statement of sources and uses of cash

Which of the following is NOT a financial statement that every public company is required to produce?

Which one of the following terms refers to a bond's rate of return that is required by the marketplace?

Yield to maturity

Secondary market

You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the: dealer market. over-the-counter market. secondary market. primary market. tertiary market.

Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments?

Zero coupon

You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true? A) The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. B) The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. C) The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. D) No comparison can be made - we need to know the cash flows to calculate the present value.

a

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is:

a bid-ask spread

limit order book

a collection of limit orders waiting to be executed

prospectus

a description of the firm and the security it is issuing. this is what it is called when the registration statement is in final form and approved by the SEC. At this point, the price at which the securities will be offered to the public is announced

auction market

a market where all traders meet at one place to buy or sell an asset. the most integrated market. all traders converge at one place (physically or electronically) to buy or sell an asset (NYSE) + advantage over dealer markets is that one need not search across dealers to find the best price for a good

The date at the top of an income statement is:

a period of time, not a specific date

Which of the following is the simplest form of loan?

a pure discount loan

The most common way to repay a loan is to pay ___

a single fixed payment every period

high-frequency trading

a special class of algorithmic trading in which computer programs initiate orders in tiny fractions of a second, far faster than any human could process the information driving the trade. compete for trades that offer very small profits, but if the opportunities are numerous enough, they can accumulate to big money

The date at the top of a balance sheet is:

a specific day of the year, not a quarter or year

operating expenses on the income statement

administrative expenses and overhead, salaries, depreciation and amortization

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the capital allocation line must:

borrow some money at the risk-free rate and invest in the optimal risky portfolio and invest only in risky securities

SIC codes classify firms based on which one of the following?

business operations

The call premium is the amount by which the:

call price exceeds the par value.

Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be:

call protected

net working capital

cash + inv + rec - payables

agency costs

costs incurred due to conflict of interest between stockholders and management

The annual interest divided by the face value of a bond is referred to as the:

coupon rate

A statistic that measures how the returns of two risky assets move together is:

covariance and correlation.

Financial statement analysis is primarily "management by ____"

exception

doubling covariance is the same as doubling what else

doubling beta

total sales - cost of sales

gross profit is calculates as ________.

the threat of a ___ motivates managers to make good decisions

hostile takeover

The information needed to compute the profit margin can be found on the ___.

income statement

criteria for MVP

r*>Rab, means frontier bulges and will be an mvp mixture, rather than all the stock with the lowest sd

what risk does the Capm reward

systematic risk not idiosyncratic

which statement is true?

the weights of the securities held in any portfolio must equal 1.0

fraction invested in higher sd in mvp

x*

can two investors have overlapping indifference curves

yes with similar risk return tradeoffs

independent risk

effects individuals (theft)

Stock markets provide liquidity for a firm's shares.

true

The Gift Shoppe has total assets of $487,920 and an equity multiplier of 1.47. What is the debt-equity ratio?

.47

Today, Stacy is investing $26,000 at 6.0 percent, compounded annually, for 4 years. How much additional income could he earn if he had invested this amount at 7 percent, compounded annually?

$1,256.30 $100,000 = $50,000 × (1 + 0.055)t ; t = 12.95 years

corporations in other countries are often called:

1. joint stock companies 2. limited liability company 3. public limited companies

treasurer's responsibilities

1. managing capital expenditure decisions 2. making financial plans 3. handling cash flows

Working capital includes:

1. short-term assets 2. cash 3. inventory

Tally Ho Inn has annual sales of $737,000. Earnings before interest and taxes is equal to 21 percent of sales. For the period, the firm paid $7,900 in interest. What is the profit margin if the tax rate is 35 percent?

12.95 percent Profit margin = net income/sales Net income is not provided, but we can calculate it: Net income = (sales*0.21) - interest - taxes = [(0.21 * $737,000) - $7,900] *(1-0.35) = 95,465.5 Profit margin = net income/sales = 95,465.5/$737,000 = 0.1295 or 12.95%

PayDay Loans wants to earn an effective annual return on its consumer loans of 18 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?

16.56 percent

PayDay Loans is offering a special on one-year loans. The company will loan you $5,000 today in exchange for one payment of $5,900 one year from now. What is the APR on this loan?

18.00 percent

The Saw Mill has a return on assets of 7.92 percent, a total asset turnover rate of 1.18, and a debt-equity ratio of 1.46. What is the return on equity?

19.48 percent

A credit card charges 1.5% interest each month. What is the EAR?

19.56% (1.015)^12 - 1

Ben invested $5,000 twenty years ago with an insurance company that has paid him 5 percent simple interest on his funds. Charles invested $5,000 twenty years ago in a fund that has paid him 5 percent interest, compounded annually. How much more interest has Charles earned than Ben over the past 20 years?

3,266.49 Interest on interest = Total earnings with compounding interest - total earnings with simple interest = [$110,000 × (1 + 0.065)4 ] - [$110,000 + ($110,000 × 0.065 × 4)] = $2,911.30

Dellf's has a profit margin of 3.8 percent on sales of $287,200. The firm currently has 5,000 shares of stock outstanding at a market price of $7.11 per share. What is the price-earnings ratio?

3.26

AD corporation has a return on equity of 20% on total equity of 800,000. AD generated 1.6 million in sales on 2.7 million in assets. A DuPont decomposition of ROE shoes the 20% return on equity is from a ____equity multiplier

3.38

AD Corporation's return on assets is 14? and the firm retains 40? of all its earnings. AD's internal growth rate is ____%

5.93 (.14 x .40) / (1 - .14 x .40)

You want to borrow $40,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $775, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan?

6.1 percent

Chubb's Market has a return on equity of 17.85 percent, an equity multiplier of 1.70, and a payout ratio of 45 percent. What is the firm's internal rate of growth?

6.13 percent Return on assets = 0.1785 / 1.70 = 10.50 percent. Internal growth rate = [0.105 × (1 - 0.45)] / {1 - [0.105 × (1 - 0.45)]} = 6.13 percent.

You invest 500 at 10 percent interest per annum. At the end of 2 years with simple interest you will have ___ and with compound interest you will have ___

600;605

SRC, Inc., sells its inventory in an average of 43 days and collects its receivables in 3.6 days, on average. What is the inventory turnover rate? Assume a 365-day year.

8.49

Which one of the following will increase the present value of a lump sum future amount to be received in 15 years?

A decrease in the interest rate

Many of the problems of Enron and WorldCom were kept hidden from boards and shareholders, until it was too late. People felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of the company

According to the text, did Enron and WorldCom follow Generally Accepted Accounting Principles (GAAP) in their financial reporting process?

Which of the following assumptions is embodied in the AFN equation? a. Accounts payable and accruals are tied directly to sales. b. Common stock and long-term debt are tied directly to sales. c. Fixed assets, but not current assets, are tied directly to sales. d. Last year's total assets were not optimal for last year's sales. e. None of the firm's ratios will change.

Accounts payable and accruals are tied directly to sales.

This morning, Jeff found a bond certificate lying on the floor of a bank. He picked it up and noticed that the bond matured today. He presented the bond to the bank teller and receive d both the principal and interest payment. The bond that Jeff found must have been which one of the following?

Bearer form bond

The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor.

C

Which of the following statements is INCORRECT? A) In general, money toady is worth more than money in one year. B) We define the risk-free interest rate (rf) for a given period as the interest rate at which money can be borrowed or lent without risk over that period. C) We refer to (1 - rf) as the interest rate factor for risk-free cash flows. D) For most financial decisions, costs and benefits occur at different points in time.

C

Which of the following statements is​ true? A. The yield curve illustrates the relative default risks of alternative types of bonds. B. Tax−free bonds normally have a higher interest rate than other types of bonds. C. The more liquid the​ bond, the lower the yield. D. The price of a bond increases as it becomes more risky.

C

Which positions generally report to the chief financial office(CFO)?

Controller and Treasurer

are less than

Net working capital will be negative when current assets ___ current liabilities.

Current assets minus current liabilities

Net working capital is defined as:

true

In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.

$600,000 (1 - 0.34 - 0.05 - 0.01) x $1mil = $600,000

In the Federal marginal tax bracket is 34%, the state marginal tax bracket is 5%, and the local marginal tax bracket is 1%, how much money will a corporation keep if it makes another $1,000,000 in taxable income?

false

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

The future value of a lump sum investment will increase if you:

Increase the time period

1 year

Long-term liabilities represent obligations of the firm lasting over ___.

competitive market

a market in which a good can be bought and sold at the same price

The process of planning and managing a firm's long-term investments is defined as:

capital budgetting

Miller Farm products is issuing a 15 year, unsecured bond. Based on this information, you know that this debt can be best described as:

debenture

market return premium

em-rf

r on formula sheet

rab

WACC Formula

re(we)+rpf(wpf)+rd(1-tc)(wd)

equity cost of capital

re=div1+p1/p0 - 1

Depreciation:

reduces both taxes and net income

With typical interest-only loans, the entire principal is:

repaid at some point in the future

Centre Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Country Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:

will be greater if you invest with Country Bank.

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

will be greater than 12.9 percent

stop orders

trade is not to be executed unless stock hits a price limit

You just received $225,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 25 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 10.5% rather than just 8%?

$1,189,576 Future value = $225,000 × (1 + .105)25 = $2,730,483 Future value = $225,000 × (1 + .08)25 = $1,540,907 Difference = $2,730,483 - $1,540,907 = $1,189,576

Your grandparents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 6 percent interest?

$1,666,666.67

You want to purchase a new condominium that costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment?

$1,736.25

Your father invested a lump sum 26 years ago at 4.25% interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest?

$17,444.86 N, I/Y, FV, solve for PV

You just won the grand prize in a national writing contest! As your prize, you will receive $2,000 a month for ten years. If you can earn 7% on your money, what is this prize worth to you today?

$172,252.71 N= 10x12 I/Y= 7/12 PMT=2,000 SOLVE FOR PV

How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25,000 a year for 30 years? She expects to earn an average rate of return of 13 percent.

$187,391.34

At the end of this month, Les will start saving $150 a month for retirement through his company's retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings, how much will Les have in his retirement account 30 years from now?

$566,190.22

Ten years from now, you will be inheriting $100,000. What is this inheritance worth to you today if you can earn 5.5 percent interest, compounded annually?

$58,543.06 Present value = $100,000/(1 + 0.055)10 = $58,543.06

Angela has just received an insurance settlement of $35,000. She wants to save this money until her daughter goes to college. If she can earn an average of 5.5 percent, compounded annually, how much will she have saved when her daughter enters college 10 years from now?

$59,785.06 Future value = $10,000 × (1 + 0.08)26 × (1 + 0.05)(38 - 26) = $132,827.88

Turner's Store had a profit margin of 6.8 percent, sales of $498,200, and total assets of $542,000. If management set a goal of increasing the total asset turnover to 1.10 times, what would the new sales figure need to be, assuming no increase in total assets?

$596,200

What is the future value of $100 deposited each year for 2 years beginning next year, then $200 deposited for the next two years if you can earn 6% per year?

$643.46

Uptown Insurance offers an annuity due with semiannual payments for 25 years at 6 percent interest. The annuity costs $200,000 today. What is the amount of each annuity payment?

$7,546.70

Gerold invested $5,600 in an account that pays 5% simple interest. How much money will he have at the end of ten years?

$8,400 Ending value = $5,600 + (5,600 x .05 x 10) = $8,400

Suppose you paid a $1,200 loan off by paying $400 in principal each year plus 10% yearly interest. How much is the second interest payment?

$80 (1,200 - 400) x .10

Sunshine Rentals has a debt-equity ratio of .67. The return on assets is 8.1 percent, and total equity is $595,000. What is the net income?

$80,485.65

The desgin team just decided to save $1,500 a month for the next 5 years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 4.5% interest compounded monthly. The first deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit today that would yield the same amount of savings as the monthly deposits after 5 years?

$80,760.79 N= 5X12 I/Y= 4.5/12 PMT= 1,500BGN SOLVE FOR PV

Taylor, Inc. has sales of $11,898, total assets of $9,315, and a debt-equity ratio of .55. If its return on equity is 14 percent, what is its net income?

$841.35

Travis United has net income of $13,280 for 2010. On the firm's common-size income statement for 2010, the net income is shown as 15.2 percent. What is the amount of the firm's sales for 2010?

$87,368 Sales = $13,280 / 0.152 = $87,368

A recent alumnus of your university gifted money to the school to fund annual scholarships for students in need. The school expects to earn an average rate of return of 5.5 percent and distribute $50,000 annually in scholarships. What was the amount of the gift?

$909,090.91

During the year, kitchen Supply increased its accounts receivable by $130, decreased its inventory by $75, and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flows for the year?

$95 use of cash 130+40-75= 95

Which of the following is the general formula for EAR when m is the number of times interest is compounded in a year?

(1 + quoted rate/ m) ^ m -1

If you invest for a single period at an interest rate of r, your money will grow to ___ per dollar invested

(1+ r)

Suppose the present value is $100, the future value is 1,000 and t is 10 years. Which formula below is used to find the interest rate?

(1,000/100)^(1/10r) - 1

Which of the following is the correct representation of the cash coverage ratio?

(EBIT + deprecitation) / interest expense

covariance of x,y

(GR x- ER x)(GR y-ER y) for all of them/n-1

What is the formula for computing the internal growth rate?

(ROA x b)/ (1- ROE x b)

What is the formula for computing a firm's sustainable growth rate?

(ROE x b)/ ( 1 - ROE x b)

The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is

-1.0. The global minimum variance portfolio will have a standard deviation of zero whenever the two securities are perfectly negatively correlated.

For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks?

-1.00.

Which of the following processes can be used to calculate the future value of multiple cash flows?

-compound the accumulated balance forward on year at a time -calculate the future value of each cash flow first and then add them up

Which of the following could not be evaluated as annuities?

-monthly electric bills -tips to a waiter

Which of the following are ways to amortize a loan?

-pay principal and interest every period in a fixed payment -pay the interest each period plus some fixed amount of the principal

When entering variables in an Excel functions (or in a financial calculator) the sign convention can be critical to achieving a correct answer. The sign convention says that outflows are negative values'; inflows are positive values. For which variable is this a consideration?

-payment -present value -future value

Which of the following are real-world examples for annuities?

-pensions -preferred stock dividends -mortgages -leases

An interest rate expressed in terms of the interest payments made each period is called a(n)___

-stated interest rate -quoted interest rate

In the Excel setup of a loan amortization problem, which of the following occurs?

-the payment is found with =PMT (rate,nper,-pv,0) -to find the principal payment each month you subtract the dollar interest payment from the fixed payment

A firm has a profit margin of 5.50 percent, a return on assets of 10.90 percent, and total sales of $401,000. What is the capital intensity ratio?

0.50 Net income = 0.055 × $401,000 = $22,055 Total assets = $22,055 / 0.109 = $202,339.45 Capital intensity ratio = $202,339.45 / $401,000 = 0.50

7) Which of the following would be best considered to be an *agency conflict problem* in the behavior of the following financial managers? A) Bill chooses to pursue a risky investment for the company's funds, because his compensation will substantially rise if it succeeds. B) Sue instructs her staff to skip safety inspections in one of the company's factories, knowing that it will likely fail the inspection and incur significant costs to fix. C) James ignores an opportunity for his company to invest in a new drug to fight Alzheimer's disease, judging the drug's chances of succeeding as low. D) Michael chooses to enhance his firm's reputation at some cost to its shareholders by sponsoring a team of athletes for the Special Olympics. Answer: A

...A) Bill chooses to pursue a risky investment for the company's funds, because his compensation will substantially rise if it succeeds.

10) What is the* most common way that agency conflict problems are addressed in most corporations*? A) by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders B) by terminating the employment of employees who are found to have put their own interests above that of the company's C) by using disinterested outside bodies to adjudicate between managers and shareholders when such conflicts arise D) by prosecuting managers who have been found to have illegally used company moneys for their own benefit Answer:

...A) by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders

8) A factory owner wants his workers to produce as many widgets as they can, so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he *checks the widgets at random at various stages of their manufacture*. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case? A) by supplying incentives so the agents act in the way principal desires B) by ensuring that all workers co-operate to maximize the gains of their section C) by making the agents into principals themselves D) by maximizing the information that the principal obtains about the behavior of the agents Answer:

...A) by supplying incentives so the agents act in the way principal desires

6) Which of the following would be more typically the *responsibility of a controller* rather than a treasurer? A) overseeing accounting and tax functions B) capital budgeting C) managing credit D) making investment decisions Answer:

...A) overseeing accounting and tax functions

10)* Whose interests) should a financial manager consider paramount when making a decision? A) the stockholders who have risked their money to become owners of the company B) the employees and associated stakeholders who are employed by the company C) the public who consume the company's goods and services D) the senior management and associated colleagues at the executive level within the company Answer:

...A) the stockholders who have risked their money to become owners of the company

2) Put the following steps of the financial cycle in the correct order: I. Money flows to companies who use it to fund growth through new products II. People invest and save their money III. Money flows back to savers and investors A) I, II, III B) II, I, III C) III, II, I D) II, III, I Answer:

...B) II, I, III

8) A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations? A) Profits from the sales of popular models will be lost when returned to the shareholders in the form of dividends. B) New models will require a lot of money to develop and bring to market before they generate any revenue. C) The company will have built up debts which must be repaid in order to bring the current models to market. D) Equity must be raised to finance the development of new models to replace the existing models. Answer:

...B) New models will require a lot of money to develop and bring to market before they generate any revenue.

11) A company's board of directors chooses to provide a *comprehensive health care plan for the families of all employees, despite the large cost*. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employees' diligence and industry. What general principle is being argued by the board of directors? A) In a conflict between stakeholders in a company, the most important stakeholder is not always the stockholders. B) Some activities that decrease shareholders' wealth may have intangible benefits which increase the strength of the company overall. C) When a conflict of interest arises between shareholders and other stakeholders, in general, the correct solution is the one that creates the greatest good for the greatest number of stakeholders. D) Ethical decisions should be assessed on their moral value, not on their value in dollars and cents. Answer:

...B) Some activities that decrease shareholders' wealth may have intangible benefits which increase the strength of the company overall.

