Finance Midterm 2 Review

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a: A) note. B) bearer form bond. C) debenture. D) registered form bond. E) call protected bond.

C) debenture.

Bond ratings classify bonds based on: A) liquidity, market, and default risk. B) liquidity, interest rate, and default risk. C) default risk only. D) interest rate, inflation rate, and default risk. E) default and liquidity risks.

C) default risk only.

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the: A) average tax rate. B) variable tax rate. C) marginal tax rate. D) fixed tax rate. E) ordinary tax rate.

C) marginal tax rate.

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities. A) face value B) market price C) maturity D) coupon rate E) issue date

C) maturity

Shareholders' equity is equal to: A) total assets plus total liabilities. B) net fixed assets minus total liabilities. C) net fixed assets minus long-term debt plus net working capital. D) net working capital plus total assets. E) total assets minus net working capital.

C) net fixed assets minus long-term debt plus net working capital.

Cash flow from assets is defined as: A) the cash flow to shareholders minus the cash flow to creditors. B) operating cash flow plus the cash flow to creditors plus the cash flow to shareholders. C) operating cash flow minus the change in net working capital minus net capital spending. D) operating cash flow plus net capital spending plus the change in net working capital. E) cash flow to shareholders minus net capital spending plus the change in net working capital.

C) operating cash flow minus the change in net working capital minus net capital spending.

The primary purpose of bond covenants is to: A) meet regulatory requirements. B) define the bond's repayment terms. C) protect the bondholders. D) identify the bond's rating. E) protect the bond issuer from lawsuits.

C) protect the bondholders.

The term structure of interest rates is primarily based on which three of the following? 1.I. Interest rate risk premium 2.II. Real rate of interest 3.III. Default risk premium 4.IV. Inflation premium 5.V. Liquidity premium A) I, II, and V B) I, III, and V C) II, III, and IV D) I, II, and IV E) II, IV, and V

D) I, II, and IV

Which one of the following terms is defined as the total tax paid divided by the total taxable income? A) Average tax rate B) Variable tax rate C) Marginal tax rate D) Absolute tax rate E) Contingent tax rate

A) Average tax rate

A real rate of return is defined as a rate that has been adjusted for which one of the following? A) Inflation B) Interest rate risk C) Taxes D) Liquidity E) Default risk

A) Inflation

Which ratio was primarily designed to monitor firms with negative earnings? A) Price-sales ratio B) Market-to-book ratio C) Profit margin D) ROE E) ROA

A) Price-sales ratio

A debenture is: A) an unsecured bond. B) a bearer form bond. C) a bond with a call provision. D) a bond with a sinking fund provision. E) a bond secured by a blanket mortgage.

A) an unsecured bond.

The price at which an investor can purchase in the bond market is called the _____ price. A) asked B) coupon C) call D) face E) bid

A) asked

Net capital spending is equal to: A) ending net fixed assets minus beginning net fixed assets plus depreciation. B) beginning net fixed assets minus ending net fixed assets plus depreciation. C) ending net fixed assets minus beginning net fixed assets minus depreciation. D) ending total assets minus beginning total assets plus depreciation. E) ending total assets minus beginning total assets minus depreciation.

A) ending net fixed assets minus beginning net fixed assets plus depreciation.

The written agreement that contains the specific details related to a bond issue is called the bond: A) indenture. B) debenture. C) document. D) registration statement. E) issue paper.

A) indenture.

Cash flow to creditors is defined as: A) interest paid minus net new borrowing. B) interest paid plus net new borrowing. C) operating cash flow minus net capital spending minus the change in net working capital. D) dividends paid plus net new borrowing. E) cash flow from assets plus net new equity.

A) interest paid minus net new borrowing.

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

A) inventory is purchased with cash.

The cash ratio is used to evaluate the: A) liquidity of a firm. B) speed at which a firm generates cash. C) length of time that a firm can pay its bills if no additional cash becomes available. D) ability of a firm to pay the interest on its debt. E) relationship between the firm's cash balance and its current liabilities.

A) liquidity of a firm.

The rate of return an investor earns on a bond prior to adjusting for inflation is called the: A) nominal rate. B) real rate. C) dirty rate. D) coupon rate. E) clean rate.

A) nominal rate.

Paid-in surplus is classified as: A) owners' equity. B) net working capital. C) a current asset. D) a cash expense. E) long-term debt.

A) owners' equity.

Shareholders' equity is best defined as: A) the residual value of a firm. B) positive net working capital. C) the net liquidity of a firm. D) cash inflows minus cash outflows. E) the cumulative profits of a firm over time.

A) the residual value of a firm.

