FIN3403 Midterm Review Ch 1-9

Costs that do not change in the short run arise because of ______.

fixed commitments

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

fixed interest payments only

Synergy will ______ the sales of existing products.

increase

An increase in depreciation expense will ______ cash flows from operations.

increase (Because depreciation is not a cash expense, its only effect is to decrease taxes paid, thereby increasing cash flows from operations.)

Given a level of investment in net working capital, that same investment must be _____ at some time in the future.

recovered

According to the basic IRR rule, we should:

reject a project if the IRR is less than the required return.

If a firm's variable cost per unit estimate used in its base-case analysis is $50 per unit and they anticipate the upper and lower bounds to be ± 10 percent, what is the "worst case" for variable cost per unit?

$55 (1.10 × $50 = $55; the worst case for costs is the higher value.)

ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?

$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years

Select all that apply Which of the following are true of financial ratios?

- They are used for comparison purposes. - They are developed from a firm's financial information.

The model that precisely specifies the relationship between the nominal rate and the real rate is: R = the nominal rate r = the real rate h = the rate of inflation.

(1 + R) = (1 + r)×(1 + h)

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

(1 + r) × (PV of an ordinary annuity).

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

(1+r)

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

(EBIT + depreciation)/Interest expense

Which of the following is the correct representation of the total debt ratio?

(Total assets − Total equity)/(Total assets)

Select all that apply The U.S. government borrows money by issuing ______.

- Treasury notes - Treasury bonds

Select all that apply Which of the following are true of a sole proprietorship?

- A proprietorship has a limited life. - It is one of the simplest types of businesses to form.

Select all that apply Identify the three main sources of cash flows over the life of a typical project.

- Cash outflows from investment in plant and equipment at the inception of the project - Net cash flows from salvage value at the end of the project - Net cash flows from sales and expenses over the life of the project

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

- Compound the accumulated balance forward one year at a time. - Calculate the future value of each cash flow first and then sum them.

Select all that apply When are corporate profits taxed?

- Corporations pay taxes on corporate profits. - Individuals pay taxes on corporate dividends.

Select all that apply A general partnership has which of the following characteristics?

- Each owner has unlimited liability for all firm debts. - All the partners share in gains or losses of the partnership.

Select all that apply Which of the following is true relative to capital rationing?

- Hard rationing implies the firm is unable to raise funds for projects. - Soft rationing is typically internal in that the firm allocates funds to divisions for capital projects.

Select all that apply Which of the following are reasons why NPV is considered a superior capital budgeting technique?

- It considers all the cash flows. - It properly chooses among mutually exclusive projects. - It considers time value of money. - It considers the riskiness of the project.

Select all that apply Which of the following are defining features of the primary market?

- It is the market where initial public offerings are made. - Proceeds from the sale of securities go to the issuing firm.

Select all that apply What are the two main benefits of performing sensitivity analysis?

- It reduces a false sense of security by giving a range of values for NPV instead of a single value. - It identifies the variable that has the most effect on NPV.

Select all that apply If a project has multiple internal rates of return, which of the following methods should be used?

- NPV - MIRR

Select all that apply What are some features of the OTC market for bonds?

- OTC dealers are connected electronically. - The OTC has no designated physical location.

Select all that apply Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?

- Stock has no set maturity. - The required rate of return is unobservable - Dividends are unknown and uncertain.

Select all that apply Which of the following create problems with financial statement analysis?

- The firm or its competitors are global companies. - The firm and its competitors operate under different regulatory environments. - The firm or its competitors are conglomerates.

Select all that apply What are the advantages of the payback period method for management?

- The payback period method is easy to use. - It allows lower-level managers to make small decisions effectively. - The payback period method is ideal for minor projects.

Select all that apply In the Excel setup of a loan amortization problem, which of the following occurs?

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

Select all that apply Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?

- There will be a tax savings if the book value exceeds the sales price. - Taxes are based on the difference between the book value and the sales price. - Book value represents the purchase price minus the accumulated depreciation.

Select all that apply Which of the following are features of municipal bonds?

- They are issued by state and local governments. - The interest on municipal bonds is exempt from federal taxes. - The interest on municipal bonds is, in some cases, exempt from state taxes in the state of issue.

Select all that apply What is a corporate bond's yield to maturity (YTM)?

- YTM is the expected return for an investor who buys the bond today and holds it to maturity. - YTM is the prevailing market interest rate for bonds with similar features.

Select all that apply A benchmark PE ratio can be determined using:

- a company's own historical PEs. - the PEs of similar companies.

Select all that apply We underestimate NPV because of the option(s) to ______.

