FINC 450 Midterm

A firm has sales of $68,400, costs of $42,900, interest paid of $2,100, and depreciation of $6,500. The tax rate is 34 percent. What is the value of the cash coverage ratio? A. 12.14 B. 15.24 C. 17.27 D. 23.41 E. 24.56

A. 12.14 Cash coverage ratio = (Sales - Costs)/Interest Paid Cash coverage ratio = ($68,400 - $42,900)/$2,100 = 12.14

Morristown Industries has an issue of preferred stock outstanding that pays a $12.60 dividend every year in perpetuity. What is the required return if this issue currently sells for $80 per share? A. 15.75 percent B. 16.72 percent C. 16.80 percent D. 16.86 percent E. 16.95 percent

A. 15.75 percent Required Return = Dividend/Current Price per Share R = $12.60/$80 = 15.75 percent

Depreciation: A. reduces both taxes and net income. B. increases the net fixed assets as shown on the balance sheet. C. reduces both the net fixed assets and the costs of a firm. D. is a noncash expense which increases the net income. E. decreases net fixed assets, net income, and operating cash flows.

A. reduces both taxes and net income.

Which one of the following is defined as a firm's short-term assets less its short-term liabilities? A. working capital B. debt C. investment capital D. net capital E. capital structure

A. working capital

What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A. zero growth B. dividend growth C. capital pricing D. earnings capitalization E. discounted dividend

B. dividend growth

Jefferson & Sons is evaluating a project that will increase annual sales by $138,000 and annual costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project? A. $11,220 B. $29,920 C. $38,720 D. $46,480 E. $46,620

C. $38,720 OCF = ($138,000 - $94,000)(1 - 0.32) + ($110,000/4)(0.32) = $38,720

What is the net present value of a project with the following cash flows if the required rate of return is 9 percent? A. -$1,574.41 B. -$1,208.19 C. $5,904.65 D. $6,029.09 E. $6,311.16

C. $5,904.65

How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend, the dividends increase by 2.5 percent annually, and you require a 10 percent rate of return? A. $9.29 B. $9.33 C. $9.57 D. $9.53 E. $9.59

C. $9.57 Payment for One Share = Annual Dividend * (1 + Dividends Increase)/ Rate of Return - Annual Dividend Payment for One Share = $0.70*(1 + 0.025)/0.10 - 0.025

It is easier to evaluate a firm using financial statements when the firm: A. is a conglomerate. B. has recently merged with its largest competitor. C. uses the same accounting procedures as other firms in the industry. D. has a different fiscal year than other firms in the industry. E. tends to have many one-time events such as asset sales and property acquisitions.

C. uses the same accounting procedures as other firms in the industry.

An increase in the depreciation expense will do which of the following? I. increase net income II. decrease net income III. increase the cash flow from assets IV. decrease the cash flow from assets A. I only B. II only C. I and III only D. II and III only E. II and IV only

D. II and III only

Which of the following questions are addressed by financial managers? I. How should a product be marketed?II. Should customers be given 30 or 45 days to pay for their credit purchases?III. Should the firm borrow more money? IV. Should the firm acquire new equipment? A. I and IV only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

D. II, III, and IV only

Which one of the following transactions occurs in the primary market? A. purchase of 500 shares of GE stock from a current shareholder B. gift of 100 shares of stock to a charitable organization C. gift of 200 shares of stock by a mother to her daughter D. a purchase of newly issued stock from AT&T E. IBM's purchase of GE stock

D. a purchase of newly issued stock from AT&T

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio? A. accounts payable B. cash C. inventory D. accounts receivable E. fixed assets

D. accounts receivable

The _____ tax rate is equal to total taxes divided by total taxable income. A. deductible B. residual C. total D. average E. marginal

D. average

A zero coupon bond: A. is sold at a large premium. B. pays interest that is tax deductible to the issuer when paid. C. can only be issued by the U.S. Treasury. D. has more interest rate risk than a comparable coupon bond. E. provides no taxable income to the bondholder until the bond matures.

