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Fina 4300 exam 2

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Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. Decrease in deferred tax assets

Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. Amortization expense

Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. Decrease in accounts receivable

Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. Decrease in accrued liabilities

Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. Decrease in income taxes payable

Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. Decrease in prepaid expenses

Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. Increase in accounts payable

Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. Increase in deferred revenue

Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. Increase in inventory

Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. Loss on sale of assets

False

Information that is significant enough to make a difference in a decision is considered to be immaterial

Soup Galore is a partnership that was formed three years ago for the purpose of creating, producing, and distributing healthy soups in a dried form. The firm has been extremely successful thus far and has decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called?

Initial Public Offering

subtracted

Insert the word "added" or "subtracted" in the blank. A decrease in accrued liabilities should be to convert net income to cash flow from operating activities.

added

Insert the word "added" or "subtracted" in the blank. Depreciation and amortization should be to convert net income to cash flow from operating activities.

Klamath Corporation has asset turnover of 3.5, a profit margin of 5.2%, and a current ratio of 0.5. What is Klamath Corporation's return on equity?

Insufficient information to find ROE

COGS/ Inventory

Inventory turnover =

True

Issue costs of equity are high relative to those of debt

True

Tools used in a financial statement analysis should generally include common-size financial statements, key financial ratios, trend analysis, structural analysis, and comparison with industry competitors.

Bakers' Town Bread is selling 1,200 shares of stock through a Dutch auction. The bids received are as follows: How much cash will Bakers' Town Bread receive from selling these shares of stock? Ignore all transaction and flotation costs.

Total cash received = 1,200 × $10 = $12,000

Webster Electrics is offering 1,500 shares of stock in a Dutch auction. The bids include: How much cash will Webster Electrics receive from selling these shares? Ignore all transaction and flotation costs.

Total cash received = 1,500 × $22 = $33,000

Miller Motors has decided to sell 1,800 shares of stock through a Dutch auction. The bids received are as follows: How much will Miller Motors receive in total from selling the 1,600 shares? Ignore all transaction and flotation costs.

Total cash received = 1,800 × $20 = $36,000

Aaron's Sailboats has decided to take the company public by offering a total of 120,000 shares of common stock to the public. The firm has hired an underwriter who arranges a full commitment underwriting and suggests an initial selling price of $25 a share with a 7 percent spread. As it turns out, the underwriters only sell 97,400 shares. How much cash will Aaron's Sailboats receive from its first public offering?

Total cash received = 120,000 × $25 (1 - 0.07) = $2,790,000

Nelson Paints recently went public by offering 65,000 shares of common stock to the public. The underwriters provided their services in a best efforts underwriting. The offering price was set at $16 a share and the gross spread was $2. After completing their sales efforts, the underwriters determined that they sold a total of 57,500 shares. How much cash did Nelson Paints receive from its IPO?

Total cash received = 57,500 × ($16 - $2) = $805,000

Richard has an outstanding order with his stock broker to purchase 1,000 shares of every IPO. The next three IPOs are each priced at $30 a share and will all start trading on the same day. Richard is allocated 1,000 shares of IPO A, 400 shares of IPO B, and 100 shares of IPO C. On the first day of trading IPO A opened at $31.50 a share and ended the day at $28.25 a share. IPO B opened at $31 a share and finished the day at $32 a share. IPO C opened at $36.50 a share and ended the day at $38.75 a share. What is Richard's total profit or loss on these three IPOs as of the end of the first day of trading?

Total profit = [1,000 × ($28.25 - $30)] + [400 × ($32 - $30)] + [100 × ($38.75 - $30)] = -$75

1. Simulation 2. Scenario analysis 3. Sensitivity analysis

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections?

1. Asset turnover ratio 2. Profit margin 3. Dividend policy 4. Financial leverage

Which of the following can affect a firms sustainable rate of growth?

The price of the underlying stock

Which of the following factors, when increased, will tend to cause the value of a put to decrease?

Payback period

Which of the following figures of merit might not use all possible cash flows in its calculations?

Net income + Non-cash items+/- changes in current assets and liabilities

Which of the following formulas describes the calculation of cash flow from operating activities?

Cash flows from selling activities

Which of the following is NOT a major category on the cash flow statement?

Managers usually believe that their stock is overvalued

Which of the following is NOT a reason for why U.S. corporations haven't issued more equity in recent years?

Goodwill

Which of the following is NOT a typical reason for differences between profits and cash flow?

Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation

Which of the following is a reason why a company's market value of equity differs from its book value of equity?

Borrowing

Which of the following is an external source of liquidity?

Sales of products or services

Which of the following is an internal source of liquidity?

The revenue must be received in cash

Which of the following is not a condition that must be met for an item to be recorded as revenue?

Reasons for retained earnings increases or decreases

Which of the following items could be found on a statement of shareholders' equity?

Advertising

Which of the following items is a discretionary expenditure?

Sale of property

Which of the following items would be classified as an investing activity on the statement of cash flows:

1. Should the firm merge with a competitor? 2. Should additional equity be sold? 3. Should a particular division be sold? 4. Should a new product be introduced?

Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process?

1. Current ratio 2. Acid test

Which of the following ratios are measures of a firm's liquidity?

bonds

Which of the following securities has a purely fixed claim against a firms cash flows?

Common stock

Which of the following securities has a purely residual claim against a firm's cash flows?

1. Diversifiable risks can be largely eliminated by investing in 50 unrelated securities 2. There is no reward for accepting diversifiable risks 3. Diversifiable risks are generally associated with an individual firm or industry

Which of the following statements are correct concerning diversifiable, or unsystematic risks?

1. When an acquiring firm purchases a target firm's equity, the acquirer must assume the target's liabilities 2. The market value of a public company reflects the worth of the business to minority investors

Which of the following statements are correct?

1. Underwriters help private companies access public stock markets through IPO's 2. Shelf registration and private placements are examples of seasoned security issues 3. Bearer bonds make it easier to avoid paying taxes on interest income

Which of the following statements are true?

A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

Which of the following statements concerning a firm's cash flows and profits is false?

The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle.

Which of the following statements concerning the cash flow production cycle is true?

The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle.

Which of the following statements concerning the cash flow-production cycle is true?

ROE is a forward looking, one period measure, while business decisions span the past and the present.

Which of the following statements does not describe a problem with using ROE as a performance measure

A cumulative cash deficit on cash budget indicates the need to acquire additional funds

Which of the following statements is correct concerning the cash balance of a firm?

The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio

Which of the following statements is correct?

It is unlikely that management can manipulate the bottom line due to the regulations in place to enforce GAAP

Which of the following statements is false with regard to quality of financial reporting?

Companies using IFRS may not reverse entries for inventory write-downs if the market recovers

Which of the following statements is false?

The design of financial instruments is greatly constrained by law and regulation

Which of the following statements is false?

Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

Which of the following statements is true?

Fixed costs do not vary proportionately with volume changes but remain the same within a relevant range of activity.

Which of the following statements is true?

Foreign firms registered with the SEC may file reports based on IFRS

Which of the following statements is true?

Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds

Which of the following statements is true?

Taxable income is reduced by the amount of the interest on a firm's debt

Which of the following statements regarding interest tax shields is correct?

Junk bonds have a huger priority in bankruptcy than preferred stock

Which of the following statements regarding junk bonds is true?

A. Holders of preferred stock have the same voting rights as common stockholders. B. Preferred stock dividend payments are a deductible expense for corporate tax purposes. C. Almost all public corporations are at least partly financed with preferred stock. *D. None of the options are correct.

Which of the following statements regarding preferred stock is true?

1. Markets tend to respond quickly to new information 2. It is difficult for the typical investor to earn above-average returns without taking above average risks 3. Short-run prices are difficult to predict accurately based on public information

Which of the following statements related to the market efficiency tend to be supported by current evidence?

The predicted future price of the underlying stock

Which of the following variables does NOT affect the value of a stock price?

Decreases in the dividend payout ratio

Which of the following will increase the sustainable growth rate a corporation can achieve

Depreciation

Which of the following would NOT be considered a use of cash?

An increase in the dividend payout ratio

Which of the following would increase a company's need for external financing?

Decreasing accounts receivable

Which of the following would increase cash from operating activities?

Equity earnings, gains from sale of assets, interest income

Which of the items below would be included under "Other income and expense"?

1. Assets-to-equity ratio 2. Profit Margin 3. Retention ratio 4. Asset turnover ratio

Which of these ratios are the determinants of a firms sustainable growth rate?

1. Profit margin 2. Financial leverage 3. Asset turnover

Which of these ratios, or levers of performance, are the determinants of ROE?

Common stocks, long-term corporate bonds, long-term government bonds, short-term government bonds

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2016 period)?

decrease in accounts receivable

Which one of the following is a source of cash?

increase in accounts payable

Which one of the following is a source of cash?

increase in inventory

Which one of the following is a use of cash?

Balance Sheet

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets?

Income Statement

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

Cash Flow Statement

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time?

Dividend policy

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?

Asset turnover

Which one of the following ratios identifies the amount of sales a firm generated for every $1 in assets?

Current ratio and cash flow liquidity ratios

Which ratios help asses the firms ability to meet cash needs as they arise?

Cash flow adequacy and fixed charge coverage

Which ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges?

The entire proceeds from sales of long-lived assets are included in investing activities.

Why are gains and losses from asset sales removed from net income when calculating the cash flows from operating activities?

The figure for operating profit provides a basis for assessing the success of the firm apart from its financing and investing activities and separate from tax considerations

Why is it important to assess operating profit?

1. How much will your sales grow? 2. Will additional fixed assets be required? 3. Will dividends be paid to shareholders? 4. How much new debt must be obtained?

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan?

Reduce the collection period

You are estimating your company's external financing needs for the next year. Your first-pass pro forma financial statements showed a large financing deficit for next year. Which of the following changes to your company's operating plan would reduce the financing deficit if incorporated in revised pro forma financial statements?

False

You can construct a sources and uses statement for 2014 if you have a company's year-end balance sheets for 2014 and 2015.

Taxes paid = Provision for income taxes - Increase in taxes payable - Increase in deferred taxes. 65 - 3 + 1 = $63 million

ZZZ Corporation's income statement shows a provision for income taxes of $65 million in 2014. At the end of 2013, ZZZ's balance sheet reported income taxes payable of $12 million and deferred taxes of $18 million. At the end of 2014 their balance sheet shows income taxes payable of $15 million and deferred taxes of $17 million. What were ZZZ's taxes paid in 2014?

Par value

Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the

Activity

_____ Ratios measure the liquidity of specific assets and the efficiency of managing assets

Management, Auditors report

_____ is responsible for the preparation of the financial statements, including the notes, and the ________ attests to the fairness of the presentation.

Liquidity

______ Ratios measure a firms ability to meet cash needs as they arise

Market

______ Ratios measure returns to stockholders and the value of the marketplace puts on a company's stock

Leverage

_______ Ratios measure the extent of a firms' financing with debt relative to equity and its ability to cover interest and other fixed charges

What is a prospectus?

a document that describes the details of a proposed security offering along with relevant information about the issuer

What is the definition of a syndicate?

a group of underwriters sharing the risk of selling a new issue of securities

Which of the following securities has a purely FIXED claim against a firm's cash flows?

Bonds

Which of the following securities has a purely fixed claim against a firm's cash flows?

Bonds

An increase in cash and cash equivalents should appear as a source of cash on the sources and uses statement.

False

If a company seeks to maximize firm value, it should never grow at a rate above its sustainable growth rate.

False

If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.

False

In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off".

False

One advantage of ROE is that it is a risk-adjusted measure of performance.

False

One way to manage an actual growth rate above the sustainable growth rate is to decrease prices.

False

Premature revenue recognition is acceptable under GAAP.

False

Principal is exchanged in interest rate swaps but not in currency swaps.

False

True

Terminal value estimates based on book value tend to understate a company's terminal value

True

The evidence indicates that, on average, a company's stock price declines when it announces a new issue of equity

True

The forecast for retained earnings on the 2019 balance sheet can be determined as 2018 retained earnings plus projected 2019 after-tax earnings less projected 2019 dividends

False

The income statement presents cash revenues, cash expenses, net income, and earnings per share for an accounting period.

Percent-of-sales method

The most common approach to developing pro forma financial statements is called the

Return on equity

The most popular yardstick of financial performance among investors and senior managers is the

True

The objectives of a financial statement analysis will vary depending on the perspective of the financial statement user

False

The only way a company can grow at a rate above its sustainable growth rate is by increasing leverage

False

The percent-of-sales approach to financial forecasting works well for forecasting the income statement but is not useful for forecasting the balance sheet

is based on the current yield to maturity of the firm's outstanding bonds

The pre-tax cost of debt:

Which of the following variables does NOT affect the value of a stock option?

The predicted future price of the underlying stock

True

The present value of a perpetuity can be calculated as the annual cash flow divided by the discount rate

The strike price

The price of a call option tends to be lower when which of the following is higher?

Which of the following factors, when increased, will tend to cause the value of a put to decrease (all else equal)?

The price of the underlying stock

The percentage of net income available to the firm to fund future growth

The retention ratio is:

Quality

The sharper and clearer the picture presented through the financial data and the closer the picture is to financial reality, the higher the ____ financial statements and reported earnings

Cash Flow Statement

The sources and uses of cash over a stated period of time are reflected on the:

True

The statement of cash flows shows the change in the balance sheet accounts between periods

The price of a call option tends to be lower when which of the following is higher (all else equal)?

The strike price

Can never be greater than the return on equity

The sustainable growth rate

Maximum growth rate achievable, excluding any external equity financing while maintaining a constant debt-equity ratio

The sustainable growth rate is best described as the:

True

The sustainable growth rate is the only growth rate in sales that is consistent with stable values of the profit margin, retention rate, asset turnover, and leverage.

Assumes the debt-equity ratio is constant

The sustainable growth rate:

False

The time period assumption assumes a two-year time frame with interim reporting occurring daily and weekly

True

The times-interest-earned ratio always equals of exceeds the times-burden-covered ratio

True

Three ratios that help the financial analyst assess short-term solvency are the current ratio, the quick ratio and the cash flow liquidity ratio.

Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan?

Times-burden-covered ratio

start by calculating the gross margin = gross profit/sales Breakeven sales volume = operating expenses / gross margin.

To calculate break even

Retained earnings = Most recent year retained earnings + earning after tax - dividends paid 158,000 + 23,400 - 12,400 = 169,000

To estimate Missed Places, Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year?

Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:

Tombstones

Homemade leverage is:

the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.

the units sold will be the first units so add up the remaining to get ending inventory balance.

Using the FIFO method for ending inventory balance

The Blue Lagoon has a return on equity of 23.62 percent, an equity multiplier of 1.48, and a capital intensity ratio of 1.06. What is the profit margin?

15.06

The M&M irrelevance proposition assures financial managers that their choice between equity or debt financing will ultimately have no impact on firm value.

False

The accrual principle requires that revenue not be recognized until payment from a sale is received.

False

The cost of equity is usually reported on the income statement right below interest expense.

False

The notes to the financial statements are only important to the accountants; the financial analyst can skip over them to save time.

False

The only reason why the price would fall on a corporate bond is if market interest rates increase.

False

The only way a company can grow at a rate above its current sustainable growth rate is by increasing leverage.

False

The percent-of-sales approach to financial forecasting works well for forecasting the income statement but is not useful for forecasting the balance sheet.

False

The quality of reported earnings is a minor element in evaluating financial statement data.

False

Valuing a call option requires an accurate estimate of the future value of the underlying asset.

False

You can construct a sources and uses statement for 2017 if you have a company's year-end balance sheets for 2017 and 2018.

False

Private equity firms comprise a relatively insignificant portion of the American economy.

False\

Which one of the following statements is false?

Financial instruments are greatly constrained by law and regulation.

William has a choice of investing $2,000 for 5 years in CD #1 that pays 6% compounded annually or a CD #2 that pays 6.8% simple interest annually (meaning it does not pay interest on the interest). What will be the value of each investment at the end of five years?

#1. $2,676.45; #2. $2,680.00

Please refer to Oscar's financial statements above. All of Oscar's costs and current asset accounts vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year?

$1,034

13. A $1,000 par value bond with a fixed 10% rate of interest pays coupons semiannually. What amount will the bondholder receive on the bond's maturity date?

$1,050

A $1,000 par value bond with a fixed 10% rate of interest pays coupons semiannually. What amount will the bondholder receive on the bond's maturity date?