27) A limited liability company is essentially A) a limited partnership without limited partners. B) a limited partnership without a general partner. C) just another name for a limited partnership. D) just another name for a corporation. Answer: B

...B) a limited partnership without a general partner

6) The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company.* How is the financial manager raising funds in this case*? A) by increasing the debt burden carried by the company B) by raising the company's equity by encouraging new owners to take a stake in the company C) by decreasing the ratio of equity to debt held by the company D) by increasing the value of shares held by the existing owners of the company Answer:

...B) by raising the company's equity by encouraging new owners to take a stake in the company

9) In which of the following ways is a *limited liability company like a corporation*? A) Both types of firm were created and developed first in the United States. B) Both can choose to be considered a partnership for tax purposes. C) All of its owners' liability is restricted to their investment in the firm. D) It is directly managed by the owners of the firm. Answer: C

...C) All of its owners' liability is restricted to their investment in the firm.

7) Joe is a *general partner in a limited partnership firm*, while Jane is a limited partner in that same firm. Which of the following statements regarding their respective relationships to the firm are correct? A) Joe has no management authority within the partnership. B) Jane is legally involved in the managerial decision making of the firm. C) Jane's liability for the firm's debts consists solely of her investment in the firm. D) Withdrawal of Jane from the partnership will dissolve that partnership. Answer: C

...C) Jane's liability for the firm's debts consists solely of her investment in the firm.

6) Which of the following is typically the *major factor in limiting the growth of a sole proprietorship*? A) The organization of such firms tends to become extremely complicated over time. B) It is extremely difficult to transfer control of such a firm to a new owner if the present owner dies or wishes to sell the firm. C) The amount of money that can be raised by the firm is limited by the fact that the single owner must make good on all debts. D) Investors have a great deal of control over the day-to-day running of the firm, leading to confusion when conflicts in direction arise. Answer: C

...C) The amount of money that can be raised by the firm is limited by the fact that the single owner must make good on all debts.

26) Which of the following is NOT an advantage of a sole proprietorship? A) single taxation B) ease of setup C) limited liability D) no separation of ownership and control Answer:

...C) limited liability

5) In most corporations, to whom does the chief financial officer report? A) the shareholders B) the board of directors C) the chief executive officer D) the controller Answer:

...C) the chief executive officer

12) What is the *major advantage corporations* have over other business entities? A) It is easier for a corporation to raise capital than other forms of businesses. B) A corporation is treated as a separate legal entity for tax and legal purposes. C) A corporation's shares can be freely traded among its shareholders. D) All of the above are advantages that a corporation has over other business forms. Answer: D

...D) All of the above are advantages that a corporation has over other business forms

11) Which of the following features of a *corporation is LEAST accurate*? A) The owners' identity is separate from the corporation. B) The owners of the corporation have unlimited liability for the corporations debts. C) Changes in ownership do not result in the dissolution of the corporation. D) Earnings from the corporation are taxed only once. Answer:

...D) Earnings from the corporation are taxed only once

9) A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met? A) The financial manager should seek to make investments that do not harm the interests of the stockholders. B) The decisions taken by the financial manager should be solely influenced by the benefit to the company since, by maximizing its fitness, he or she will also maximize the benefits of that company to the shareholders. C) The financial manager should consider the interests and concerns of large shareholders a priority, so the needs of those who hold a controlling interest in the company are met. D) In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment. Answer:

...D) In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.

10)* Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property*? A) The number of owners, and hence the spread of risk among these owners, is not limited. B) Its owners are liable for any obligations it enters into. C) The state in which the corporation is incorporated provides safeguards against any wrongdoing by the corporation. D) It is a legally defined, artificial entity that is separate from its owners. Answer:

...D) It is a legally defined, artificial entity that is separate from its owners.

8) What is the major way in which the roles and obligations of the *owners of a limited liability company* differ from the roles and obligations of* limited partners in a limited partnership*? A) The owners of a limited liability company have personal obligation for debts incurred by the company. B) There is no separation between the company and its owners in a limited liability company. C) The owners of a limited liability company can withdraw from the company without the company being dissolved. D) The owners of a limited liability company can take an active role in running the company. Answer: D

...D) The owners of a limited liability company can take an active role in running the company.

4) Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves? A) It is best for the control of the finances of a corporation to be in the hands of a disinterested third party. B) The interests of the various owners may conflict with each other. C) The owners may not be U.S. citizens or residents. D) There are often many owners, and they can often change as they buy and sell stock. Answer:

...D) There are often many owners, and they can often change as they buy and sell stock.

15) Which of the following are unique for an *S corporation*? A) The firm's profits and losses are not taxed at the corporate level, but shareholders must include these profits and losses on their individual tax returns. B) The shareholders of an S corporation must include the firm's profit and losses in their individual income taxes even if no money is distributed to them. C) There is a maximum limit on the number of shareholders for an S corporation. D) all of the above Answer: D

...D) all of the above

4) Which of the following is *NOT a function of the board of directors*? A) determining how top executives should be compensated B) monitoring the performance of the company C) answering to shareholders of the company D) day-to-day running of the company Answer: D

...D) day-to-day running of the company

the line that represents the expected return-beta relationship.

The security market line (SML) is

9) In which of the following relationships is an *agency conflict problem LEAST likely to arise*? A) the relationship between a hire-car company and the persons who hire that company's cars regarding the treatment of those cars B) the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks C) the relationship between a restauranter and the suppliers of produce to that restaurant regarding the freshness of the produce supplied D) the relationship between a driver and the passengers in a car regarding the safe driving of that car Answer:

...D) the relationship between a driver and the passengers in a car regarding the safe driving of that car

5) What is the *most important* duty of a financial officer? A) to ensure that the firm has enough cash on hand to meet its commitments at any given time B) to decide how to pay for investments C) to manage working capital D) to make investment decisions Answer:

...D) to make investment decisions

1.3 The Financial Manager 1) The principal goal of the financial manager is to maximize the wealth of the stockholders. Answer:

...TRUE

1.2 The Four Types of Firms 1) Partnerships are the most common type of business firm in the world T/F

...false

2) It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions. Answer:

...false

2) The fact that corporations' shares are easily traded within the market has a net effect of acting as a disincentive for managers to favor the interests of shareholders over their own interests. Answer:

...false

22) Which of the following people *may not manage* the operations of a firm in which they are part or full owners? A) stockholders in S corporations B) stockholders in C corporations C) limited partners in a limited partnership D) general partners in a limited partnership Answer: C

..C) limited partners in a limited partnership

Deep Sea Fisheries has current liabilities of $238,620, net working capital of $42,580, inventory of $262,750, and sales of $1,941,840. What is the quick ratio?

.08

Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio?

.25

Wiley's has total equity of $679,400, long-term debt of $316,900, net working capital of $31,600, and total assets of $1,123,900. What is the total debt ratio?

.40

You are analyzing a company that has cash of $8,800, accounts receivable of $15,800, fixed assets of $87,600, accounts payable of $40,300, and inventory of $46,900. What is the quick ratio?

.61

The present value interest factor for $1 at 5% compounded annually for 5 years

.7835 1/ (1.05)^5

As diversification increases, the firm-specific risk of a portfolio approaches

0.

Which of the following is an incorrect keystroke in a financial calculator for calculating the future value of 100 dollars today for 2 years at 10% per year?

0.10 I/Y

Use the following financial information to answer this question. What are the values of the three components of the DuPont identity? Use ending balance sheet values.

0.15; 0.98; 2.86

Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio?

0.25 Cash ratio = cash/accounts payable = $2,950/$11,900 = 0.25

The Jelly Jar has total assets of $79,600 and an equity multiplier of 1.35. What is the debt-equity ratio?

0.35

Tressler Dry Cleaners has inventory of $1,700, accounts payable of $4,200, cash of $1,950, and accounts receivable of $3,680. What is the cash ratio?

0.46 Cash ratio = cash/accounts payable = $1,950/$4,200 = 0.46

If a firm has a debt equity ratio of 1.0, then it's total debt ratio must be which one of the following?

0.5 (section 3.3)

The debt to equity ratio for a company with a 1 million in total debt and 2 million in equity is

0.50

Corporations

1. borrow money in the corporation's name 2. own property 3. sue and be sued 4. own stock in another corporation 5. is a legal person 6. enter into contracts 7. general partner or limited partner in a partnership 8. Limited liability for business debts 9. ease of transferring ownership 10. unlimited life of business 11. has to pay taxes 12. corporate profits taxed twice

working capital includes:

1. cash 2. inventory 3. short-term assets

the Sarbanes-Oxley act requires corporate officers to:

1. confirm the validity of the financial statements 2. be responsible for errors on the annual report

2 purposes of road shows

1. generate interest among potential investors and provide information about the offering 2. they provide information to the issuing firm and its underwriters about the price at which they will be able to market the securities

NASDAQ's three levels of subscribers

1. highest: level 3- subscribers are registered market makers. these are first that make a market in securities, maintain inventories of securities, and post bid and ask prices at which they are willing to buy or sell shares. they can enter and change bid-ask quotes continually and have the fastest execution of trades. they profit from the spread between bid and ask prices 2. level 2- subscribers receive all bid and ask quotes but cannot enter their own quotes. they can see which market makers are offering the best prices. these subscribers tend to be brokerage firms that execute trades for clients but do not actively deal in stocks for their own account 3. level 1- subscribers receive only inside quotes but don't see how many shares are being offered. these subscribers tend to be investors who are not actively buying or selling but want information on current prices

features of a primary market

1. proceeds from the sale of securities goes to the issuing firm 2. the market where initial public offerings are made

3 forms of evidence that support insider trading exists

1. there have been well publicized convictions of principal in insider trading schemes 2. there is considerable evidence of "leakage" of useful information to some traders before any public announcement of that info 3. returns earned on trades by insiders

What is the role of an auditor in financial statement analysis?

1. to ensure that the annual financial statements are prepared accurately 2. to ensure that the annual financial statements are prepared according to Generally Accepted Accounting Principles (GAAP) 3. to verify that the information used in preparing the annual financial statements is reliable

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

1.20

Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?

1.21

Motor Works has total assets of $919,200, long-term debt of $264,500, total equity of $466,900, net fixed assets of $682,800, and sales of $1,021,500. The profit margin is 6.2 percent. What is the current ratio?

1.26

AZ Sales has total revenue of $318,400, cost of goods sold equal to 72 percent of sales, and a profit margin of 8.1 percent. Net fixed assets are $154,500 and current assets are $89,500. What is the total asset turnover rate?

1.30

A firm has net working capital of $6,800 and current assets of $21,800. What is the current ratio?

1.45

What is the debt-equity ratio for a company with 3.5 million in total assets and 1.4 million in equity?

1.50 (3.5-1.4)/ 1.4

Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes is equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34 percent?

1.56 percent

In the future value factor for $1 invested for 5 years at 10% is ___, then the corresponding present value factor for $1 received in 5 years with a 10% discount rate is ___.

1.611; 0.6209

The Inside Door has total debt of $78,600, total equity of $214,000, and a return on equity of 14.5 percent. What is the return on assets?

10.61 percent Return on assets = net income/total assets Total liabilities = 78,600 + 214,000 = 292,600 (we use this figure as total assets because on the balance sheet total liabilities equal total assets.) We are not given net income, but ROE = NI/TE and NI = ROE * TE Net income = 0.145*214,000 = 31,030 Return on assets = net income/total assets = 31,030/292,600 = 0.1061 or 10.61%

Westover Mills has a return on equity of 13.90 percent, an equity multiplier of 1.40, and a payout ratio of 30 percent. What is the firm's sustainable rate of growth?

10.78 percent Sustainable growth rate = [0.139 × (1 - 0.30)] / {1 - [0.139 × (1 - 0.30)]} = 10.78 percent

The Veggie Hut has net income of $26,400, total equity of $102,700, and total assets of $189,500. The dividend payout ratio is 0.30. What is the internal growth rate?

10.81 percent

Assume a 100 investment earns a stated interest rate of 10 percent, compounded monthly. What will be the investment value after one year?

101.11 FV= 100 x (1+ .10/12) ^ 12

The future value of $100 compounded for 50 years at 10% per year is

11,739.09

International Travel Services has net income of $48,400, total assets of $219,000, total equity of $154,800, and total sales of $411,700. What is the common-size percentage for the net income?

11.76 Percent Net income common-size percentage = net income/assets = $48,400/$411,700 = 11.76 percent

You just won $50,000 and deposited your winnings into an account that pays 5.5 percent interest, compounded annually. How long will you have to wait until your winnings are worth $100,000?

12.95 years $100,000 = $50,000 × (1 + 0.055)t ; t = 12.95 years

Al's Sport's store has sales of $897,400 costs of goods sold of $628,300, inventory of $208,400 , and accounts receivable of $74,100. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?

121.07 days Inventory turnover= $628,300/208,400= 3.014875 Days in inventory: 365/3.014875= 121.07 days

You agree to pay back 1,100 in 4 weeks for a 1,000 payday loan. Your annual percentage rate (APR) to two decimal places is ___%

130.00 [(1100/1000) - 1] x (52/4) (100)

The future vale of a $100 investment in 4 years compounded at 8% per year equals

136.05

A credit card has a stated interest rate of 14.56 percent. What is the APR if interest is compounded monthly?

14.56 percent

Mike's Place has total assets of $152,080, a debt-equity ratio of .62, and net income of $14,342 What is the return on equity?

15.28 percent

Browning's, Inc. has a capital intensity ratio of 0.48, a profit margin of 4.80 percent, and a debt-equity ratio of 0.54. What is the firm's return on equity?

15.40 percent ROE = 0.048 × (1 / 0.48) × (1 + 0.54) = 15.40 percent

True Blue Transport has a current stock price of $27. For the past year, the company had net income of $2,187,400, total equity of $13,892,300, sales of $26,511,000, and 2.5 million shares outstanding. What is the market-to-book ratio?

4.86 Market-to-book = Price per share/book value per share Price per share = $27 Book value per share = TE/shares outstanding = $13,892,300/2,500,000 = $5.55692 Market-to-book = $27/$5.55692 = 4.86

Today, you deposit $2,400 in a bank account that pays 4 percent simple interest. How much interest will you earn over the next 5 years?

480.00 Interest = $2,400 × 0.04 × 5 = $480

Goshen Industrial Sales has sales of $487,600, total equity of $367,700, a profit margin of 5.1 percent, and a debt-equity ratio of .34. What is the return on assets?

5.05 percent

The meat market has $747,000 in sales. The profit margin is 4.1% and the firm has 7,500 shares of stock outstanding. The market price per share is $22. What is the price-earnings ratio?

5.39 Earnings per share = (.041x $747,000)/7,500= 4.0836 Price earnings ratio= $22/4.0836= 5.39

You have just won the lottery! You can either receive $5,000 a year for 15 years or $50,000 as a lump sum payment today. What is the interest rate on the annuity option?

5.56 percent

Suppose you borrow 1,000 at 5% interest per year for 10 years. The loan is an interest only loan so each year you will pay ___

50 5% x 1,000

A firm has $42,900 in receivables and $211,800 in total assets. The total asset turnover rate is 1.45 and the profit margin is 4.2 percent. How long on average does it take the firm to collect its receivables?

50.99 days

What is the present value of the following cash flow stream discounted at 6%? 100 in years 1 and 2 followed by 200 in years 3 and 4

509.68

Kato's Corner has an average inventory balance of $41,000, total sales of $363,600, and cost of goods sold of $288,700. How long on average does it take the firm to sell its inventory?

51.84 days Inventory turnover = $288,700/ $41,000 = 7.04146. Days' sales in inventory = 365 / 7.04146= 51.84 days.

A firm has $42,900 in receivables and $211,800 in total assets. The total asset turnover rate is 1.40 and the profit margin is 5.2 percent. How long on average does it take the firm to collect its receivables?

52.81 days Accounts receivable turnover = sales/account receivables Note that sales are not given, but we can calculate it as: Sales = total assets * total asset turnover Accounts receivable turnover = ($211,800 × 1.40)/$42,900 = 6.9119 Days' sales in receivables = 365/receivables turnover = 365/6.9119 = 52.81 days

Galaxy Sales has sales of $746,700, cost of goods sold of $603,200, and inventory of $94,300. How long on average does it take the firm to sell its inventory?

57.06 days

Galaxy Sales has sales of $746,700, cost of goods sold of $603,200, and inventory of $94,300. How long on average does it take the firm to sell its inventory?

57.06 days Inventory turnover = COGS/inventory = $603,200/$94,300 = 6.39661 Days' sales in inventory = 365/inventory turnover = 365/6.39661 = 57.06 days

Delmont Movers has a profit margin of 7.1 percent and net income of $63,700. What is the common-size percentage for the cost of goods sold if that expense amounted to $522,600 for the year?

58.25 percent

Galaxy Sales has sales of $938,300, cost of goods sold of $764,500, and inventory of $123,600. How long on average does it take the firm to sell its inventory?

59.01 days

An imprecise period of time

The short run is ___.

A fire has destroyed a large percentage of the financial records of the Strongwell Co. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 13.8 percent. Sales were $979,000, the total debt ratio was .42, and total debt was $548,000. What is the return on assets?

8.00 percent

Today, you invested $3,900 in a retirement account. What annual rate of return will you have to earn if your account is to be worth $54,000 when you retire 33 years from now? Assume you make no further deposits into this account.

8.29 percent $54,000 = $3,900 × (1 + r)33; r = 8.29 percent

Overnight Trucking recently purchased a new truck costing $150,800. The firm financed this purchase at 8.6 percent interest with monthly payments of $2,100. How many years will it take the firm to pay off this debt?