D. has more interest rate risk than a comparable coupon bond.

The secondary market is best defined by which one of the following? A. market in which subordinated shares are issued and resold B. market conducted solely by brokers C. market dominated by dealers D. market where outstanding shares of stock are resold E. market where warrants are offered and sold

D. market where outstanding shares of stock are resold

A common-size income statement is an accounting statement that expresses all of a firm's expenses as percentage of: A. total assets. B. total equity. C. net income. D. taxable income. E. sales.

E. sales.

Who owns the NYSE? A. NYSE members B. specialists C. dealers D. floor brokers E. shareholders

E. shareholders

What is the quick ratio for 2009? A. 0.56 B. 0.60 C. 1.32 D. 1.67 E. 1.79

B. 0.60 Quick ratio = (Sub-total - Inventory)/Accounts Payable Quick ratio for 2009 = ($268,100 - $186,700)/$134,700 = 0.60

A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities? A. $2,050 B. $2,690 C. $4,130 D. $5,590 E. $5,860

E. $5,860 Current assets = $6,230 - $3,910 = $2,320 Current liabilities = $2,320 - $640 = $1,680 Total liabilities = $1,680 + $4,180 = $5,860

Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital? A. -$100 B. $300 C. $600 D. $1,700 E. $1,800

B. $300 Net working capital = total assets - fixed assets - short-term debt Net working capital = $4,900 - $3,200 - $1,400 = $300

Which of the following accounts are included in working capital management? I. accounts payable II. accounts receivable III. fixed assets IV. inventory A. I and II only B. I and III only C. II and IV only D. I, II, and IV only E. II, III, and IV only

D. I, II, and IV only

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions? A. discounted payback B. profitability index C. internal rate of return D. payback E. average accounting return

D. payback

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following? A. coupon rate B. face rate C. call rate D. yield to maturity E. coupon rate

D. yield to maturity

How many days of sales are in receivables? (Use 2009 values) A. 17.08 days B. 23.33 days C. 26.49 days D. 29.41 days E. 32.97 days

E. 32.97 days Accounts receivable turnover = Net sales/Accounts receivable Accounts receivable turnover for 2009 = $627,800/$56,700 = 11.07 Days' sales in receivables = 365/Accounts receivables turnover Days' sales in receivables for 2009 = 365/11.07 = 32.97

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: A. equilibrium. B. premium. C. discount. D. call price. E. spread.

E. spread.

Which one of the following costs was incurred in the past and cannot be recouped? A. incremental B. side C. sunk D. opportunity E. erosion

C. sunk

The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond? A. increase the coupon rate B. decrease the coupon rate C. increase the market price D. decrease the market price E. increase the time period

D. decrease the market price

An indenture is: A. another name for a bond's coupon. B. the written record of all the holders of a bond issue. C. a bond that is past its maturity date but has yet to be repaid. D. a bond that is secured by the inventory held by the bond's issuer. E. the legal agreement between the bond issuer and the bondholders.

E. the legal agreement between the bond issuer and the bondholders.

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? A. altering B. cumulative voting C. straight voting D. indenture agreement E. voting by proxy

E. voting by proxy

You are considering a project with an initial cost of $7,500. What is the payback period for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next four years, respectively? A. 3.21 years B. 3.28 years C. 3.36 years D. 4.21 years E. 4.29 years

A. 3.21 years

Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years. The project has a 12 percent required rate of return and an initial cost of $6,000. What is the discounted payback period? A. 3.72 years B. 3.91 years C. 4.26 years D. 4.38 years E. never

A. 3.72 years

Miller Brothers Hardware paid an annual dividend of $0.95 per share last month. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 13 percent rate of return, how much are you willing to pay to purchase one share of this stock today? A. $9.23 B. $9.37 C. $9.67 D. $9.72 E. $9.88

B. $9.37 Purchase of One Share = Annual Dividend * (1 + Dividend Increase)/Rate of Return - Dividend Increase Purchase for One Share = $0.95 * (1 + 0.026)/0.13-0.026

Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year? A. -$210 B. $990 C. $1,610 D. $1,910 E. $2,190

B. $990 Net income = Dividends + Retained Earnings Net income = $1,300 + (-$310) = $990

Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per bond if the face value is $1,000? A. $989.70 B. $991.47 C. $996.48 D. $1,002.60 E. $1,013.48