$1,050

Please refer to Oscar's financial statements above. Sales are projected to increase by 3 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the PROJECTED ADDITION to retained earnings for next year?

$1,421.40

Northwest Rail wants to raise $14.2 million through a rights offering so it can purchase additional rail cars and upgrade its maintenance facilities. How many shares of stock will the firm need to sell through this offering if the current market price is $34 a share and the subscription price is $31 a share?

$14.2m/$31 = 458,064.52 shares

Ginormous Oil entered into an agreement to purchase all of the outstanding shares of Slick Company for $60 per share. The number of outstanding shares at the time of the announcement was 82 million. The book value of liabilities on the balance sheet of Slick Co. was $1.46 billion. Immediately prior to the Ginormous Oil bid, the shares of Slick Co. traded at $33 per share. What value did Ginormous Oil place on the control of Slick Co.?

$2.21 billion

Please refer to the financial information for Foodtek, Inc.above. During 2017, what was the cost of merchandise (in millions of dollars) produced by Foodtek?

$218

Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 11%. The amount of money will you have in ten years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?

$2839; $184.565

At the end of 2017, Stacky Corp. had $500,000 in liabilities and a debt-to-assets ratio of 0.5. For 2017, Stacky had an asset turnover of 3.0. What were annual sales for Stacky in 2017?

$3,000,000

High Mountain Mining wants to expand its current operations and requires $3.5 million in additional funding to do so. After discussing this with key shareholders, the firm has decided to raise the necessary funds through a rights offering at a subscription price of $18 a share. The current market price of the firm's stock is $22 a share. How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans?

$3.5m/$18 = 194,444 shares

Consider the following premerger information about a bidding firm (Buyitall Inc.) and a target firm (Tarjay Corp.). Assume that neither firm has any debt outstanding. Buyitall Tarjay Shares outstanding 1,500 1,100 Price per share $32 $26 Buyitall has estimated that the present value of any enhancements that Buyitall expects from acquiring Tarjay is $2,600. What is the NPV of the merger assuming that Tarjay is willing to be acquired for $28 per share in cash

$400

What would be the carried interest (at 20%) on a private equity portfolio with an initial value of $500 million that was subsequently liquidated for $750 million?

$50 million

Jose's Boxed Goods expects sales of $1,800 next year. The profit margin is 6 percent and the firm has a 40 percent dividend payout ratio. What is the projected increase in retained earnings?

$64.80

Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August?

$643

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, what will be the book value of equity if all else remains the same?

$750,000

Please refer to the income statement for VGA Associates below. Assuming that cost of goods sold are variable and operating expenses are fixed, what was VGA Associates' breakeven sales volume in 2017?

$80,000

Suppose you purchase a put option on XYZ stock when the stock price is $40. The option premium is $2, and the strike price is $39. What is your net profit on the put option if the stock price is $41 at maturity?

-$2

Please refer to the selected financial information for Boss Stores above. What is the difference between Boss's sustainable growth rate and its actual growth rate for 2017?

-3.04%

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥122 at year-end. What holding period return, measured in yen, did you earn on the bond?

-7.38 You paid $1,000 for the bond (¥100,000/100). At the end of the year, you had interest income and a yen bond worth a total of $926.23 (¥113,000/122). Your dollar return was -7.38 percent ([$926.23 - $1,000]/$1,000). Another way to find the dollar return is to use the following equation, (1+$ return) - (1+ Y return)(1+ % appreciation in $) (1+.13)(1+((1/22) - (1/100))/ (1/100)) = )1+.13)(1-.18) - 1 = -.0738

-7.38 You paid $1,000 for the bond (¥100,000/100). At the end of the year, you had interest income and a yen bond worth a total of $926.23 (¥113,000/122). Your dollar return was -7.38 percent ([$926.23 - $1,000]/$1,000). Another way to find the dollar return is to use the following equation,(1+$ return) - (1+ Y return)(1+ % appreciation in $)(1+.13)(1+((1/22) - (1/100))/ (1/100)) = )1+.13)(1-.18) - 1 = -.0738

A firm has net income of $197,400, a return on assets of 8.4 percent, and a debt-equity ratio of .72. What is the return on equity?

14.45

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

.47

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

0.69

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2016 period)?

1. Common stocks, 2. long-term corporate bonds, 3. long-term government bonds, 4. short-term government bills

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%

At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the dividend yield in fiscal year 2012?

1.79%

1.79% Dividend yield = 0.55/30.75 = 1.79%

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

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥122 at year-end. What was your U.S. dollar holding period return on the bond?

13% The holding period return in yen was [3%*100,000 + 10,000]/100,000 = 13 percent.

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥122 at year-end. What was your U.S. dollar holding period return on the bond?

13% The holding period return in yen was [3%*100,000 + 10,000]/100,000 = 13 percent.

At the end of 2016, Crane Industries, Inc.'s stock price was $30.75. A year later, it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in fiscal year 2017?

13.43%

13.43% Percentage change in share price = (34.88- 30.75)/30.75 = 4.13/30.75 = 13.43%.

Kessler Cleaners has accounts receivable of $28,943, total assets of $387,600, cost of goods sold of $317,400, and a capital intensity ratio of .97. What is the accounts receivable turnover rate?

13.81

15.22 Rate of return = ((34.88 + 0.55) - 30.75)/30.75 = 15.22%

. At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What rate of return did the common stock owners earn in fiscal year 2012?

15.22%

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000, and dividends were $44,640. What is Westcomb's sustainable growth rate?

18.24 percent

A firm has net income of $28,740, depreciation of 6,170, taxes of $13,420, and interest paid of $2,605. What is the cash coverage ratio

19.55

Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:

2 years.

Please refer to the financial data for Link, Inc. above. The current ratio for Link at the end of 2017 is

2.76 (current assets/current liabilities)

Please refer to the selected financial information for Boss Stores above. What is the actual sales growth rate for 2016?

21.4%

Please refer to the financial data for Link, Inc. above. Assume a 365-day year for your calculations. Link's days' sales in cash at the end of 2017 is:

249.7

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%

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

Average U.S. wages in 1990 were $28,960, far higher than the average wage in 1930 of $1,970. What was the average annual increase in wages over this sixty-year period?

4.58%

A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $32,600, total equity of $294,000, total assets of $503,000, and a 25 percent dividend payout ratio?

4.88

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

Tessler Farms has a return on equity of 11.28 percent, a debt-equity ratio of 1.03, and a total asset turnover of .87. What is the return on assets?

5.56

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

60 percent of March sales.

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?

Komatsu has a 4.5 percent net profit margin and a 25 percent dividend payout ratio. The asset turnover ratio is 1.6 and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is the sustainable rate of growth?

9.56 percent

Please refer to the selected financial information for Boss Stores above. What is the sustainable growth rate for 2016?

9.97%

True

A firm's WACC is the appropriate discount rate to value a project undertaken by the firm only if the project has the same risk as the firm's existing assets.

Florida Corp. is calculating the appropriate rate for discounting cash flows on a project valued using the APV method. Florida's target debt ratio (D/(D+E)) in market value terms is 50%, and the yield-to-maturity on its outstanding debt is 6%. A comparable firm has an equity beta of 1.4 and a debt ratio (D/(D+E)) of 40%. Assume a risk-free rate of 5% and a market risk premium of 8%. Florida's tax rate is 40%. What discount rate should Florida use? A 11.72% B. 18.44% C. 11.02% D. 7.66%

A 11.72%

proxy

A _____ statement contains useful information about the board of directors and executive compensation, option grants, audit-related matters, related party transactions and proposals to be voted on by shareholders.

at any point in time.

A balance sheet reports the value of a firm's assets, liabilities, and equity:

False

A beta grater than 1 is indicative of an above average level of diversifiable (unsystematic) risk

True

A cash flow statement places each source or use of cash into one of three broad categories: operating activities, investing activities, or financing activities.

True

A company experiencing balanced growth does not generate cash surpluses or cash deficits

False

A company incurs costs of financial distress only after declaring bankruptcy

Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

A company purchases a new $10 million building, financed half with cash and half with a bank loan. How would this transaction affect the company's balance sheet?

Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.

A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company's balance sheet?

Which of the following statements concerning a firm's cash flows and profits is false?

A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

False

A company's price-to-earnings ratio is always equal to 1 minus its earnings yield

False

A company's return on assets will always equal or exceed its profit margin?

A corporate annual report contains ____ financial statements.

False

A creditor is ultimately concerned with the ability of a firm to generate profits

False

A decline in the Net fixed assets account between year-end 2013 and year-end 2014 is a clear indication that fixed assets were sold during 2014.

False

A decline in the Net fixed assets account between year-end 2016 and year-end 2017 is a clear indication that fixed assets were sold during 2017.

Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 11% and Conundrum has cash of $85 million, debt of $65 million, and 30 million shares outstanding, what is Conundrum's expected current share price?

A) $12.61

In March, with the spot price of wheat at $5.75 per bushel, Hollywood Bakery longs 100 July wheat futures contracts (5,000 bushels each) on the CBOE at a futures price of $5.90 per bushel. In June, Hollywood Bakery closes out its futures contracts when the futures price is $5.80 per bushel. What is Hollywood Bakery's gain (or loss) on the futures contracts?

A loss of $50,000

True

A reduction in long-term debt is a use of cash.

Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 12% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected terminal enterprise value in year 2?

A) $1384.24

Advanced Chemical Industries is awaiting the verdict from a court case over whether it is liable for the clean-up of wastes on a disused factory site. If it is liable, this will result in a reduction of its free cash flow by $11 million per year for ten years. If it is not liable, there will be no effect. On the close of trading the day before the announcement of the verdict, Advanced Chemicals was trading at $20 per share. Most investors calculate that there is a 100% chance that Advanced Chemicals will have a verdict returned against them. One investor, Jo, has performed extensive research into the outcome of the trial and estimates that there is no chance Advanced Chemicals will have a verdict returned against them. Given that Advanced Chemicals has 40 million shares outstanding and an equity cost of capital of 6% with no debt, Jo's estimate of the value of a share of Advanced Chemicals would be how much more than the market price?

A) $2.02

Banco Industries expect sales to grow at a rapid rate over the next 3 years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. Banco industries has a weighted average cost of capital of 11%, $40 million in cash, $70 million in debt, and 18 million shares outstanding. If Banco Industries can reduce its operating expenses so that EBIT becomes 12% of sales, by how much will its stock price increase?

A) $3.27

On a particular date, FedEx has a stock price of $89.27 and an EPS of $7.11. Its competitor, UPS, had an EPS of $0.38. What would be the expected price of UPS stock on this date, if estimated using the method of comparables?

A) $4.77

The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $640 million, EBITDA of $84 million, excess cash of $67 million, $14 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the range of reasonable share price estimates?

A) $6.27 to $8.86

General Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 9% and General Industries has cash of $15 million, debt of $45 million, and 80 million shares outstanding, what is General Industries' expected current share price?

A) $7.78

Which of the following statements is FALSE?

A) As the enterprise value represents the entire value of a firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows after interest payments are made.

Which of the following should be done by a manager wishing to raise his stock's price? I. Focus on maximizing the present value (PV) of the free cash flow. II. Focus on accounting earnings. III. Focus on financial policy.

A) I only

If you want to value a firm but do not want to explicitly forecast its dividends, the simplest model for you to use is ________.

A) the discounted free cash flow model

A study of trading behavior of individual investors at a discount brokerage found that individual investors ________.

A) trade very actively, despite the fact that their performance is actually worse because of trading costs

Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings? A. $14,700 B. $17,500 C. $18,300 D. $20,600 E. $21,000 F. None of the above.

A. $14,700 Change in retained earnings = $437,500 × 0.048 × (1 - 0.30) = $14,700

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance? A. $560,000 B. $1,400,000 C. $8,000,000 D. $20,000,000

A. $560,000

Which of the following would increase a company's need for external finance, all else equal? A. An increase in the dividend payout ratio B. A decrease in sales growth C. An increase in profit margin D. A decrease in the collection period

A. An increase in the dividend payout ratio

Which of the following is most likely to increase the final number for notes payable in the pro forma balance sheet? A. Decrease in accounts payable. B. Decrease in accounts receivable. C. Decrease in inventory. D. Decrease in inventory.

A. Decrease in accounts payable

Which item is a noncash item that would be added to net income to convert it to cash flow from operating activities? A. Depreciation. B. Inventory. C. Accounts receivable. D. Accounts payable.

A. Depreciation.

Which of the following statements are correct? I. Going-concern value of a firm is equal to the present value of expected future cash flows to owners and creditors. II. When an acquiring firm purchases a target firm's equity, the acquirer need not assume the target's liabilities. III. The market value of a public company reflects the worth of the business to minority investors. IV. The fair market value of a business is usually the lower of its liquidation value and its going-concern value. A. I and III only B. II and IV only C. II and III only D. I, II, and III only E. II, III, and IV only

A. I and III only

Which of the following accounts could be categorized as either a current or noncurrent liability depending on date the debt is due? A. Notes payable and deferred taxes. B. Accounts payable and current portion of long-term debt. C. Deferred taxes and mortgages due in 30 years. D. Long-term warranties and accounts payable.

A. Notes payable and deferred taxes.

All of the following are steps of a financial statement analysis except: A. Prepare pro forma statements. B. Establish objectives of the analysis. C. Study the industry in which the firm operates. D. Develop knowledge of the firm and the quality of management.

A. Prepare pro forma statements.

Which of the following items could be found on a statement of shareholders' equity? A. Reasons for retained earnings increases or decreases. B. A reconciliation of beginning to ending cash. C. The market value of the firm's common stock. D. Assets = Liabilities + Stockholders' Equity.

A. Reasons for retained earnings increases or decreases.

When will a firm record goodwill on its books? A. When the company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired. B. When the firm donates property to charities. C. When it is determined that there has been a loss of value of long-term assets. D. When fixed assets are impaired.

A. When the company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired.

Which one of the following will increase the sustainable rate of growth a corporation can achieve? A. decrease in the dividend payout ratio B. decrease in sales given a positive profit margin C. reduction in the retention ratio D. None of the options are correct. E. avoidance of external equity financing F. increase in corporate tax rates

A. decrease in the dividend payout ratio

On a common-size balance sheet, all accounts are expressed as a percentage of A. total assets. B. sales. C. profits. D. equity. E. None of the options are correct.

A. total assets

When considering the impact of distress costs on capital structure, which of the following facts should lead ABC Corporation to set a higher target debt ratio than XYZ Corporation (all else equal)?

ABC's cash flows from operations are less volatile than XYZ's.

CEO and CFO

According to Section 302 of the Sarbanes-Oxley Act, who must certify the accuracy of the financial statements of a public company?

False

Accounting rules require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line method.

True

Across companies, ROA and financial leverage tend to be inversely related

Which one of the following statements is correct? Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business. Peer group analysis is easier when seasonal firms have different fiscal years. Peer group analysis is simplified when firms use varying methods of depreciation. Comparing results across geographic locations is easier since all countries now use a common set of accounting standards. Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory

True

After issue, the market price of a fixed-rate bond can differ substantially from its par value

Yield to call on company long term bonds * (1- tax rate)

After tax cost of debt capital=

False

All else equal, an increase in a company's asset turnover will decrease its ROE

True

All else equal, increasing the assumed payables period in a financial forecast will decrease external funding required

The market value of all assets

All of the following items should be discussed in the management discussion and analysis except for:

False

An advantage of the percent-of-sales approach to financial forecasting is that effective forecasts can be prepared without consulting historical financial statements

False

An annual financial forecast for 2017 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2017.

True

An average-risk project that has an NPV of zero when its cash flows are discounted at the weighted-average cost of capital will provide sufficient returns to satisfy both stockholders and bondholders

False

An increase in cash and cash equivalents should appear as a source of cash on the sources and uses statement.

An increase in the retention ratio

True

Analyzing the statement of cash flows helps determine the future external financing needs of a business firm.

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share?

Book Value per share = equity/shares outstanding. 1,750,000/5,000,000=$3.50

Which of the following is NOT a likely financing policy for a rapidly growing business?

Borrow funds rather than limit growth, thereby limiting growth only as a last resort.

False

Financial ratios are powerful tools due to the fact that standard definitions exist and there is a set standard that should be met for each ratio

False

Increasing the assumed collection period in a financial forecast will decrease external funding

Your brother will borrow $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at an 8.6-percent annual interest rate, compounded monthly. What is the amount of each payment? A. $287.71 B. $296.67 C. $301.12 D. $342.76 E. $366.05 F. None of the options are correct.