- abandon - expand

Select all that apply Which of the following items are used to compute the current ratio?

- accounts payable - cash

Select all that apply When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in ______.

- asking what-if questions - scenario analysis

Select all that apply The goals of risk analysis in capital budgeting include ______.

- assessing the degree of financing risk - identifying critical components

Select all that apply The Sarbanes-Oxley Act requires corporate officers to:

- be responsible for errors in the annual report. - confirm the validity of the financial statements.

Select all that apply Under GAAP, assets are generally carried on a firm's balance sheet at _____.

- book value - historical cost

Select all that apply Which of the following are components of cash flow from assets?

- capital spending - operating cash flow - change in net working capital

Select all that apply Which of the following are considered relevant cash flows?

- cash flows from external costs - cash flows from beneficial spillover effects - cash flows from erosion effects

Select all that apply Which of the following are components of project cash flow?

- change in net working capital - capital spending - operating cash flow

Select all that apply Nasdaq has which of these features?

- computer network of securities dealers - multiple market maker system

Select all that apply The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?

- coupon rate - time to maturity

Select all that apply Assets can be categorized as:

- current and fixed assets. - tangible and intangible assets.

Select all that apply Preferred stock has preference over common stock in the:

- distribution of corporate assets. - payment of dividends.

Select all that apply In the dividend growth model, the expected return for investors comes from which two sources?

- dividend yield - growth rate

Select all that apply Which of the following are cash flows to investors in stocks?

- dividends - capital gains

Select all that apply A key difference between interest payments and dividend payments is:

- dividends are not tax deductible. - interest is tax deductible.

Side effects from investing in a project refer to cash flows from:

- erosion effects. - beneficial spillover effects.

Select all that apply The possibility that errors in projected cash flows will lead to incorrect decisions is known as ______.

- estimation risk - forecasting risk

Select all that apply Depreciation is the accountant's estimate of the cost of ______ used in the production process matched with the benefits produced from owning it.

- fixed assets - equipment

Select all that apply Marginal tax rates are the most important tax rates because:

- incremental cash flows are taxed at marginal tax rates. - financial decisions are usually based on new cash flows.

Select all that apply Time value of money tables are not as common as they once were because:

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

Select all that apply When a corporation is formed, it is granted which of the following rights?

- legal powers to sue - the ability to issue stock

Select all that apply Which of the following are included in a firm's capital structure?

- long-term debt - equity

Select all that apply A treasurer's responsibilities typically include:

- making financial plans. - handling cash flows. - managing capital expenditure decisions.

Select all that apply According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), which of the following two capital budgeting methods are widely used by firms in the United States and Canada?

- net present value - internal rate of return

Select all that apply What are the two major forms of long-term debt?

- public issue - private issue

Select all that apply Corporations in other countries are often called:

- public limited companies - limited liability companies - joint stock companies

Select all that apply Which of the following are methods of calculating the MIRR of a project?

- the combination approach - the discounting approach - the reinvestment approach

Select all that apply Which of the following qualify as "managerial options"?

- the option to abandon - the option to expand - the option to wait

The term structure of interest rates describes ______.

- the pure time value of money - the relationship between nominal rates and time to maturity

Select all that apply Which of the following are usually included in a bond's indenture?

- the total amount of bonds issued - the repayment arrangements

Select all that apply Which of the following terms apply to a bond?

- time to maturity - coupon rate - par value

Select all that apply According to Figure 1.2, where does cash generated by a corporation typically go?

- to pay corporate taxes - reinvested in the firm - paid to shareholders and creditors

Select all that apply Estimates of which of the following are needed to prepare pro forma income statements?

- unit sales - selling price per unit - variable costs

Select all that apply Which three of the following are common shapes for the term structure of interest rates?

- upward sloping - downward sloping - humped

Select all that apply Which of the following methods are used to calculate present value?

-an algebraic formula - a financial calculator - a time value of money table

If you are holding a municipal bond that is trading at par to yield 6 percent, by how much will your aftertax yield change if your federal income tax bracket increases from 15 percent to 20 percent. Assume there are no state or local taxes.

0 percent (Interest income from munis is exempt from federal income tax.)

Click and drag on elements in order Rank the ease (from easiest to hardest) of turning the following assets into cash.

1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment

Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?

1.4400

Which formula below represents a present value factor?

1/(1 + r)^t

A firm with a profit margin of 10 percent generates ______ in net income for every dollar in sales.

10 cents

If a new project requires an investment in net working capital when it is launched, then at the end of the project, NWC will be:

100 percent reversed.

Current assets are defined as assets that can be turned into cash within ______ months.