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past? A) A decrease in the total asset turnover B) A decrease in the capital intensity ratio C) An increase in days' sales in receivables D) A decrease in the profit margin E) A decrease in the inventory turnover rate

B) A decrease in the capital intensity ratio

Which one of the following has nearly the same meaning as free cash flow? A) Net income B) Cash flow from assets C) Operating cash flow D) Cash flow to shareholders E) Addition to retained earnings

B) Cash flow from assets

Generally Accepted Accounting Principles, as they relate to the Income Statement includes the recognition principle: to recognize revenue when the earnings process is virtually complete and the value of an exchange of goods or services is known or can be reliably determined. Which of the following statements is true with regard to this principle? A) Income and expense items can be recorded at any time the company deems appropriate B) Revenue is recognized at the time of sale. Costs associated with the sale of that product likewise would be recognized at that time C) Revenues must be reported only when cash is collected D) Expenses can be smoothed to make earnings appear greater

B) Revenue is recognized at the time of sale. Costs associated with the sale of that product likewise would be recognized at that time

Net working capital includes: A) a land purchase. B) an invoice from a supplier. C) non-cash expenses. D) fixed asset depreciation. E) the balance due on a 15-year mortgage.

B) an invoice from a supplier.

All else held constant, the book value of owners' equity will decrease when: A) the market value of inventory increases. B) dividends exceed net income for a period .C) cash is used to pay an accounts payable. D) a long-term debt is repaid. E) taxable income increases.

B) dividends exceed net income for a period

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital: A) had to increase. B) had to decrease. C) remained constant. D) could have either increased, decreased, or remained constant. E) was unaffected as the changes occurred in the firm's current accounts.

B) had to decrease.

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the: A) statement of cash flows. B) income statement. C) GAAP statement. D) balance sheet. E) net working capital schedule.

B) income statement.

When a bond's yield to maturity is less than the bond's coupon rate, the bond: A) had to be recently issued. B) is selling at a premium. C) has reached its maturity date. D) is priced at par. E) is selling at a discount.

B) is selling at a premium.

The market value: A) of accounts receivable is generally higher than the book value of those receivables. B) of an asset tends to provide a better guide to the actual worth of that asset than does the book value. C) of fixed assets will always exceed the book value of those assets. D) of an asset is reflected in the balance sheet. E) of an asset is lowered each year by the amount of depreciation expensed for that

B) of an asset tends to provide a better guide to the actual worth of that asset than does the book value.

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis. A) annual B) semiannual C) quarterly D) monthly E) daily

B) semiannual

7) Operating cash flow is defined as: A) a firm's net profit over a specified period of time. B) the cash that a firm generates from its normal business activities. C) a firm's operating margin. D) the change in the net working capital over a stated period of time. E) the cash that is generated and added to retained earnings.

B) the cash that a firm generates from its normal business activities.

All else held constant, the present value of a bond increases when the: A) coupon rate decreases. B) yield to maturity decreases. C) current yield increases. D) time to maturity of a premium bond decreases. E) time to maturity of a zero coupon bond increases.

B) yield to maturity decreases.

The market-required rate of return on a bond that is held for its entire life is called the: A) coupon rate. B) yield to maturity. C) dirty yield. D) call premium. E) current yield.

B) yield to maturity.

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant? A) An increase in net capital spending B) A decrease in the cash flow to creditors C) An increase in depreciation D) An increase in the change in net working capital E) A decrease in dividends paid

C) An increase in depreciation

Which statement is true? A) Bonds are generally called at par value .B) A current list of all bondholders is maintained whenever a firm issues bearer bonds. C) An indenture is a contract between a bond's issuer and its holders. D) Collateralized bonds are called debentures. E) A bondholder has the right to determine when his or her bond is called.

C) An indenture is a contract between a bond's issuer and its holders.

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes? A) Income statement B) Balance sheet C) Common-size income statement D) Common-size balance sheet E) Statement of cash flows

C) Common-size income statement

Which one of the following is an intangible fixed asset? A) Inventory B) Machinery C) Copyright D) Account receivable E) Building

C) Copyright

Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow? A) Increase in depreciation B) Increase in accounts receivable C) Increase in accounts payable D) Decrease in cost of goods sold E) Increase in sales

C) Increase in accounts payable

Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value? A) Interest rate risk premium B) Inflation premium C) Liquidity premium D) Taxability premium E) Default risk premium

C) Liquidity premium

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders? A) Callable B) Income C) Zero coupon D) Convertible E) Tax-free

C) Zero coupon

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the: A) market yield. B) yield-to-call. C) bid-ask spread. D) current yield. E) bond premium.

C) bid-ask spread.

A bond's annual interest divided by its face value is referred to as the: A) market rate. B) call rate. C) coupon rate. D) current yield. E) yield-to-maturity.

C) coupon rate.