E. $366.05

False

Articles from current business periodicals should not be used in financial statement analysis as journalists are often biased

False

Articles from current business periodicals should not be used in financial statement analysis as journalists are often biased.

False

Asset betas measure financial risk and business risk

times-burden-covered ratio

Aerelon Airways, a commercial airline, suffers a major crash. As a result, passengers are considered to be less likely to choose Aerelon as their carrier, and it is expected free cash flows will fall by $15million per year for five years. If Aerelon has 55 million shares outstanding, an equity cost of capital of 10%, and no debt, by how much would Aerelon's shares be expected to fall in price as a result of this accident?

B) $1.03

Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 6% per year. If the weighted average cost of capital is 12% and Conundrum has cash of $80 million, debt of $60 million, and 30 million shares outstanding, what is Conundrum's expected terminal enterprise value?

B) $459.3 million

The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $620 million, EBITDA of $81 million, excess cash of $62 million, $11 million of debt, and 120 million shares outstanding. If the firm had an EPS of $0.41, what is the difference between the estimated share price of this firm if the average price-earnings ratio is used and the estimated share price if the average enterprise value/EBITDA ratio is used?

B) -$0.13

Which of the following statements is FALSE?

B) For valuation purposes, the trailing price-earnings ratio is generally preferred, since it is based on actual not expected earnings.

Which of the following statements is FALSE?

B) Free cash flow measures the cash generated by a firm after payments to debt or equity holders are considered.

On a particular day, a mining company reveals that, due to new extraction technology, the extractable yield from several of its nickel/lead mines has risen by 15%. Which of the following is the LEAST likely consequence of such an announcement?

B) Investors would determine that the estimates of the firm's value on the date prior to the announcement were too high.

Which of the following statements is FALSE?

B) You should be willing to pay proportionally more for a stock with lower current earnings.

Which of the following is NOT a reason why a dollar today is worth more than a dollar in the future? A. Inflation reduces the purchasing power of future dollars. B. The value of a dollar in the future will be compounded more than the value of a dollar today. C. There is more uncertainty of receiving dollars further into the future. D. A dollar today can be productively invested in the time before receiving a dollar in the future.

B. The value of a dollar in the future will be compounded more than the value of a dollar today.

In a discounted cash flow analysis of Giant Corp.'s project described in the problem above, what would be the projected Year 1 free cash flow? A. $300 B. $600 C. $750 D. $900

B. $600

Gujarat Corporation doubled its shareholders' equity during the year 2014. Gujarat did not issue any new equity, repurchase any equity, or pay out any dividends during the year. What is Gujarat's sustainable growth rate for 2014? A. 50% B. 100% C. 150% D. 200%

B. 100% If equity doubled, then g* = change in equity/equitybop = 100%. For example, if equitybop was 25, the change in equity must also be 25 in order to double equity.

Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares. Which one of the following terms best describes this underwriting?

Best Efforts

True

Bond investors should be more concerned with real returns than with nominal returns

Pro forma free cash flows for a proposed project should I. exclude the cost of employing existing assets that could be sold anyway. II. exclude interest expense. III. include the depreciation tax shield related to the project. IV. exclude any required increase in operating current assets. A. I and II only B. II and III only C. II and IV only D. I, III, and IV only E. I, II, III, and IV F. None of the options are correct.

B. II and III only

The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations? I. Firms that have a 100-percent retention ratio II. Firms that pay an unchanging dividend III. Firms that pay a constantly increasing dividend IV. Firms that pay an erratically growing dividend A. None of the options are correct. B. II and III only C. I and II only D. I and IV only E. I, III, and IV only F. I, II, and III only

B. II and III only

Which one of the following correctly defines the retention ratio? A. one plus the dividend payout ratio B. additions to retained earnings divided by net income C. additions to retained earnings divided by dividends paid D. net income minus additions to retained earnings E. net income minus cash dividends F. None of the above.

B. additions to retained earnings divided by net income

The weighted-average cost of capital for a firm is the A. minimum discount rate the firm should require on any new project. B. rate of return a firm must earn on its existing assets to maintain the current value of its stock. C. None of the options are correct. D. coupon rate the firm should expect to pay on its next bond issue. E. discount rate which the firm should apply to all of the projects it undertakes. F. rate of return shareholders should expect to earn on their investment in this firm.

B. rate of return a firm must earn on its existing assets to maintain the current value of its stock

A firm is considering an average-risk project with an IRR of 6%. The firm's cost of debt (KD) is 5%, its cost of equity (KE) is 12%, and its tax rate (t) is 20%. The target debt ratio (D/(D+E)) for the project, in market values, is 0.5. The firm should A. accept the project only if it can be completely financed with debt. B. reject the project regardless of the financing method. C. accept the project only if it can be completely financed with equity. D. accept the project regardless of the financing method.

B. reject the project regardless of the financing method.

Total risk is measured by _____, and systematic risk is measured by ____. A. beta; alpha B. standard deviation; beta C. standard deviation; variance D. WACC; beta E. beta; standard deviation F. None of the options are correct

B. standard deviation; beta

The retention ratio is: A. equal to net income divided by the change in total equity. B. the percentage of net income available to the firm to fund future growth. C. equal to one minus the asset turnover ratio. D. the change in retained earnings divided by the dividends paid. E. the dollar increase in net income divided by the dollar increase in sales. F. None of the above.

B. the percentage of net income available to the firm to fund future growth.

According to the pecking order theory of capital structure, why do firms avoid issuing equity

Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall

Increase in the inventory turnover rate

Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. All else held constant, how will this accomplishment be reflected in the firm's financial ratios?

time periods

Budgets apply over:

Carbondale Oil announces that a well that it has sunk in a new oil province has shown the existence of substantial oil reserves. The exploitation of these reserves is expected to increase Carbondale's free cash flow by $100 million per year for eight years. If investors had not been expecting this news, what is the most likely effect on Carbondale's stock price upon the announcement, given that Carbondale has 80 million shares outstanding, no debt, and an equity cost of capital of 11%?

C) rise by $6.43

Individual investors' tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals is known as ________.

C) the investor overconfidence hypothesis

A company's price-to-earnings ratio is always equal to one minus its earnings yield.

False

A company's return on assets will always equal or exceed its profit margin.

False

Gonzales Corporation generated free cash flow of $86 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $275 million, and 100 million shares outstanding, what is Gonzales Corporation's expected current share price?

C) $12.49

Banco Industries expect sales to grow at a rapid rate over the next three years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. If Banco industries has a weighted average cost of capital of 11%, $50 million in cash, $80 million in debt, and 18 million shares outstanding, which of the following is the best estimate of Banco's stock price at the start of year 1?

C) $13.04

On a particular date, the above information concerning Office Depot, Incorporated, was given on Google Finance. Its competitor, Staples Incorporated, had a stock price of $24.33. Which of the following is closest to the EPS of Staples Incorporated if it is estimated using valuation multiples based on price-earnings ratios?

C) $2.63

The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $600 million, EBITDA of $84 million, excess cash of $68 million, $18 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the best estimate of the firm's share price?

C) $7.17

Which of the following is the best statement of the efficient markets hypothesis?

C) Competition between investors works to make the net present value (NPV) of all trading opportunities zero.

The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm?

C) Enterprise Value/Sales

Valuation models use the relationship between share value, future cash flows, and the cost of capital to estimate these quantities for a given firm. Realistically, for a publicly traded firm, what can we reliably use such models to determine? I. the firm's future cash flows II. the firm's cost of capital III. the firm's market price

C) III only

Which of the following statements is FALSE?

C) If a firm has no debt, then rwacc equals the risk-free rate of return.

Which of the following statements concerning the valuation of firms using the method of comparables is FALSE?

C) Valuation multiples take into account differences in the risk and future growth between the firms being compared.

If you want to value a firm that consistently pays out its earnings as dividends, the simplest model for you to use is the ________.

C) dividend-discount model

Your grandmother invested a lump sum 26 years ago at 4.25-percent interest. Today, she gave you the proceeds of that investment which totaled $51,480.79. How much did she originally invest? A. $15,929.47 B. $16,500.00 C. $17,444.86 D. $17,500.00 E. $17,999.45 F. None of the options are correct.

C. $17,444.86

What is an appropriate estimate of Havasham's terminal value as of the end of 2017 using a warranted multiple of free cash flow as your estimate? A. $155 million B. $2,898.5 million C. $3,007.0 million D. $4,365.0 million E. $7,042.2 million F. None of the options are correct.

C. $3,007.0 million

What is an appropriate estimate of Havasham's terminal value as of the end of 2017 using a warranted price-to-earnings multiple as your estimate? A. $225 million B. $3,833.0 million C. $4,207.5 million D. $4,365.0 million E. $6,788.1 million F. None of the options are correct.

C. $4,207.5 million

Please refer to the selected financial information for Boss Stores above. What is the difference between Boss's sustainable growth rate and its actual growth rate for 2014? A. - 11.40% B. - 7.09% C. - 3.04% D. 5.47% E. 13.98% F. 21.40%

C. - 3.04%

Please refer to the selected financial information for Boss Stores above. What is the retention ratio for 2013? A. 0.32 B. 0.68 C. 0.97 D. 1.00 E. None of the above.

C. 0.97

Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The asset turnover ratio is 1.6 and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is Komatsu's sustainable rate of growth? A. 1.91% B. 6.12% C. 10.83% D. 11.26% E. 12.74% F. None of the above.

C. 10.83% Sustainable growth = PRAT = 0.045 × (1 - 0.15) × 1.6 × 1.77 = 10.83%

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's earnings per share next year assuming Squamish raises $40 million of new debt at an interest rate of 7 percent. A. 1.28 B. 2.00 C. 2.12 D. 2.22 E. .06

C. 2.12

Please refer to the selected financial information for Boss Stores above. What is the sustainable growth rate for 2013? A. - 17.6% B. - 7.9% C. 9.97% D. 10.27% E. 12.23% F. 21.40%

C. 9.97%

Which of the following statements are correct concerning diversifiable, or unsystematic, risks? I. Diversifiable risks can be largely eliminated by investing in 50 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk. A. I and IV only B. I, II, III, and IV C. I, II, and III only D. I and III only E. II and IV only F. None of the options are correct.

C. I, II, and III only

When making a capital budgeting decision, which of the following is/are NOT relevant? I. The size of a cash flow II. The risk of a cash flow III. The accounting earnings from a cash flow IV. The timing of a cash flow A. I only B. II only C. III only D. II and III only E. III and IV only F. They are all relevant.

C. III only

True

Current liabilities are defined as liabilities with a maturity of less than a year.

True

Current liabilities are defined as liabilities with a maturity of less than one year.

Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7-percent discount rate to these amounts? A. The present values of Ian and Sunny's monies are equal. B. In future dollars, Sunny's money is worth more than Ian's money. C. In today's dollars, Ian's money is worth more than Sunny's. D. Twenty years from now, the value of Ian's money will be equal to the value of Sunny's money. E. Sunny's money is worth more than Ian's money given the 7-percent discount rate. F. None of the options are correct.

C. In today's dollars, Ian's money is worth more than Sunny's.

Milano Corporation has experienced growth of 20% for each of the last 5 years. Over this 5-year period, Milano's return on equity has never exceeded 15%, its profit margin has held steady at 5%, and its total asset turnover has not changed. Over the 5-year period, Milano paid no dividends and issued no new equity. Based on this information, which of the following can you most likely infer about Milano's performance over the past 5 years? A. Milano's leverage has decreased. B. Milano's leverage has remained constant. C. Milano's leverage has increased. D. None of the above.

C. Milano's leverage has increased. Note first that g > g* because g = 20% and g*<15%. With g > g* one of PRAT must increase. P has held steady at 5%, R has remained at 100%, A has not changed. Thus T (leverage) must have increased.

Which of the following is NOT an implication of the pecking order theory of capital structure? A. On average, a firm's stock price drops when it announces an equity issue. B. Firms may want to maintain a reserve of cash or unused borrowing capacity. C. More-profitable firms (all else equal) should have higher debt ratios. D. Firms may fail to undertake positive-NPV projects if they would have to be financed with a new issue of equity.

C. More-profitable firms (all else equal) should have higher debt ratios.

A decline in the Net fixed assets account between year-end 2016 and year-end 2017 is a clear indication that fixed assets were sold during 2017.

False

The sustainable growth rate: A. assumes there is no external financing of any kind. B. assumes no additional long-term debt is available. C. assumes the debt-equity ratio is constant. D. assumes the debt-equity ratio is 1.0. E. assumes all income is retained by the firm. F. None of the above.

C. assumes the debt-equity ratio is constant.

The sustainable growth rate: A. is the highest growth rate attainable for a firm that pays no dividends. B. is the highest growth rate attainable for a firm without issuing new stock. C. can never be greater than the return on equity. D. can be increased by decreasing leverage.

C. can never be greater than the return on equity.

Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? A. net working capital policy B. capital structure policy C. dividend policy D. capital budgeting policy E. capacity utilization policy F. None of the above.

C. dividend policy

Principal amounts are usually exchanged A. in currency swaps. B. in interest rate swaps. C. in both currency swaps and interest rate swaps. D. in neither currency swaps nor interest rate swaps.

C. in both currency swaps and interest rate swaps.

According to GAAP, revenue should not be recognized until cash is received.

False

You run a construction firm. You have just won a contract to build a government office building. building it will require an investment of $10.6 million today and $5.8 million in one year. The government will pay you $22.2 million in one year upon the building's completion. suppose the interest rate is 11.3% a. what is the NPV of this opportunity? b.how can your firm turn this NPV into cash today?

Calculator: N=1 I/YR=11.3 FV=22.2 PV=? -19.95 then Calculator: n=1 I/YR=11.3 FV=5.8 PV=? -5.21 NPV=$19.95m-$10.6m-$5.21m=$4.14

Your factory has been offered a contract to produce a part for a new printer. The contract would be for three years and your cash flows from the contract would be $5.28 million per year. Your upfront setup costs to be ready to produce the part would be $8.31 million. Your discount rate for this contract is 8.7% a.what does the NPV rule say you should do? b. if you take the contract, what will be the change in the value of your firm?

Calculator: N=3 I/YR=8.7 PMT=5.28 PV=? -13.44 NPV=-8.31m+13.44m=5.13m

Your factory has been offered a contract to produce a part for a new printer. the contract would last for three years, and your cash flows from the contract would be $5.12 million per year. Your upfront setup costs to be ready to produce the part would be $8.21 million. Your discount rate for this contract is 8.7% a. what is the IRR? b. The NPV is $4.82 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule?

Calculator: N=3 PV=-8.21 PMT=5.12 I/YR=?=39.28

Jack Smith reportedly was paid $10.9 million to write his book THE FORK IN THE ROAD. the book took three years to write. in the time he spent writing , jack smith could have been making speeches. given his popularity, assume that he could earn $8.6 million a year(paid at the end of the year) speaking instead of writing. if his cost capital is 10.700% per year, then the NPV of agreeing to write the book (ignoring any royalty payments) is -$10,226,089. How many IRRs are there in this problem? does the IRR rule give the right answer in this case? (note: consider the upfront payment as a positive cash flow and the opportunity cost of missed speaking fees as negative cash flows.)

Calculator: N=3 PV=10.9 PMT=-8.6 I/YR=?=59.43

cash flows from operating activities/ capital expenditures + debt repayments + dividends paid

Cash flow adequacy ratio=

True

Cash flow forecasts are less informative than pro forma financial statements

Increase in long term debt - payment of dividends

Cash flow from financing=

(increase in plant and equipment)

Cash flow from investing

Net income + depreciation + decrease in receivables - increase in inventories - decrease in accounts payable

Cash flow from operations

True

Cash flow from operations represents the "cash" income from the company's business operations

Cash from operating activities/ Net sales X 100

Cash flow margin formula

Cash flows activities/Net sales

Cash flow margin=

The sources and uses of cash over a stated period of time are reflected in the...

Cash flow statement

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time?

Cash flow statement

True

Cash outflows results from increases in asset accounts and decreases in liability and equity accounts

Interest expense

Classified as an operating expense?

A/R/(COGS/365)

Collection period in days =

Which of the following securities has a purely RESIDUAL claim against a firm's cash flows?