12

The rules for depreciating assets for tax purposes are based upon provisions in the:

1986 Tax Reform Act.

U.S. corporations pay tax at a rate of _____ percent. (Enter number only.)

21

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

365/receivables turnover

Crossover bonds can also be called ______ bonds.

5B

Which of the following spreadsheet functions will result in the correct answer for the below annuity problem: You plan to deposit $100 per year for the next 10 years in an account paying 8 percent. How much will you have in this annuity?

= FV(.08,10,-100,0)

Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year?

= PV(0.10,10,-100,0,0)

Which of the following is the correct Excel function to calculate the present value of $300 due in five years at a discount rate of 10 percent?

= PV(0.10,5,0,-300)

The spreadsheet function for calculating net present value is ______.

=NPV(rate,CF1, ..., CFn) + CF0

True or false: The payback period takes into consideration the time value of money.

False

______ budgeting is the process of planning and managing a firm's long-term assets.

Capital

As an investor in the bond market, why should you be concerned about changes in interest rates?

Changes in interest rates cause changes in bond prices.

True or false: The higher the coupon rate, the greater the interest rate risk, all other things being equal.

False

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

P1 = (__ + P2)/(1 + R)

D2

Which of the following is an example of a non-cash item on an income statement?

Depreciation

Which of the following represents the valuation of stock using a zero growth model?

Dividend/Discount rate = D/R

Which one of the following is true about dividend growth patterns?

Dividends may grow at a constant rate.

Which of the following is not a difference between debt and equity?

Equity is publicly traded, while debt is not.

True or false: Bonds that have dropped into junk territory are called "trash" bonds.

False

True or false: If the interest rate is greater than zero, the value of an annuity due is always less than an ordinary annuity.

False

True or false: The Sarbanes-Oxley Act provides incentives for companies to go public in U.S. markets.

False

True or false: The profitability index rule for an independent project states that, if a project has a positive NPV, then the present value of the future cash flows must be smaller than the initial investment.

False

True or false: There is only one way to calculate the modified IRR.

False

True or false: A PE ratio that is based on estimated future earnings is called a regressive PE ratio.

False (A PE ratio that is based on estimated future earnings is called a forward PE ratio.)

True or false: A debenture is a bond secured with collateral.

False (A debenture is an unsecured bond.)

True or false: Bond ratings are concerned only with the possibility of price changes.

False (Bond ratings are concerned only with the possibility of default.)

True or false: Current assets plus current liabilities equals net working capital.

False (CA minus CL equals NWC.)

True or false: Fixed costs cannot be changed over the life of the investment.

False (Fixed costs cannot be changed in the short term but can be changed over the long term.)

True or false: Future value refers to the amount of money an investment is worth today.

False (Future value refers to the amount of money an investment will grow to over some period of time at some given interest rate.)

True or false: Given the PV, FV, and payment amount, you can determine the number of periods.

False (Given the PV, FV, and discount rate, you can determine the number of periods.)

True or false: Operating cash flow is based on the salvage value of equipment.

False (Operating cash flow equals EBIT plus depreciation minus taxes.)

True or false: The present value is the sum of all expenses in a project.

False (PV is the current value of the future cash flows discounted at the appropriate discount rate.)

True or false: Sensitivity analysis is helpful because it indicates what we should do regarding forecasting errors.

False (Sensitivity analysis does not tell us what to do about forecasting errors.)

True or false: The DuPont identity is a popular expression breaking ROA into three parts.

False (The DuPont identity is a popular expression breaking ROE into three parts.)

True or false: The PI always results in correct decisions in comparisons of mutually exclusive investments.

False (The PI may lead to incorrect decisions in comparisons of mutually exclusive investments.)

True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.

False (The annuity present value factor equals one minus the present value factor all divided by the discount rate.)

True or false: The depreciation tax shield is the depreciation deduction divided by the tax rate.

False (The depreciation tax shield is the depreciation deduction times the tax rate.)

True or false: The annual percentage rate (APR) is calculated as the interest rate charged per period on a loan divided by the number of periods per year.

False (The interest rate charged per period on a loan multiplied by the number of periods per year equals the annual percentage rate.)

True or false: The number of positive NPV projects is unlimited for any given firm.

False (The positive NPV investments are not at all common, and the number of positive NPV projects is certainly limited for any given firm.)

True or false: The price-earnings ratio is price per share times earnings per share.

False (The price-earnings ratio is price per share divided by earnings per share.)

True or false: The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its future cost.

False (The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its initial cost.)

True or false: The retention ratio equals one minus the ROA.

False (The retention ratio equals one minus the dividend payout ratio.)