8.44 years

Bamp;C Co. has net income of $48,200, sales of $947,100, a capital intensity ratio of .87, and an equity multiplier of 1.53. What is the return on equity?

8.95 percent

Suppose you paid a 1,200 loan off by paying 400 in principal each ear plus 10% yearly interest. How much is the second interest payment?

80

BC Corporation had net income of $3.5 million and paid out 700,000 in cash dividends to stockholders. Their retention ratio is ___%.

80 Retention ratio = (3,500,000 - 700,000) / 3,500,000

Last year, Benton Inc. had net income of 3.5 million and paid out 700,000 in cash dividends. If income this year is 4.1 million and the dividend payout ratio is held constant, how much will be paid in dividends?

820,000 4.1m (700,000 / 3.5m)

Friendly Skies Airline has earnings before interest and taxes of $21,680 and net income of $12,542. The tax rate is 35 percent. What is the times interest earned ratio?

9.09 Times interest earned ratio = EBIT/interest Interest paid is not given. Therefore, we have to deduce it based on the given information. According to the income statement: Net income = EBIT - interest - taxes Interest = EBIT - net income - taxes We do not have taxes, but know the tax rate. Therefore: net income = taxable income - (taxable income * tax rate) = taxable income*(1-tax rate) Because the unknown is taxable income: Taxable income = net income/(1-tax rate) Taxes = taxable income - net income Now plug in the tax amount: Interest = EBIT - net income - taxes = 21,680 - 12,542 - 6743.38 = 2,384.62 Times interest earned ratio = EBIT/interest = 21,680/2,384.62 = 9.09

Kessler, Inc. has accounts receivable of $31,600, total assets of $311,500, cost of goods sold of $208,400, and a capital intensity ratio of 1.08. What is the accounts receivables turnover rate?

9.13

Black Stone Industries has a return on equity of 14.10 percent and a debt-equity ratio of 0.53. What is the firm's return on assets?

9.22 percent ROA = 0.141 / (1 + 0.53) = 9.22 percent

The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____.

9.8181 [1- (1/1.08^20)] / .08

Hughes Motors will sell you a $15,000 car for $380 a month for 48 months. What is the interest rate?

9.94 percent

How long will it take to double your savings if you earn 7.2 percent interest, compounded annually?

9.97 years $2 = $1 × (1 + 0.072)t; t = 9.97 years

A decline in bank lending has the most significant effect on A. small businesses. B. federal government. C. state governments. D. large businesses.

A

A flight to quality refers to a shift by savers from A. low−quality bonds and into high-quality bonds. B. bonds and into real​ assets, such as real estate. C. bonds and into stocks. D. stocks and into gold or other precious metals.

A

A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded? A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows. B) It will be depreciated over time on the income statement and subtracted as Inventory on the statement of cash flows. C) It will be depreciated over time on the income statement and therefore not be recorded separately on the statement of cash flows. D) It will be subtracted from Gross Profit on the income statement and therefore not be recorded separately on the statement of cash flows.

A

Hardy Lumber has a capital structure which includes bonds, preferred stock, and common stock. Which of the following rights have most likely been granted to the preferred shareholders? I. right to share in company profits prior to other shareholders II. right to elect the corporate directors III. right to vote on proposed mergers IV. right to all residual income after the common dividends have been paid A. I only B. I and III only C. I and IV only D. II, III, and IV only E. I, II, III, and IV

A

Harvey County Choppers, Inc. is experiencing rapid growth. The company expects dividends to grow at 25 percent per year for the next 7 years before leveling off to 7 percent into perpetuity. The required return on the stock is 12 percent. What is the current stock price if the annual dividend share that was just paid was $1.05? A. $60.15 B. $64.36 C. $67.37 D. $72.11 E. $75.19

A

If you purchase a Treasury​ bond, the Treasury bond is A .an asset to​ you, but a liability to the U.S. government. B. a liability to you as well as a liability to the U.S. government. C. an asset to you as well as an asset to the U.S. government. D. a liability to​ you, but an asset to the U.S. government.

A

In the United​ States, the lender of last resort is A. the Federal Reserve. B. Fannie Mae. C. Securities and Exchange Commission. D. the Federal Deposit Insurance Corporation.

A

Liquidity A. is the ease with which an asset can be exchanged for money. B. is the best available measure of the riskiness of an asset. C. was declining for many financial assets during the 1990s. D. is a characteristic of​ money, and of no other asset.

A

Monetary policy refers to the​ government's A. management of the money supply and interest rates to achieve macroeconomic objectives. B. decisions on how much money to spend. C. decisions on how much money to collect in taxes. D. plans for retiring the national debt

A

Morristown Industries has an issue of preferred stock outstanding that pays a $13.25 dividend every year in perpetuity. What is the required return if this issue currently sells for $80 per share? A. 16.56 percent B. 16.72 percent C. 16.80 percent D. 16.86 percent E. 16.95 percent

A

National Warehousing just announced it is increasing its annual dividend to $1.18 next year and establishing a policy whereby the dividend will increase by 3.25 percent annually thereafter. How much will one share of this stock be worth 8 years from now if the required rate of return is 9.5 percent? A. $24.38 B. $25.68 C. $26.51 D. $27.02 E. $27.37

A

On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction? A) The transaction was between the corporation and investors. B) Shares of Google from this time onward could be traded between investors on a stock exchange. C) The shares were the first to be publicly issued by Google. D) Google was at the time a recently founded company seeking capital with which to expand.

A

Sessler Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.75 a share. Secondly, all dividends after that will decrease by 1.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock today if you require a 14 percent rate of return? A. $11.29 B. $12.64 C. $13.27 D. $14.00 E. $14.21

A

Shares of Hot Donuts common stock are currently selling for $32.35. The last annual dividend paid was $1.10 per share and the market rate of return is 10.7 percent. At what rate is the dividend growing? A. 7.06 percent B. 8.67 percent C. 10.42 percent D. 12.60 percent E. 14.10 percent

A

Southern Utilities just issued some new preferred stock. The issue will pay a $19 annual dividend in perpetuity beginning 9 years from now. What is one share of this stock worth today if the market requires a 7 percent return on this investment? A. $157.97 B. $164.16 C. $189.08 D. $241.41 E. $271.43

A

Springboro Tech is a young start-up company. No dividends will be paid on the stock over the next 15 years, because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend in 16 years and will increase the dividend by 3 percent per year thereafter. What is the current share price if the required return on this stock is 8 percent? A. $75.66 B. $88.19 C. $120.00 D. $164.59 E. $240.00

A

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years time he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steve's major error in reasoning when making this decision? A) Costs and benefits must be in the same terms to be compared. B) There may be other investments that he can make that will offer even bigger benefits. C) The investment may have hidden costs that will reduce the amount of benefit he receives. D) The value of the cash he has today is greater than the value of the cash he may have in the future.

A

Suppose financial intermediaries did not exist and only direct finance was possible. How would this affect the process of an individual buying a car or a​ house? A.Direct financing would increase the price the lender charges and reduce the number of loans. B.Direct financing would increase the price the lender charges while the number of loans would remain unchanged. C.Direct financing would not affect the loan process when buying a house or car. D.Direct financing would decrease the price the lender charges and increase the number of loans

A

Sweatshirts Unlimited is downsizing. The company paid a $2.80 annual dividend last year. The company has announced plans to lower the dividend by 25 percent each year. Once the dividend amount becomes zero, the company will cease all dividends and go out of business. You have a required rate of return of 15.5 percent on this particular stock given the company's situation. What are your shares in this firm worth today on a per share basis? A. $5.19 B. $6.91 C. $8.68 D. $19.29 E. $22.11

A

The Farmer's Market just paid an annual dividend of $5 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a 13 percent return on the stock for the first 3 years, a 9 percent return for the next 3 years, a 7 percent return thereafter. What is the current price per share? A. $212.40 B. $220.54 C. $223.09 D. $226.84 E. $227.50

A

The common stock of Textile Mills pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return? A. $13.75 B. $14.01 C. $14.56 D. $14.79 E. $15.23

A

The current dividend yield on Clayton's Metals common stock is 2.5 percent. The company just paid a $1.48 annual dividend and announced plans to pay $1.54 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock? A. 6.55 percent B. 6.82 percent C. 7.08 percent D. 7.39 percent E. 7.75 percent

A

The term structure of interest rates A. represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities. B. usually results in a downward−sloping yield curve. C. always results in an upward−sloping yield curve. Your answer is not correct.D. reflects differing tax treatment received by different instruments.

A

Under the expectations theory if market participants expect that future short−term rates will be higher than current short−term ​rates, the yield curve will A. slope upward. B. slope​ upward, slope​ downward, or be​ flat, depending on​ risk, liquidity, cost of​ information, and tax considerations. C. slope downward. D. be flat.

A

Under the liquidity premium theory the shape of the yield curve depends on A. the expected pattern of future short−term rates and the size of the term premium at each maturity. B. the relative return of investments in common stocks versus investments in corporate bonds. C. the size of the federal​ government's budget deficit. D. government tax treatment of long−term versus short−term bonds.

A

Westover Winds just paid a dividend of $2.50 per share. The company will increase its dividend by 8 percent next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 2 percent dividend growth, after which the company will keep a constant growth rate forever. What is the price of this stock today given a required return of 12 percent? A. $28.42 B. $28.99 C. $31.83 D. $32.06 E. $32.47

A

What is a primary reason for the yield on​ 3-month Treasury bills being low during​ recessions? A. the Fed pushing short−term interest rates down B. rising inflation C. low risk premium D. the inversion of the yield curve

A

What is the bid-ask spread? A) the difference in price available for an immediate sale of a stock and the immediate purchase of that stock B) all of the costs and fees that a stock exchange charges in order to process a transaction C) the rise or fall in the value of a stock between the time it is acquired by an investor and sold by that investor D) the difference in the selling price of a stock between different exchanges Answer: A

A

What is the effective annual rate (EAR)? A) the interest rate that would earn the same interest with annual compounding B) the ratio of the number of the annual percentage rate to the number of compounding periods per year C) the discount rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction) D) the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year

A

What is the main problem in using a balance sheet to provide an accurate assessment of the value of a company's equity? A) Valuable assets such as the company's reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet. B) The balance sheet does not accurately represent the book value of assets held by the company. C) The equity shown on the balance sheet does not reflect the market capitalization of the company. D) Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.

A

What is the most common way that agency conflict problems are addressed in most corporations? A) by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders B) by terminating the employment of employees who are found to have put their own interests above that of the company's C) by using disinterested outside bodies to adjudicate between managers and shareholders when such conflicts arise D) by prosecuting managers who have been found to have illegally used company moneys for their own benefit

A

When the yield curve is downward−​sloping, A. short−term yields are higher than long−term yields. B. long−term yields are higher than short−term yields. C. the bond market is anticipating the U.S. Treasury may default on its obligations. D. the inflation rate is expected to rise.

A

Which of the following accurately describes the tax treatment of municipal​ bonds? A. Interest is tax​ free, but realized capital gains are taxable. B. Interest is​ taxable, but capital gains are tax free. C. Interest is tax​ free, but unrealized capital gains are taxable. D. All income from municipal bonds is tax free.

A

Which of the following firms would be expected to have a high ROE based on that firm's high profitability? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a low-end retailer that has a low mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of their assets per year

A

Which of the following is not an operating expense? A) interest expense B) depreciation and amortization C) selling, general, and administrative expenses D) research and development

A

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

A

Which of the following statements is FALSE? A) Finding the present value (PV) and compounding are the same. B) A dollar today and a dollar in one year are not equivalent. C) If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. D) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.

A

Which of the stock markets listed below is the smallest, as judged by trading volume? A) Deutsche Börse B) London Stock Exchange C) NASDAQ D) NYSE Euronext (US)

A

Which one of the following statements is correct? A. The capital gains yield is the annual rate of change in a stock's price. B. Preferred stocks have constant growth dividends. C. A constant dividend stock cannot be valued using the dividend growth model. D. The dividend growth model can be used to compute the current value of any stock. E. An increase in the required return will decrease the capital gains yield.

A

Which one of the following statements related to the NYSE is correct? A. Commission brokers work on behalf of brokerage firm clients. B. Shareholders of NYSE Group, Inc. own "seats" on the exchange. C. Specialists buy at the asked price. D. The NYSE is primarily a dealer's market. E. Floor brokers earn income in the form of a bid-ask spread.

A

Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage? A) debt-equity or equity multiplier ratio B) market-to-book ratio C) market debt-equity ratio D) current or quick ratio

A

long-term liability

A 30-year mortgage loan is a ________.

-Accounting value on a specific date -Economic value at a specific time

A balance sheet reflects a firm's ___.

$3.8 billion

A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?

a patent for a drug held by the company

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?

Which of the following is a perpetuity?

A constant steam of cash flows forever

Accounts receivable

A customer has yet to pay the bill for products purchased on credit. This debt is recorded in which balance sheet account?

revenue received for the delivery of items that have not yet been delivered

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?

50.99 days

A firm has $42,900 in receivables and $211,800 in total assets. The total asset turnover rate is 1.45 and the profit margin is 4.2 percent. How long on average does it take the firm to collect its receivables?

Has positive net working capital

A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm: pays cash for its inventory. has more than half its current assets invested in inventory. has more cash than inventory. has more current liabilities than it does current assets. has positive net working capital.

that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firmʹs management discussion and analysis (MD&A)?

true

A firmʹs statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.

Which one of these statements is true concerning the price-earnings (PE) ratio? A high PE ratio may indicate that a firm is expected to grow significantly. A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings. PE ratios are unaffected by the accounting methods employed by a firm. The PE ratio is classified as a profitability ratio. The PE ratio is a constant value for each firm.

A high PE ratio may indicate that a firm is expected to grow significantly.

prefers its profits be taxed as personal income to its owners

A limited liability company: Is a hybrid between a sole proprietorship and a partnership Prefers its profits be taxed as personal income to its owners That meets the IRS criteria to be an LLC will be taxed like a corporation Provides limited liability for some, but not all, of its owners Cannot be created for professional service firms, such as accountants and attorneys

It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows

A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded?

Which of the following statements is CORRECT? a. The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet. b. Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast. c. A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed. d. If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN equation will provide more accurate forecasts than the forecasted financial statements method. e. Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income.

A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed.

the jones brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships are:

A perpetuity

The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows

A printing company prints a brochure for a client and then bills them for this service. At the time the printing companyʹs financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?

Investors believe the companyʹs assets are not likely to be profitable since its market value is worth less than its book value

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?

F. Marston, Inc. has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)? a. A switch to a just-in-time inventory system and outsourcing production. b. The company reduces its dividend payout ratio. c. The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35. d. The company discovers that it has excess capacity in its fixed assets. e. A sharp increase in its forecasted sales.

A sharp increase in its forecasted sales.

Since net working capital is negative, the company will not have enough funds to meet its obligations

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?

as an outflow under investment activities

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?

Has its profits taxed as personal income

A sole proprietorship: provides limited financial liability for its owner. involves significant legal costs during the formation process. has an unlimited life. has its profits taxed as personal income. can generally raise significant capital from non-owner sources.

Production equipment is classified as:

A tangible fixed asset

20) The fact that the *after-tax cost of debt is lower than the pretax cost* of debt implicitly assumes that interest expense can be A) expensed. B) margined. C) refinanced. D) none of the above Answer: A

A) *expensed*

6) Which of the stock markets listed below is the *smallest, as judged by trading volume*? A) Deutsche Börse B) London Stock Exchange C) NASDAQ D) NYSE Euronext (US) Answer:

A) Deutsche Börse

7) Which of the following statements is *FALSE*? A) Issuance costs increase the WACC. B) External equity is less expensive than retained earnings. C) A project that can be financed with internal funds will be less costly than the same project if it were financed with external funds. D) Issuance costs should be treated as cash outflows in NPV analysis. Answer:

A) Issuance costs increase the WACC.

13.1 A First Look at the Weighted Average Cost of Capital 1) Financial managers *do not need to use all *sources of financing in order to determine the cost of capital.

Answer: FALSE

For a given time period (t) and interest rate (r), the present value factor is ___ the future value factor

The reciprocal of and 1 divided by

8) On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction? A) The transaction was between the corporation and investors. B) Shares of Google from this time onward could be traded between investors on a stock exchange. C) The shares were the first to be publicly issued by Google. D) Google was at the time a recently founded company seeking capital with which to expand. Answer:

A) The transaction was between the corporation and investors.

9) Many financial managers *use market risk premiums that are closer to 5%*, which is *lower* than historical averages, because investors require a ________ risk premium for holding risky securities than in the past. A) lower B) higher C) similar D) none of the above Answer: A 

A) lower

24) A sole proprietorship is owned by A) one person. B) two or more persons. C) shareholders. D) bankers. Answer:

A) one person.

5) What is the *most common type of firm* in the United States and the world? A) sole proprietorships B) partnerships C) limited partnerships D) corporations Answer:

A) sole proprietorships

9) What is the *bid-ask spread*? A) the difference in price available for an immediate sale of a stock and the immediate purchase of that stock B) all of the costs and fees that a stock exchange charges in order to process a transaction C) the rise or fall in the value of a stock between the time it is acquired by an investor and sold by that investor D) the difference in the selling price of a stock between different exchanges Answer:

A) the difference in price available for an *immediate sale* of a stock and the *immediate purchase* of that stock

16) Holding everything else constant, an *increase in cash* ________ the firm's net debt. A) will decrease B) will have no impact on C) will increase D) may increase or decrease Answer:

A) will decrease

-15% -34% -25% -35%

According to the originators of the US corporate tax code, the only rates are:

Which of the following statements is CORRECT? a. Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets. b. If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth. c. Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them. d. If a firm has a positive free cash flow, then it must have either a zero or a negative AFN. e. Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.

Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

Agency Problem

Which one of the following statements is true concerning annuities?