Common Stock

Which of the following securities has a purely residual claim against a firm's cash flows?

Common Stock

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2013 period)?

Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1900-2010 period)?

Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1900-2015 period)?

Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills

True

Congress passed the Sarbanes-Oxley Act of 2002 in hopes of ending future accounting scandals and renewing investor confidence in the marketplace

additions to retained earnings divided by net income

Correctly defines the retention ratio

cost of goods sold - the difference in finished goods in inventory(recent year - previous year)

Cost of merchandise produced=

The stock of Cleaner Home Products is currently selling for $26.40 a share. The company has decided to raise funds through a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares being offered are priced at $25 plus five rights. What is the value of one right?

Cost per share = [$25 + (5 × $26.40)]/(1 + 5) = $26.17 Value of right = $26.40 - $26.17 = $0.23

Mike just purchased a bond which pays $40 each year in interest. The $40 interest payment is also called the:

Coupon

Mike just purchased a bond which pays $40 every six months in interest. The $40 interest payment is also called the:

Coupon

Underwater Experimental is considering a project which requires the purchase of $498,000 of fixed assets. The net present value of the project is $22,500. Equity shares will be issued as the sole means of financing the project. What will the new book value per share be after the project is implemented given the following current information on the firm?

Current market value per share = $936,000/60,000 = $15.60 Number of new shares needed = $498,000/$15.60 = 31,923.08 shares New book value per share = ($720,000 + $498,000)/(60,000 + 31,923.08) = $13.25

current assets/ current liabilities

Current ratio=

Gonzales Corporation generated free cash flow of $81 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 9%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected free cash flow in year 2?

D) $96.24 million

Which of the following statements is FALSE?

D) A valuation multiple is a ratio of some measure of a firm's scale to the value of the firm.

On a certain date, Kastbro has a stock price of $37.50, pays a dividend of $0.64, and has an equity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year in perpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbro's share price, was this a reasonable action?

D) No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect.

Which of the following is the appropriate way to calculate the price of a share of a given company using the free cash flow valuation model?

D) P0 = (V0 + Cash0 - Debt0) / (Shares Outstanding0)

Praetorian Industries will pay a dividend of $2.50 per share this year and has an equity cost of capital of 8%. Praetorian's stock is currently trading at $84 per share. By comparing Praetorian with similar firms, an investor expects that its dividends will grow by up to 5% per year. What is the best next step that the investor should take regarding Praetorian's stock?

D) Revise her estimate of Praetorian's dividend growth.

Which of the following statements is FALSE?

D) When using the discounted free cash flow model, we should use a firm's equity cost of capital.

An investor estimates the value of a firm which manufactures cookware by examining the cash flows of similar firms. Which of the following is assumed to be the same for these firms?

D) all of the above

Disposition effect is the tendency of individual investors to ________.

D) hold on to stocks that have lost value and sell stocks that have risen in value since the time of purchase

Which of the following is NOT an advantage of the valuation multiple method as compared to the discounted cash flow method?

D) takes into account important differences between different firms

Accounting rules require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line method.

False

All else equal, an increase in a company's asset turnover will decrease its ROE.

False

A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent. Its asset turnover ratio is 0.85 and its assets-to-equity ratio (using beginning-of-period equity) is 1.80. What is its profit margin? A. 3.79% B. 5.69% C. 6.75% D. 10.13% E. 18.24%

D. 10.13% 0.062 = PRAT = profit margin × 0.40 × 0.85 × 1.80 profit margin = 0.062/(0.40 × 0.85 × 1.80) = 10.13%

Please refer to the selected financial information for Boss Stores above. What is the actual sales growth rate for 2013? A. - 17.6% B. - 7.9% C. 8.51% D. 21.4% E. None of the above.

D. 21.4%

Carbon8 Corporation wants to raise $120 million in a seasoned equity offering, net of all fees. Carbon8 stock currently sells for $28.00 per share. The underwriters will require a fee of $1.25 per share, and indicate that the issue must be underpriced by 7.5%. In addition to the underwriter's fee, the firm will incur $785,000 in legal, administrative, and other costs. How many shares must Carbon8 sell in order to raise the desired amount of capital? A. 4.3 million B. 4.5 million C. 4.6 million D. 4.9 million

D. 4.9 million

Hayesville Corporation had net income of $5 million this year on net sales of $125 million per year. At the beginning of this year, its debt-to-equity ratio was 1.5 and it held $75 million in total liabilities. It paid out $2 million in dividends for the year. What is Hayesville Corporation's sustainable growth rate? A. 3% B. 4% C. 5% D. 6%

D. 6% ROEbop × Retention ratio = (5/50) × 0.6 = 6%

You constructed a pro forma balance sheet for next year and found that external financing required was negative (i.e., the company projected a financing surplus). Which of the following options, all else equal, would NOT correct the projected imbalance? A. A stock repurchase B. A decrease in accounts payable C. An increase in cash and marketable securities D. An increase in the retention ratio

D. An increase in the retention ratio

According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources, such as retained profits and excess cash. II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms prefer to issue new equity rather than source external debt. IV. A firm's capital structure is dictated by its need for external financing. 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 F. None of the options are correct.

D. I, II, and IV only

Which of the following actions would help a firm's growth problem if its actual sales growth exceeds its sustainable rate of growth? I. Increase prices II. Decrease financial leverage III. Decrease dividends IV. Prune away less-profitable products A. I and II only B. I and III only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV F. None of the above.

D. I, III, and IV only

Unitron Corp. is considering project Z, which costs $50 million and offers an annual after-tax cash flow of $7.5 million in perpetuity. The project is in an industry that has greater market risk than Unitron's typical projects. Unitron's company weighted-average cost of capital, based on its typical projects, is 15%. Should Unitron Corp. accept project Z? A. Yes, because a zero-NPV project is marginally acceptable. B. Yes, because the NPV of the project is positive. C. No, because a zero-NPV project is a waste of resources. D. No, because the NPV of the project is negative.

D. No, because the NPV of the project is negative

Which of the following statements is true?

Due to required cash investments in current assets, fast-growing and profitable companies can "grow broke."

Which of the following statements regarding interest tax shields is correct? A. Taxes are reduced by the amount of a firm's interest-bearing debt. B. Taxable income is reduced by the amount of a firm's interest-bearing debt. C. Taxes are reduced by the amount of the interest on a firm's debt. D. Taxable income is reduced by the amount of the interest on a firm's debt.

D. Taxable income is reduced by the amount of the interest on a firm's debt.

Sol's Sporting Goods is expanding and, as a result, expects additional operating cash flows of $26,000 a year for 4 years. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an additional $3,000 of net working capital throughout the life of the project; Sol expects to recover this amount at the end of the project. What is the net present value of this expansion project at a 16-percent required rate of return? A. $18,477.29 B. $21,033.33 C. $28,288.70 D. $29,416.08 E. $32,409.57 F. None of the options are correct.

E. $32,409.57

Which one of the following will increase the sustainable rate of growth a corporation can achieve? A. avoidance of external equity financing B. increase in corporate tax rates C. reduction in the retention ratio D. decrease in the dividend payout ratio E. decrease in sales given a positive profit margin F. None of the above.

D. decrease in the dividend payout ratio

The sustainable growth rate of a firm is best described as the: A. minimum growth rate achievable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding external financing of any kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing. F. None of the above.

D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.

(Cash + Marketable securities)/(Sales/365)

Days sales in cash at the end of year=

Which of the following would NOT be considered a use of cash?

Depreciation

Reduces both taxes and net income.

Depreciation expense:

Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the current rights offering by this firm. As a result, Roy will most likely be subject to:

Dilution

Which one of the following statements is correct concerning the issuance of long-term debt? A. A direct long-term loan has to be registered with the SEC. B. Direct placement debt tends to have more restrictive covenants than publicly issued debt. C. Distribution costs are lower for public debt than for private debt. D. It is easier to renegotiate public debt than private debt. E. Wealthy individuals tend to dominate the private debt market.

Direct placement debt tends to have more restrictive covenants than publicly issued debt.

Laurel Enterprises expects earning next year of $4.45 per share and has a 50% retention rate, which it plans to keep constant. Its equity cost of capital is 11%, which is also its expected return on new investment. Its earning are expected to grow forever at a rate of 5.5% per year. if its next dividend is due in one year, what do you estimate the firm's current stock price to be.

Div1=EPSxPayout Ratio Div1=$4.45x(1-.50)=2.225 per share g=Retention Rate x Return on New Investment g=.5 x .110=.055 P0=Div1/(rE-g) P0=$2.225/(.110-.055)=$40.45

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000 and dividends were $44,640. What is Westcomb's sustainable growth rate? A. 15.32 percent B. 15.79 percent C. 17.78 percent D. 18.01 percent E. 18.24 percent

E. 18.24 percent Change in Equity = Retained earnings = $72,000 - $44,640 = $27,360 Sustainable growth rate = g* = Change in Equity/Equitybop = $27,360/$150,000 = 18.24% Alternative: g* = R × ROEbop = (72,000 - 44,640)/72,000 × 72,000/150,000 = 0.38 × 0.48 = 0.1824

Which of the following statements is true? A. Rapid growth spurs increases in market share and profits and thus, is always a blessing. B. Firms that grow rapidly only very rarely encounter financial problems. C. The cash flows generated in a given time period are equal to the profits reported. D. Profits provide assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke". F. None of the above.

E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

Which of the following can affect a firm's sustainable rate of growth? I. Asset turnover ratio II. Profit margin III. Dividend policy IV. Financial leverage A. III only B. I and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

E. I, II, III, and IV

Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process? I. Should the firm merge with a competitor? II. Should additional equity be sold? III. Should a particular division be sold? IV. Should a new product be introduced? A. I, II, and III only B. I, II, and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

E. I, II, III, and IV

Which of these ratios are the determinants of a firm's sustainable growth rate? I. Assets-to-equity ratio II. Profit margin III. Retention ratio IV. Asset turnover ratio A. I and III only B. II and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV F. None of the above.

E. I, II, III, and IV

Which of the following statements related to market efficiency tends to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for the typical investor to earn above-average returns without taking above-average risks. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely strong-form efficient. A. I and III only B. II and IV only C. I and IV only D. I, III, and IV only E. I, II, and III only

E. I, II, and III only

An advantage of the percent-of-sales approach to financial forecasting is that effective forecasts can be prepared without consulting historical financial statements.

False

Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released? I. Insiders knew the information prior to the announcement II. Investors need time to digest the information prior to reacting III. The information has no bearing on the value of the firm IV. The information was anticipated A. I and II only B. I and III only C. II and III only D. II and IV only E. III and IV only F. None of the above.

E. III and IV only

Which one of the following is an example of systematic risk? A. A flood washes away a firm's warehouse. B. Corn prices increase due to increased demand for alternative fuels. C. A city imposes an additional one-percent sales tax on all products. D. None of the options are correct. E. The Federal Reserve unexpectedly announces an increase in target interest rates. F. A toymaker has to recall its top-selling toy.

E. The Federal Reserve unexpectedly announces an increase in target interest rates.

Unsystematic risk A. None of the options are correct. B. is compensated for by the risk premium. C. is measured by beta. D. is measured by standard deviation. E. can be effectively eliminated by portfolio diversification. F. is related to the overall economy.

E. can be effectively eliminated by portfolio diversification

The discount rate assigned to an individual project should be based on A. the actual sources of funding used for the project. B. the current risk level of the overall firm. C. None of the options are correct. D. an average of the firm's overall cost of capital for the past five years. E. the risks associated with the use of the funds required by the project. F. the firm's weighted-average cost of capital.

E. the risks associated with the use of the funds required by the project.

Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal?

Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products.

Which one of the following statements concerning venture capitalists is correct? A. Venture capitalists assume management responsibility for the firms they finance. B. Exit strategy is a key consideration when selecting a venture capitalist. C. Venture capitalists limit their services to providing money to start-up firms. D. Most venture capitalists are long-term investors in a firm. E. A venture capitalist normally invests in a new idea and finances that idea until the newly-formed firm can issue an IPO.

Exit strategy is a key consideration when selecting a venture capitalist.

Assume Coleco pays an annual dividend of $1.54 and has a share price of $37.65. It announces that its annual dividend will increase to $1.72. If its dividend yield stays the same, what should be its new share price?

Expected return on the dividends: rE=(Div1)/(P0) rE=($1.54)/($37.65)=4.09% New Price P0=Div1/rE P0=$1.72/.0409=$42.05

True

External auditors are required to audit the internal control assessment of the company as well as the financial statements

If you value a stock using a range of stock valuation methods and these valuations indicate a stock price that is greater than its actual market price, it is most likely that the stock is under-valued.

FALSE

Individual investors trade conservatively, given the difficulty of finding over-valued and under-valued stocks.

FALSE

your are preparing to produce some goods for sale. you will sell them in one year and you will incur costs of $86,000 immediately. if your cost of capital is 7.3%, what is the minimum dollar amount you need to sell the goods for in order for this to be a non-negative NPV?

FV=PV(costs) x (1+r) FV=$86,000 x (1+.073)=$92,278

D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25,000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this?

Firm Commitment

False

Form 10-Ks and Form 10-Qs can be located through the Dun & Bradstreet Information services

earnings after tax + non-cash charges - investment

Free Cash Flow (FCF)=

True

GAAP-based financial statements are prepared according to the accrual basis of accounting

What is an issue of securities that is offered for sale to the general public on a direct cash basis called?

General Cash Offer

True

Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding

Which of the following is NOT a typical reason for differences between profits and cash flow?

Goodwill

Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale. The underwriters sold a total of 53,000 shares to the public. The additional 3,000 shares were purchased in accordance with which one of the following? A. Green shoe provision B. Red herring provision C. quiet provision D. lockup agreement E. post-issue agreement

Green Shoe Provision

(Sales - COGS)/Sales

Gross Margin=

The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the:

Gross Spread

A times-interest-earned ratio of 3.5 indicates that the firm

Has EBIT equal to 3.5 times its interest expense.

Which one of the following statements is true?

Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds.

Which one of the following statements is true?

Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds.

Revenues are recognized in the accounting period when the sale is made and expenses are recognized in the period in which they relate to the sale of the product.

How are revenues and expenses recognized under the accrual basis of accounting?

Income is recognized even though cash may never be received

How does the equity method distort earnings?

Net profit divided by the average number of common stock shares outstanding

How is earnings per common share calculated?

Operating profit divided by the average number of common stock shares outstanding

How is earnings per common share calculated?

Which of the following statements concerning the sustainable growth rate are correct? I. A decrease in the profit margin will decrease the sustainable rate of growth. II. Decreasing capital intensity increases the sustainable rate of growth. III. Increasing the debt-equity ratio decreases the sustainable rate of growth. IV. Decreasing the dividend payout ratio also decreases the sustainable rate of growth.

I and II only.

Which of the following is/are helpful for evaluating the effect of leverage on a company's risk and potential returns? I. Estimated pro forma coverage ratios III. A range of earnings chart and proximity of expected EBIT to the breakeven value

I and III

Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling III. Management incentives

I and III only

Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling III. Tax benefits

I and III only

Which of the following actions might a firm take if its actual sales growth exceeds its sustainable rate of growth? I. Increase prices II. decrease financial leverage III. Merge with another company with exciting investment opportunities IV. Prune away marginal products

I and IV only

The term "financial distress costs" includes which of the following? I. Direct bankruptcy costs II. Indirect bankruptcy costs III. Direct costs related to being financially distressed, but not bankrupt IV. Indirect costs related to being financially distressed, but not bankrupt

I, II, III, and IV

Which of the following have been offered as supporting arguments in favor of IPO underpricing? I. Underpricing counteracts the "winner's curse". II. Underpricing rewards institutional investors for sharing their opinions of a stock's market value. III. Underpricing diminishes the underwriting risk of a firm commitment underwriting. IV. Underpricing reduces the probability that investors will sue the underwriters.

I, II, III, and IV

Which of the following should be considered when selecting a venture capitalist? I. level of involvement II. past experiences III. termination of funding IV. financial strength

I, II, III, and IV

The value of a right depends upon: I. the number of rights required to purchase one new share. II. the market price of the security. III. the subscription price. IV. the price-earnings ratio of the stock.

I, II, and III only

According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources such as retained profits and excess cash. II. There is an inverse relationship between a firm's profit level and its debt level. IV. A firm's capital structure is dictated by its need for external financing.