True or false: The effective annual rate is the interest rate expressed in terms of the interest payment made each period.

False (The stated interest rate is the interest rate expressed in terms of the interest payment made each period.)

True or false: The times interest earned ratio is EBIT minus interest.

False (The times interest earned ratio is EBIT divided by interest.)

True or false: The value of managerial options is taken into account when performing conventional NPV analysis.

False (The value of managerial options is ignored when conducting conventional NPV analysis.)

True or false: Daily stock prices can only be found by looking up the stock in newspapers.

False (Up-to-the-minute stock prices are available on many websites.)

True or false: Using the spreadsheet formula to convert a quoted rate (or an APR) to an effective rate, use the formula NOMINAL(effect_rate, npery).

False (Using the Excel formula to convert a quoted rate (or an APR) to an effective rate, use the formula EFFECT(nominal_rate, npery).)

True or false: The IRR is easy to use because you only need to know the appropriate discount rate.

False (You need the discount rate to calculate the NPV, but it is not required for the IRR calculation.)

True or false: An advantage of the AAR is that it is based on book values, not market values.

False (disadvantage)

True or false: When using a financial calculator to find the number of payments, the PMT value should be entered as a positive.

False (entered as a negative)

True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.

False (less than)

The three most important items to keep in mind when reviewing an income statement are:

GAAP, cash versus noncash items, and time and costs

According to the textbook, which of the following is not one of the three main questions to be addressed if you wanted to start your own business?

How many employees will I need?

In the context of capital budgeting, what does sensitivity analysis do?

It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.

What is the nominal rate of return on an investment?

It is the actual percentage change in the dollar value of an investment unadjusted for inflation.

Which of the following is true about the sustainable growth rate?

It is the maximum rate of growth a firm can maintain without increasing its financial leverage.

What is the definition of a bond's time to maturity?

It is the number of years until the face value is paid off.

What does a Treasury yield curve show?

It shows the yield for different maturities of Treasury notes and bonds.

A positive NPV exists when the market value of a project exceeds its cost. Which of these two values is the most difficult to establish?

Market value

How is the market-to-book ratio measured?

Market value per share/Book value per share

Which of the following is the equation for estimating operating cash flows using the tax-shield approach?

OCF = (Sales - Costs) × (1 − Tax rate) + Depreciation × Tax rate

You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the ______ value on the financial calculator.

N

The two most important stock markets in the United States are the New York Stock Exchange and ______.

Nasdaq

Is profit maximization the primary objective of a business?

No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.

What is the formula for the present value of a growing perpetuity, where C1 is the net cash flow, R is the required return, and g is the growth rate?

P = C1/(R − g)

FV = _____ × (1 + r)t

PV (or present value, $1, 1)

If FV = PV × (1 + r) is the single-period formula for future value, which of the following is the single-period present value formula?

PV = FV/(1 + r)

The basic present value equation is ______.

PV = FVt/(1 + r)t

What is the equation for approximating the nominal rate of return? R = the nominal rate of interest r = the real rate of interest h = the inflation rate.

R = r + h

Why would the threat of a takeover motivate a manager to act in stockholders' interest?

Running the firm well and acting in the stockholders' interest makes the firm a less attractive takeover target to begin with.

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.

True

Which of the following best explains why financial managers use a common-size income statement?

The common-size income statement can show which costs are rising or falling as a percentage of sales.

What does the AAA rating assigned by S&P mean?

The firm is in a strong position to meet its debt obligations.

True or false: Long-term liabilities are not due in the current year (from the date of the balance sheet).

True

Which of the following defines the primary market?

The primary market is where stocks are issued for the first time.

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. (Total asset turnover = sales/total assets. If sales increase with no change in total assets, the total asset turnover ratio will increase.)

Junk bonds have the following features:

They are rated below investment grade bonds.

The formula for the future value of an annuity factor is [(1 + r)t − 1]/r.

True

True or false: A corporation borrows money in its own name.

True

True or false: A project with nonconventional cash flows will produce two or more IRRs.

True

True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price.

True

True or false: A way to establish a benchmark for ratio analysis is to identify a peer group.

True

True or false: According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), the internal rate of return and the NPV are the two most popular capital budgeting methods used by firms in the United States and Canada.

True

True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.

True

True or false: Current yield = Annual coupon payment/Price

True

True or false: Free cash flow is also known as cash flow from assets.

True

True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.

True

True or false: If analysts are overly optimistic about the future, then they may accept a project that realistically has a negative NPV.

True

True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1 + r)^2 per dollar invested.