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

Increase in accounts payable

All else equal, an increase in which one of the following will decrease owners' equity? Increase in inventory Increase in accounts payable Increase in accounts receivable Increase in net working capital Increase in net fixed assets

Which of the following create problems when conducting financial statement analysis?

All of the above are common problems

It would be an addition to property, plant and equipment so it would be an investing activity

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?

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

Amortized

Which of the following methods can be used to calculate present value?

An alegbraic formula, a time value of money table and a financial calculator

Records expenses based on the matching principle

An income statement prepared according to GAAP: reflects the net cash flows of a firm over a stated period of time. reflects the financial position of a firm as of a particular date. distinguishes variable costs from fixed costs. records revenue when payment for a sale is received. records expenses based on the matching principle.

When you refer to a bond's coupon, you are referring to which one of the following?

Annual interest payment

Lee pays 1% per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as:

Annual percentage rate

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?

Annuity

An annuity with payments beginning immediately rather than at the end of the period is called an ____.

Annuity due

9) A *levered firm* is one that has ________ outstanding. A) debt B) equity C) preferred stock D) equity options

Answer: A A) debt

6) The *firm's overall cost of capital* that is a blend of the costs of the different sources of capital is known as the firm's A) weighted average cost of capital. B) cost of equity infusion. C) cost of debt. D) cost of preferred stock.

Answer: AA) *weighted average cost of capital*

11) For an *unlevered firm*, the cost of capital of the firm can be determined by using the A) yield on the traded debt. B) Capital Asset Pricing Model. C) dividend yield. D) preferred stock yield.

Answer: B B) Capital Asset Pricing Model.

10) *Leverage* is the amount of ________ on a firm's balance sheet. A) equity B) debt C) preferred stock D) none of the above

Answer: B B) debt

3) Anheuser Busch, a manufacturer of beverages, is planning to *purchase Six Flags* theme parks. Anheuser Busch should use the ________ to evaluate the business of Six Flags. A) WACC of Anheuser Busch B) WACC of Six Flags C) average market return D) none of the above

Answer: BB) WACC of Six Flags

4) A firm's sources of financing, which usually consists of *debt and equity*, represent its A) total assets. B) capital. C) total liabilities. D) current liabilities.

Answer: BB) capital.

4) *Different divisions with differing lines* of business* use different costs of capital* because their cost of ________ could be different. A) debt B) equity C) capital D) assets

Answer: CC) capital

8) Apple computers has *raised all its capital via equity rather than debt*. Such a firm is also referred to as an ________ firm. A) levered B) margined C) risk less D) unlevered

Answer: D D) unlevered

5) *Different divisions with differing lines* of business use *different costs of capital* because their *cost of equity is different* and also because the ________ could be different. A) optimal volatility B) optimal current ratio C) optimal asset mix D) optimal debt-equity ratio

Answer: DD) optimal debt-equity ratio

- Deferred taxes - Accounts payable

Which of the following are classified as liabilities on a firm's balance sheet?

13.99%

Assume the total cost of a college education will be $325,000 when your child enters college in 16 years. You presently have $40,000 to invest and do not plan to invest anything further. What annual rate of interest must you earn on your investment to cover the entire cost of your child's college education? 12.65 percent 10.40 percent 13.99 percent 14.62 percent 11.08 percent

What is the primary benefit of "S" corporations?

Avoids double taxation

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

B

) Which of the following is the best statement of the Valuation Principle? A) It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks. B) The value of a commodity or an asset to the firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm. C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. D) If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.

B

A company has two open seats, Seat A and Seat B, on its board of directors. There are 6 candidates vying for these 2 positions. There will be a single election to determine the winner of both open seats. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 200 of your votes for a single candidate. What is this type of voting called? A. democratic B. cumulative C. straight D. deferred E. proxy

B

A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations? A) Profits from the sales of popular models will be lost when returned to the shareholders in the form of dividends. B) New models will require a lot of money to develop and bring to market before they generate any revenue. C) The company will have built up debts which must be repaid in order to bring the current models to market. D) Equity must be raised to finance the development of new models to replace the existing models.

B

A company's board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employees' diligence and industry. What general principle is being argued by the board of directors? A) In a conflict between stakeholders in a company, the most important stakeholder is not always the stockholders. B) Some activities that decrease shareholders' wealth may have intangible benefits which increase the strength of the company overall. C) When a conflict of interest arises between shareholders and other stakeholders, in general, the correct solution is the one that creates the greatest good for the greatest number of stakeholders. D) Ethical decisions should be assessed on their moral value, not on their value in dollars and cents.

B

A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case? A) by the sale of the assets held by the company that hold most of its value B) by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors C) by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company D) by removing the employees expectations of the continued poor performance of the company

B

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

B

A limited liability company is essentially A) a limited partnership without limited partners. B) a limited partnership without a general partner. C) just another name for a limited partnership. D) just another name for a corporation.

B

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

B

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

B

-Change in net working capital -Operating cash flow -Capital spending

Which of the following are components of cash flow from assets?

Beatrice Markets is expecting a period of intense growth and has decided to retain more of its earnings to help finance that growth. As a result, it is going to reduce its annual dividend by 30 percent a year for the next 2 years. After that, it will maintain a constant dividend of $2.50 a share. Last year, the company paid $3.60 as the annual dividend per share. What is the market value of this stock if the required rate of return is 14.5 percent? A. $14.63 B. $16.70 C. $18.08 D. $19.61 E. $21.23

B

Bechtel Machinery stock currently sells for $50 per share. The market requires a 15 percent return on the firm's stock. The company maintains a constant 8 percent growth rate in dividends. What was the most recent annual dividend per share paid on this stock? A. $3.00 B. $3.24 C. $3.50 D. $3.67 E. $3.91

B

Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company: A. must always show a current liability of $2,400, ($2.40 1,000), for dividends payable. B. must still declare each dividend before it becomes an actual company liability. C. is obligated to pay $2.40 per share each year in perpetuity. D. will be declared in default if it does not pay at least $2.40 per share per year on a timely basis. E. has a liability that must be paid at a later date should the company miss paying an annual dividend payment.

B

Default risk arises from the fact that A. it is inherently riskier to wait for a capital gain than to receive an immediate interest payment. B. borrowers differ in their ability to repay in full the principal and interest required by a loan agreement. C. interest rates are far more likely to go up than to go down. D. the bond price drops when interest rates rise.

B

Diversification refers to the A. difficulty of selling common stocks in a weak market. B. splitting of wealth into many assets. C. difference between the liquidity of an asset and its risk. D. difficulty of converting investments in common stocks into investments in bonds.

B

Douglass Gardens pays an annual dividend that is expected to increase by 4.1 percent per year. The stock commands a market rate of return of 12.6 percent and sells for $24.90 a share. What is the expected amount of the next dividend? A. $2.03 B. $2.12 C. $3.17 D. $2.20 E. $2.28

B

Hardwoods, Inc. is a mature manufacturing firm. The company just paid a $10 dividend, but management expects to reduce the payout by 9 percent each year, indefinitely. How much are you willing to pay today per share to buy this stock if you require a 15 percent rate of return? A. $34.79 B. $37.92 C. $38.27 D. $41.33 E. $42.09

B

Hightower Pharmacy just paid a $3.10 annual dividend. The company has a policy of increasing the dividend by 3.8 percent annually. You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another four years. If you require a 16 percent rate of return, how much will you be willing to pay per share for the 100 shares when you can afford to make this investment? A. $29.50 B. $30.62 C. $31.12 D. $31.78 E. $32.47

B

Home Care Providers is paying an annual dividend of $1.10 every other year. The last dividend was paid two years ago. The firm will continue this policy until 3 more dividend payments have been paid. One year after the last dividend normal payment, the company plans to pay a final liquidating dividend of $40 per share. What is the current market value of this stock if the required return is 17 percent? A. $18.92 B. $20.74 C. $23.16 D. $24.14 E. $24.53

B

How do the shareholders of most corporations exercise their control of that corporation? A) by voting on issues that concern them B) by electing members of a board of directors C) by vetting the decisions of the board of directors D) by providing oversight of the day to day running of the corporation

B

If lenders anticipate no changes in​ liquidity, information​ costs, and tax​ differences, the yield on a risky security should be A. less than that on a safe security and the price of a risky security should be greater than that on a safe security. B. greater than that on a safe security and the price of a risky security should be lower than that of a safe security. C. less than that on a safe security and the price of a risky security should also be less than that of a safe security. D. greater than that on a safe security and the price of a risky security should also be greater than that of a safe security.

B

Interest and capital gains are taxed differently in the United States in that A. capital gains when realized are exempt from state and local taxes. B. interest is taxed as ordinary​ income, but capital gains are taxed only when realized. C. interest is taxed as ordinary​ income, but capital gains are taxed as accrued. D. interest is exempt from state and local taxes.

B

Langley Enterprises pays a constant dividend of $0.60 a share. The company announced today that it will continue to pay the dividend for another 2 years after which time all dividends will cease. What is one share of this stock worth today if the required rate of return is 16.5 percent? A. $0.92 B. $0.96 C. $1.04 D. $1.09 E. $1.20

B

Many savers are willing to accept a lower interest rate on municipal bonds than on comparable instruments because A. municipal bonds invariably have lower default risk. B. the after−tax yield on municipal bonds is greater. C. municipal bonds are more liquid than most other instruments. D. the yield on municipal bonds is considered inflation proof.

B

Miller Brothers Hardware paid an annual dividend of $1.15 per share last month. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 12 percent rate of return, how much are you willing to pay to purchase one share of this stock today? A. $12.23 B. $12.55 C. $12.67 D. $12.72 E. $12.88

B

Municipal bonds are issued A. only by state governments. B. by both state and local governments. C. only by local governments. D. by the federal​ government, and by state and local governments.

B

Show Boat Dinner Theatres has paid annual dividends of $0.32, $0.48, and $0.60 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively flat. Given the lack of future growth, you will only buy this stock if you can earn at least a 16 percent rate of return. What is the maximum amount you are willing to pay for one share of this stock today? A. $3.43 B. $3.75 C. $4.43 D. $4.69 E. $4.82

B

Situations of negative interest rates on​ short-term bonds resulted​ from: A. very low risk premiums B. investors were looking for safe havens when other investments were perceived to be very risky C. government regulations requiring financial firms to purchase government bonds D. high income tax rates

B

Suppose you know a company's stock currently sells for $90 per share and the required return on the stock is 10 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. What is the current dividend if it's the company's policy to always maintain a constant growth rate in its dividends? A. $4.18 B. $4.29 C. $4.37 D. $4.50 E. $4.64

B

The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to pay $1.35 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 3 percent annually and expects to continue doing so. What is the market rate of return on this stock? A. 7.42 percent B. 7.79 percent C. 19.67 percent D. 20.14 percent E. 20.86 percent

B

The default risk premium is measured A. by an index published monthly by The Wall Street Journal. B. as the difference between the yield on a non−Treasury security and the yield on a U.S. Treasury security of the same maturity. C. by an index published monthly by the Securities and Exchange Commission. D. as the difference between the nominal yield on the security and the real after−tax yield on the security.

B

The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case? A) by increasing the debt burden carried by the company B) by raising the company's equity by encouraging new owners to take a stake in the company C) by decreasing the ratio of equity to debt held by the company D) by increasing the value of shares held by the existing owners of the company

B

The financial system performs the role of communicating information by A. constantly increasing the liquidity of most assets. B. incorporating all available information into the prices of financial assets. C. providing to investors for a nominal charge all government reports available about a particular company. D. constantly reducing the riskiness of most assets.

B

The next dividend payment by Hillside Markets will be $2.35 per share. The dividends are anticipated to maintain a 4.5 percent growth rate forever. The stock currently sells for $70 per share. What is the dividend yield? A. 3.20 percent B. 3.36 percent C. 3.54 percent D. 4.50 percent E. 4.81 percent

B

The owner of one of the 1,366 trading licenses for the NYSE is called a: A. broker. B. member. C. agent. D. specialist. E. dealer.

B

The process by which investment banks guarantee a certain price to a firm issuing stocks or bonds is known​ as: A. microlending B. underwriting C. securitization D. proprietary trading

B

To compute the future value of a cash flow, you must: A) discount it. B) compound it. C) double it. D) arbitrage it.

B

What is a competitive market? A) a market in which goods can be bought at the ask price and sold at bid price B) a market in which a good can be bought and sold at the same price C) a market in which a good is sold at a lower price than that for which it can be bought D) a market in which a good is bought for a lower price than that for which it can be sold

B

What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A. zero growth B. dividend growth C. capital pricing D. earnings capitalization E. discounted dividend

B

Whenever a good trades in a competitive market, the ________ determines the value of the good. A) supply B) price C) demand D) cost

B

Which of the following best explains why market prices are useful to a financial manager when performing a cost benefit analysis? A) They can be used to determine how much an asset can be sold for. B) They can be used to convert different services and commodities into equivalent cash values which can be compared. C) They allow all commodities and services to be assigned a fixed and unchanging value. D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.

B

Which of the following statements regarding the valuing of costs and benefits is NOT correct? A) The first step in evaluating a project is to identify its costs and benefits. B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values. C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations

B

Which of the following statements regarding the valuing of costs and benefits is NOT correct? A) The first step in evaluating a project is to identify its costs and benefits. B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values. C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.

B

Which one of the following is an underlying assumption of the dividend growth model? A. A stock has the same value to every investor. B. A stock's value is equal to the discounted present value of the future cash flows which it generates. C. A stock's value changes in direct relation to the required return. D. Stocks that pay the same annual dividend have equal market values. E. The dividend growth rate is inversely related to a stock's market price.

B

Why is a stock exchange like NASDAQ considered a secondary market? A) It trades the second largest volume of shares in the world. B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation. C) The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart D) NASDAQ is called a secondary market because NYSE is considered a primary market.

B

Why is it usually necessary to use the time value of money when performing a cost benefit analysis? A) For an investment project to be considered, costs must have a higher dollar value from benefits. B) In most investment projects costs are incurred up front, but benefits are provided in the future. C) For practical purposes, a dollar today may be considered to be equal to a dollar at some future time. D) Although costs and benefits generally occur concurrently, the benefits will accrue value over time, due to interest.

B

Why is the stock price of a company an indication of the performance of that company's senior managers? A) Well-run companies are invariably highly profitable, which leads to a higher share price. B) In general, people want to invest in a well-managed corporation, which will drive up the price of shares. C) Investors who can see that a company is well-run will hold on to their shares, even if the company faces temporary set-backs, since they know that the stock price will likely rise again. D) Larger companies tend to be better run and so have higher stock prices.

B

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true? A. The dividend must be constant. B. The stock has a negative capital gains yield. C. The dividend yield must be zero. D. The required rate of return for this stock increased over the year. E. The firm is experiencing supernormal growth.

B

Yesteryear Productions pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $0.40 a share for two years commencing four years from today. After that time, the company plans on paying a constant $0.75 a share annual dividend indefinitely. How much are you willing to pay to buy a share of this stock today if your required return is 11.6 percent? A. $3.78 B. $4.22 C. $4.37 D. $4.71 E. $4.98

B

You want to purchase some shares of Green World stock but need a 15 percent rate of return to compensate for the perceived risk of such ownership. What is the maximum you are willing to spend per share to buy this stock if the company pays a constant $0.90 annual dividend per share? A. $5.40 B. $6.00 C. $6.90 D. $7.20 E. $7.80

B

12) Why is the *stock price of a company an indication of the performance of that company's senior managers*? A) Well-run companies are invariably highly profitable, which leads to a higher share price. B) In general, people want to invest in a well-managed corporation, which will drive up the price of shares. C) Investors who can see that a company is well-run will hold on to their shares, even if the company faces temporary set-backs, since they know that the stock price will likely rise again. D) Larger companies tend to be better run and so have higher stock prices. Answer:

B) In general, people want to invest in a well-managed corporation, which will drive up the price of shares

11) Which of the following is a *measure of the aggregate price level of collections of pre-selected stocks*? A) NASDAQ B) S&P 500 C) NYSE D) Euronext Answer:

B) S&P 500

7) Why is a *stock exchange* like NASDAQ considered a *secondary market*? A) It trades the second largest volume of shares in the world. B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation. C) The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart D) NASDAQ is called a secondary market because NYSE is considered a primary market. Answer:

B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation.

Inverse

The relationship between the present value and the investment time period is best described as: direct. inverse. unrelated. ambiguous. parallel.

23) What is the process of double taxation for the stockholders in a C corporation? A) Their shares are taxed when they are both bought and sold. B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. C) The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares. D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation. Answer:

B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them.

13) A *corporate raider gains a controlling fraction of the shares of a poorly managed company* and *replaces the board of directors*. How does the corporate raider hope to make a profit in this case? A) by the sale of the assets held by the company that hold most of its value B) by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors C) by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company D) by removing the employees expectations of the continued poor performance of the company Answer:

B) by the *rise in the value of the stock held by the raider* when the new board of directors is judged to be superior to the ousted board of directors

6) When we *compute the cost of equity capital for a project* we assume that the ________ of the project is equivalent to the *average risk* of the firm's investments. A) diversifiable risk B) market risk C) non-systematic risk D) volatility Answer:

B) market risk

What are the distributions to shareholders by a corporation called? A. retained earnings B. net income C. dividends D. capital payments E. diluted profits

C

Which on of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?

Balance sheet

8.95%

Bamp;C Co. has net income of $48,200, sales of $947,100, a capital intensity ratio of .87, and an equity multiplier of 1.53. What is the return on equity? 6.77 percent 5.93 percent 8.95 percent 12.21 percent 14.09 percent

To calculate the future value of 100 invested for t years at r interst rate, you enter the present value in your calculator as a negative number. Why?

Because the 100 is an outflow from you which should be negative.