I, II, and IV only

Which of the following statements are true? I. Underwriters help private companies access public stock markets through IPOs. II. Shelf registrations and private placements are examples of seasoned security issues. III. Issue costs for debt are typically greater than issue costs for equity. IV. Private equity financing is a common source of financing for startup firms.

I, II, and IV only

Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover

I, II, and IV only

The interest tax shield has no value when a firm has: I. no taxable income. III. zero debt. IV. no leverage.

I, III, and IV only

Which of the following factors favor the issuance of equity in the financing decision? II. Distress costs IV. Financial flexibility

II and IV only

Financial leverage: II. increases breakeven sales, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved. III. is a fundamental financial variable affecting sustainable growth. IV. increases expected return and risk to owners.

II, III and IV only

III and IV only

Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released? III. The information has no bearing on the value of the firm IV. The information was anticipated

III and IV only

In todays dollars, Ians money is worth more than Sunnys

False

If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle

True

If the cost of goods sold percentage increases or decreases, this does not necessarily mean that costs have increased or decreased.

True

If the maturity of a company's liabilities is less than that of its assets, the company incurs a refinancing risk

True

If the return on invested capital is greater than the after-tax interest rate, then a higher debt to equity ratio increases return on equity

True

In a strong-form efficient market, insider trading is not profitable

False

In business valuation, a typical discount for lack of marketability is about 10%

Its inventory level is too high

In comparison to industry averages, Okra Corp. has a low inventory turnover, a high current ratio, and an average quick ratio. Which of the following would be the most reasonable inference about Okra Corp.?

True

In recent years, U.S. companies have as a whole repurchased more equity than they have ever issued

False

In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off"

True

In volatile industries, such as high technology, gross profit margin may increase or decrease significantly each year.

Pharmaceutical

In what industry would it be expected that companies would spend a significant amount on research and development activities?

Which one of the following is a use of cash?

Increase in inventory

Since nothing else has changed besides the repurchased shares equal to $1million. The market value will fall exactly by that amount of the cash paid in the transaction. 5-1= 4million

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market and there are no taxes or transactions costs and all else remains the same, what should the market value of the firm be after the repurchase?

20% of the shares is 100,000 and JM will pay $10 per share which will reduce the book value by $1million. The new book value would be $750,000

Book value per share = Equity/ number of shares outstanding. 1,750,000/ 500,000 = 3.50 per share

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share?

Stock price per share = Market value of shares/ number of shares outstanding. 5million/ 500,000 shares = $10 per share.

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's price per share?

Which of the following statements regarding junk bonds is true?

Junk bonds have higher priority in bankruptcy than preferred stock.

Insufficient information to find ROE

Klamath Corporation has asset turnover of 3.5, a profit margin of 5.2%, and a current ratio of 0.5. What is Klamath Corporation's return on equity?

Which of the following would not be considered a cost of financial distress?

Lack of interest tax shield

Discretionary

Management exercises control over the budget level and timing of ________ expenditures

Which one of the following statements concerning dilution is correct? A. Dilution of percentage ownership occurs whenever an investor participates in a rights offer. B. Market value dilution increases as the net present value of a project increases. C. Market value dilution occurs when the net present value of a project is negative. D. Neither book value dilution nor market value dilution has any direct bearing on individual shareholders. E. Book value dilution is the cause of market value dilution.

Market value dilution occurs when the net present value of a project is negative.

Coupon

Mike just purchased a bond which pays $40 every six months in interest. The $40 interest payment is also called the

Milano's leverage has increased.

Which of the following is NOT an implication of the pecking order theory of capital structure?

More-profitable firms (all else equal) should have higher debt ratios.

The Huff Co. has just gone public. Under a firm commitment agreement, Huff received $21.50 for each of the 6 million shares sold. The initial offering price was $23.65 per share, and the stock rose to $31.42 per share in the first few minutes of trading. Huff paid $1,260,000 in direct legal and other costs, and $390,000 in indirect costs. The flotation costs were what percentage of the funds raised?

Net amount raised = 6m ($21.50) - $1,260,000 - $390,000 = $127,350,000 Total direct costs = $1,260,000 + ($23.65 - $21.50) (6m) = $14,160,000 Total indirect costs = $390,000 + ($31.42 - $23.65) (6m) = $47,010,000 Total costs = $14,160,000 + $47,010,000 = $61,170,000 Flotation cost percentage = $61,170,000/$127,350,000 = 48.03 percent

Add Net income $300 to depreciation expense $20, gain on sale of assets ($35), increase in inventories ($25), increase in deferred tax asset ($5), and decrease in accounts payable ($15) 300+20+(35)+(25)+(5)+(15)= $240

Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is cash flow from operating activities for Felix Company? Indirect method

A company purchases a new $10 million building financed half with cash and half with a bank loan. How would this transaction affect the company's balance sheet?

Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

Atlas Corp. wants to raise $4 million via a rights offering. The company currently has 450,000 shares of common stock outstanding that sell for $40 per share. Its underwriter has set a subscription price of $24 per share and will charge the company a 7 percent spread. Assume that you currently own 7,200 shares of stock in the company and decide not to participate in the rights offering. How much can you get for selling all of your rights?

Net proceeds to firm = $24 (1 - 0.07) = $22.32 New shares offered = $4m/$22.32 = 179,211.47 Number of rights needed per share = 450,000/179,211.47 = 2.511 PEx = [$24 + 2.511($40)]/(1 + 2.511) = $35.44 Right value = $40 - $35.44 = $4.56 Sale proceeds = $4.56 (7,200) = $32,811.16

The discounted free cash flow model ignores interest income and expense but adjusts for cash and debt directly, if free cash flow is calculated based on EBIT.

TRUE

Wagner Trucking is considering investing in a new project that will cost $13 million and increase net income by 6.5 percent. This project will be completely funded by issuing new equity shares. Currently, the firm has 1.25 million shares of stock outstanding with a market price of $42 per share. The current earnings per share are $1.82. What will the earnings per share be if the project is implemented?

New earnings per share = ($1.82 × 1.25m × 1.065)/[1.25m + ($13m/$42)] = $1.55

Jennifer owns 14,000 shares of Calico Clothing. Currently, there are 1.6 million shares of stock outstanding. The company has just announced a rights offering whereby 200,000 shares are being offered for sale at a subscription price of $14 a share. The current stock price is $16 a share. Assume that Jennifer sells her rights and that all rights are exercised. What percentage of the firm will Jennifer own after the rights offering?

New ownership percentage = 14,000/(1.6m + 0.2m) = 0.78 percent

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions? No new external financing of any kind No new debt but additional external equity equal to the increase in retained earnings New debt and external equity in equal proportions New debt and external equity, provided the debt-equity ratio remains constant No new external equity and a constant debt-equity ratio

No new external equity and a constant debt-equity ratio

Which of the following statements regarding preferred stock is true? A. Holders of preferred stock have the same voting rights as common stockholders. B. Preferred stock dividend payments are a deductible expense for corporate tax purposes. C. Almost all public corporations are at least partly financed with preferred stock.

None

Which of the following would allow a corporation to issue a bond at a lower coupon rate, all else equal?

None are correct

Which one of the following statements is true? A. Debt instruments offer residual claims to future cash payouts. B. Bonds with call provisions will have lower coupon rates than otherwise identical bonds. C. Bondholders enjoy a direct voice in company decisions. D. Bonds are low-risk investments that do well in inflationary periods. E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation.

None of the above

The Motor Plant wants to raise $21.4 million through a rights offering so it can modernize its facilities. The subscription price for the offering is set at $11 a share. Currently, the company has 2.6 million shares of stock outstanding at a market price of $12.50 a share. Each shareholder will receive one right for each share of stock they own. How many rights will a shareholder need to purchase one new share of stock in this offering?

Number of rights issued = 1 × 2.6m = 2.6m; Number of shares needed = $21.4m/$11 = 1,945,454.55; Rights needed for each new share = 2.6m/1,945,454.55 = 1.34 rights

Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $34.80. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $33 a share. How many rights will a shareholder need to purchase one new share of stock in this offering?

Number of rights issued = 1 × 540,000 = 540,000; Number of shares needed = $8.6m/$33 = 260,606.06; Rights needed for each new share = 540,000/260,606.06 = 2.07 rights

You currently own 8 percent of the 3.5 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $28. One right will be issued for each share of outstanding stock. This offering will provided $9 million of new financing for the firm, ignoring all issue costs. Assume that all rights are exercised. What will be your new ownership position if you opted to sell your rights rather than exercise them personally?

Number of shares owned = 0.08 × 3.5m = 280,000 shares Number of shares offered = $9m/$28 = 321,428.57 shares New ownership position = 280,000/(3.5m + 321,428.57) = 7.33 percent

total assets

On a common-size balance sheet, all accounts are expressed as a percentage of?

False

One advantage of ROE is that it is a risk-adjusted measure of performance

Matching

One of the generally accepted accounting principles that provide the foundation for preparing financial statements is the ____ principle

True

One way to manage an actual growth rate below the sustainable growth rate is to repurchase shares

Assume Evco, Inc. has a current stock price of $53.15 and will pay a $2.15 dividend in one year; its equity cost of capital is 18%. What price must you expect Evco stock to sell for immediately after the firm pays the dividend in one year to justify its current price?

P0=(Div1+P1)/(1+rE) $53.15=($2.15+P1)/(1+.18) P1=($53.15x1.18)-$2.15=60.57

summit systems will pay a dividend of $1.61 this year. If you expect summits dividend to grow by 6.3% per year, what is its price per share if the firms equity cost of capital is 11.8%?

P0=Div1/(rE-g) P0=$1.61/(.118-.063)=$29.27

Assume Gillette Corporation will pay an annual dividend of $.68 one year from now. Analysts expect this dividend to grow at 12.2% per year thereafter until the 4th year. Thereafter, growth will level off at 1.9% per year. According to the dividend-discount model, what is the value of a share of Gillette stock if the firm's equity cost of capital is 8.3%?

PV1-4=(Div1)/(rE-g) x (1-((1+g)/(1+rE))^n) PV1-4=$.68/(.083-.122) x (1-((1+.122)/(1+.083))^4)=$2.65 PV4=Div5/rE-g PV4=(($.68 x (1+.122)^3 x (1+.019)) / (.083-.019)=$15.29 PV0=PV4/((1+rE)^) PV0=$15.29/(1+.083)^4=$11.11 P0=PV1-4+PV0 P0=$2.65+$11.11=$13.76

Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the:

Par Value

Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the:

Par value

A/P/(COGS/365)

Payables period=

You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $6,300 and will be posted for one year. You expect that it will generate additional revenue of $1,386 a month. What is the payback period?

Payback Period=CF0/CF PaybackPeriod= $6,300/$1,386=4.5 months

Which one of the following is probably the most successful means of finding venture capital? A. internet searches B. Dutch auctions C. newspaper advertisements D. personal contacts E. personal letters to venture capital firms

Personal Contacts

Cash flow from operations = Net income - increase in A/R - increase in inventory + increase in A/P + depreciation.

Please refer to the financial information for Foodtek, Inc. above. Assuming that there were no financing cash flows during 2014 and basing your answer solely on the information provided, what were Foodtek's cash flows from operations (in $ millions) for 2014?

Capital expenditures = Change in net fixed assets + depreciation. 105 + 65 = 170

Please refer to the financial information for Foodtek, Inc. above. Assuming the company neither sold nor salvaged any assets during the year, what were Foodtek's capital expenditures (in $ millions) during 2014? Net fixed assets 2013 = 310, Net fixed assets 2014 = 415, Depreciation 2014 = 65

Cash collected from sales = Net Sales - Change in AR 364-40 = 324

Please refer to the financial information for Foodtek, Inc. above. During 2014, how much cash (in $ millions) did Foodtek collect from sales? Net sales = 364 AR 2013 = 47 AR 2014 = 87

Cost of merchandise = Cost of Goods Sold +/- Change in Inventory 223 - 5 = 218

Please refer to the financial information for Foodtek, Inc. above. During 2014, what was the cost of merchandise (in $ millions) produced by Foodtek? COGS = 223, Inventory in 2013 = 34 ,Inventory in 2014 = 29

Which ratio was primarily designed to monitor firms with negative earnings? Price-sales ratio Market-to-book ratio Profit margin ROE ROA

Price - sales ratio

In currency swaps

Principal amounts are usually exchanged:

False

Principal is exchanged in interest rate swaps but not in currency swaps

False

Private equity firms comprise a relatively insignificant portion of the American economy

Accounts receivable previous year X (1+ percentage increase in sales)

Pro forma A/R for next year =

Net income/Sales

Profit Margin=

The collection period decreased

Cash budget

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a

Dividends & Splits

Stock __________ and stock __________ result in the issuance of additional shares of stock to existing shareholders.

Barstow Industrial Supply has decided to raise $27.52 million in additional funding via a rights offering. The firm will issue one right for each share of stock outstanding. The offering consists of a total of 860,000 new shares. The current market price of the stock is $38. Currently, there are 5.16 million shares outstanding. What is the value of one right?

Subscription price = $27.52m/860,000 shares = $32 a share Number of shares issued = 1 × 5.16m = 5.16m Number of rights needed = 5.16m/860,000 = 6

Which of the following statements regarding interest tax shields is correct?

Taxable income is reduced by the amount of the interest on a firm's debt.

True

Supplementary schedules, such as data related to the breakdown of key financial figures by operating segment, are helpful to financial statement analysts

Goodwill account = acquired price - estimated replacement value. 100-80 = 20

Suppose an acquiring firm pays $100 million for a target firm and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account?

Sustainable growth rate = PRAT = Profit margin decimal moved over 2 times X (1 - Dividend payout ratio with decimal loved over twice) X Asset turnover ratio X Assets to equity ratio

Sustainable growth rate =

Direct business loans typically ranging from one to five years are called:

Term loans

change in equity = income - dividends sustainable growth rate = change in equity / # of equity at the beginning * 100

Sustainable growth rate =

In an efficient market, investors will only find positive-NPV trading opportunities if they have some form of competitive advantage over other investors.

TRUE

In the method of comparables, the known values of a firm's cash flows are used to estimate the unknown cash flows of a similar firm.

TRUE

Individual investors who grow up and live during a time of high stock returns are more likely to invest in stocks.

TRUE

Several methods should be used to provide an estimate of a stock's value since no single method provides a definitive value.

TRUE

The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period.

Quiet

True

ROA can be calculated as profit margin times asset turnover

Which one of the following statements does NOT describe a problem with using ROE as a performance measure?

ROE is a forward-looking, one-period measure, while business decisions span the past and present.

False

Rational investors would never value a company's stock below its liquidation value?

Asset turnover and control ratios

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ____ ratios

Which one of the following is a preliminary prospectus? A. tombstone B. green shoe C. registration statement D. rights offer E. red herring

Red Herring

What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public?

Registration Statement

Miller & Chase is offering $4 million of new securities to the general public. Which SEC regulation governs this offering?

Regulation A

Sweet Candies reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity

Return on Assets Total Asset Turnover

Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called?

Rights Offer

Common-size financial statements present all balance sheet account values as a percentage of: the forecasted budget. sales. total equity. total assets. last year's account value.

Sales

False

Scenario analysis involves changing one input to a financial forecast, wheras sensitivity analysis involves changing multiple inputs

Two IPOs will commence trading next week. Scott places an order to buy 300 shares of IPO A. Steve places an order to purchase 300 shares of IPO A and 300 shares of IPO B. Both IPOs are priced at $20 a share. Scott is allocated 100 shares of IPO A. Steve is allocated 100 shares of IPO A and 300 shares of IPO B. At the end of the first day of trading, IPO A is selling for $22.70 a share and IPO B is selling for $18.60 a share. What is the difference in the total profits or losses that Scott and Steve have as of the end of the first day of trading?

Scott's profit = 100 × ($22.70 - $20) = $270 Steve's profit = [100 × ($22.70 - $20)] + [300 × ($18.60 - $20)] = -$150 Difference = $270 - (-$150) = $420

All new interstate security issues are regulated by the:

Securities Act of 1933.

Suzie is a chemist who has been experimenting with fragrances in her home laboratory and feels that she now has three viable perfumes that could be successfully marketed. She knows a venture capitalist who has offered to finance her business to the point where she would be ready to begin the manufacturing and marketing stage. Which type of financing is Suzie being offered?

Seed Money

False

Share repurchases usually decrease earnings per share

Pearson Electric recently registered 250,000 shares of stock under SEC Rule 415. The firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year. What type of registration was this?