True

True or false: In a common-size income statement, each item is expressed as a percentage of total sales.

True

True or false: In a large corporation, stockholders and managers are usually separate groups.

True

True or false: Interest paid minus net new borrowing equals cash flow to creditors.

True

True or false: Interest rates can be quoted in various ways.

True

True or false: Investment in net working capital may arise from the need to cover credit sales.

True

True or false: Investors require a premium for the risk that issuers other than the Treasury may not make all promised payments on the issued bonds.

True

True or false: Longer-term bonds have greater interest rate sensitivity because a large portion of a bond's value comes from the face amount.

True

True or false: Some projects, such as mines, have cash outflows followed by cash inflows and cash outflows again, giving the project multiple internal rates of return.

True

True or false: The perpetuity present value can be found using the perpetual cash flow and the discount rate.

True

True or false: Total return is calculated by adding the dividend yield and the capital gains yield.

True

True or false: When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus the discount rate raised to the nth power.

True

True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.

True

True or false: While performing sensitivity analysis, we recompute NPV several times by changing one input variable at a time.

True

True or false: Operating cash flow does not include depreciation or interest.

True (Depreciation is a noncash expense and interest is a financing expense. We add depreciation BACK to EBIT in order to reflect the fact that we didn't pay it out in cash.)

True or false: In general, the price that is paid for a bond will exceed its quoted price.

True (Invoice price = Dirty price = Quoted price + Accrued interest)

True or false: The annuity present value of an amount C is calculated as c*{(1−[1/(1+r)t])/r}

True (The present value interest factor is the term in parentheses.)

Which of the following is a perpetuity?

a constant stream of cash flows forever

The most common way to repay a loan is to pay ______.

a single fixed payment every period

The threat of ______ motivates managers to make good decisions.

a takeover

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:

a target average accounting return.

A project should be ______ if its NPV is greater than zero.

accepted

A balance sheet reflects a firm's:

accounting value on a specific date.

A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?

accounts receivable

Cash flows should always be considered on a(n) ______ basis.

aftertax

The relationship between stockholders and management can best be described as a(n) ______ relationship.

agency

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?

agency problem

In the long run, costs may be considered as ______.

all variable

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

annuity due

If a $1,000 face value U.S. Treasury bond is quoted at 99.5, then the bond can be purchased ______.

at 99.5 percent of face value plus any accrued interest

The average accounting return is defined as:

average net income/average book value.

To calculate the future value of $100 invested for t years at r interest 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

Opportunity costs are ______.

benefits lost due to taking on a particular project

A problem with the TIE ratio is that it is based on EBIT, which is not a measure of _____ available to pay interest.

cash

Tax rates for proprietorships, partnerships, and LLCs ______ with the passage of the Tax Cuts and Jobs Act of 2017.

changed

In large firms, financial activity is usually associated with which top officer?

chief financial officer

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

compounding

Which corporate officer is responsible for accurate financial accounting of the firm's activities?

controller

The ______ office is responsible for corporate tax reporting.

controller's

The Sarbanes-Oxley Act is intended to strengthen protection against:

corporate accounting fraud and financial malpractice

A bond's _____ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders.

coupon

The cash ratio is found by dividing cash by:

current liabilities.

Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ______.

dealer

The bid-ask spread represents the ______.

dealer's profit

When interest rates in the market rise, we can expect the price of bonds to ______.

decrease

A bad financial decision is defined as a decision that ______ shareholder wealth.

decreases

All else constant, the dividend yield will increase if the stock price ______.

decreases (The stock price is in the denominator of the dividend yield equation, so a decrease in the stock price will increase the dividend yield.)

Net capital spending is equal to the change in net fixed assets plus ______.

depreciation

Which of the following is a disadvantage of sole proprietorships and partnerships?

difficulty of transferring ownership

Incremental cash flows come about as a(n) ______ consequence of taking a project under consideration.

direct

The _____ price is also called the "full" or "invoice" price.

dirty

Return on assets equals net income _____ by total assets.

divided

The _____ payout ratio equals cash dividends divided by net income.

dividend

When a firm smooths earnings to please investors, it is called ______.

earnings management

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.

effective

Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the ______ of the period.

end

Debt cannot be subordinated to _____.

equity

Financial statement analysis is primarily "management by ______ ."

exception

The price of a share of common stock is equal to the present value of all ______ future dividends.

expected

A PE ratio that is based on estimated future earnings is known as a ______ PE ratio.

forward

The amount an investment is worth after one or more periods is called the ______ value.

future

What does GAAP stand for?

generally accepted accounting principles

The common set of standards and procedures by which audited financial statements are prepared are called _____.

generally accepted accounting principles (GAAP)

If a bond is selling at a discount from its par value, the YTM must be ______ the coupon rate.

greater than

Given an internal growth rate of 3 percent, a firm will ______.

grow by 3 percent or less without any additional external financing

If we find that our estimated NPV is sensitive to a variable that is difficult to forecast, then the degree of forecasting risk is _____.

high

Interest expenses incurred on debt financing are ______ when computing cash flows from a project.

ignored (In order to separate the investment from the financing of that investment, you must ignore any costs associated with financing.)