B. $991.47 N = 6*2 I/Y = 7.68/2 PV = PMT = 75/2 FV = 1,000 *remember that the payment are semiannual

During the year, Kitchen Supply increased its accounts receivable by $130, decreased its inventory by $75, and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flows for the year? A. $245 use of cash B. $165 use of cash C. $95 use of cash D. $95 source of cash E. $165 source of cash

C. $95 use of cash Net use of cash = Accounts receivable + Accounts payable - Inventory Net use of cash = $130 + $40 - $75

Why should financial managers strive to maximize the current value per share of the existing stock? A. doing so guarantees the company will grow in size at the maximum possible rate B. doing so increases employee salaries C. because they have been hired to represent the interests of the current shareholders D. because this will increase the current dividends per share E. because managers often receive shares of stock as part of their compensation

C. because they have been hired to represent the interests of the current shareholders

Which one of the following business types is best suited to raising large amounts of capital? A. sole proprietorship B. limited liability company C. corporation D. general partnership E. limited partnership

C. corporation

Which one of the following represents the most liquid asset? A. $100 account receivable that is discounted and collected for $96 today B. $100 of inventory which is sold today on credit for $103 C. $100 of inventory which is discounted and sold for $97 cash today D. $100 of inventory that is sold today for $100 cash E. $100 accounts receivable that will be collected in full next week

D. $100 of inventory that is sold today for $100 cash

At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital? A. -$19,679 B. -$11,503 C. -$9,387 D. $1,809 E. $21,903

E. $21,903 Change in net working capital = (BOY Current Assets - BOY Current Liabilities) - ( EOY Current Assets - EOY Current Liabilities) Change in net working capital = ($122,418 - $103,718) - ($121,306 - $124,509) = $21,903

What is the amount of the dividends paid for 2009? A. $11,100 B. $15,000 C. $32,600 D. $41,200 E. $45,100

E. $45,100 Dividends paid = Net income - (Retained earnings from Current Year - Retained earnings from Past Year) Dividends paid = $56,200 - ($131,800 - $120,700) = $45,100

Big Guy Subs has net income of $150,980, a price-earnings ratio of 12.8, and earnings per share of $0.87. How many shares of stock are outstanding? A. 13,558 B. 14,407 C. 165,523 D. 171,000 E. 173,540

E. 173,540 Number of shares = Net Income/Earning Per Share Number of shares = $150,980/$0.87 = 173,540

Which of the following should a financial manager consider when analyzing a capital budgeting project? I. project start up costs II. timing of all projected cash flows III. dependability of future cash flows IV. dollar amount of each projected cash flow A. I and IV only B. I, II, and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

Greenbrier Industrial Products' bonds have a 7.60 percent coupon and pay interest annually. The face value is $1,000 and the current market price is $1,062.50 per bond. The bonds mature in 16 years. What is the yield to maturity? A. 6.94 percent B. 7.22 percent C. 7.46 percent D. 7.71 percent E. 7.80 percent

A. 6.94 percent N = 16 (Number of Periods) I/Y = (Interest Rate) PV = -1.062.50 (Present Value) PMT = 76 (Payment Amount) FV = 1,000 (Future Value)

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule? A. Project A only B. Project B only C. Both A and B D. Neither A nor B E. Answer cannot be determined based on the information given.

A. Project A only

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

A. broker.

Which one of the following is an advantage of the average accounting return method of analysis? A. easy availability of information needed for the computation B. inclusion of time value of money considerations C. the use of a cutoff rate as a benchmark D. the use of pre-tax income in the computation E. use of real, versus nominal, average income

A. easy availability of information needed for the computation

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm? A. net present value B. discounted payback C. internal rate of return D. profitability index E. payback

A. net present value

Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $280,000. Today, that lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.47 million. What amount should be used as the initial cash flow for this project? A. -$1,470,000 B. -$1,810,000 C. -$1,825,000 D. -$1,845,000 E. -$1,860,000

B. -$1,810,000 CF0 = -$340,000 - $1,470,000 = -$1,810,000

What is the cash coverage ratio for 2009? A. 9.43 B. 10.53 C. 11.64 D. 11.82 E. 12.31

B. 10.53 Cash coverage ratio = (Earnings before Interest and taxes + Depreciation)/Interest Paid Cash coverage ratio = ($95,200 + $11,200)/$10,100 = 10.53