Shelf Registration

True

Shelf registration is possible for both debt and equity issues

Big Mac's and Small Dog's are two firms that are equal in every way except for their retention ratios. Big Mac's has a 50 percent retention ratio. Small Dog's has a 60 percent retention ratio. Given this difference,

Small Dog's has a higher sustainable rate of growth than does Big Mac's.

$25,000 & $75,000

The Breakfast Company purchases equipment for $100,000. Management estimates that the equipment will have a useful life of eight years and no salvage value. Calculate depreciation expense and the book value at the end of the first year using the double-declining balance method of depreciation. Expense: $______ Book Value: $_____

$12,500 & $87,500

The Breakfast Company purchases equipment for $100,000. Management estimates that the equipment will have a useful life of eight years and no salvage value. Calculate depreciation expense and the book value of the equipment at the end of the first year using the straight-line method of depreciation. Expense: $______ Book Value: $______

Net profit margin X Total asset turnover = Return on investment and return on investment X financial leverage = Return on equity

The Du Pont System shows which of the following series of relationships?

False

The European Union began requiring publicly traded companies to use U.S. GAAP in 2005

False

The FASB has congressional authority to set accounting policies

False

The IRR is the discount rate at which an investments NPV equals its initial cost

False

The M&M irrelevance proposition assures financial mangers that their choice between equity and debt financing will ultimately have no impact on the firm value

True

The Management Discussion and Analysis is of potential interest to the analyst because it contains information that cannot be found in the financial data

True

The SEC regulates U.S. companies that issue securities to the public and requires the issuance of a prospectus for any new security offering.

SEC

The ___ requires all public companies to file a form 10-K report annually?

Cash conversion cycle and Net trade cycle.

The _______ cycle or ____ cycle is the normal operating cycle of a firm that consists of buying or manufacturing inventory, selling inventory and paying accounts payable and collecting accounts receivable.

Monetary Unit

The ________ assumption is the assumed unit of measurement when preparing financial statements.

Proxy Statement

The ________ is a document used to solicit shareholder votes.

cash conversion & net trade

The _________ cycle or ______________ cycle is the normal operating cycle of a firm that consists of buying or manufacturing inventory, selling inventory and paying accounts payable and collecting accounts receivable.

Sarbanes Oxley Act

The __________ was passed in 2002 and was one of the most sweeping corporate reforms since the securities act of 1934

True

The accounting rate of return is deficient as a figure of merit because it is insensitive to the timing of cash flows

True

The accounts receivable turnover, inventory turnover and accounts payable turnover ratios are mathematical complements to the ratios that make up the cash conversion cycle

True

The accounts receivable turnover, inventory turnover, and accounts payable turnover ratios are mathematical compliments to the ratios that make up the cash conversion cycle.

False

The accrual principle requires that revenue not be recognized until payment from a sale is received.

True

The analyst of financial statements should consider cash flows over a period of time, looking at patterns of performance and exploring underlying causes of strength and weakness.

Which one of the following statements is correct?

The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio.

the total cash flow of the firm

The basic lesson of the M&M theory is that the value of a firm is dependent upon

maximizes expected cash flows

The best financing choice is one that

Based on historical cost

The book value of a firm is:

are based on the market value of the firm's debt and equity securities

The capital structure weights used in computing the weight-average cost of capital:

Revenues, Expenses

The cash basis of accounting recognizes when _____ when cash is received and recognizes _____ when cash is paid

Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products.

The collection period decreased.

False

The cost of equity is usually reported on the income statement right below interest expense.

False

The debt ratio considers the proportion of all stockholders' equity that is financed with debt

Which one of the following statements is false?

The design of financial instruments is greatly constrained by law and regulation.

You are a broker and have been instructed to place an order for a client to purchase 500 shares of every IPO that comes to market. The next two IPOs are each priced at $25 a share and will begin trading on the same day. The client is allocated 500 shares of IPO A and 100 shares of IPO B. At the end of the first day of trading, IPO A was selling for $23.50 a share and IPO B was selling for $29 a share. What is the client's total profit or loss on these two IPOs as of the end of the first day of trading?

Total profit = [500 × ($23.50 - $25)] + [100 × ($29 - $25)] = -$350

Mountain Teas wants to raise $11.6 million to open a new production center. The company estimates the issue costs including the legal and accounting fees will be $440,000. The underwriters have set the stock price at $17.50 a share and the underwriting spread at 9 percent. How many shares of stock does Mountain Teas have to sell to meet its cash need?

Total value of issue = ($11,600,000 + $440,000)/(1 - 0.09) = $13,230,769 Number of shares needed = $13,230,769/$17.50 = 756,044 shares

Wear Ever is expanding and needs $12.6 million to help fund this growth. The firm estimates it can sell new shares of stock for $35 a share. It also estimates it will cost an additional $340,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a 7 percent spread. How many shares of stock must Wear Ever sell if it is going to have $12.6 million available for its expansion needs?

Total value of issue = ($12,600,000 + $340,000)/(1 - 0.07) = $13,913,978.49 Number of shares needed = $13,913,978.49/$35 = 397,542.24 shares

Outdoor Living needs $7.5 million to finance modifications to its production equipment because the design of its all-season tents has changed dramatically. The underwriters estimate that the firm could sell additional shares of stock at $14.50 a share with a 7.5 percent underwriting spread. This would be a firm commitment underwriting. The estimated issue costs are $125,000. How many shares of stock will Outdoor Living need to sell to finance this project?

Total value of issue = ($7,500,000 + $125,000)/(1 - 0.075) = $8,243,243.24 Number of shares needed = $8,243,243.24/$14.50 = 568,500 shares

A cash flow statement places each source or use of cash into one of three broad categories: operating activities, investing activities, or financing activities.

True

A company experiencing balanced growth does not generate cash surpluses or cash deficits.

True

Across companies, ROA and financial leverage tend to be inversely related.

True

After issue, the market price of a fixed-rate bond can differ substantially from its par value.

True

All else equal, a firm would prefer to have a higher gross margin.

True

All else equal, increasing the assumed collection period in a financial forecast will decrease external funding required.

True

Bond investors should be more concerned with real returns than with nominal returns.

True

Cash flow forecasts are less informative than pro forma financial statements.

True

Current liabilities are defined as liabilities with a maturity of less than one year.

True

Debt financing results in lower after-tax earnings relative to equity financing

True

Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding.

True

If the maturity of a company's liabilities is less than that of its assets, the company incurs a refinancing risk.

True

In a strong-form efficient market, insider trading is not profitable.

True

In evaluating a business firm it is essential that the financial analyst consider the qualitative as well as the quantitative components of earnings for an accounting period.

True

In recent years, U.S. companies as a whole have repurchased more equity than they have issued.

True

In some instances, additional debt financing can encourage managers to act more in the interests of owners.

True

Investment-grade bonds are usually defined as bonds with ratings of BBB- or higher.

True

Issue costs of equity are high relative to those of debt.

True

One way to manage an actual growth rate below the sustainable growth rate is to repurchase shares.

True

Return on assets can be calculated as profit margin times asset turnover.

True

Shelf registration is possible for both debt and equity issues.

True

The allowance for doubtful accounts is a type of account that can be manipulated to over or under estimating bad debt expense and so influence earnings.

True

The evidence indicates that, on average, a company's stock price declines when it announces a new issue of equity.

True

The sustainable growth rate is the only growth rate in sales that is consistent with stable values of the profit margin, retention rate, asset turnover, and leverage (assets/equitybop).

True

The times-interest-earned ratio always equals or exceeds the times-burden-covered ratio.

True

When a company is in financial distress, its shareholders may have an incentive to undertake excessively risky investments.

True

When reporting financial performance for tax purposes, U.S. companies prefer to use accelerated depreciation methods over the straight-line method.

True

Two special items, discontinued operations and extraordinary items, must be disclosed separately on the income statement.

Increase the variability in earnings per share

Under the simplifying assumptions of Modigliani and Miller, an increase in a firms financial leverage will

Jefferson Refining is issuing a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares in this offering are priced at $19 plus 3 rights. The current market price of the stock is $23 a share. What is the value of one right?

Value per share excluding right = [$19 + (3 × $23)]/(1 + 3) = $22.00 Value of one right = $23 - $22.00 = $1.00

Which of the following is a reason why a company's market value of equity differs from its book value of equity?

Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

False

Valuing a call option requires an accurate estimate of the future value of the underlying asset

Jones & Co. is funded by a group of individual investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products. What is this type of funding called?

Venture Capital

Which one of the following statements concerning venture capital financing is correct? A. Venture capitalists desire shares of common stock but avoid preferred stock. B. Venture capital is relatively easy to obtain. C. Venture capitalists rarely assume active roles in the management of the financed firm. D. Venture capitalists often require at least a forty percent equity position as a condition of financing. E. Venture capital is relatively inexpensive in today's competitive markets.

Venture capitalists often require at least a forty percent equity position as a condition of financing.

Balance sheet, Income statement, Statement of shareholders' equity and statement of cash flows

What basic financial statements can be found in a corporate annual report?

ROE > ROA

What does a financial leverage index greater than one indicate about a firm?

A reconciliation of the beginning and ending balances of all accounts that appears in the stockholders' equity section of the balance sheet.

What information can be found on a statement of stockholders' equity?

Financial Reporting Rulings

What information would not be found in a firm's annual report?

A report that states that departures from GAAP exist in the firm's financial statements

What is a qualified report?

The process used to allocate the cost of capital leases, leasehold improvements and intangible asset

What is amortization?

A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP

What is an unqualified audit report?

Cash flow from operating activities has decreased relative to net income

What is implied if the inventory account has increased?

Operating activites

What is the preferred method to generate cash in a firm?

Public Company Accounting Oversight Board

What organization has the authority to register, inspect, and discipline auditors of all publicly owned companies?

True

When an acquirer purchases all of a target firm's equity, it must assume the target's liabilities

True

When an acquirer values a potential target, it should discount the target's cash flows at the target's cost of capital

False

When conducting a discounted cash flow analysis of a project, it is important to always include a careful estimate of financing costs in the projects cash flows

True

When evaluating investments under capital rationing that are independent and can be acquired fractionally, ranking by the BCR is the appropriate technique

spreading an investment across many diverse assets will eliminate some of the total risk

When investment returns are less than perfectly positively correlated, the resulting diversification effect means that

True

When projected cash flows are in nominal dollars, they should be discounted with a nominal discount rate?

True

When reporting financial performance for tax purposes, U.S. companies prefer to use accelerated depreciation methods over the straight-line method.

SEC

Which agency requires the filing of Form 10-Ks, Form 10-Qs and Form 8-Ks?

Income Statement

Which financial statement presents the results of operations?

Statement of cash flows

Which financial statement provides information about operating, financing and investing activities?

Balance Sheet

Which financial statement shows the assets, liabilities and stockholders' equity of the firm on a particular date?

LIFO

Which method of inventory would be least likely to be used by a European firm?

Notes payable and deferred taxes

Which of the following accounts could be categorized as either a current or non current liability depending on date the debt is due?

Accounts receivable, inventory, cash equivalents

Which of the following accounts would be classified as current assets on the balance sheet

1. Increase prices 2. Decrease dividends 3. Prune away less-profitable products

Which of the following actions would help a firm's growth problem if its actual sales exceeds its sustainable growth rate?

1. An earthquake damages Oakland, California 2. Toymakers are required to improve their safety standards

Which of the following are examples of diversifiable risk?

1. The information has no bearing on the value of the firm 2. The information was anticipated

Which of the following are the most likely reasons for why stock prices might not react at all on the day that new information related to the stock issuer is released?

Bill Clinton was paid $10.5 million to write his book my life. the book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Gives his popularity, assume that he could earn $9.2 million per year (paid at the end of the year) speaking instead of writing. assume his costs of capital is 10.7% per year. a. what is the NPV of agreeing to write the book(ignoring any royalty payments)? b. Assume that, once the book is finished, it is expected to generate royalties of $5.8 million in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty payments?

a. NPV=CF0-CF/r x (1-((1)/(1+r))^n) NPV=10.5m-9.2m/.107 x (1-((1)/(1+.107))^3)=-12,100,002 b. PV3=CF/r-g PV3=$5.8/((.107-(-.3))=$14,250,614 PV=PV3/(1+r)^3 PV=$14,250,614/(1+.107)^3=$10,504,871 NPV= -$12,100,002+$10,504,871=-$1,595,131

Which one of the following statements is correct? a. The greater the volatility of returns, the greater the risk premium. b. The lower the volatility of returns, the greater the risk premium. c. The lower the average return, the greater the risk premium. d. The risk premium is unrelated to the average rate of return. e. The risk premium is not affected by the volatility of returns.

a. The greater the volatility of returns, the greater the risk premium.

The return earned in an average year over a multi-year period is called the _____ average return. a. arithmetic b. standard c. variant d. geometric e. real

a. arithmetic

With Dutch auction underwriting:

all successful bidders pay the same price.

An individual investor with a small portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an allocation of shares when:

an IPO is undersubscribed.

Which of the following would increase a company's need for external finance, all else equal?

an increase in the dividend payout ratio.

Marketable securities

are also _____ are also referred to as short-term investments.

A balance sheet reports the value of a firm's assets, liabilities, and equity

at any point in time.

You bought one of Shark Repellant's 8 percent coupon bonds one year ago for $802. These bonds pay annual payments, have a face value of $1,000, and mature 14 years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 12 percent. The inflation rate over the past year was 3.7 percent. What was your total real return on this investment? a. 2.97 percent b. -2.02 percent c. -1.18 percent d. 3.44 percent e. 2.58 percent

b. -2.02 percent

A stock has an expected rate of return of 13 percent and a standard deviation of 21 percent. Which one of the following best describes the probability that this stock will lose at least half of its value in any one given year? a. 1 percent b. .5 percent c. 1.0 percent d. 2.5 percent e. v5.0 percent

b. .5 percent

A stock has an expected return of 11 percent, the risk-free rate is 5.2 percent, and the market risk premium is 5 percent. What is the stock's beta? a. 1.08 b. 1.16 c. 1.29 d. 1.32 e. 1.35

b. 1.16

Individuals who continually monitor the financial markets seeking mispriced securities: a. earn excess profits over the long-term. b. make the markets increasingly more efficient. c. are never able to find a security that is temporarily mispriced. d. are overwhelmingly successful in earning abnormal profits. e. are always quite successful using only historical price information as their basis of evaluation.

b. make the markets increasingly more efficient.

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the: a. amount of total risk assumed and the market risk premium. b. market risk premium and the amount of systematic risk inherent in the security. c. risk free rate, the market rate of return, and the standard deviation of the security. d. beta of the security and the market rate of return. e. standard deviation of the security and the risk-free rate of return.

b. market risk premium and the amount of systematic risk inherent in the security.

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments? a. index b. portfolio c. collection d. grouping e. risk-free

b. portfolio

Efficient financial markets fluctuate continuously because: a. the markets are continually reacting to old information as that information is absorbed. b. the markets are continually reacting to new information. c. arbitrage trading is limited. d. current trading systems require human intervention. e. investments produce varying levels of net present values.

b. the markets are continually reacting to new information.

Standard deviation is a measure of which one of the following? a. average rate of return b. volatility c. probability d. risk premium e. real returns

b. volatility

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets?

balance sheet

Which of the following securities has a purely fixed claim against a firm's cash flows?

bonds

A stock had annual returns of 16 percent, 8 percent, -17 percent, and 21 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year? a. -9.87 to 23.87 percent b. -24.60 to 31.80 percent c. -26.74 to 40.74percent d. -47.68 to 54.68 percent e. -50.54 to 57.61 percent

c. -26.74 to 40.74percent

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average? a. 1.0 percent b. 2.5 percent c. 5.0 percent d. 16 percent e. 32 percent

d. 16 percent

If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following to occur as a result? a. Increase in the risk premium b. Increase in the average long-term rate of return c. Decrease in the 68 percent probability range of returns d. Increase in the standard deviation e. Increase in the geometric average rate of return

c. Decrease in the 68 percent probability range of returns

Which of the following statements is correct in relation to a stock investment? I. The capital gains yield can be positive, negative, or zero. II. The dividend yield can be positive, negative, or zero. III. The total return can be positive, negative, or zero. IV. Neither the dividend yield nor the total return can be negative. a. I only b. I and II only c. I and III only d. I and IV only e. IV only

c. I and III only

If the variability of the returns on large-company stocks were to increase over the long-term, you would expect which of the following to occur as a result? I. decrease in the average rate of return II. increase in the risk premium III. increase in the 68 percent probability range of the frequency distribution of returns IV. decrease in the standard deviation a. I only b. IV only c. II and III only d. I and III only e. II and IV only

c. II and III only

Which one of the following statements is correct based on the historical record for the period 1926-2010? a. The standard deviation of returns for small-company stocks was double that of large-company stocks. b. U.S. Treasury bills had a zero standard deviation of returns because they are considered to be risk-free. c. Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds. d. Inflation was less volatile than the returns on U.S. Treasury bills. e. Long-term government bonds underperformed intermediate-term government bonds.

c. Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds.