The purpose of a(n) ______ is to measure performance over a set period of time.

income statement

An increase in a firm's total asset turnover will ______ the sustainable growth rate.

increase

A(n) ______ project does not rely on the acceptance or rejection of another project.

independent

The present value of the future cash inflows are divided by the ______ to calculate the profitability index.

initial investment

Cash flow to creditors equals:

interest paid minus net new borrowing.

Period costs are the costs that are allocated to a specific ______.

interval of time

The payback period can lead to foolish decisions if it is used too literally because:

it ignores cash flows after the cutoff date.

Long-term solvency ratios measure what aspect of the firm's financial position?

its financial leverage

If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______ $1,000.

less than

If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be ______.

less than 1

A limited liability company's owners have ______ liability.

limited

What type of partnership involves both general and limited partners to run the business?

limited partnership

Current assets are classified as relatively ______; these assets can be converted to cash within the next 12 months.

liquid

Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.

liquidity

Short-term solvency ratios are also called _____ ratios.

liquidity

When dealing with compound interest, it is more financially advantageous to have a _____ time horizon for investment.

longer

The interest rate risk premium is the additional compensation demanded by investors for holding ______ bonds.

longer-term

A zero-coupon bond is a bond that ____.

makes no interest payments

Since ______ and ownership are separated, a corporation's life is unlimited.

management

The ______ tax rate is the tax rate paid on the next dollar of income.

marginal

The price at which willing buyers and sellers would trade is called ______ value.

market

Whenever ______ information is available, it should be used instead of accounting data.

market

The discounted cash flow valuation shows that higher cash flows earlier in a project's life are ______ valuable than higher cash flows later on.

more

The price-earnings (PE) ratio is a ______ ratio.

market value

A simple way to amortize a loan is to have the borrower pay the interest each period plus some fixed amount. This approach is common with _____-term business loans.

medium

The balance sheet identity shows that stockholders' equity equals assets ______ liabilities.

minus

If a firm is evaluating two possible projects, both of which require the use of the same production facilities, and taking one project means that we cannot take the other, these projects would be considered ______.

mutually exclusive

The last item (or "bottom line") on the income statement is typically the ______.

net income

Which one of the following is the correct equation for computing return on assets (ROA)?

net income/total assets

In capital budgeting, ______ determines the dollar value of a project to the company.

net present value

Which of the following techniques will provide the most consistently correct result?

net present value

The difference between a firm's current assets and its current liabilities is known as the ______.

net working capital

If a company's growth for Years 1 through 3 is 20% but stabilizes at 5% beginning in Year 4, its growth pattern would be described as _______.

non-constant

Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?

noncash expenses

A primary reason that accounting income differs from cash flow is that an income statement contains ______.

noncash items

One of the flaws of the payback period method is that cash flows after the cutoff date are ______.

not considered in the analysis

When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:

one vote per share held

The most valuable alternative that is given up if an investment is undertaken is called what?

opportunity cost

The fundamental business of the New York Stock Exchange is to attract ______.

order flow

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

ordinary

Which of the following variables is not required to calculate the value of a bond?

original issue price of bond

The entire principal of an interest-only loan is the:

original loan amount.

A positive operating cash flow indicates that the firm is generating enough cash to:

pay everyday cash outflows.

The ______ method evaluates a project by determining the time needed to recoup the initial investment.

payback

The _____ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.

payment (or pmt)

The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.

perpetuity

Which of the following is not one of the basic areas of finance?

personal finance

Ending net fixed assets minus beginning net fixed assets _____ depreciation equals net investment in fixed assets.

plus

The current value of a future cash flow discounted at the appropriate rate is called the ______ value.

present

If a company has had negative earnings for several periods, they might choose to use a ______.

price-sales ratio

Which of these topics is not of especial interest to a financial manager?

product development

The DuPont identity shows that _____ _____ times total asset turnover times equity multiplier equals ROE. (Enter only one word per blank.)

profit margin

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

profitability

Which of the following is an example of a sunk cost?

project consultation fee

Which one of these is an important mechanism used by unhappy stockholders to replace current management?

proxy fight

If you borrow $15,000 today at 5 percent annual interest to be repaid in one year as a lump sum, this is termed a ______.

pure discount loan

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value.