Global Communications has a 7 percent, semiannual coupon bond outstanding with a current market price of $1,023.46. The bond has a par value of $1,000 and a yield to maturity of 6.72 percent. How many years is it until this bond matures? A. 12.26 years B. 12.53 years C. 18.49 years D. 24.37 years E. 25.05 years

B. 12.53 years N = I/Y = 6.72/2 PV = -1,023.46 PMT = 70/2 FV = 1,000 *remember that the payment are semiannual

The next dividend payment by Hillside Markets will be $2.35 per share. The dividends are anticipated to maintain a 4.5 percent growth rate forever. The stock currently sells for $65 per share. What is the dividend yield? A. 3.20 percent B. 3.62 percent C. 3.81 percent D. 4.50 percent E. 4.81 percent

B. 3.62 percent Dividend yield = Dividend Payment/Current Stock Price Dividend yield = $2.35/$65

Which one of the following statements is correct? A. A general partnership is legally the same as a corporation. B. Both sole proprietorship and partnership income is taxed as individual income. C. Partnerships are the most complicated type of business to form. D. All business organizations have bylaws. E. Only firms organized as sole proprietorships have limited lives.

B. Both sole proprietorship and partnership income is taxed as individual income.

Which of the following are negative covenants that might be found in a bond indenture? I. The company shall maintain a current ratio of 1.10 or better. II. No debt senior to this issue can be issued. III. The company cannot lease any major assets without approval by the lender. IV. The company must maintain the loan collateral in good working order. A. I and II only B. II and III only C. III and IV only D. II, III, and IV only E. I, II, and III only

B. II and III only

Which of the following ratios are measures of a firm's liquidity? I. cash coverage ratio II. interval measure III. debt-equity ratio IV. quick ratio A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and III only E. I, II, III, and IV

B. II and IV only

Which of the following represent cash outflows from a corporation? I. issuance of securities II. payment of dividends III. new loan proceeds IV. payment of government taxes A. I and III only B. II and IV only C. I and IV only D. I, II, and IV only E. II, III, and IV only

B. II and IV only

An investment has the following cash flows and a required return of 13 percent. Based on IRR, should this project be accepted? Why or why not? A. No; The IRR exceeds the required return by about 0.06 percent. B. No; The IRR is less than the required return by about 1.53 percent. C. Yes; The IRR exceeds the required return by about 0.06 percent. D. Yes; The IRR exceeds the required return by about 1.53 percent. E. Yes; The IRR is less than the required return by about 0.06 percent.

B. No; The IRR is less than the required return by about 1.53 percent.

The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. B. based on historical cost. C. generally greater than the market value when fixed assets are included. D. more of a financial than an accounting valuation. E. adjusted to the market value whenever the market value exceeds the stated book value.

B. based on historical cost.

A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following? A. zero coupon B. callable C. senior D. collateralized E. unsecured

B. callable

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value? A. real estate investment B. good reputation of the company C. equipment owned by the firm D. money due from a customer E. an item held by the firm for future sale

B. good reputation of the company

Mason Farms purchased a building for $729,000 eight years ago. Six years ago, repairs were made to the building which cost $136,000. The annual taxes on the property are $11,000. The building has a current market value of $825,000 and a current book value of $494,000. The building is totally paid for and solely owned by the firm. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building? A. $494,000 B. $582,000 C. $825,000 D. $865,000 E. $953,000

C. $825,000 Opportunity cost = $825,000

Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of $208,400, and accounts receivable of $74,100. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit? A. 74.19 days B. 84.76 days C. 121.07 days D. 138.46 days E. 151.21 days

C. 121.07 days Inventory Turnover = Cost of Goods Sold/Inventory Inventory turnover = $628,300/$208,400 = 3.014875 Days in Inventory = 365/Inventory Turnover Days in inventory = 365/3.014875 = 121.07 days

The preferred stock of Rail Lines, Inc., pays an annual dividend of $12.25 and sells for $59.70 a share. What is the rate of return on this security? A. 19.38 percent B. 19.63 percent C. 20.52 percent D. 20.72 percent E. 20.84 percent

C. 20.52 percent Rate of return = Annual Dividend/Price of Share Rate of return = $12.25/$59.70

Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4. The bonds have a 5 percent coupon rate. What is the current yield on these bonds? A. 4.67 percent B. 4.78 percent C. 5.08 percent D. 5.33 percent E. 5.54 percent