Which one of the following events would be included in the expected return on Sussex stock? a. The chief financial officer of Sussex unexpectedly resigned. b. The labor union representing Sussex' employees unexpectedly called a strike. c. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. d. The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. e. The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.

c. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated.

Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: a. was unaffected by the announcement. b. increased proportionately with the dividend decrease. c. decreased proportionately with the dividend decrease. d. decreased by $0.14 per share. e. increased by $0.14 per share.

c. decreased proportionately with the dividend decrease.

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return. a. greater than b. equal to c. less than d. greater than or equal to e. unrelated to

c. less than

The real rate of return on a stock is approximately equal to the nominal rate of return: a. multiplied by (1 + inflation rate). b. plus the inflation rate. c. minus the inflation rate. d. divided by (1 + inflation rate). e. divided by (1 - inflation rate).

c. minus the inflation rate.

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly? a. variance b. standard deviation c. reward-to-risk ratio d. beta e. risk premium

c. reward-to-risk ratio

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient. a. weak b. semiweak c. semistrong d. strong e. perfect

c. semistrong

Which one of the following categories of securities had the highest average return for the period 1926-2010? a. U.S. Treasury bills b. large company stocks c. small company stocks d. long-term corporate bonds e. long-term government bonds

c. small company stocks

Small-company stocks, as the term is used in the textbook, are best defined as the: a. 500 newest corporations in the U.S. b. firms whose stock trades OTC. c. smallest twenty percent of the firms listed on the NYSE. d. smallest twenty-five percent of the firms listed on NASDAQ. e. firms whose stock is listed on NASDAQ.

c. smallest twenty percent of the firms listed on the NYSE.

The total direct costs of underwriting an equity IPO:

can be as high as 25 percent for small issues.

difference in net fixed assets + depreciation

capital expenditures =

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a

cash budget

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a:

cash budget.

Which of the following securities has a purely residual claim against a firm's cash flows

common stock

Which of the following securities has a purely residual claim against a firm's cash flows?

common stock

Mike just purchased a bond which pays $40 each year in interest. The $40 interest payment is also called the:

coupon

You find a certain stock that had returns of 4 percent, -5 percent, -15 percent, and 16 percent for four of the last five years. The average return of the stock for the past year-year period was 8 percent. What is the standard deviation of the stock's returns for the 5-year period? a. 21.39 percent b. 24.98 percent c. 27.16 percent d. 21.22 percent e. 34.02 percent

d. 21.22 percent

Which one of the following statements best defines the efficient market hypothesis? a. Efficient markets limit competition. b. Security prices in efficient markets remain steady as new information becomes available. c. Mispriced securities are common in efficient markets. d. All securities in an efficient market are zero net present value investments. e. Profits are removed as a market incentive when markets become efficient.

d. All securities in an efficient market are zero net present value investments.

The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B. Stock A has a beta of 0.82 and stock B has a beta of 1.29. This information implies that: a. Stock A is riskier than stock B and both stocks are fairly priced. b. Stock A is less risky than stock B and both stocks are fairly priced. c. Either stock A is underpriced or stock B is overpriced or both. d. Either stock A is overpriced or stock B is underpriced or both. e. Both stock A and stock B are correctly priced since stock A is riskier than stock B.

d. Either stock A is overpriced or stock B is underpriced or both.

A stock had returns of 4 percent, 11 percent, 16 percent, -6 percent, and -2 percent for the past five years. Based on these returns, what is the approximate probability that this stock will return at least 20 percent in any one given year? a. Less than .5 percent. b. Greater than .5 percent but less than 1 percent. c. Greater than 1 percent but less than 2.5 percent. d. Greater than 2.5 percent but less than 16 percent. e. Greater than 16.0 percent.

d. Greater than 2.5 percent but less than 16 percent.

Aimee is the owner of a stock with annual returns of 27 percent, -32 percent, 11 percent, and 23 percent for the past four years. She thinks the stock may be able to achieve a return of 50 percent or more in a single year. What is the probability that your friend is correct? a. Less than .5 percent. b. Greater than .5 percent but less than 1 percent. c. Greater than 1 percent but less than 2.5 percent. d. Greater than 2.5 percent but less than 16 percent. e. Greater than 16 percent

d. Greater than 2.5 percent but less than 16 percent.

A stock had returns of 14 percent, 13 percent, -10 percent, and 7 percent for the past four years. Which one of the following best describes the probability that this stock will lose no more than 10 percent in any one year? a. Greater than .5 but less than 1.0 percent. b. Greater than 1 percent but less than 2.5 percent. c. Greater than 2.5 percent but less than 16 percent. . d. Greater than 84 percent but less than 97.5 percent. e. Greater than 95 percent.

d. Greater than 84 percent but less than 97.5 percent.

Over the past five years, a stock produced returns of 11 percent, 14 percent, 4 percent, -9 percent, and 5 percent. What is the probability that an investor in this stock will not lose more than 10 percent in any one given year? a. Greater than .5 but less than 1.0 percent. b. Greater than 1 percent but less than 2.5 percent. c. Greater than 2.5 percent but less than 16 percent. d. Greater than 84 percent but less than 97.5 percent. e. Greater than 95 percent.

d. Greater than 84 percent but less than 97.5 percent.

The historical record for the period 1926-2010 supports which one of the following statements? a. A higher-risk security will provide a higher rate of return next year than will a lower-risk security. b. If you need a stated amount of money next year, your best investment option today for those funds would be long-term government bonds. c. Increased long-run potential returns are obtained by lowering risks. d. It is possible for small-company stocks to more than double in value in any one given year. e. Inflation was positive each year throughout the period of 1926-2010.

d. It is possible for small-company stocks to more than double in value in any one given year.

The expected return on a stock computed using economic probabilities is: a. guaranteed to equal the actual average return on the stock for the next five years. b. guaranteed to be the minimal rate of return on the stock over the next two years. c. guaranteed to equal the actual return for the immediate twelve month period. d. a mathematical expectation based on a weighted average and not an actual anticipated outcome. e. the actual return you should anticipate as long as the economic forecast remains constant.

d. a mathematical expectation based on a weighted average and not an actual anticipated outcome.

What was the average rate of inflation over the period of 1926-2010? a. less than 2.0 percent b. between 2.0 and 2.5 percent c. between 2.5 and 3.0 percent d. between 3.0 and 3.5 percent e. greater than 3.5 percent

d. between 3.0 and 3.5 percent

The average compound return earned per year over a multi-year period is called the _____ average return. a. arithmetic b. standard c. variant d. geometric e. real

d. geometric

The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly. a. real return b. actual return c. nominal return d. risk premium e. expected return

d. risk premium

Which one of the following will increase the sustainable rate of growth a corporation can achieve?

decrease in the dividend payout ratio

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:

decrease.

Suppose you observe the following situation: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Bust 0.22 -0.12 -0.27 Normal 0.48 0.10 0.05 Boom 0.30 0.23 0.28 Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21. What is the expected market risk premium? a. 8.8 percent b. 9.5 percent c. 12.6 percent d. 17.9 percent e. 20.0 percent

e. 20.0 percent

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

income statement

Consider the following information on stocks I and II: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock I Stock II Recession 0.06 0.15 -0.35 Normal 0.69 0.35 0.35 Irrational exuberance 0.25 0.43 0.45 The market risk premium is 8 percent, and the risk-free rate is 3.6 percent. The beta of stock I is _____ and the beta of stock II is _____. a. 2.08; 2.47 b. 2.08; 2.76 c. 3.21; 3.84 d. 4.47; 3.89 e. 4.03; 3.71

e. 4.03; 3.71

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights? a. Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. b. The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. c. Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. d. The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. e. Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

e. Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

Which of the following statements related to market efficiency tend to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for investors to earn abnormal returns. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely weak form efficient. a. I and III only b. II and IV only c. I and IV only d. I, III, and IV only e. I, II, and III only

e. I, II, and III only

Which of the following correspond to a wide frequency distribution? I. relatively low risk II. relatively low rate of return III. relatively high standard deviation IV. relatively large risk premium a. II only b. III only c. I and II only d. II and III only e. III and IV only

e. III and IV only

A stock had annual returns of 4.8 percent, -11.6 percent, 18.2 percent, and 7.4 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 30percent or more in a single year? a. 99 percent or more b. 95 percent or more c. Less than .5 percent d. Less than 1 percent but more than .5 percent e. Less than 2.5 percent but more than .5 percent

e. Less than 2.5 percent but more than .5 percent

Which one of the following best defines the variance of an investment's annual returns over a number of years? a. The average squared difference between the arithmetic and the geometric average annual returns. b. The squared summation of the differences between the actual returns and the average geometric return. c. The average difference between the annual returns and the average return for the period. d. The difference between the arithmetic average and the geometric average return for the period. e. The average squared difference between the actual returns and the arithmetic average return.

e. The average squared difference between the actual returns and the arithmetic average return.

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010? a. long-term government bonds b. small company stocks c. large company stocks d. long-term corporate bonds e. U.S. Treasury bills

e. U.S. Treasury bills

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the: a. average arithmetic return. b. expected return. c. market rate of return. d. internal rate of return. e. cost of capital.

e. cost of capital.

Which one of the following is represented by the slope of the security market line? a. reward-to-risk ratio b. market standard deviation c. beta coefficient d. risk-free interest rate e. market risk premium

e. market risk premium

Which one of the following categories of securities has had the most volatile returns over the period 1926-2010? a. long-term corporate bonds b. large-company stocks c. intermediate-term government bonds d. U.S. Treasury bills e. small-company stocks

e. small-company stocks

Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock?

ex-rights date

If a company seeks to maximize firm value, it should never grow at a rate above its sustainable growth rate.

false

One way to manage an actual growth rate above a sustainable growth rate is to decrease prices.

false

Share repurchases usually decrease earnings per share.

false

The only way a company can grow at a rate above its current sustainable growth rate is by increasing leverage.

false

Trevor is the CEO of Harvest Foods, which is a privately-held corporation. What is the first step he must take if he wishes to take Harvest Foods public?

gain board approval

The date on which a shareholder is officially listed as the recipient of stock rights is called the:

holder-of-record date.

Principal amounts are usually exchanged

in currency swaps.

Which one of the following is a source of cash?

increase in accounts payable

Under the simplifying assumptions of Modigliani and Miller, an increase in a firm's financial leverage will:

increase the variability in earnings per share

The Securities and Exchange Commission:

is concerned only that an issue complies with all rules and regulations.

If an IPO is underpriced then the:

issuing firm receives less money than it probably should have.

With firm commitment underwriting, the issuing firm:

knows up-front the amount of money it will receive from the stock offering.

Individuals who continually monitor the financial markets seeking mispriced securities.

make the markets increasingly more efficient.

Individuals who continually monitor the financial markets seeking mispriced securities:

make the markets increasingly more efficient.

The best financing choice is the one that:

maximizes expected cash flows

The sustainable growth rate of a firm is best described as the:

maximum growth rate achievable, excluding any external equity financing while maintaining a constant debt-equity ratio.

Existing shareholders:

may or may not have a preemptive right to newly issued shares.

Franklin Minerals recently had a rights offering of 1,000 shares at an offer price of $10 a share. Isabelle is a shareholder who exercised her rights option by buying all of the rights to which she was entitled based on the number of shares she owns. Currently, there are six shareholders who have opted not to participate in the rights offering. Isabelle would like to purchase the unsubscribed shares. Which one of the following will allow her to do so?

oversubscription privilege

Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the:

par value

The most common approach to developing pro forma financial statements is called the

percent-of-sales-method

Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000 shares outstanding. After the seasoned offering, you still owned 7,500 shares but the number of shares outstanding rose to 625,000. Which one of the following terms best describes this situation?

percentage ownership dilution

A group of five private investors recently loaned $6 million to Henderson Hardware for ten years at 9 percent interest. This loan is best described as a:

private placement.

Financial statement analysis: is primarily used to identify account values that meet the normal standards. is limited to internal use by a firm's managers. provides useful information that can serve as a basis for forecasting future performance. provides useful information to shareholders but not to debtholders. is enhanced by comparing results to those of a firm's peers but not by comparing results to prior periods.

provides useful information that can serve as a basis for forecasting future

Underwriters generally:

receive less compensation under a competitive agreement than under a negotiated agreement.

Depreciation expense:

reduces both taxes and net income.

What is a seasoned equity offering?

sale of newly issued equity shares by a firm that is currently publicly owned

A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting.

standby

The amount paid to an underwriter who participates in a standby underwriting agreement is called a(n):

standby fee.

To purchase shares in a rights offering, a shareholder generally just needs to:

submit the required number of rights along with the subscription price.

The sustainable growth rate is based on the premise that: an additional dollar of debt will be acquired only if an additional dollar in equity shares is issued. no additional equity will be added to the firm. the debt-equity ratio will be held constant. the dividend payout ratio will be zero. the dividend payout ratio will increase at a steady rate.

the debt-equity ratio will be held constant.

The basic lesson of the M&M theory is that the value of a firm is dependent upon:

the total cash flow of the firm

The flotation cost for a firm is computed as: A. the arithmetic average of the flotation costs of both debt and equity. B. the weighted average of the flotation costs associated with each form of financing. C. the geometric average of the flotation costs associated with each form of financing. D. one-half of the flotation cost of debt plus one-half of the flotation cost of equity. E. a weighted average based on the book values of the firm's debt and equity.

the weighted average of the flotation costs associated with each form of financing.

On a common-size balance sheet, all accounts are expressed as a percentage of

total assets.

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.

total equity / total assets

In recent years, U.S. companies as a whole have repurchased more equity than they have issued.

true

Issue costs of equity are high relative to those of debt.

true

Executive Tours has decided to take its firm public and has hired an investment firm to handle this offering. The investment firm is serving as a(n):

underwriter.

In general, the capital structures used by non-financial U.S. firms:

vary significantly across industries.

Which of the following is not a condition that must be met for an item to be recorded as revenue? A. Revenues must be earned. B. The amount of the revenue must be measurable. C. The revenue must be received in cash. D. The costs of generating the revenue can be determined.

C. The revenue must be received in cash.

A balance sheet reports the value of a firm's assets, liabilities, and equity A. over an annual period. B. over any period of time. C. at any point in time. D. at the end of the year.

C. at any point in time.

C. dividend policy

In the development of the pro forma financial statements, the last step in the process is the development of the: A. pro forma income statement B. cash budget C. pro forma balance sheet D. capital budget

C. pro forma balance sheet

CHAPTER 3

Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The asset turnover ratio is 1.6, and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is Komatsu's sustainable rate of growth? A. 11.26% B. 6.12% C. 1.91% D. 10.83% E. 12.74% F. None of the options are correc

D. 10.83%

Please refer to the pro forma financial statements for Royal Corporation above. Assume that net fixed assets are projected to be 5,000 for 2014 and that shareholders' equity is projected to be 5,500 for 2014. If long-term debt is the plug figure, what should be the projection for long-term debt for Royal Corporation in 2014? A. $2,206 B. $2,363 C. $2,455 D. $2,847

D. $2,847

BUDGETING

B. $1,034

Please refer to Oscar's financial statements above. What was Oscar's increase in retained earnings during 2014? A. $450 B. $1,380 C. $1,830 D. $2,280 E. None of the above.

B. $1,380

Please refer to Oscar's financial statements above. Sales are projected to increase by 3 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the projected addition to retained earnings for next year? A. $1,309.19 B. $1,421.40 C. $1,884.90 D. $2,667.78 E. $3,001.40 F. None of the above.