$783,400

Blythe Industries reports the following account balances: inventory of $417,600, equipment of $2,028,300, accounts payable of $224,700, cash of $51,900, and accounts receivable of $313,900. What is the amount of the current assets? $46,700 $56,000 $783,400 $975,000 $699,700

The major downside of using financial statements for analysis is that the data contained in them is based on

Book values and historical values

"The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate" is false.

C

A company that retains a high bond rating during a recession in which many other companies see their bond ratings cut will experience A. a decreased demand for its​ securities, resulting in a lower expected return. B. a decreased flow of funds into the market for its securities. C. an increased flow of funds into the market for its securities. D. an increased demand for its​ securities, resulting in a higher expected return.

C

A floor broker on the NYSE does which one of the following? A. supervises the commission brokers for a financial firm B. trades for his or her personal inventory C. executes orders on behalf of a commission broker D. maintains an inventory and takes the role of a specialist E. is charged with maintaining a liquid, orderly market

C

A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a: A. floor trader. B. floor post. C. specialist. D. floor broker. E. commission broker.

C

A one−year bond currently pays​ 5% interest.​ It's expected that it will pay​ 4.5% next year and​ 4% the following year. The two−year term premium is​ 0.2% while the three−year term premium is​ 0.35%. What is the interest rate on a three−year bond according to the liquidity premium​ theory? A. ​5.05% B. ​4.68% C. ​4.85% D. ​4.5%

C

A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which type of market? A. auction B. private C. over-the-counter D. regional E. electronic network

C

All of the following accurately describe microlending​ EXCEPT: A. it involves small loans B. many economists think it has aided economic growth in many​ low-income countries C. lending is primarily undertaken by the government D. the borrowers are people who are attempting to start or expand a small business

C

10) When *corporate tax rates decline*, the *net cost of debt* financing A) decreases. B) is unchanged. C) increases. D) none of the above Answer:

C) increases.

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: A. an increase in all stock values. B. all stock values to remain constant. C. a decrease in all stock values. D. dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. E. dividend-paying stocks to increase in price while non-dividend paying stocks decrease in value.

C

Atlas Mines has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 2.75 percent annually. The firm just paid an annual dividend of $1.67. What will the dividend be six years from now? A. $1.88 B. $1.92 C. $1.97 D. $2.02 E. $2.05

C

Combined Communications is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15 percent a year for the next 4 years and then decreasing the growth rate to 3.5 percent per year. The company just paid its annual dividend in the amount of $0.20 per share. What is the current value of one share of this stock if the required rate of return is 15.5 percent? A. $1.82 B. $2.04 C. $2.49 D. $2.71 E. $3.05

C

Dexter Metals, paid its first annual dividend yesterday in the amount of $0.18 a share. The company plans to double each annual dividend payment for the next 3 years. After that time, it plans to pay $1.25 a share for 2 years than then pay a constant dividend of $1.60 per share indefinitely. What is one share of this stock worth today if the market rate of return on similar securities is 10.24 percent? A. $12.32 B. $12.77 C. $13.20 D. $14.26 E. $14.79

C

Diets For You announced today that it will begin paying annual dividends next year. The first dividend will be $0.12 a share. The following dividends will be $0.15, $0.20, $0.50, and $0.60 a share annually for the following 4 years, respectively. After that, dividends are projected to increase by 4 percent per year. How much are you willing to pay to buy one share of this stock today if your desired rate of return is 8.5 percent? A. $9.67 B. $9.94 C. $10.38 D. $10.50 E. $10.86

C

Fannie Mae and Freddie Mac both A. directly lend funds to people seeking mortgages. B. help regulate the banking system. C. sell bonds to investors and use the funds to purchase mortgages. D. reduce access to funds for mortgages by purchasing existing mortgages.

C

Following the downgrade of U.S. debt by Standard​ & Poor's in​ August, 2011: A. other rating agencies also downgraded U.S. debt B. the U.S. implemented a plan to significantly reduce its budget deficit later that year C. investors​ didn't seem to be any more concerned about default risk than before the downgrade D. interest rates spiked as​ investor's perception of risk increased

C

Galloway, Inc. has an odd dividend policy. The company has just paid a dividend of $7 per share and has announced that it will increase the dividend by $2 per share for each of the next 5 years, and then never pay another dividend. How much are you willing to pay per share today to buy this stock if you require a 15 percent return? A. $27.08 B. $34.15 C. $41.72 D. $42.60 E. $43.33

C

High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of High Country Builders' has a higher ______ than the stock of Valley High Builders. A. market price B. dividend yield C. capital gains yield D. total return E. The answer cannot be determined based on the information provided.

C

How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend, the dividends increase by 1.6 percent annually, and you require a 10 percent rate of return? A. $8.29 B. $8.33 C. $8.47 D. $8.53 E. $8.59

C

I) The CML is the line from the risk-free rate through the market portfolio. II) The CML is the best attainable capital allocation line.IV) The CML always has a positive slope.

C

In most corporations, to whom does the chief financial officer report? A) the shareholders B) the board of directors C) the chief executive officer D) the controller

C

Inflation is calculated as the rate of change in the: A) Unemployment rate. B) Gross Domestic Product. C) Consumer Price Index. D) Risk-free rate.

C

Jen's Fashions is growing quickly. Dividends are expected to grow at a 22 percent rate for the next 3 years, with the growth rate falling off to a constant 8 percent thereafter. The required return is 12 percent and the company just paid a $3.80 annual dividend. What is the current share price? A. $128.96 B. $131.11 C. $146.17 D. $148.87 E. $152.20

C

3) The ________ of a firm's debt can be used as the *firm's current cost of debt*. A) current yield B) coupon rate C) yield to maturity D) discount yield Answer:

C) yield to maturity

KL Airlines paid an annual dividend of $1.42 a share last month. The company is planning on paying $1.50, $1.75, and $1.80 a share over the next 3 years, respectively. After that, the dividend will be constant at $2 per share per year. What is the market price of this stock if the market rate of return is 10.5 percent? A. $15.98 B. $16.07 C. $18.24 D. $21.16 E. $24.10

C

Last year, Hansen Delivery paid an annual dividend of $3.20 per share. The company has been reducing the dividends by 10 percent annually. How much are you willing to pay to purchase stock in this company if your required rate of return is 11.5 percent? A. $1.92 B. $7.87 C. $13.40 D. $21.16 E. $24.08

C

Marie owns shares of Deltona Productions preferred stock which she says provides her with a constant 14.3 percent rate of return. The stock is currently priced at $45.45 a share. What is the amount of the dividend per share? A. $6.00 B. $6.25 C. $6.50 D. $6.60 E. $7.00

C

National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: A. basically worthless as it offers no growth potential. B. equal in value to the present value of $1 paid one year from today. C. priced the same as a $1 perpetuity. D. valued at an assumed growth rate of one percent. E. worth $1 a share in the current market.

C

Renew It, Inc., is preparing to pay its first dividend. It is going to pay $0.45, $0.60, and $1 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you demand a 10.8 percent rate of return on stocks of this type? A. $6.67 B. $8.21 C. $10.14 D. $11.47 E. $12.03

C

Roy's Welding Supplies common stock sells for $38 a share and pays an annual dividend that increases by 3 percent annually. The market rate of return on this stock is 8.20 percent. What is the amount of the last dividend paid? A. $1.80 B. $1.86 C. $1.92 D. $1.98 E. $2.10

C

Some claim that ratings agencies have a conflict of interest​ since: A. government began to include bond ratings as part of regulations of mutual​ funds, banks, and financial firms B. they issued many of the mortgages that were later securitized into bonds C. since agencies charge firms for their services rather than​ investors, they have an incentive to give high ratings to gain business D. they rate the quality of their own bonds

C

The Troubled Asset Relief Program​ (TARP) allowed A. the Fed to provide funds to commercial banks in return for stock. B. the Fed to make loans to banks as the lender of last resort. C. the Treasury to inject funds into commercial banks in return for stock in the banks. D. the Treasury to insure bank deposits at major U.S. banks.

C

The distinguishing feature of a wellminus−functioning financial market is the A.continual reduction in the riskiness of most assets. B.increased ease of converting common stocks into bonds. C.incorporation of available information into asset prices. D. continual increase in the liquidity of most assets.

C

The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board? A) Germany B) France C) United States D) United Kingdom

C

The expectations theory suggests that A. the yield curve should usually be upward−sloping. B. the slope of the yield curve reflects the risk premium incorporated into the yields on long-term bonds. C. the slope of the yield curve depends on the expected future path of short−term rates. D. the yield curve should usually be downward−sloping.

C

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

C

The preferred stock of Rail Lines, Inc., pays an annual dividend of $7.50 and sells for $59.70 a share. What is the rate of return on this security? A. 10.38 percent B. 11.63 percent C. 12.56 percent D. 12.72 percent E. 12.84 percent

C

The segmented markets theory A. provides a good explanation of why yields on instruments of different maturities tend to move together. B. has difficulty explaining why yield curves usually slope up. C. has difficulty explaining why yields on instruments of different maturities tend to move together. D. has difficulty explaining why yield curves usually slope down.

C

The stream of customer orders coming in to the NYSE trading floor is called the: A. paper trail. B. trading volume. C. order flow. D. bid-ask spread. E. commission trail.

C

The term structure is usually defined with yields on which​ securities? A. Commercial paper B. Corporate bonds C. U.S. Treasury securities D. Municipal bonds

C

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

C

Which of the following apply to a specialist who trades on the floor of the NYSE? I. provides liquidity for an individual security II. partially being replaced by SuperDOT III. pays an annual fee for a trading license IV. acts as a dealer A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

C

Which of the following assets is the most​ liquid? A.computer B.washing machine C.money market mutual fund D.U.S. Treasury bond

C

Which of the following is NOT a financial statement that every public company is required to produce? A) income statement B) statement of sources and uses of cash C) balance sheet D) statement of stockholders' equity

C

Which of the following is NOT a reason why financial managers must take great care when making investment decisions? A) These investment decisions determine whether the firm will add value for its owners. B) These investments determine the long-term directions in which the company may move. C) These investment decisions determine the corporations mix of debt and equity. D) These investment decisions typically involve substantial costs which must be carefully

C

Which of the following is typically the major factor in limiting the growth of a sole proprietorship? A) The organization of such firms tends to become extremely complicated over time. B) It is extremely difficult to transfer control of such a firm to a new owner if the present owner dies or wishes to sell the firm. C) The amount of money that can be raised by the firm is limited by the fact that the single owner must make good on all debts. D) Investors have a great deal of control over the day-to-day running of the firm, leading to confusion when conflicts in direction arise.

C

Which of the following people may not manage the operations of a firm in which they are part or full owners? A) stockholders in S corporations B) stockholders in C corporations C) limited partners in a limited partnership D) general partners in a limited partnership

C

Which of the following statements is FALSE? A) The actual return kept by an investor will depend on how the interest is taxed. B) The equivalent after-tax interest rate is r(1 - τ). C) The highest interest rate, for a given horizon, is the rate paid on U.S. Treasury securities. D) It is important to use a discount rate that matches both the horizon and the risk of the cash flows.

C

Which one of the following is computed by dividing next year's annual dividend by the current stock price? A. yield to maturity B. total yield C. dividend yield D. capital gains yield E. growth rate

C

Whistle Stop Trains pays a constant $16 dividend on its stock. The company will maintain this dividend for the next 14 years and will then cease paying dividends forever. What is the current price per share if the required return on this stock is 15 percent? A. $77.78 B. $82.48 C. $91.59 D. $106.67 E. $112.00

C

Why are arbitrage opportunities short-lived? A) Federal regulations will kick in to restrict trade and effectively shut the opportunity down. B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values. C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal. D) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.

C

You are the sole shareholder of a small corporation. Presently, you wish to diversify your holdings and thus want to sell a portion of your shares but do not want to incur the costs associated with SEC filings. Which one of the following markets, if any, might be conducive to this sale? A. NASDAQ B. OTCBB C. Pink Sheets D. NYSE E. None of the above

C

You want to be on the board of directors of Wisely Foods. Since you are the only shareholder that will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected under these conditions? A. democratic B. cumulative C. straight D. deferred E. proxy

C

4) Which of the following is *not a role of financial institutions*? A) Moving funds from savers to borrowers. B) Spreading out risk-bearing. C) Printing money for borrowers. D) Moving funds though time. Answer:

C) Printing money for borrowers.

7) Which of the following is *NOT* a reason *why financial managers must take great care when making investment decisions*? A) These investment decisions determine whether the firm will add value for its owners. B) These investments determine the long-term directions in which the company may move. C) These investment decisions determine the corporations mix of debt and equity. D) These investment decisions typically involve substantial costs which must be carefully weighed against their potential benefits. Answer:

C) These investment decisions determine the corporations mix of debt and equity.

8) When calculating the *WACC*, it is *standard practice to subtract* ________ to compute the net debt outstanding. A) equity B) dividends C) cash and risk-free securities D) coupons Answer:

C) cash and risk-free securities

5) When we use the *WACC to assess a project*, we assume that the ________ ratio does not change. A) reward to systematic risk B) risk to reward C) debt to equity D) volatility to systematic risk Answer:

C) debt to equity

Jenna has ben promoted and is now in charge of all external financing. In other words, she is in charge of:

Capital Structure Management

Which of the following items are used to compute the current ratio?

Cash and accounts payable

Which one of the following is a measure of long-term solvency? Price-earnings ratio Profit margin Cash coverage ratio Receivables turnover Quick ratio

Cash coverage ratio

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:

Charge interest annually

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Common-size income statement

Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.

Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?

Which of the following is NOT one of the steps taken in the financial planning process? a. Monitor operations after implementing the plan to spot any deviations and then take corrective actions. b. Determine the amount of capital that will be needed to support the plan. c. Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios. d. Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors. e. Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised.

Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.

2.35

Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio?

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 50/50 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

Corporation

The Du Pont identity can be totally defined by which one of the following?

Correct Equity multiplier and return on assets

How is the inventory turnover ratio computed?

Cost of goods sold/ Inventory

A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets?

Current Assets = $520 + $190 + $70 = $780

A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,9190. What is the amount of the total liabilities?

Current assets: $6,230 - $3,910 = $2,320 Current liabilities: $2,320 - $640 = $1,680 Total liabilities: $1,680 + $4,180 = $5,860

The current yield on a bond is equal to the annual interest divided by which one of the following?

Current market price

) Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders? A) by increasing the penalties to firms for providing false information B) by increasing the independence of auditors and clients C) by decreasing the non-audit fees that an auditor can receive from a client D) by forcing companies to audit financial statements they release

D

) Which of the following statements is FALSE? A) Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows. B) The effective annual rate indicates the amount of interest that will be earned at the end of one year. C) The annual percentage rate indicates the amount of simple interest earned in one year. D) The annual percentage rate indicates the amount of interest including the effect of compounding.

D

A stock pays a constant annual dividend and sells for $56.10 a share. If the market rate of return on this stock is 15.85 percent, what is the amount of the next annual dividend? A. $7.67 B. $7.94 C. $8.21 D. $8.89 E. $10.30

D

All of the following were significant changes in the mortgage market in the 2000s EXCEPT A. mortgage−backed securities became more popular with investors. B. investment banks became significant participants in the secondary mortgage market. C. lenders loosened lending standards. D. borrowers tended to increase the amount of their down payments.

D

Alt−A borrowers were those who A.did not provide documentation of their income when applying for a mortgage. B. used mortgages to purchase apartments. C. borrowed using ​"interest−​only" mortgages. D. chose adjustable−rate mortgages instead of fixed−rate mortgages.

D

An ECN is best described as: A. an electronic network which transmits orders directly to the floor of the NYSE. B. the network used in the primary market for selling newly issued shares. C. the international trading network of the NYSE. D. a website that allows individual investors to trade directly with one another. E. a computerized network used by independent brokers.

D

An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate A. I and II only B. III and IV only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV

D

Free Motion Enterprises paid a $2.20 per share annual dividend last week. Dividends are expected to increase by 3.75 percent annually. What is one share of this stock worth to you today if your required rate of return is 15 percent? A. $19.06 B. $19.30 C. $19.56 D. $20.29 E. $20.59

D

The purpose of diversification is to A. reduce tax liability. B. increase the liquidity of a financial portfolio. C. reduce the brokerage fees involved in managing a financial portfolio. D. reduce risk.

D

Historically, why have high inflation rates tended to be associated with high nominal interest rates? A) Individuals will spend more when they expect their investments to increase in value. B) Growth in investment and savings is encouraged when consumers are judged to be overspending. C) High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term. D) The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.

D

If you buy a bond issued by​ Intel, the bond is​ a(n): A.liability to both you and Intel. B.liability to you and an asset to Intel. C.asset to both you and Intel. D.liability to Intel and an asset to you.

D

In which of the following relationships is an agency conflict problem LEAST likely to arise? A) the relationship between a hire-car company and the persons who hire that company's cars regarding the treatment of those cars B) the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks C) the relationship between a restauranter and the suppliers of produce to that restaurant regarding the freshness of the produce supplied D) the relationship between a driver and the passengers in a car regarding the safe driving of that car

D

Investments by wealthy individuals and endowments is a major source of money for each of the following except: A) private equity funds. B) hedge funds. C) venture capital funds. D) mutual funds.

D

J&J Foods wants to issue some 7 percent preferred stock that has a stated liquidating value of $100 a share. The company has determined that stocks with similar characteristics provide a 12.8 percent rate of return. What should the offer price be? A. $37.26 B. $41.38 C. $48.20 D. $54.69 E. $62.60

D

Jefferson Mills just paid a dividend of $1.56 per share on its stock. The dividends are expected to grow at a constant rate of 8 percent per year, indefinitely. What will the price of this stock be in 7 years if investors require a 15 percent rate of return? A. $28.18 B. $32.04 C. $37.46 D. $41.25 E. $43.33

D

Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information? A. Regardless of the voting procedure, Jen does not own enough shares to gain a seat on the board. B. If straight voting applies, Jen is assured a seat on the board. C. If straight voting applies, Jen can control all of the open seats. D. If cumulative voting applies, Jen is assured one seat on the board. E. If cumulative voting applies, Jen can control all of the open seats.