The matching principle states that: A) costs should be recorded on the income statement whenever those costs can be reliably determined. B) costs should be recorded when paid. C) the costs of producing an item should be recorded when the sale of that item is recorded as revenue. D) sales should be recorded when the payment for that sale is received. E) sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

C) the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

Which one of the following bonds is the most sensitive to changes in market interest rates? A) 5-year, zero coupon B) 5-year, 5 percent coupon C) 5-year, 8 percent coupon D) 10-year, zero coupon E) 10-year, 5 percent coupon

D) 10-year, zero coupon

Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in: A) 5-year, 7 percent coupon bonds. B) 20-year, 6 percent coupon bonds. C) 20-year, zero coupon bonds. D) 2-year, 7 percent coupon bonds. E) 3-year, zero coupon bonds.

D) 2-year, 7 percent coupon bonds.

The lowest rating a bond can receive from Standard and Poor's and still be classified as an investment-quality bond is: A) BB. B) B. C) Ba. D) BBB. E) A.

D) BBB.

This morning, Jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment. The bond that Jeff found must have been which one of the following? A) Debenture B) Note C) Registered-form bond D) Bearer-form bond E) Callable bond

D) Bearer-form bond

Which statement is correct? A) Bond markets have less daily trading volume than equity markets. B) There are fewer bond issues outstanding than there are equity issues. C) Municipal bond prices are highly transparent. D) Bond markets are dealer based. E) Most bond trades occur on the NYSE.

D) Bond markets are dealer based.

Which one of the following will increase the profit margin of a firm, all else held constant? A) Increase in interest paid B) Increase in fixed costs C) Increase in depreciation expense D) Decrease in the tax rate E) Decrease in sales

D) Decrease in the tax rate

Outdoor Gear reduced its general and administrative costs this year. This cost improvement will increase which of the following ratios? 1.I. Profit margin 2.II. Return on assets 3.III. Total asset turnover 4.IV. Return on equity A) I and II only B) I and III only C) II, III, and IV only D) I, II, and IV only E) I, II, III, and IV

D) I, II, and IV only

Which one of these is correct? A) Depreciation has no effect on taxes. B) Interest paid is a noncash item. C) Taxable income must be a positive value. D) Net income is distributed either to dividends or retained earnings. E) Taxable income equals net income divided by (1 + Average tax rate).

D) Net income is distributed either to dividends or retained earnings.

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive. A) The clean price of the bond must equal the bond's dirty price. B) The bond must be a zero coupon bond and mature in exactly one year. C) The market price must exceed the par value by the value of one year's interest. D) The bond must be priced at par. E) There is no condition under which this can occur.

D) The bond must be priced at par.

On which one of the following dates is the principal amount of a semiannual coupon bond repaid? A) A portion of the principal is repaid on each coupon date. B) The entire bond is repaid on the issue date. C) Half of the principal is repaid evenly over each coupon period with the remainder paid on the issue date. D) The entire bond is repaid on the maturity date. E) Half of the principal is repaid evenly over each coupon period with the remainder paid on the maturity date.

D) The entire bond is repaid on the maturity date.

Production equipment is classified as: A) a net working capital item. B) a current liability. C) a current asset. D) a tangible fixed asset. E) an intangible fixed asset.

D) a tangible fixed asset.

A bond dealer sells at the _____ price and buys at the _____ price. A) clean; dirty B) dirty; clean C) bid; asked D) asked; bid E) asked; asked

D) asked; bid

The financial statement that summarizes a firm's accounting value as of a particular date is called the: A) income statement. B) cash flow statement. C) liquidity position. D) balance sheet. E) periodic operating statement.

D) balance sheet.

The current yield on a bond is equal to the annual interest divided by the: A) issue price. B) maturity value. C) face amount. D) current market price. E) current par value.

D) current market price.

Cash flow to stockholders is defined as: A) cash flow from assets plus cash flow to creditors. B) operating cash flow minus cash flow to creditors. C) dividends paid plus the change in retained earnings. D) dividends paid minus net new equity raised. E) net income minus the addition to retained earnings.

D) dividends paid minus net new equity raised.

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be: A) upward sloping. B) flat. C) humped. D) downward sloping. E) double-humped.

D) downward sloping.

A protective covenant: A) protects the borrower from unscrupulous practices by the lender. B) guarantees the interest and principal payments will be paid in full on a timely basis. C) prevents a bond from being called. D) limits the actions of the borrower. E) guarantees the market price of a bond will never be less than par value.

D) limits the actions of the borrower.

A bond's indenture agreement generally includes all of the following except the A) terms of repayment. B) details of protective covenants. C) total amount of the bond issue. D) names of registered shareholders. E) description of property used as security.

D) names of registered shareholders.