EAR = (1 + _____ rate/m)m − 1

quoted

Compounding during the year can lead to a difference between the _____ rate and the effective rate.

quoted (or stated)

The term structure of interest rates examines the ______.

relationship between short-term and long-term interest rates

The first step in estimating cash flow is to determine the ______ cash flows.

relevant

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

repaid at some point in the future.

Internal rate of return (IRR) must be compared to the ______ in order to determine the acceptability of a project.

required return

The profit margin is equal to net income divided by ______.

sales

The trading of existing shares occurs in the ______ market.

secondary

Scenario analysis considers a combination of factors for each scenario, while _____ analysis focuses on only one variable at a time.

sensitivity

How is ownership of a corporation represented?

shares of stock

With _____ interest, the interest is not reinvested. (Enter only one word per blank.)

simple

A(n) ______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm.

stakeholder

According to the ______ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm."

stand-alone

Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:

stock options.

Physical assets are termed ______ assets.

tangible

Earnings over the coming year are expected to be $3 and a benchmark PE of 15 applies to earnings over the previous year. The ______, or forecast, price over the coming year is $45.

target

The general formula for ______ is (1 + quoted rate/m)m − 1.

the EAR

What does a bond's rating reflect?

the ability of the firm to repay its debt and interest on time

The dividend yield is determined by dividing the expected dividend (D1) by:

the current price (P0).

Cash flow refers to ______.

the difference between the number of dollars that came in and the number that went out

Capital rationing exists when a company has identified positive NPV projects but cannot (or will not) find ______.

the necessary financing

What does the clean price for a bond represent?

the quoted price excluding accrued interest

What is the primary objective of an auction market?

to bring buyers and sellers together

What is the main goal of financial management?

to maximize the current share value

Which one of the following best explains why financial managers use a common-size balance sheet?

to track changes in a firm's capital structure

Shareholders' equity equals _____.

total assets minus total liabilities

A partnership must have at least _______ owners.

two

In order to analyze the risk of a project's NPV estimate, we should establish ______ for each important estimate variable.

upper and lower bounds

Financial leverage refers to a firm's ______.

use of debt in its capital structure

According to GAAP, when is income reported?

when it is earned or accrued

Most of the time, a floating-rate bond's coupon adjusts ______.

with a lag to some base rate

Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of ______ management.

working capital

If the growth rate (g) is zero, the capital gains yield is ______.

zero

The IRR is the discount rate that makes NPV equal to ______.

zero

The cash flows of an annuity due are the same as those of an ordinary annuity except that there is an extra cash flow at Time _____.

zero (or 0)

Select all that apply Which of the following are real-world examples of annuities?

- leases - mortgages - pensions

Select all that apply Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields?

- liquidity premium - default risk premium

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

26

The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.

agency

Which one of these will decrease a firm's sustainable rate of growth?

an increase in the dividend payout ratio (Sustainable growth is ROE × b = ROE × (1 − dividend/net income). An increase in dividend payout ratio will decrease b, which decreases sustainable growth.)

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

are less than

Which of the following is shown on the left-hand side of the balance sheet?

assets

Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm has increased. The firm has _____ (increased/decreased) its liquidity over the past year.

decreased

The GAAP matching principle requires revenues to be matched with ______.

expenses

The bonds of a firm in financial distress may have a market value that is ______ than the face value at maturity. (Enter only one word per blank.)

less

The ______ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service.

matching

Select all that apply Which of the following would help a company take action to improve its ratios?

- comparing to aspirant companies - comparing to aspirant companies - comparing to major competitors - comparing to its own historical ratios

Select all that apply Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?

- dividend policy - financial policy - profit margin

Select all that apply Which of these have been noted as unintended consequences of the Sarbanes-Oxley Act?

- firms going public outside of the U.S. market - public firms "going dark" and leaving the stock market - eliminating public disclosure for many firms

True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged.

False

True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.

False (Correct. Higher levels of inventory result in less liquidity, all else equal.)

True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.

False (Financial analysis relies on cash flows, not accounting or book numbers.)

True or false: Receivables turnover is cost of goods sold divided by accounts receivable.

False (Receivables turnover is sales divided by accounts receivable.)

Select all that apply Which of the following are traditional financial ratio categories?

- turnover ratios - profitability ratios - financial leverage ratios

According to the current U.S. corporate tax code, the corporate tax rate in effect for 2019 is:

21%

Which of the following is true of zero coupon bonds?