D

Supernormal growth is a growth rate that: A. is both positive and follows a year or more of negative growth. B. exceeds a firm's previous year's rate of growth. C. is generally constant for an infinite period of time. D. is unsustainable over the long term. E. applies to a single, abnormal year.

D

Suppose that savers become much more willing to purchase a certain type of municipal bond. The result will be that the​ bond's price will A. fall relative to the price of U.S. Treasury securities but rise relative to the price of corporate bonds. B. rise relative to the price of U.S. Treasury securities but fall relative to the price of corporate bonds. C. fall relative to the prices of U.S. Treasury securities and corporate bonds. D. rise relative to the prices of U.S. Treasury securities and corporate bonds.

D

The Blue Marlin is owned by a group of 5 shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting? A. 17 percent B. 20 percent plus one vote C. 25 percent plus one vote D. 50 percent plus one vote E. 51 percent

D

The counter area on the floor of the NYSE where a specialist operates is called a: A. pit. B. hot spot. C. seat. D. post. E. DOT.

D

The main role of financial intermediaries is to A. provide funds to the federal government to cover the budget deficit. B. help ensure that there is enough money in circulation. C. provide advice to consumers on how they should handle their finances. D. borrow funds from savers and lend them to borrowers.

D

The risk structure of interest rates refers to A. the relationship among the interest rates on similar bonds with different maturities. B. the amount of additional yield necessary to compensate savers for the lesser liquidity of some bonds. C. the amount of additional interest necessary to compensate savers for the greater risk of default on some bonds. D. the relationship among the interest rates on bonds with the same maturity.

D

The secondary market is best defined by which one of the following? A. market in which subordinated shares are issued and resold B. market conducted solely by brokers C. market dominated by dealers D. market where outstanding shares of stock are resold E. market where warrants are offered and sold

D

The segmented markets theory A. explains upward−sloping yield curves as resulting from the favorable tax treatment of long−term bonds. B. is unable to account for upward−sloping yield curves. C. explains upward−sloping yield curves as resulting from the demand for long−term bonds being high relative to the demand for short−term bonds. D. explains upward−sloping yield curves as resulting from the demand for long−term bonds being low relative to the demand for short−term bonds.

D

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: A. pay an increasing dividend for a period of time and then cease paying dividends altogether. B. increase the dividend amount every other year. C. pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. D. grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. E. pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.

D

Upper Crust Bakers just paid an annual dividend of $2.80 a share and is expected to increase that amount by 4 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 11.50 percent at the time of your purchase? A. $37.33 B. $38.16 C. $38.83 D. $40.38 E. $42.00

D

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements? A) It is easier to find specific information in such a report if it is laid out in a clear and consistent manner. B) It ensures that information on the performance of private companies is readily available to the public. C) It ensures that important information is not omitted and superfluous information is not included. D) It makes it easier to compare the financial results of different firms.

D

What is the most important duty of a financial officer? A) to ensure that the firm has enough cash on hand to meet its commitments at any given time B) to decide how to pay for investments C) to manage working capital D) to make investment decisions

D

When the costs of an investment come before that investment's benefits, what will be the the effect of a rise in interest rates on the attractiveness of that investment to potential investors? A) It will make it more attractive, since it will increase the investment's net present value (NPV). B) It will make it more attractive, since it will decrease the investment's net present value (NPV). C) It will make it less attractive, since it will increase the investment's net present value (NPV). D) It will make it less attractive, since it will decrease the investment's net present value (NPV).

D

Which of the following are unique for an S corporation? A) The firm's profits and losses are not taxed at the corporate level, but shareholders must include these profits and losses on their individual tax returns. B) The shareholders of an S corporation must include the firm's profit and losses in their individual income taxes even if no money is distributed to them. C) There is a maximum limit on the number of shareholders for an S corporation. D) all of the above

D

Which of the following firms would be expected to have a high ROE based on that firm's high operating efficiency? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a high-end fashion retailer that has a very high mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of their assets per year

D

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned? A) It includes entries for the depreciation of assets. B) It does not include entries for expenditures on inventory. C) It does not include entries for collection of money from account receivables. D) It includes cash inflows from services rendered.

D

Which of the following is the overarching principal that a financial manager should follow when making decisions? A) Decisions should generate the greatest benefits for the firm. B) Decisions should provide benefit to the firm without incurring costs greater than those benefits to others. C) Decisions should be on behalf of the firm's owners that give the greatest benefit to those owners, the firm's employees and the firm's other stakeholders. D) Decisions should increase the value of the firm to its investors.

D

Which of the following is true about perpetuities? A) All else equal, the value of a perpetuity is higher when the periodic cash flow is higher. B) All else equal, the value of a perpetuity is higher when the interest rate is lower. C) If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. D) All of the above are true statements.

D

Which of the following need be true for an asset to be considered liquid? A) It pays regular dividends. B) It can be bought and sold at an organized stock market or bourse. C) It is offered for sale on both primary and secondary markets. D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.

D

Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate? A) There is a greater chance that a borrower will default in a longer time-frame. B) The penalties for closing out a long term loan early make them unattractive to many investors. C) Long term loans typically have ongoing costs that accumulate over the life of the loan. D) The loan values are very sensitive to changes in market interest rates.

D

Which of the following statements about junk ​(high−​risk) bonds is​ true? A. They never outperform treasury bonds since​ they're too risky. B. The price of junk bonds increase as their perceived risk increases. C. They tend to perform best during recessions. D. One can profit by owning them if market perceptions of their risk decline.

D

Which of the following statements is FALSE? A) The interest rates that banks offer on investments or charge on loans depends on the horizon of the investment or loan. B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates. D) Fundamentally, interest rates are determined by the Federal Reserve. Answer: D

D

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

D

Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower? A) The number of borrowers seeking funds is low. B) The expected inflation rate is expected to be low. C) The borrower is judged to have a low degree of risk. D) The investment will be for a long period of time.

D

Which one of following is the rate at which a stock's price is expected to appreciate? A. current yield B. total return C. dividend yield D. capital gains yield E. coupon rate

D

Which one of the following players on the floor of the NYSE can be likened to part-time help because they are called to duty only when others are fully employed? A. floor trader B. specialist C. dealer D. floor broker E. commission broker

D

Which one of the following represents the capital gains yield as used in the dividend growth model? A. D1 B. D1/P0 C. P0 D. g E. g/P0

D

Which one of the following rights is never directly granted to all shareholders of a publicly-held corporation? A. electing the board of directors B. receiving a distribution of company profits C. voting either for or against a proposed merger or acquisition D. determining the amount of the dividend to be paid per share E. having first chance to purchase any new equity shares that may be offered

D

Which one of the following statements currently applies to a NYSE broker? A. owns a "seat" on the exchange B. buys at the bid price C. remains at his or her specified post D. matches customer buy and sell orders E. trades for his or her personal account

D

Which one of the following statements is correct concerning the two-stage dividend growth model? A. G1 cannot be negative. B. Pt = Dt/R. C. G1 must be greater than G2. D. G1 can be greater than R. E. R must be less than G1 but greater than G2.

D

Which one of the following transactions occurs in the primary market? A. purchase of 500 shares of GE stock from a current shareholder B. gift of 100 shares of stock to a charitable organization C. gift of 200 shares of stock by a mother to her daughter D. a purchase of newly issued stock from AT&T E. IBM's purchase of GE stock

D

Why is it in general difficult to determine the market price of a private corporation's shares at any point in time? A) It is difficult to obtain enough information to accurately value such a company. B) The price of its shares is fixed by the owners. C) It has a limited number of owners. D) There is no organized market for its shares.

D

Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company? A) Both decisions involve the purchase of assets. B) Both decisions will be made based on what provides the greatest long-term benefit. C) Both decisions are vital to the financial health of the decision maker. D) Both decisions should be made based upon the tradeoff benefits and costs across time.

D

Why must care be taken when comparing a firm's share price to its operating income? A) Both share price and operating income are related to the whole firm. B) Share price is a quantity related to the entire firm, while operating income is an amount that is related solely to equity holders. C) Both share price and operating income are related solely to equity holders. D) Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.

D

Winter Time Adventures is going to pay an annual dividend of $2.86 a share on its common stock next year. This year, the company paid a dividend of $2.75 a share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth five years from now if the applicable discount rate is 11.7 percent? A. $43.45 B. $43.87 C. $44.15 D. $45.19 E. $47.00

D

false

International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty -first century.

You are an accountant and have been analyzing the financial statements of Euro Place Markets, which is a foreign retailer. While the firm's financials are not prepared according to GAAP, you have still been able to understand the firm's accounting practices and feel that this firm has a bright future. On which one of the following U.S. markets, if any, might you be able to purchase shares in this firm? A. NYSE B. NASDAQ C. OTCBB D. Pink Sheets E. No U.S. market will list this foreign security.

D

You own 600 shares of a NASDAQ listed stock that you wish to sell. Which of the following are options available to you for this purpose? I. sell the shares to a dealer at the dealer's bid price II. sell directly to another individual via an ECN III. offer the shares yourself on NASDAQ via an ECN IV. have a broker offer the shares for sale on the NYSE A. I and II only B. III and IV only C. II and III only D. I, II, and III only E. II, III, and IV only

D

You own one share of a cumulative preferred stock which pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next dividend is paid. A. 0 B. 1 C. 2 D. 3 E. either 1, 2, or 3

D

Zylo, Inc. preferred stock pays a $7.50 annual dividend. What is the maximum price you are willing to pay for one share of this stock today if your required return is 9.75 percent? A. $32.26 B. $35.48 C. $72.68 D. $76.92 E. $79.81

D

13) Which of the following is *NOT a step in the WACC valuation method*? A) Compute the weighted average cost of capital. B) Discount the incremental free cash flows of the investment using the weighted average cost of capital. C) Determine the incremental free cash flows of the investment. D) Determine the mean weighted average cost of capital for the firm's industry. Answer:

D) *Determine the mean weighted average* cost of capital for the firm's industry.

4) Which of the following need be *true for an asset to be considered liquid*? A) It pays regular dividends. B) It can be bought and sold at an organized stock market or bourse. C) It is offered for sale on both primary and secondary markets. D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time. Answer: D

D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.

3) Which of the following best describes why the *Valuation Principle* is a key concept in making financial decisions? A) It shows how to assign monetary value to intangibles such as good health and well-being. B) It allows fixed assets and liquid assets to be valued correctly. C) It gives a good indication of the net worth of a person, item, or company and can be used to estimate any changes in that net worth. *D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.* Answer:

D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.*

5) Why is it in general *difficult to determine the market price of a private corporation's shares* at any point in time? A) It is difficult to obtain enough information to accurately value such a company. B) The price of its shares is fixed by the owners. C) It has a limited number of owners. D) There is no organized market for its shares. Answer: D

D) There is no organized market for its shares.

3) Which of the following are major duties of a financial manager? I. To make investment decisions II. To make financing decisions III. To manage cash flow from operating activities A) I only B) I and II only C) I and III only D) all of the above Answer:

D) all of the above

4) Over *four-fifths of all U.S. business revenue* is generated by which type of firm? A) sole proprietorships B) partnerships C) limited partnerships D) corporations Answer:

D) corporations

2) *Divisional costs of capital* are more appropriate when evaluating a project for a line of business when the types of business in a firm are A) mature businesses. B) similar. C) new businesses. D) different.

D) different.

14) A ________ is when a *rich individual or organization purchases a large fraction* of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO. A) shareholder proposal B) leveraged buyout C) shareholder action D) hostile takeover Answer:

D) hostile takeover

3) *Investments by wealthy individuals* and endowments is a major source of money for each of the following except: A) private equity funds. B) hedge funds. C) venture capital funds. D) mutual funds. Answer:

D) mutual funds.

What is the expected return of a zero-beta security?

The risk-free rate.

Which one of the following will decrease the present value of an annuity?

Decrease in the annuity payment

Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested.

Decrease in the interest rate

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

Decrease in the tax rate

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

Decrease in the tax rate

-Equipment -Fixed assets

Depreciation is the accountant's estimate of the cost of ___ used in the production process matched with the benefits produced from owning it.

-Equipment -Fixed assets

Depreciation is the accountants's estimate of the cost of ___ used in the production process matched with the benefits produced from owning it.

Which one of the following is the price that an investor pays to purchase an outstanding bond?

Dirty price

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

Discount rate

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

Discounted cash flow valuation

Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called:

Discounting

An agent who maintains an inventory from which he or she buys and sells securities is called a: A. broker. B. trader. C. capitalist. D. principal. E. dealer.

E

Bonnie's Ice Cream is expecting its ice cream sales to decline due to the increased interest in healthy eating. Thus, the company has announced that it will be reducing its annual dividend by 2 percent a year for the next five years. After that, it will maintain a constant dividend of $2 a share. Last year, the company paid $2.20 per share. What is this stock worth to you if you require a 9.5 percent rate of return? A. $16.21 B. $17.48 C. $18.64 D. $19.09 E. $21.36

E

Callander Enterprises stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets? A. private B. auction C. exchange floor D. secondary E. primary

E

Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management? A. negotiated settlement where each side is granted control over one of the open seats B. protracted legal battle over control of the board of directors C. arbitrated settlement where the arbitrator determines who will be elected to the board D. control of the board decided without your influence E. proxy fight for control of the board

E

Great Lakes Health Care common stock offers an expected total return of 9.2 percent. The last annual dividend was $2.10 a share. Dividends increase at a constant 2.6 percent per year. What is the dividend yield? A. 3.75 percent B. 4.20 percent C. 4.55 percent D. 5.25 percent E. 6.60 percent

E

Home Canning Products common stock sells for $44.96 a share and has a market rate of return of 12.8 percent. The company just paid an annual dividend of $1.04 per share. What is the dividend growth rate? A. 8.29 percent B. 8.45 percent C. 9.23 percent D. 9.67 percent E. 10.25 percent

E

Marshall Arts Studios just paid an annual dividend of $1.36 a share. The firm plans to pay annual dividends of $1.40, $1.46, and $1.58 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share. What is this stock worth today at a 9 percent discount rate? A. $14.08 B. $14.30 C. $16.67 D. $16.79 E. $17.46

E

Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return? A. 13.88 percent B. 14.03 percent C. 14.21 percent D. 14.37 percent E. 14.60 percent

E

The Stiller Corporation will pay a $3.80 per share dividend next year. The company pledges to increase its dividend by 2.4 percent indefinitely. How much are you willing to pay to purchase this company's stock today if you require a 6.9 percent return on your investment? A. $55.07 B. $63.09 C. $72.22 D. $78.47 E. $84.44

E

The person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n): A. floor trader. B. dealer. C. specialist. D. executor. E. commission broker.

E

Which of the following features do preferred shareholders and bondholders frequently have in common? I. lack of voting rights II. conversion option into common stock III. annuity payments IV. fixed liquidation value A. I and II only B. III and IV only C. II, III, and IV only D. I, III, and IV only E. I, II, III, and IV

E

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities? A. senior bond B. debenture C. warrant D. common stock E. preferred stock

E

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model? A. no dividends for 5 years, then increasing dividends forever B. $1 per share annual dividend for 2 years, then $1.25 annual dividends forever C. decreasing dividends for 6 years followed by one final liquidating dividend payment D. dividends payments which increase by 2, 3, and 4 percent respectively for 3 years followed by a constant dividend thereafter E. dividend payments which increase by 10 percent per year for 5 years followed by dividends which increase by 3 percent annually thereafter

E

Which one of the following statements applies to NASDAQ? A. a partner with the London exchange B. exchange floor is located in Chicago C. single market maker for each listed security D. broker's market E. comprised of three separate markets

E

Which one of the following statements related to corporate dividends is correct? A. Dividends are nontaxable income to shareholders. B. Dividends reduce the taxable income of the corporation. C. The Chief Executive Officer of a corporation is responsible for declaring dividends. D. The Chief Financial Officer of a corporation determines the amount of dividend to be paid. E. Corporate shareholders may receive a tax break on a portion of their dividend income.

E

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? A. dual class B. cumulative C. non-cumulative D. preferred E. common

E

Which one of these statements related to preferred stock is correct? A. Preferred shareholders normally receive one vote per share of stock owned. B. Preferred shareholders determine the outcome of any election that involves a proxy fight. C. Preferred shareholders are considered to be the residual owners of a corporation. D. Preferred stock normally has a stated liquidating value of $1,000 per share. E. Cumulative preferred shares are more valuable than comparable non-cumulative shares.

E

Who owns the NYSE? A. NYSE members B. specialists C. dealers D. floor brokers E. shareholders

E

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? A. altering B. cumulative voting C. straight voting D. indenture agreement E. voting by proxy

E

SML formula

Ei

estimated return of stock given new info and beta

Ei aka sml

Non-owner stakeholders in a company

Employees, suppliers, government

An ordinary annuity is best defined by which one of the following?

Equal payments paid at regular intervals over a stated time period.

Which one of the following is a measure of long-term solvency?

Equity Multiplier

Which of the following accurately describes the three parts of the Du Pont indentity?

Equity multiplier, profit margin, and total asset turnover (3.4)

1.4 The Financial Manager's Place in the Corporation 1) In most corporations the owners exercise direct control of the corporation. Answer:

FALSE

Joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest compounded monthly, at the end of three years. Joe has taken out an amortizing loan.

FALSE

The annual percentage rate indicates the amount of interest, including the effect of any compounding.

FALSE

The real interest rate is the rate of growth of one's purchasing power due to money invested.

FALSE

Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.

FALSE

When there are large numbers of people looking to save their money and there is little demand for loans, one would expect interest rates to be high.

FALSE

Which one of the following is the correct formula for the future value of $500 invested today at 7 percent interest for 8 years?