C. 5.08 percent Current Yield = (0.05*1,000)/(0.984*1,000)

You are considering a project with conventional cash flows and the following characteristics: Which of the following statements is correct given this information? I. The discount rate used in computing the net present value was less than 11.63 percent. II. The discounted payback period must be more than 2.98 years. III. The discount rate used in the computation of the profitability ratio was 11.63 percent. IV. This project should be accepted as the internal rate of return exceeds the required return. A. I and II only B. III and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

C. I, II, and IV only

Denver Shoppes will pay an annual dividend of $1.46 a share next year with future dividends increasing by 4.2 percent annually. What is the market rate of return if the stock is currently selling for $42.10 a share? A. 6.55 percent B. 7.13 percent C. 7.46 percent D. 7.67 percent E. 8.29 percent

D. 7.67 percent Stocks Current Selling Rate = Annual Dividend/Market rate of return - Dividends Increase $42.10 = $1.46/Market rate of return - 0.042

An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate A. I and II only B. III and IV only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV

D. I, II, and IV only

Net working capital: A. can be ignored in project analysis because any expenditure is normally recouped at the end of the project. B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. C. is rarely affected when a new product is introduced. D. can create either a cash inflow or a cash outflow at time zero of a project. E. is the only expenditure where at least a partial recovery can be made at the end of a project.

D. can create either a cash inflow or a cash outflow at time zero of a project.

Which one of following is the rate at which a stock's price is expected to appreciate? A. current yield B. total return C. dividend yield D. capital gains yield E. coupon rate

D. capital gains yield

Which one of the following is a capital structure decision? A. determining which one of two projects to accept B. determining how to allocate investment funds to multiple projects C. determining the amount of funds needed to finance customer purchases of a new product D. determining how much debt should be assumed to fund a project E. determining how much inventory will be needed to support a project

D. determining how much debt should be assumed to fund a project

Noncash items refer to: A. accrued expenses. B. inventory items purchased using credit. C. the ownership of intangible assets such as patents. D. expenses which do not directly affect cash flows. E. sales which are made using store credit

D. expenses which do not directly affect cash flows.

Which of the following represent problems encountered when comparing the financial statements of two separate entities? I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business. II. The operations of the two firms may vary geographically. III. The firms may use differing accounting methods. IV. The two firms may be seasonal in nature and have different fiscal year ends. A. I and II only B. II and III only C. I, III, and IV only D. I, II, and III only E. I, II, III, and IV

E. I, II, III, and IV

A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond? I. discounted price II. premium price III. yield-to-maturity that exceeds the coupon rate IV. yield-to-maturity that is less than the coupon rate A. III only B. I and III only C. I and IV only D. II and III only E. II and IV only

E. II and IV only

Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 14 percent? Why or why not? A. Yes; The PI is 0.96. B. Yes; The PI is 0.80. C. Yes; The PI is 1.08. D. No; The PI is 0.96. E. No; The PI is 0.80.

E. No; The PI is 0.80.

A project has a net present value of zero. Which one of the following best describes this project? A. The project has a zero percent rate of return. B. The project requires no initial cash investment. C. The project has no cash flows. D. The summation of all of the project's cash flows is zero. E. The project's cash inflows equal its cash outflows in current dollar terms.

E. The project's cash inflows equal its cash outflows in current dollar terms.

Which one of the following statements is correct? A. The capital gains yield is the annual rate of change in a stock's price. B. Preferred stocks have constant growth dividends. C. A constant dividend stock cannot be valued using the dividend growth model. D. The dividend growth model can be used to compute the current value of any stock. E. An increase in the required return will decrease the capital gains yield.

A. The capital gains yield is the annual rate of change in a stock's price.

A business created as a distinct legal entity and treated as a legal "person" is called a: A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership. E. unlimited liability company.

A. corporation

Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock B. $1,200 paid to repair a machine last year C. $20,000 project that must be forfeited if another project is accepted D. $4,500 reduction in current shoe sales if a store commences selling sandals E. $1,800 increase in comic book sales if a store commences selling puzzles

B. $1,200 paid to repair a machine last year

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: A. accepted because the internal rate of return is positive. B. accepted because the profitability index is greater than 1. C. accepted because the profitability index is negative. D. rejected because the internal rate of return is negative. E. rejected because the net present value is negative.