B. $1,421.40

If projected net cash flow for November is ($10,000); beginning cash balance is $4,000; minimum cash balance is $3,000; beginning loan balance is $8,000, what will be the cumulative loan balance at the end of November? A. $5,000 B. $17,000 C. $22,000 D. $14,000

B. $17,000

Suppose an acquiring firm pays $100 million for a target firm, and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account? A. $0 million B. $20 million C. $30 million D. $70 million E. $80 million F. None of the options are correct.

B. $20 million

C. can never be greater than the return on equity.

Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a: A. pro forma income statement. B. sales projection. C. cash budget. D. receivables analysis. E. credit analysis. F. None of the above.

C. cash budget.

CHAPTER 4

Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis A. II and IV only B. III and IV only C. II, III, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV

E. I, III, and IV only

Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test A. I, III, and IV only B. I and III only C. I, II, and III only D. III and IV only E. II and IV only

E. II and IV only

CHAPTER 5

[The following information applies to the questions displayed below.] Link, Inc.Selected financial data ($ thousands) 2016 2017Income statement and related items Sales$160,835 $274,219 Cost of goods sold 141,829 209,628 Net income (91,432) (257,981)Cash flow from operations (35,831) (12,538) Balance sheet items Cash$236,307 $164,952 Marketable securities 209,670 22,638 Accounts receivable 12,645 21,655 Inventory 3,971 40,556 Total current assets 462,593 249,801 Accounts payable 17,735 13,962 Accrued liabilities 27,184 76,596 Total current liabilities 44,919 90,558 Please refer to the financial data for Link, Inc. above. Link's profit margin for 2017 is

-94%

A. $14,700 Change in retained earnings = $437,500 × 0.048 × (1 - 0.30) = $14,700

To estimate Missed Places Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year? A. $169,000 B. $170,400 C. $181,400 D. $506,300 E. $518,700 F. None of the above.

A. $169,000 158,000 + 23,400 - 12,400 = $169,000

You are estimating your company's external financing needs for the next year. At the end of the year you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year? A. $20 million B. $70 million C. $150 million D. $160 million E. $180 million F. None of the above.

A. $20 million

Please refer to the pro forma financial statements for Royal Corporation above. If Royal Corporation plans to issue $100 in new equity in 2014, what should be the projection for shareholders' equity for 2014? A. $5,349 B. $5,436 C. $5,451 D. $5,536

A. $5,349

In the above financial statements, Royal Corporation has prepared (incomplete) pro forma financial statements for 2014, based on actual financial statements for 2013. Royal Corp. used the percent-of-sales method assuming a sales growth rate of 10% for 2014. If capital expenditures are planned to be $1,615 in 2014, then what would be the appropriate projection for net fixed assets in 2014? A. $4,453 B. $4,563 C. $4,663 D. $5,663

B. $4,563

You are preparing pro forma financial statements for 2014 using the percent-of-sales method. Sales were $100,000 in 2013 and are projected to be $120,000 in 2014. Net income was $5,000 in 2013 and is projected to be $6,000 in 2014. Equity was $45,000 at year-end 2012 and $50,000 at year-end 2013. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2014? A. $55,000 B. $56,000 C. $60,000 D. Insufficient information is provided to project equity in 2014.

B. $56,000 All of net income was added to equity in 2013, so all of net income will be added to equity in 2014. $50,000 + $6,000 = $56,000.

Please refer to Oscar's financial statements above. Assume a constant profit margin and dividend payout ratio, and further assume all of Oscar's assets and current liabilities vary directly with sales. Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is Oscar's external financing need for next year? A. -$410 B. -$260 C. $235 D. $1,320 E. $7,240 F. None of the above.

B. -$260

B. 100% If equity doubled, then g* = change in equity/equitybop = 100%. For example, if equitybop was 25, the change in equity must also be 25 in order to double equity.

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Which of the following formulas would correctly give the forecast for sales in cell C8? A. =B8*B2 B. =B8 + B8*B2 C. =(1 + B8)*B2 D. =(1/B2)*B8 E. None of the above.

B. =B8 + B8*B2

Which of the following statements is FALSE with regard to quality of financial reporting? A. Financial statements should reflect an accurate picture of a company's financial condition and performance. B. It is unlikely that management can manipulate the bottom line due to the regulations in place to enforce GAAP. C. Financial information should be useful both to assess the past and predict the future. D. The closer that the picture presented through the financial data is to reality, the higher the quality of financial reporting.

B. It is unlikely that management can manipulate the bottom line due to the regulations in place to enforce GAAP.

Which of the following statements regarding junk bonds is true? A. Junk bonds typically offer lower yields to maturity than investment-grade bonds. B. Junk bonds have higher priority in bankruptcy than preferred stock. C. Junk bonds offer no coupon payments to investors. D. Junk bonds are typically defined as bonds with default probabilities of 25% or higher

B. Junk bonds have higher priority in bankruptcy than preferred stock.

Selling and administrative expenses include which of the following income statement items? A. Salaries, insurance, interest. B. Salaries, rent, advertising. C. Rent, interest, cost of goods. D. Advertising, research & development, amortization.

B. Salaries, rent, advertising.

Which of the following items would be classified as an investing activity on the statement of cash flows: A. Payment to lenders. B. Sale of property. C. Sale of goods. D. Proceeds from borrowing.

B. Sale of property.

What does a low asset turnover compared to the industry imply? A. The investment in assets is too low. B. The investment in assets may be too high. C. Sales are higher than average. D. Net income is low relative to the investment in assets.

B. The investment in assets may be too high.

The need for an increase or decrease in short-term borrowing can be predicted by A. ratio analysis. B. a cash budget. C. an income statement. D. trend analysis

B. a cash budget

B. additions to retained earnings divided by net income

Pro forma financial statements are A. often required by prospective creditors. B. all of these. C. often required by prospective creditors. D. the most comprehensive means of financial forecasting.

B. all of these

In the construction of the cash payments schedule, the major cash payment is generally A. interest and dividends. B. costs associated with inventory manufactured. C. the general and administrative expense. D. payments for new plant and equipment.

B. costs associated with inventory manufactured.

In a cash budget, the cumulative cash balance is equal to: A. cumulative loan balance plus the ending cash balance. B. net cash flow plus the beginning cash balance. C. net cash flow minus the beginning cash balance. D. cumulative loan balance minus the ending cash balance.

B. net cash flow plus the beginning cash balance

A firm utilizing LIFO inventory accounting would, in calculating gross profits, assume that A. all sales were from current production. B. sales were from current production until current production was depleted, and then use sales from beginning inventory. C. all sales were for cash. D. all sales were from beginning inventory.

B. sales were from current production until current production was depleted, and then use sales from beginning inventory.

B. the percentage of net income available to the firm to fund future growth.

Please refer to the selected financial information for Boss Stores above. What is the sustainable growth rate for 2013? A. - 17.6% B. - 7.9% C. 9.97% D. 10.27% E. 12.23% F. 21.40%

C. 9.97%

Please refer to Oscar's financial statements above. Assume a constant debt-equity ratio, net profit margin and dividend payout ratio, and further assume all of Oscar's expenses, assets and current liabilities vary directly with sales. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent? A. $10,857.50 B. $10,931.38 C. $11,663.75 D. $15,587.50 E. $18,987.50 F. None of the above.

C. $11,663.75

On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya's sales for April were $430 and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya's accounts receivable period is 30 days. What is the firm's beginning cash balance on June 1? A. $145 B. $155 C. $205 D. $215 E. $265

C. $205 Cash balance = $175 - $110 - $290 + $430 = $205

C. - 3.04%

Please refer to the selected financial information for Boss Stores above. What is the retention ratio for 2013? A. 0.32 B. 0.68 C. 0.97 D. 1.00 E. None of the above.

C. 0.97

C. 10.83% Sustainable growth = PRAT = 0.045 × (1 - 0.15) × 1.6 × 1.77 = 10.83%

The Limited collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect: A. 60 percent of February sales. B. 15 percent of April sales. C. 60 percent of March sales. D. 15 percent of March sales. E. 25 percent of February sales.

C. 60 percent of March sales

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. Assume that no new equity will be issued in 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for shareholders' equity in cell G19? A. =F19*B2 B. =F19*(1 + B2) C. =F19 + (1 - B4)*C16 D. =F19 + B4*C16 E. None of the above.

C. =F19 + (1 - B4)*C16

How is the cash conversion cycle calculated? A. Average collection period + days inventory held + Days payable outstanding. B. Average collection period - days inventory held - Days payable outstanding. C. Average collection period + days inventory held - Days payable outstanding. D. Average collection period - days inventory held + Days payable outstanding.

C. Average collection period + days inventory held - Days payable outstanding.

Which of the following statements are true? I. Underwriters help private companies access public stock markets through IPOs. II. Shelf registrations and private placements are examples of seasoned security issues. III. Issue costs for debt are typically greater than issue costs for equity. IV. Bearer bonds make it easier for investors to avoid paying taxes on interest income. A. I and II only B. I and III only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV

C. I, II, and IV only

C. Milano's leverage has increased. Note first that g > g because g = 20% and g<15%.With g > g* one of PRAT must increase. P has held steady at 5%, R has remained at 100%, A has not changed. Thus T (leverage) must have increased.

Which of the following statements is correct if a firm's pro forma financial statements project net income of $12,000 and external financing required of $5,000? A. Total assets cannot grow by more than $10,000. B. Dividends cannot exceed $10,000. C. Retained earnings cannot grow by more than $12,000. D. Long-term debt cannot grow by more than $5,000.

C. Retained earnings cannot grow by more than $12,000.

Which equation represents an income statement? A. Assets = liabilities + stockholders' equity. B. Cash in - cash out = net income. C. Revenues - expenses = net income. D. Beginning retained earnings + revenues - expenses = ending retained earnings.

C. Revenues - expenses = net income

What is amortization? C. The process used to allocate the cost of natural resources. B. The process used to allocate the cost of tangible fixed assets. C. The process used to allocate the cost of capital leases, leasehold improvements and intangible assets. D. The process used to allocate the cost of oil, gas, minerals and standing timber.

C. The process used to allocate the cost of capital leases, leasehold improvements and intangible assets.

Use the indirect method to answer this question. The following information is available for Felix Company: Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is cash flow from operating activities for Felix Company? A. $70 B. $320 C. $250 D. $240

D. $240

D. 10.13% 0.062 = PRAT = profit margin × 0.40 × 0.85 × 1.80profit margin = 0.062/(0.40 × 0.85 × 1.80) = 10.13%

D. 18.24 percent

Please refer to the selected financial information for Boss Stores above. What is the actual sales growth rate for 2013? A. - 17.6% B. - 7.9% C. 8.51% D. 21.4% E. None of the above.

D. 21.4%

D. 6% ROEbop × Retention ratio = (5/50) × 0.6 = 6%

Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times. B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. C. Most firms attempt to maximize the cash balance at all times. D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds. E. The ending cash balance must equal the minimum desired cash balance

D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds.

What is an unqualified audit report? A. A report stating that the auditors are not qualified to report on a firm. B. A report that states the financial statements are in violation of GAAP. C. A report that states that departures from GAAP exist in the firm's financial statements. D. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

D. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

In forecasting a firm's cash needs for some future period A. the percent-of-sales method is a "broad-brush" approach B. cash budgets are more exact than the percent-of-sales method C. a cash budget approach can deal effectively with both level and seasonal production schedules D. All of these

D. All of these

D. An increase in the retention ratio

Which item may be of concern when analyzing cash flow from financing activities? A. Payments of dividends. B. Repayment of debt. C. Increasing inventories. D. Borrowing each year to repay debt from prior years.

D. Borrowing each year to repay debt from prior years.

Which of the following would increase cash from operating activities? A. Increasing accounts receivable. B. Decreasing accounts payable. C. Increasing inventories. D. Decreasing accounts receivable.

D. Decreasing accounts receivable.

Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal? A. Ellsbury starts paying off all outstanding invoices to suppliers twice a month instead of once a month. B. Ellsbury changes the credit terms it offers to customers, allowing them to pay in 45 days instead of 30 days. C. Ellsbury increases its cash/assets ratio from 12% to 15%. D. Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products

D. Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products

Which one of the following statements is true? A. Equity securities offer fixed claims on future cash payouts. B. Unlike bondholders, for their returns, shareholders rely entirely on price appreciation. C. In theory, common shareholders exercise very little control over company decisions. D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds. E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation

D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds.

D. I, III, and IV only

Which of the following is an acceptable method to report total comprehensive income? A. On the face of the balance sheet. B. Total comprehensive income does not have to be reported. C. In the operating section of the cash flow statement. D. In the statement of stockholders' equity.

D. In the statement of stockholders' equity.

Which of the following is NOT a reason for why U.S. corporations haven't issued more equity in recent years? A. Managers try to avoid dilution of earnings per share. B. Equity is relatively expensive to issue. C. Companies in the aggregate had sufficient funds through profits and new debt. D. Managers usually believe that their stock is overvalued. E. Managers perceive the stock market to be an unreliable funding source.

D. Managers usually believe that their stock is overvalued.

Which of the following statements regarding preferred stock is true? A. Holders of preferred stock have the same voting rights as common stockholders. B. Preferred stock dividend payments are a deductible expense for corporate tax purposes C. Almost all public corporations are at least partly financed with preferred stock. D. None of the above.

D. None of the above.

D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.

In the percent-of-sales method, if (A/S) and (L/S) both increase: A. RNF goes up. B. RNF stays the same. C. RNF goes down. D. more information is needed.

D. more information is needed.

The most common approach to developing pro forma financial statements is called the: A. cash budget method. B. financial planning method. C. seasonality approach. D. percent-of-sales method. E. market-oriented approach. F. None of the above.

D. percent-of-sales method.

When the cost of raw materials is increasing, FIFO accounting A. All of these. B. yields higher cost of goods sold than LIFO. C. produces higher unit sales than using LIFO. D. yields higher ending inventory values than LIFO. E. None of these

D. yields higher ending inventory values than LIFO.

E. $643 August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643

Which of the following actions would help a firm's growth problem if its actual sales growth exceeds its sustainable rate of growth? I. Increase prices II. Decrease financial leverage III. Decrease dividends IV. Prune away less-profitable products A. I, II, III, and IV B. I, II, and IV only C. I and II only D. I and III only E. I, III, and IV only F. None of the options are correct

E. I, III, and IV only

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000 and dividends were $44,640. What is Westcomb's sustainable growth rate? A. 15.32 percent B. 15.79 percent C. 17.78 percent D. 18.01 percent E. 18.24 percent

E. 18.24 percent Change in Equity = Retained earnings = $72,000 - $44,640 = $27,360Sustainable growth rate = g* = Change in Equity/Equitybop = $27,360/$150,000 = 18.24%Alternative: g* = R × ROEbop = (72,000 - 44,640)/72,000 × 72,000/150,000 = 0.38 × 0.48 = 0.1824

XYZ Co. has forecasted June sales of 400 units and July sales of 700 units. The company maintains ending inventory equal to 125% of next month's sales. June beginning inventory reflects this policy. What is June's required production? A. 725 units B. 750 units C. -0- units D. 425 units E. 775 units

E. 775 units

E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDocs will collect payment for the sales it made during which of the months listed below? A. October, November, and December B. November, December, and January C. December, January, and February D. January, February, and March E. February, March, and April

E. February, March, and April

Which of the following can affect a firm's sustainable rate of growth?I. Asset turnover ratio II. Profit margin III. Dividend policy IV. Financial leverage A. III only B. I and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

E. I, II, III, and IV

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained? A. I and IV only B. II and III only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2015. When the pro formas are completed, which of the following formulas would correctly give the forecast for cost of goods sold in cell C9? A. =B9*B3 B. =B9 + B9*B3 C. =B8*B3 D. =B9*B2 E. None of the above.

E. None of the above.

Ptarmigan Travelers had sales of $420,000 in 2016 and $480,000 in 2017. The firm's current asset accounts remained constant. Given this information, which one of the following statements must be true? A. The days' sales in receivables increased. B. The total asset turnover rate increased. C. The fixed asset turnover decreased. D. The inventory turnover rate increased. E. The collection period decreased.

E. The collection period decreased.

The sustainable growth rate A. assumes there is no external financing of any kind. B. assumes all income is retained by the firm. C. None of the options are correct. D. assumes no additional long-term debt is available. E. assumes the debt-equity ratio is 1.0. F. assumes the debt-equity ratio is constant.

F. the debt-equity ratio is constant.

None of the Answers above

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