No coupon payments are made on the bonds.

______ group analysis is a way to establish a benchmark when using ratios.

Peer

Long-term solvency ratios are also known as:

financial leverage ratios.

True or false: Market-to-book ratio equals book value per share divided by market value per share.

False (Market-to-book ratio equals market value per share divided by book value per share.)

What will happen to a bond's time to maturity as the years go by?

It will decline.

The cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.

assets

What are "fallen angel" bonds?

bonds that have dropped from investment grade to junk bond status

Liabilities can be classified as ______ or long-term.

current

Non-cash items are ______ that ____ cash flow.

expenses; do not directly affect

One of the important questions in the area of investments includes the potential risks and reward associated with investing in _____ assets.

financial

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

interest rate

Which one of the following does not affect ROE according to the DuPont identity?

investor sentiment

When using trial and error to compute the yield to maturity (YTM) for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ______ 6 percent.

lower than (The YTM is less than the coupon rate for a premium bond.)

Agency costs occur when ______ and stockholder interests are not in line with each other.

management

The goal of a "for-profit" business is to ______ the value of shareholders' wealth.

maximize

When using a financial calculator to find the number of payments, the PMT value should be entered as a _____.

negative

A limited liability company is taxed like a ______, but retains ______ for owners.

partnership; limited liability

In practice, accountants tend to classify costs as either ______ costs or ______ costs.

product; period

Which of the following is an example of an opportunity cost?

rental income likely to be lost by using a vacant building for an upcoming project

Receivables turnover is ______ divided by accounts receivable.

sales

The relationship between nominal rates, real rates, and inflation is called ______ .

the Fisher Effect

On which side of the balance sheet do liabilities appear?

the right-hand side

In a for-profit business, owners' equity is equivalent to:

the total value of stock in a corporation.

Common stockholders are entitled to the difference between ______ and ______.

total assets; total liabilities

Select all that apply Which of the following are true about a bond's face value?

- It is the principal amount repaid at maturity. - It is also known as the par value.

Select all that apply What are the two unique features of a U.S. federal government bond?

- U.S. Treasury issues are exempt from state income taxes. - U.S. Treasury issues are considered to be default-free.

Select all that apply Working capital includes which of the following?

- inventory - cash - short-term assets

Cal's Market has a return on equity (ROE) of 15 percent. What does this mean?

Cal's generated $.15 in profit for every $1 of book value of equity.

Which one of the following is true?

Cash flows can be derived from financial statements.

_____ paid minus net new equity raised equals cash flow to stockholders.

Dividends

The ______ identity can help to explain why two firms with the same return on equity may not be operating in the same way.

DuPont

True or false: All else being equal, a 1-year bond's price is less sensitive to interest rate changes as compared to that of a 10-year bond's price.

True

True or false: Dividends paid minus net new equity raised equals cash flow to stockholders.

True

True or false: Zero coupon bond calculations use semiannual periods to be consistent with coupon bond calculations.

True

One of the most important uses of financial statement information within the firm is:

performance evaluation.

Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as ______.

period costs

Which type of debt is given preference in the event of default?

senior

Who is entitled to the residual value of a firm's cash flows?

shareholders

Select all that apply Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds?

- Treasury bonds are considered free of default risk, while corporate bonds are exposed to default risk. - Treasury bonds are issued by the U.S. government, while corporate bonds are issued by corporations. - Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer.

If a $1,000 par value bond is trading at a premium, the bond is:

trading for more than $1,000 in the market.

True or false: The dirty price does not include accrued interest.

False

Select all that apply Which of the following are key questions for investments?

- What is the best mixture of financial assets to hold? - What determines the price of a financial asset? - What are the risks and rewards associated with investing?

Select all that apply When entering variables in a spreadsheet function (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 variables is this a consideration?

- future value - present value - payment

Select all that apply Which three components determine the shape of the term structure of interest rates?

- inflation premium - real interest rate - interest rate risk premium

Select all that apply Which of the following are classified as liabilities on a firm's balance sheet?

- long-term debt - accounts payable

Select all that apply What should you keep in mind when examining an income statement?

- time and costs - cash versus noncash items - GAAP

Select all that apply Which of the following could not be evaluated as annuities or annuities due?

- tips to a waiter - monthly electric bills

Why don't large businesses organize as sole proprietorships or partnerships?

It can be difficult to raise cash for investment in these forms, and that limits the ability of the business to grow.

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

It will increase.

What is a premium bond?

a bond that sells for more than face value

Net capital spending is negative when ______.

a firm sold off more assets than it purchased

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes ______ to sell.

a long time

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

creditors and stockholders