B. accepted because the profitability index is greater than 1.

The interest rate risk premium is the: A. additional compensation paid to investors to offset rising prices. B. compensation investors demand for accepting interest rate risk. C. difference between the yield to maturity and the current yield. D. difference between the market interest rate and the coupon rate. E. difference between the coupon rate and the current yield.

B. compensation investors demand for accepting interest rate risk.

Which one of the following is a capital budgeting decision? A. determining how many shares of stock to issue B. deciding whether or not to purchase a new machine for the production line C. deciding how to refinance a debt issue that is maturing D. determining how much inventory to keep on hand E. determining how much money should be kept in the checking account

B. deciding whether or not to purchase a new machine for the production line

Which one of the following is a working capital management decision? A. determining the amount of equipment needed to complete a job B. determining whether to pay cash for a purchase or use the credit offered by the supplier C. determining the amount of long-term debt required to complete a project D. determining the number of shares of stock to issue to fund an acquisition E. determining whether or not a project should be accepted

B. determining whether to pay cash for a purchase or use the credit offered by the supplier

Ratios that measure a firm's financial leverage are known as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. book value

B. long-term solvency

The length of time a firm must wait to recoup the money it has invested in a project is called the: A. internal return period. B. payback period. C. profitability period. D. discounted cash period. E. valuation period.

B. payback period.

The liquidity premium is compensation to investors for: A. purchasing a bond in the secondary market. B. the lack of an active market wherein a bond can be sold for its actual value. C. acquiring a bond with an unfavorable tax status. D. redeeming a bond prior to maturity. E. purchasing a bond that has defaulted on its coupon payments.

B. the lack of an active market wherein a bond can be sold for its actual value.

Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. ability to raise capital IV. unlimited firm life A. I and II only B. III and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

C. I, III, and IV only

You are considering an investment with the following cash flows. If the required rate of return for this investment is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not? A. Yes; The IRR exceeds the required return. B. Yes; The IRR is less than the required return. C. No; The IRR is less than the required return. D. No; The IRR exceeds the required return. E. You cannot apply the IRR rule in this case.

E. You cannot apply the IRR rule in this case. Since the cash flow direction changes twice, there are two IRRs. Thus, the IRR rule cannot be used to determine acceptance or rejection.

Which one of the following is a use of cash? A. increase in notes payable B. decrease in inventory C. increase in long-term debt D. decrease in accounts receivables E. decrease in common stock

E. decrease in common stock

Activities of a firm which require the spending of cash are known as: A. sources of cash. B. uses of cash. C. cash collections. D. cash receipts. E. cash on hand.

B. uses of cash.

Webster & Moore paid $139,000, in cash, for a piece of equipment 3 years ago. At the beginning of last year, the company spent $21,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $89,000 from a firm that would like to purchase it. Webster & Moore is debating whether to sell the equipment or to expand its operations so that the equipment can be used. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project? A. $0 B. $21,000 C. $89,000 D. $110,000 E. $160,000

C. $89,000 Relevant value = $89,000

The U.S. government coding system that classifies a firm by the nature of its business operations is known as the: A. NASDAQ 100. B. Standard & Poor's 500. C. Standard Industrial Classification code. D. Governmental ID code. E. Government Engineered Coding System.

C. Standard Industrial Classification code.

Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct? A. The bonds will become discount bonds if the market rate of interest declines. B. The bonds will pay 10 interest payments of $60 each. C. The bonds will sell at a premium if the market rate is 5.5 percent. D. The bonds will initially sell for $1,030 each. E. The final payment will be in the amount of $1,060.

C. The bonds will sell at a premium if the market rate is 5.5 percent.

Jasper United had sales of $21,000 in 2008 and $24,000 in 2009. The firm's current accounts remained constant. Given this information, which one of the following statements must be true? A. The total asset turnover rate increased. B. The days' sales in receivables increased. C. The net working capital turnover rate increased. D. The fixed asset turnover decreased. E. The receivables turnover rate decreased.