The purpose of a bond sinking fund is to: A) accumulate funds needed to pay the tax liability on the bond proceeds. B) accumulate funds to pay the regular interest payments. C) hold the bond proceeds until the funds need disbursed. D) repay bonds early either through purchases or calls. E) repay bondholders from a trust fund if the issuer defaults.

D) repay bonds early either through purchases or calls.

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

D) total assets.

What is the price of a $1,000 face value bond if the quoted price is 102.1? A) $102.10 B) $1,002.10 C) $1,020.01 D) $1,020.10 E) $1,021.00

E) $1,021.00

Which one of the following statements is true? A) The current yield on a par value bond will exceed the bond's yield to maturity. B) The yield to maturity on a premium bond exceeds the bond's coupon rate. C) The current yield on a premium bond is equal to the bond's coupon rate. D) A premium bond has a current yield that exceeds the bond's coupon rate. E) A discount bond has a coupon rate that is less than the bond's yield to maturity.

E) A discount bond has a coupon rate that is less than the bond's yield to maturity.

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? A) Interest rate risk premium B) Inflation premium C) Liquidity premium D) Taxability premium E) Default risk premium

E) Default risk premium

What is the principal amount of a bond that is repaid at the end of the loan term called? A) Coupon B) Market price C) Accrued price D) Dirty price E) Face value

E) Face value

The term structure of interest rates represents the relationship between which of the following? A) Nominal rates on risk-free and risky bonds B) Real rates on risk-free and risky bonds C) Nominal and real rates on default-free, pure discount bonds D) Market and coupon rates on default-free, pure discount bonds E) Nominal rates on default-free, pure discount bonds and time to maturity

E) Nominal rates on default-free, pure discount bonds and time to maturity

The Wood Shop generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship? A) Receivables turnover B) Equity multiplier C) Profit margin D) Return on assets E) Total asset turnover

E) Total asset turnover

Net working capital decreases when: A) a new 3-year loan is obtained with the proceeds used to purchase inventory. B) a credit customer pays his or her bill in full. C) depreciation increases. D) a long-term debt is used to finance a fixed asset purchase. E) a dividend is paid to current shareholders.

E) a dividend is paid to current shareholders.

The inflation premium: A) increases the real return. B) is inversely related to the time to maturity. C) remains constant over time. D) rewards investors for accepting interest rate risk. E) compensates investors for expected price increases.

E) compensates investors for expected price increases.

An unexpected decrease in market interest rates will cause a: A) coupon bond's current yield to increase. B) zero coupon bond's price to decrease. C) fixed-rate bond's coupon rate to decrease. D) zero coupon bond's current yield to decrease. E) coupon bond's yield to maturity to decrease.

E) coupon bond's yield to maturity to decrease.

Net working capital is defined as: A) the depreciated book value of a firm's fixed assets. B) the value of a firm's current assets. C) available cash minus current liabilities. D) total assets minus total liabilities. E) current assets minus current liabilities.

E) current assets minus current liabilities.

Financial leverage: A) increases as the net working capital increases. B) is equal to the market value of a firm divided by the firm's book value. C) is inversely related to the level of debt. D) is the ratio of a firm's revenues to its fixed expenses. E) increases the potential return to the stockholders.

E) increases the potential return to the stockholders.

Net working capital increases when: A) fixed assets are purchased for cash. B) inventory is purchased on credit. C) inventory is sold at cost. D) a credit customer pays for his or her purchase. E) inventory is sold at a profit.

E) inventory is sold at a profit.

The R in the Fisher effect formula represents the: A) current yield. B) real return. C) coupon rate. D) inflation rate. E) nominal return.

E) nominal return.

A call provision grants the bond issuer the: A) right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds. B) option to exchange the bonds for equity securities. C) right to automatically extend the bond's maturity date. D) right to repurchase the bonds on the open market prior to maturity. E) option of repurchasing the bonds prior to maturity at a prespecified price.

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

If a firm has an inventory turnover of 15, the firm: A) sells its entire inventory every 15 days. B) stocks its inventory only once every 15 days. C) delivers inventory to its customers every 15 days. D) sells its inventory by granting customers 15 days' of free credit. E) sells its entire inventory an average of 15 times each year.

E) sells its entire inventory an average of 15 times each year.

An upward-sloping term structure of interest rates indicates: A) the real rate of return is lower for short-term bonds than for long-term bonds. B) there is an indirect relationship between real interest rates and time to maturity. C) there is an indirect relationship between nominal interest rates and time to maturity. D) the nominal rate is declining as the real rate rises as the time to maturity increases. E) the nominal rate is increasing even though the real rate is constant as the time to maturity increases.

E) the nominal rate is increasing even though the real rate is constant as the time to maturity increases.