FV = $500 (1 + 0.07)8

What is the principal amount of a bond that is repaid at the end of the loan term called?

Face value

Manning, Inc. originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. Which one of the following terms applies to this situation?

Fallen angel

A firm's profit margin is 5%, its debt/assets ratio is 56%, and its dividend payout ratio is 40%. If the firm is operating at less than full capacity, then sales could increase to some extent without the need for external funds, but if it is operating at full capacity with respect to all assets, including fixed assets, then any positive growth in sales will require some external financing.

False

Companies with relatively high assets-to-sales ratios require a relatively large amount of new assets for any given increase in sales; hence, they have a greater need for external financing. There are currently no alternatives for these types of firms to lower their asset requirements.

False

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the well being of the firm

False

Firms pay a low interest rate on spontaneous liabilities so these funds are its cheapest source of capital. Consequently, the firm should make arrangements with its suppliers to use as much of this credit as possible

False

If a firm's capital intensity ratio (A0*/S0) decreases as sales increase, use of the AFN formula is likely to understate the amount of additional funds required, other things held constant.

False

Once a firm has defined its purpose, scope, and objectives, it must develop a strategy for achieving its goals. Corporate strategies are detailed plans rather than broad approaches

False

Operating plans sketch out broad approaches for realization of the firm's strategic vision. These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year

False

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

False

The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate. It can be calculated by using the AFN equation with AFN equal to zero and solving for g.

False

To calculate a cash flow's present value (PV), you must compound it.

False

To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets. both of which are uses of funds

False

When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal

False, the calculator is already programmed to interpret 10 as 10%

Assume that expected returns and standard deviations for all securities (including the risk-free rate for borrowing and lending) are known. In this case all investors will have the same optimal risky portfolio.

False. If the borrowing and lending rates are not identical, then, depending on the tastes of the individuals (that is, the shape of their indifference curves), borrowers and lenders could have different optimal risky portfolios.

Which of the following statements is CORRECT? a. When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow. b. Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process. c. For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets. d. There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to remain constant over time as the size of the firm increases. The Economic Ordering Quantity model for establishing inventory levels demonstrates this relationship. e. When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A0*/S0 and L0*/S0) vary from year to year in a stable, predictable manner.

Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process.

Marginal

For financial decision-making purposes, the most important tax rate is the __ tax rate.

The term "additional funds needed (AFN)" is generally defined as follows: a. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations. b. The amount of assets required per dollar of sales. c. The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth. d. A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant. e. Funds that are obtained automatically from routine business transactions.

Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.

Spontaneous funds are generally defined as follows: a. A forecasting approach in which the forecasted percentage of sales for each item is held constant. b. Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock. c. Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes. d. The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm's growth. e. Assets required per dollar of sales.

Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes.

The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times respectively. Explaining the upward trend in the inventory turnover ratio requires:

Further investigation

The amount an investment is worth after one or more periods is called the ___ value.

Future

Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the:

Future Value

1.35

GenCorp. has a total debt of $140 million and stockholdersʹ equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorpʹs market debt-equity ratio?

If the interest rate is greater than zero, the value of an annuity due is always ___ an ordinary annuity

Greater than

$5,100

Green Roofs, Inc. has current liabilities of $14,300 and accounts receivable of $7,800. The firm has total assets of $43,100 and net fixed assets of $23,700. The owners' equity has a book value of $21,400. What is the amount of the net working capital?

Given an internal growth rate of 3 percent, a firm can ___

Grow by 3 percent or less without any additional external financing

Which one of the following individuals is most apt to purchase a municipal bond?

Highly compensated business owner

The major downside of using financial statements for analyses is that the data contained in them is based on

Historical and book values

The last item in the statement of cash flows should equal the difference in cash balances between two adjacent balance sheets

How can we cross check the statement of cash flows?

The balance sheet is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st.

How does a firm select the date for preparation of its balance sheet?

The income statement is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st. Typically the income statement spans the flow between two adjacent balance sheets.

How does a firm select the dates for preparation of its income statement?

Total tax bill / Total taxable income

How is the average income tax rate computed?

The T-shirt Hut successfully managed to reduce its general and administrative costs this year. This cost improvement will increase which of the following ratios? I. Profit margin II. Return on assets III. Total asset turnover IV. Return on equity

I, II, and IV only

You want to have $1 million dollas in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5% annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire?

I. Invest in a different account paying a higher rate of interest. II. Invest in a different account paying a lower rate of interest. III. Retire later. IV. Retire sooner. I AND III

Which of the following will increase the future value of a lump sum investment? I. Decreasing the interest rate II. Increasing the interest rate III. Increasing the time period IV. Decreasing the amount of the lump sum investment

II and III only

Which of the following will decrease the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value. I. Increase in the interest rate II. Decrease in the lump sum amount III. Increase in the investment time period IV. Decrease in the investment time period

II and IV only

$50 **(200-150)

If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ___.

Investments

If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas? international finance private placements corporate finance capital management investments

$330,000

In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?

The total debts of the partnership, even if he or she was unaware of those debts

In a general partnership, each partner is personally liable for: the partnership debts that he or she created. his or her proportionate share of all partnership debts regardless of which partner incurred that debt. the total debts of the partnership, even if he or she was unaware of those debts. the debts of the partnership up to the amount he or she invested in the firm. all personal and partnership debts incurred by any partner, even if he or she was unaware of those debts.

unsystematic risk is negligible.

In a well-diversified portfolio

Cash flows

In finance, the value of a firm depends on its ability to generate ___.

Sara is investing $1,000 today. Which one of the following will increase the future value of that amount?

Increasing the interest rate

Jamie earned $180 in interest on her savings account last year. She has decided to leave the $180 in her account so that she can earn interest on the $180 this year. The interest Jamie earns this year on this $180 is referred to as:

Interest on interest

You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain?

Interest only

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

Internal Growth rate

$487,100

Lew's Auto Repair has cash of $18,600, accounts receivable of $34,500, accounts payable of $28,900, inventory of $97,800, long-term debt of $142,000, and net fixed assets of $363,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $85,000 and the fixed assets for $349,000. The firm could collect 100 percent of its receivables as they are secured. What is the market value of the firm's assets? $332,800 $458,200 $374,200 $495,500 $487,100

Generally speaking, payback is best used to evaluate which type of projects?

Low-cost, short-term

1.59%

Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0 . Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7 . How much asset turnover should manufacturer B have to match manufacturer Aʹs ROE?

Sole proprietorship

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts? Sole proprietorship Limited partnership Corporation Joint stock company General partnership

Whenever ___ information is available, it should be used instead of accounting data

Market

How is the market-to-book ratio measured?

Market value per share/ book value per share

On which one of the following dates is the principal amount of a bond repaid?

Maturity date

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

Maximize the current value per share

Based on the DuPont Identity, an increase in sales, all else held equal, ____ ROE

May increase or decrease May not change

beta with other formula given stock and excess returns

NOT GIVEN stock return excess/mrp (Er-rf)/mrp

Depriciation

Net capital spending is equal to the change in net fixed assets plus:

Plus (+) depriciation

Net capital spending to ending net fixed assets minus beginning net fixed assets ____.

Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year?

Net income = $1,300 + (-$310) = $990

Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35%. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes?

Net income = $75 + $418 + = $493 Taxable income = $493/(1-.35) = $758.46 Earnings before interest and taxes = $758.46 + $511 = $1,269.46

0.15; 0.98; 2.86

Net income = 1,220 Sales = 8,200 Total liabilities and owners' equity = 8,340 Common stock = 1,500 Retained earnings = 1,420 What are the values of the three components of the DuPont identity?

Which one of the following is the correct equation for computing return on assets?

Net income/ total assets

Which of the following is the correct equation for return on equity?

Net income/ total equity

Expenses; do not directly affect

Non-cash items are ___ that __ cash flow.

Net income; cash flow

Non-cash items are expenses that directly affect ___ but do not directly affect ___ .

If the simple CAPM is valid, say whether the situation is possible or not? Portfolio Expected Return Beta A 20 1.4 B 25 1.2

Not possible. Portfolio A has a higher beta than Portfolio B, but the expected return for Portfolio A is lower than the expected return for Portfolio B. Thus, these two portfolios cannot exist in equilibrium.

Portfolio Expected Return Standard Deviation Risk-free 10 0 Market 18 24 A 16 12

Not possible. The reward-to-variability ratio for Portfolio A is better than that of the market. This scenario is impossible according to the CAPM because the CAPM predicts that the market is the most efficient portfolio. Using the numbers supplied: SA = 0.16 - 0.10 = 0.5 SM = 0.18 - 0.10 = 0.33 0.12 0.24 Portfolio A provides a better risk-reward trade-off than the market portfolio.

Why are arbitrage opportunities short - lived?

Once investors take advantage of the opportunity, prices will respond so that the buying and selling price becomes equal.

The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?

Which of the following statements is CORRECT? a. A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives. b. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon. c. A firm's mission statement defines its lines of business and geographic area of operations. d. The corporate scope is a condensed version of the entire set of strategic plans. e. Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals.

Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.

constant dividend growth model

P0= div1/re-g; Re=div1/Po+g

Which of the following are ways to amortize a loan?

Pay principal and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of the principal

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?

Perpetuity

what is not a basic area of finance?

Personal Finance

$1,377

Precision Engineering invested $125,000 at 6 percent interest, compounded annually for 3 years. How much interest on interest did the company earn over this period of time? $1,284 $1,377 $1,317 $1,369 $2,679

If you want to know how much you need to invest today at 12% compounded annually in order to have 4,000 in five years, you will need to find a ___ value.

Present

Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626?

Present value

When entering variables in an excel function the "sign convention" can be critical to achieving a correct answer. The sign convention says that outflows are negative values; inflows are positive values. For which variables is this a consideration?

Present value, payment and future value

2.60

Preston's Market has sales of $213,600, total assets of $198,700, a debt-equity ratio of 1.6, and a profit margin of 2.4 percent. What is the equity multiplier?

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

Price-earnings ratio

true

Price-earnings ratios tend to be high for fast-growing firms.

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

Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33

Book Value

Purchase Price- Accumulated Depreciation

If you borrow 15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a

Pure discount loan

1. Cash equivalents 2. Accounts receivable 3. Inventory 4. Plant and equipment

Rank the ease (from easiest to hardest) of turning the following assets into cash.

Given an interest rate of 0%, the future value of a lump sum invested today will always:

Remain constant, regardless of the investment time period

According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to

Rf + β [E(RM) - Rf].

Which of the following can be determined using the future value approach to compound growth developed in this chapter?

Sales, population and dividend growth

A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?

Shareholders' equity: $5,900 + $21,200 - $8,400 = $18,700 (Note: The amount of retained earnings is not provided, so you must use total assets minus total liabilities to derive the correct answer.)

Working Capital

Short term assets+Short term liabilities ex: inventory=short term asset money owed to suppliers=short-term liability *is not total current liabilities

RISK FREE RATE

Since Stock A and Stock B are perfectly negatively correlated, a risk-free portfolio can be created and the rate of return for this portfolio, in equilibrium, will be the risk-free rate. To find the proportions of this portfolio [with the proportion wA invested in Stock A and wB = (1 - wA) invested in Stock B], set the standard deviation equal to zero. With perfect negative correlation, the portfolio standard deviation is: σP = Absolute value [wAσA- wBσB] 0 = 5 × wA − [10 × (1 - wA)] => wA = 0.6667 The expected rate of return for this risk-free portfolio is: E(r) = (0.6667 × 12) + (0.3333 × 17) = 13.667% Therefore, the risk-free rate is: 13.667%

Kurt will have a larger account value than stacey will

Stacey deposits $5,000 into an account that pays 2 percent interest, compounded annually. At the same time, Kurt deposits $5,000 into an account paying 3.5 percent interest, compounded annually. At the end of three years: Both Stacey and Kurt will have accounts of equal value. Kurt will have twice the money saved that Stacey does. Kurt will earn exactly twice the amount of interest that Stacey earns. Kurt will have a larger account value than Stacey will. Stacey will have more money saved than Kurt.

___ financial statements provide for comparison of firms that differ in size

Standardized

Examples of some firms that had practiced inaccurate reporting are Enron and WorldCom

State the names of some of the firms discussed in the chapter that had inaccurate reporting in their financial statements

An interest rate expressed in terms of the interest payment made each period is called a

Stated or quoted interest rate

true

Stockholdersʹ equity is the difference between a firmʹs assets and liabilities, as shown on the balance sheet

stocks vs treasury bills

Stocks generally deliver a higher rate of return but also have higher trends of fluctuation

1.1 Why Study Finance? 1) The *Valuation Principle* shows how to make the *costs and benefits* of a decision comparable so that we can evaluate them properly. Answer:

TRUE

2) *Stock markets* provide* liquidity for a firm's shares.* Answer:

TRUE

2) Corporations have come to *dominate the business world through their ability to raise large amounts of capital by sale of ownership shares* to anonymous outside investors. Answer:

TRUE

A growing perpetuity where the rate of growth is greater than the discount rate will have an infinitely large present value

TRUE

The internal rate of return (IRR) is the interest rate that sets the net present value (NPV) of the cash flows equal to zero

TRUE

The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.

TRUE

$327,700

The Import Store has cash of $34,600 and accounts receivable of $54,200. The inventory cost $92,300 and can be sold today for $146,900. The fixed assets were purchased at a cost of $234,500 of which $87,900 has been depreciated. The fixed assets can be sold today for $199,000. What is the total book value of the firm's assets?

what happened to the organization of the NYSE post 2006?

The NYSE became a public corporation

6.83%

The Next Life has sales of $428,300, total assets of $389,100, and a profit margin of 6.2 percent. What is the return on assets?

Corporate accounting and financial fraud

The Sarbanes-Oxley Act in 2002 was prompted by which one of the following from the 1990's? Increased stock market volatility Corporate accounting and financial fraud Increased executive compensation Increased foreign investment in U.S. stock markets Increased use of tax loopholes

A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase? a. The company increases its dividend payout ratio. b. The company begins to pay employees monthly rather than weekly. c. The company's profit margin increases. d. The company decides to stop taking discounts on purchased materials. e. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.

The company increases its dividend payout ratio.

Working Capital

The daily financial operations of a firm are primarily controlled by managing the: total debt level. working capital. capital structure. capital budget. long-term liabilities.

the portion of the investment opportunity set that lies above the global minimum variance portfolio.

The efficient frontier of risky assets is

one plus the debt-equity ratio

The equity multiplier is equal to: one plus the debt-equity ratio. one plus the total asset turnover. total debt divided by total equity. total equity divided by total assets. one divided by the total asset turnover.

What is the expected rate of return for a stock that has a beta of 1.0 if the expected return on the market is 15%?

The expected return of a stock with a β = 1.0 must, on average, be the same as the expected return of the market which also has a β = 1.0. 15

Balance Sheet

The financial statement that summarizes a firm's accounting value as of a particular date is called the: income statement. cash flow statement. liquidity position. balance sheet. periodic operating statement.

Which of the following create problems with financial statement analysis

The firm or its competitors are global companies, operate under different regulatory environments, are conglomerates

Which of the following statements is CORRECT? a. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales. b. Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management's historical performance is evaluated. c. The capital intensity ratio gives us an idea of the physical condition of the firm's fixed assets. d. The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy, economies of scale exist, or if excess capacity exists. e. Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and

The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.

What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?

The interest rate in your calculator is entered as a whole number while in the spreadsheet function it is entered as a decimal

Break-even

The level of a parameter for which an investment has an NPV of zero.

common stock, paid in surplus, and retained earnings

The major components of stockholdersʹ equity are ________.

false

The management of public companies is not legally required to disclose any off-balance sheet transactions.

Which are included in a firm's capital structure?

The mix of debt and equity

Degree of financial leverage

The more debt a firm has, the greater its:

Which one of the following statements is correct?

The more frequent the compounding, the higher the EAR.

to disclose the financial implications of any off-balance sheet transactions

The notes to the financial statements would LEAST likely be used for which of the following purposes?

What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership?

The owners of a limited liability company can take an active role in running the company.

You are comparing 3 investments, all of which pay $100 a month and have an interest rate of 8%. One is ordinary annuity, one is annuity due, and the 3rd investment is a perpetuity. Which one of the following statements is correct given these 3 investment options?

The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due

You are comparing three investments, all of which pay $100 a month and have an 8 percent interest rate. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?

The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.

The market value of existing stock

The primary goal of financial management is to maximize: current profits. market share. current dividends. the market value of existing stock. revenue growth.

Income statement

The purpose of a(n)____ is to measure performance over a set period of time.

Two firms with identical capital intensity ratios are generating the same amount of sales. However, Firm A is operating at full capacity, while Firm B is operating below capacity. If the two firms expect the same growth in sales during the next period, then Firm A is likely to need more additional funds than Firm B, other things held constant.

True

10-K

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?

6.90 times

UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate? 7.33 times 6.90 times 5.70 times 7.14 times 8.47 times

-Book value -Historical cost

Under GAAP, asses are generally carried on a firm's balance sheet at ____.

$68,390.90

Use the following tax table to answer this question: Taxable income: 0-50,000 @ 15% 50-75,000 @ 25% 75-100,000 @ 34% 100-335,000 @ 39% 335-10,000,000 @ 34% Comfy Inn earned $218,310 in taxable income for the year. How much tax does the company owe? $86,311.20 $85,140.90 $68,390.90 $69,998.20 $65,240.10

It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process

What are the requirements of section 404 of SOX?

-Period costs -Product costs

What are two ways in which financial accountants usually classify costs?

General accepted accounting principles

What does GAAP stand for?

A residual claim against the firm's assets

What does stockholder's equity represent?

A systematic expensing of an asset based on the assets estimated life

What is depreciation?

Which of the items below is not one of the 5 questions to ask oneself about ratios?

What is it telling us about the future?