C. The net working capital turnover rate increased.

A project's average net income divided by its average book value is referred to as the project's average: A. net present value. B. internal rate of return C. accounting return. D. profitability index. E. payback period.

C. accounting return.

Bonds issued by the U.S. government: A. are considered to be free of interest rate risk. B. generally have higher coupons than those issued by an individual state. C. are considered to be free of default risk. D. pay interest that is exempt from federal income taxes. E. are called "munis".

C. are considered to be free of default risk.

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? A. income statement B. creditor's statement C. balance sheet D. statement of cash flows E. dividend statement

C. balance sheet

A bond that is payable to whomever has physical possession of the bond is said to be in: A. new-issue condition. B. registered form. C. bearer form. D. debenture status. E. collateral status.

C. bearer form.

A bond's coupon rate is equal to the annual interest divided by which one of the following? A. call price B. current price C. face value D. clean price E. dirty price

C. face value

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a: A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership. E. limited liability company.

C. general partnership

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: A. independent. B. interdependent. C. mutually exclusive. D. economically scaled. E. operationally distinct.

C. mutually exclusive.

Municipal bonds: A. are totally risk-free. B. generally have higher coupon rates than corporate bonds. C. pay interest that is federally tax-free. D. are rarely callable. E. are free of default-risk.

C. pay interest that is federally tax-free.

Which two methods of project analysis are the most biased towards short-term projects? A. net present value and internal rate of return B. internal rate of return and profitability index C. payback and discounted payback D. net present value and discounted payback E. discounted payback and profitability index

C. payback and discounted payback

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A. providing both ketchup and mustard for its customer's use B. repairing the roof of the hot dog stand because of water damage C. selling fewer hot dogs because hamburgers were added to the menu D. offering French fries but not onion rings E. losing sales due to bad weather

C. selling fewer hot dogs because hamburgers were added to the menu

Which one of the following best describes the concept of erosion? A. expenses that have already been incurred and cannot be recovered B. change in net working capital related to implementing a new project C. the cash flows of a new project that come at the expense of a firm's existing cash flows D. the alternative that is forfeited when a fixed asset is utilized by a project E. the differences in a firm's cash flows with and without a particular project

C. the cash flows of a new project that come at the expense of a firm's existing cash flows

Nelson Mfg. owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that originally cost $159,000. The facility itself cost $1,460,000 to build. As of now, the book value of the land and the facility are $159,000 and $458,000, respectively. The firm owes no debt on either the land or the facility at the present time. The firm received a bid of $1,500,000 for the land and facility last week. The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market. If the firm was to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis? A. $0 B. $617,000 C. $1,460,000 D. $1,500,000 E. $1,619,000

D. $1,500,000 Relevant cost = $1,500,000

Pro forma statements for a proposed project should: I. be compiled on a stand-alone basis. II. include all the incremental cash flows related to the project. III. generally exclude interest expense. IV. include all project-related fixed asset acquisitions and disposals. A. I and II only B. II and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

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

E. I, II, III, and IV

Which one of the following statements is correct? A. The risk-free rate represents the change in purchasing power. B. Any return greater than the inflation rate represents the risk premium. C. Historical real rates of return must be positive. D. Nominal rates exceed real rates by the amount of the risk-free rate. E. The real rate must be less than the nominal rate given a positive rate of inflation

E. The real rate must be less than the nominal rate given a positive rate of inflation

You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 8.5 percent? What if the discount rate is 13 percent? A. accept project A as it always has the higher NPV B. accept project B as it always has the higher NPV C. accept A at 8.5 percent and B at 13 percent D. accept B at 8.5 percent and A at 13 percent E. accept B at 8.5 percent and neither at 13 percent

E. accept B at 8.5 percent and neither at 13 percent

A stakeholder is: A. a person who owns shares of stock. B. any person who has voting rights based on stock ownership of a corporation. C. a person who initially founded a firm and currently has management control over that firm. D. a creditor to whom a firm currently owes money. E. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

E. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

Which one of the following is a source of cash? A. increase in accounts receivable B. decrease in common stock C. decrease in long-term debt D. decrease in accounts payable E. decrease in inventory

E. decrease in inventory

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the: A. trustee relationships. B. bylaws. C. legal bounds. D. "plain vanilla" conditions. E. protective covenants

E. protective covenants