Valuable assets such as the companyʹs reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet

What is the main problem in using a balance sheet to provide an accurate assessment of the value of a companyʹs equity?

It makes it easier to compare the financial results of different firms

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?

Not all actions of the firm can be directly converted to an entry on the financial statements. For example, the firm may be involved in off balance sheet transactions, which have to be reported through notes to the financial statements

What is the need for the notes to the financial statements when a firmʹs operations are already documented in the financial statements?

As the name implies, external auditors act as third party monitors to a firmʹs financial reporting process

What role do external auditors play in a firmʹs financial reporting process?

All firms quoted on a U.S. exchange are required to use GAAP in their financial reporting process. This standardization process makes it easier to adjust and/or compare the financial figures across different firms

What role does Generally Accepted Accounting Principles (GAAP) play in the accounting process?

- GAAP - Cash vs non-cash items - Time and costs

What should you keep in mind when examining an income statement?

The Assets side will increase under Net property, plant, and equipment with the net effect of the new processing plant, while the Liabilities side will correspondingly show the new debt that was incurred in paying for the plant.

What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan?

The effect on the income statement will be in the form of a depreciation expense for the first year on the new processing plant.

What will be the effect on the income statement if a firm buys a new processing plant through a new loan?

The new loan entry should show as a cash inflow for the firm, while the payment for the new processing plant will be entered as a cash outflow

What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?

Earning management

When a firm smooths earnings t please investors, it is called ___.

-When the exchange of goods or services is complete -When the earnings process is virtually completed

When is revenue recognized on a n income statement?

the portfolio standard deviation will be less than the weighted average of the individual security standard deviations.

When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio,

the amount of deferred tax liability held by the company

Which of the following amounts would be included on the right side of a balance sheet?

-Buildings -Trademark -Patents

Which of the following are classified as fixed assets on the balance sheet?

There must be at least one general partner

Which one of the following statements about a limited partnership is correct? All partners have their losses limited to their capital investment in the partnership. All partners are treated equally. There must be at least one general partner. Equity financing is easy to obtain and unlimited. Any partner can transfer his or her ownership interest without ending the partnership

Assets are listed in descending order of liquidity

Which one of the following statements concerning the balance sheet is correct? Total assets equal total liabilities minus total equity Net working capital is equal to total assets minus total liabilities Assets are listed in descending order of liquidity Current assets are equal to total assets minus net working capital Shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt

Obtaining additional equity is dependent on the owner's personal finances.

Which one of the following statements correctly applies to a sole proprietorship? The business entity has an unlimited life. The ownership can easily be transferred to another individual. The owner enjoys limited liability for the firm's debts. Debt financing is easy to arrange in the firm's name. Obtaining additional equity is dependent on the owner's personal finances.

debt-equity or equity multiplier ratio

Which ratio would you use to measure the financial health of a firm by assessing that firmʹs leverage?

Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.

Why must care be taken when comparing a firmʹs share price to its operating income?

General partnership

Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts? Sole proprietorship Limited partnership Corporation Joint stock company General partnership

General parnership

Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts? Sole proprietorship Limited partnership Corporation Joint stock company General partnership

0.66

Wilson's Realty has total assets of $46,800, net fixed assets of $37,400, current liabilities of $6,100, and long-term liabilities of $24,600. What is the total debt ratio?

Which one of the following is defined as a firm's short-term assets and its short-term liabilities?

Working Capital

$119,359.43

World Exports has total assets of $938,280, a total asset turnover rate of 1.18, a debt-equity ratio of .47, and a return on equity of 18.7 percent. What is the firm's net income? $119,359.43 $88,303.33 $104,624.14 $121,548.09 $92,236.67

by raising its reported earnings

WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldComʹs financial statements more attractive to investors?

which companies were involved in the corporate scandals that led to the sarbanes-oxely act?

WorldCom, Tyco, Enron

$6,018.26

You and your sister are planning a large anniversary party 3 years from today for your parents' 50th wedding anniversary. You have estimated that you will need $6,500 for this party. You can earn 2.6 percent compounded annually on your savings. How much would you and your sister have to deposit today in one lump sum to pay for the entire party? $6,076.55 $6,018.26 $6,308.16 $5,934.90 $5,868.81

89.66 years

You have $1,500 today in your savings account. How long must you wait for your savings to be worth $4,000 if you are earning 1.1 percent interest, compounded annually? 76.68 years 79.69 years 72.13 years 80.57 years 89.66 years

4.15%

You have been told that you need $32,000 today for each $100,000 you want when you retire 28 years from now. What rate of interest was used in the present value computation? Assume interest is compounded annually. 4.15 percent 4.37 percent 4.29 percent 4.53 percent 4.58 percent

23.95 years

You just won $30,000 and deposited your winnings into an account that pays 3.9 percent interest, compounded annually. How long will you have to wait until your winnings are worth $75,000? 21.24 years 25.00 years 22.29 years 22.67 years 23.95 years

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. you can earn 6% on your money. Which option should you take and why?

You should accept the $200,00 because the payments are only worth $195,413 to you today.

6.82 years

You're trying to save to buy a new car valued at $48,690. You have $38,000 today that can be invested at your bank. The bank pays 3.7 percent annual interest on its accounts. How long will it be before you have enough to buy the car for cash? Assume the price of the car remains constant. 5.13 years 9.29 years 4.67 years 7.08 years 6.82 years

Variable

___ cost change as the output of the firm changes.

perpetuity

a steam of equal cash flows that occur at regular intervals and last forever

annuity

a stream consisting of a fixed number of equal cash flows paid at regular intervals (growing perpetuity: perpetuities that grow at a constant rate forever) PV(growing pepetuity)=C/r-g

naked short

a trader sells shares that have not yet been borrowed, assuming that the shares can be acquired and delivered whenever the short sale needs to be closed out

specialist

a trader who makes a market in the shares of one or more firms and who maintains a "fair and orderly market" by dealing personally in the market. Exchanges such as the NYSE assign responsibility for managing the trading in each security to them. each security is assigned to only one specialist, but each specialist firm makes a market in many securities. they maintain the limit order book of all outstanding unexecuted limit orders. when orders can be executed at market prices, the specialist executes or "crosses" the trade. the highest outstanding bid price and the lowest outstanding ask price "win" the trade if the spread between the highest bid price and lowest ask price become too wide, the specialist firm would be expected to offer to buy and sell shares from its own inventory at a narrower bid-ask spread

the rule of IRR states:

accept the project if IRR is the same or greater than the required return by investors

4 types of markets

direct search markets, brokered markets, dealer markets, and auction markets

Calculating the present value of a future cash flow to determine its worth today is commonly called ____ valuation

discounted cash flow

John owns a stock with a market price of $38 per share. This stock pays the same annual dividend of $0.60 per share. If the price of the stock suddenly decreases to $33 a share, you would expect the:

dividend yield to increase (I only)

straight voting

each shareholder has as many votes for each director as shares held

cumulative voting

each shareholders total vote allocation for all directors is equal to the number of open sports multiplied by his or her number of shares

Assume interest is compounded monthly. The ___ annual rate will express this rate as though it were compounded annually

effective

Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:

effective annual rate

common risk

effects everyone the same (earthquake)

dark pools

electronic trading networks where participants can anonymously buy or sell large block of securities. buyers and sellers are hidden from the public and trades may not be reported, or if they are they may be lumped with other trades to obscure information about particular participants. controversial because they contribute to the fragmentation of markets

securities investor protection act of 1970 (SIPC)

ensures that investors will receive securities held for their account in street name by a failed brokerage firm up to a limit of $500,000 per customer financed by levying and insurance premium on its participating or member brokerage firms

working capital management

ensures that the firm has sufficient funds to continue operations on a day-to-day basis

equation of the CML

ep

dividend total (divt)

eps(total) x dividend payout rate

For a stated positive interest rate, the EAR is always __ the APR

equal to or greater than

In equilibrium, the marginal price of risk for a risky security must be

equal to the marginal price of risk for the market portfolio.

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum variance portfolio has a standard deviation that is always

equal to zero.

excess return given the stock return and market return

er-rf

DuPont Identiy

expresses ROE as the product of profit margin, asset turnover, and a measure of leverage. (net income/sales)(sales/total assets)(total assets/total equity)

1.6 Financial Institutions 1) *Raising new capital by issuing bonds* is an example of a *commercial banking activity*. Answer:

false

3) If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85. Answer: x

false

Financial decisions require that you weigh alternatives in strictly monetary terms.

false

Financial statements are accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firm's assets and the financing of those assets, and a prediction of the firm's future performance.

false

short sale

first you sell, and then you buy the shares. you begin and end with no shares. the sale of shares not owned by the investor buy borrowed through a broker and later purchased to replace the loan. allows investors to profit from a decline in a security's price. they anticipate the stock price will fall, so that the share can be purchased later at a lower price than it initially sold for. they must not only replace the shares but also pay the lender of the security any dividends paid during the short sale the owner of the shares need not know that the shares have been lent to the short seller. if the owner wishes to sell the shares, the brokerage firm will simply borrow shares from another investor. therefore, the short sale may have an indefinite term. if the brokerage firm cannot locate new shares to replace the ones sold, the short seller will need to repay the loan immediately by purchasing shares in the market and turning them over to the brokerage house to close out the loan proceeds from a short sale must be kept on account with the broker. the short seller cannot invest these funds to generate income, although large or institutional investors typically will receive some income from the proceeds of a short sale being held with the broker. short sellers also are required to post margin

unsystematic risk

fluctuation of a stock's return that are due to a company-or industry-specific-news are independent risks. These are unrelated across stocks

Systematic risk

fluctuations of a stock's return that are due to market-wide news represent common risk. As with earthquakes, these affect all stocks

Efficient portfolios of N risky securities are portfolios that

have the highest rates of return for a given level of risk.

profitability index

help identify the optimal combination of projects to undertake

Assume all else is equal. when comparing savings accounts, you should select the account that has the:

highest effective annual rate

When comparing savings accounts, you should select the account that has the:

highest effective annual rate

can an investor diversify what risk

idiosyncratic risk which allows the shareholder to not add any additional risk

margin call

if the percentage margin falls below the maintenance level the broker will issue this, which requires the investor to add new cash or securities to the margin account. if the investor does not act, the broker may sell securities from the account to pay off enough of the loan to restore the percentage margin to an acceptable level

when are abnormal profits made

in an inefficient market

Chief financial officer

in large firms, financial activity is usually associated with

brokered market

in markets where trading in a good is active, brokers find it profitable to offer search services to buyers and sellers (real estate market/primary market)

26) As a firm *increases its level of debt* relative to its *level of equity*, the firm is: A) increasing the fraction of the firm financed with equity. B) decreasing the fraction of the firm financed with debt. C) decreasing its leverage. D) increasing its leverage. Answer: D

increasing its leverage

The written agreement that contains the specific details related to a bond issue is called the bond:

indenture

book

indications of interest from large investors communicating their interest in purchasing shares of the IPO to the underwriters

A perpetuity is a constant stream of cash flow for a(n) ____ period of time

infinite

A perpetuity is a constant stream of cash flows for a ___ period of time

infinite

limit buy order

instruct the broker to buy some number of shares if and when they may be obtained at or below a stipulated price

limit sell

instruct the broker to sell if and when the stock price rises above a specified limit

Jamie earned $14 in interest on her saving account last year. She has decided to leave the $14 in her account so that she can earn interest on that $14 this year. The interest earned on last year's interest earnings is called:

interest on interest

Two investment advisers are comparing performance. One averaged a 19% rate of return and the other a 16% rate of return. However, the beta of the first investor was 1.5, whereas that of the second was 1. a. Can you tell which investor was a better selector of individual stocks (aside from the issue of general movements in the market)? Cannot determine b. If the T-bill rate were 6% and the market return during the period were 14%, which investor would be the superior stock selector? Second investor c. If the T-bill rate were 3% and the market return during the period were 15%, which investor would be the superior stock selector? Second investor

r1 = 19%; r2 = 16%; β1 = 1.5; β2 = 1 a. To determine which investor was a better selector of individual stocks we look at abnormal return, which is the ex-post alpha; that is, the abnormal return is the difference between the actual return and that predicted by the SML. Without information about the parameters of this equation (risk-free rate and market rate of return) we cannot determine which investor was more accurate. b. If rf = 6% and rM = 14%, then (using the notation alpha for the abnormal return): α1 = 0.19 - [0.06 + 1.5 × (0.14 - 0.06)] = 0.19 - 0.18 = 1% α2 = 0.16 - [0.06 + 1 × (0.14 - 0.06)] = 0.16 - 0.14 = 2% Here, the second investor has the larger abnormal return and thus appears to be the superior stock selector. By making better predictions, the second investor appears to have tilted his portfolio toward underpriced stocks. c. If rf = 3% and rM = 15%, then: α1 = 0.19 - [0.03 + 1.5 × (0.15 - 0.03)] = 0.19 - 0.21 = -2% α2 = 0.16 - [0.03 + 1 × (0.15 - 0.03)] = 0.16 - 0.15 = 1% Here, not only does the second investor appear to be the superior stock selector, but the first investor's predictions appear valueless (or worse).

income statement

reports firm's revenues and expenses over a given period of time

statement of cash flows

reports the sources and uses of the firm's cash; shows the adjustments to net income for non-cash expenses and changes to net working capital as well as the cash used from investing and financing activities

Shareholder's equity:

represents the residual value of a firm

growth (g)

retention rate x return on investment

what kind of investors only accept risky investments that offer risk premiums over the risk-free rate

risk averse investors

government bond

risk free asset or RF

CAPM expected returns formula

risk free rate (rf) +B(rp)

short sales

sales of securities you don't own but have borrowed from your broker

capital gain

sales price -book value

covariance given cc and sds

sasbrab

Weight of portfolio with risk free asset formula

sdp=w1xsd1

when one owner or creditor sells to another, the transaction takes place in the ____ market

secondary

stock exchanges

secondary markets where already-issued securities are bought and sold by members. NYSE is the largest US stock exchange. NYSE Arca is the firm's electronic communications network, and is where the bulk of exchange-traded funds trade

Other things equal, diversification is most effective when

securities' returns are negatively correlated.

In words, the covariance considers the probability of each scenario happening and the interaction between

securities' returns relative to their mean returns.

blue sky laws

security trading is subject to state laws known as this because they are intended to give investors a clearer view of investment prospects

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

sells its entire inventory an average of 15 times each year.

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

sells its entire inventory on average of 15 times each year

asset efficiency ratios

show how efficiently the firm is using its assets by showing how many dollars of revenues the firm produces per dollar of assets

profitability ratios

show the firm's operating or net income as a fraction of sales, and they are an indcation of a firm's efficiency and its pricing strategy

balance sheet

shows the current financial position of the firm at a single point in time

smith and son's company has a current ratio that is average in comparison to their industry. However, their quick ratio is significantly lower than their industry average. The following can be concluded:

smith and sons has higher inventory than the industry average.

A business owned by a solitary individual who has unlimited liability for its debt is called a:

sole partnership

stakeholder

someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm

financial industry regulatory authority (FINRA)

the most important overseer of self-regulation of the securities market. the largest nongovernmental regulator of all securities firms in the US broad mission is to foster of investor protection and market integrity. it examines securities firms, writes and enforces rules concerning trading practices and administers a dispute resolution forum for investors and registered firms

bid price

the price at which a dealer or other trader is willing to purchase a security

ask price

the price at which a dealer or other trader will sell a security

Flu Gone, Inc. just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. which one of the folllowing reactions to this announcement indicates teh market for Flue Gone Inc.'s stock is efficient?

the price of Flu Gone stock increases rapidly to a higher price and then remains at that price.

EPS measures the net income with respect to:

the profit or loss for each share of stock

nominal interest rate

the rate at which your money will grow if invested for a certain period

real interest rate

the rate of growth of your purchasing power, after adjusting for inflation

CAPM

the return we should expect on any invesment is equal to the risk free rate of return plus a risk premium proportional to the amount of systematic risk in the investment. E[Ri]= rf +Bi(E[Rmkt}-rf)

seasoned equity offering

the sale of additional shares in firms that already are publicly traded (Apple selling new shares of stock)

equally weighted portfolio

the same amount of money is invested in each stock

covering the short position

the short-seller must purchase a share for the same stock in order to replace the share that was borrowed

The standard deviation of a portfolio of risky securities is

the square root of the weighted sum of the securities' variances and covariances.

stop-loss orders

the stock is to be sold if its price falls below a stipulated level. the order lets the stock be sold to stop further losses from accumulating

market beta

the stocks sensitivity to the market portfolio, the percentage change in i its return that we expect for each 1% change in the market's return

depreciation tax shield

the tax savings that results from the ability to deduct depreciation

latency

the time it takes to accept, process, and deliver a trading order.

depth

the total number of shares offered for trading at the best bid and ask prices. considered another component of liquidity

algorithmic trading

the use of computer programs to make rapid trading decisions. more than half of all equity volume in the US is believed to be initiated by computer algorithms algorithmic traders are not registered market makers and so do not have an affirmative obligation to maintain both bid and ask quotes

As diversification increases, the total variance of a portfolio approaches

the variance of the market portfolio.

underwriters

this is what investment bankers are called when they purchase securities from the issuing company and resell them to the public. they market the securities. in this role, they advise the firm regarding the terms on which it should attempt to sell the securities. a preliminary registration statement must be filed with the SEC, describing the issue and the prospects of the company

Which of the following could not be evaluated as annuities?

tips to a waiter and monthly electric bills

auction market primary objective

to bring buyers and sellers together

Goal for "for profit" businesses

to maximize the value of shareholder wealth

ear/apy

total amount of interest that will be earned at the end of one year (1+APR/m)^m - 1

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

total asset turnover

net worth

total assets-total debt

Common-size financial statements present all balance sheet account values as a percentage of:

total assets.

A firm has an equity multiplier of 1.5. This means that the firm has a:

total debt ratio of .33.