chapter 1- 3
An S corporation earns $9.10 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $5.00 dividend?
A) $9.10 × 36% = $3.28
. Put the following steps of the financial cycle in the correct order. I. Money flows to companies who use it to fund growth through new products. II. People invest and save their money. Money flows back to savers and investors
B) II, I, and III
Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct?
Janeʹs liability for the firmʹs debts consists solely of her investment in the firm.
Which of the following statements regarding the balance sheet is INCORRECT?
The balance sheet reports liabilities on the left-hand side.
The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board?
United States
What is the main problem in using a balance sheet to provide an accurate assessment of the value of a companyʹs equity?
Valuable assets such as the companyʹs reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet.
. ) Which of the following statements is INCORRECT based on the time value of money?
We refer to (1 - rf) as the interest rate factor for risk-free cash flows.
Which of the following statements regarding arbitrage and security prices is INCORRECT?
When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.
A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?
as an outflow under investment activities
The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________.
auditor
It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.
false
Partnerships are the most common type of business firms in the world
false
Raising new capital by issuing bonds is an example of a commercial banking activity
false
The balance sheet shows the assets, liabilities, and stockholdersʹ equity of a firm over a given length of time.
false
The fact that corporationsʹ shares are easily traded within the market has a net effect of acting as a disincentive for managers to favor the interests of shareholders over their own interests
false
The management of public companies is not legally required to disclose any off-balance sheet transactions
false
The shares of private corporations are traded on a stock market
false
To calculate a cash flowʹs present value (PV), you must compound it.
false
To enable costs and benefits to be compared, they are typically converted into cash value at the time the benefit is received.
false
Which of the following is NOT an operating expense?
interest expense
A U.S.-based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors is the most relevant when analyzing this decision?
the cost of the courtside advertising at the tennis matches
What is a firmʹs gross profit?
the difference between sales revenues and the costs
. What is the bid-ask spread?
the difference in price available for an immediate sale of a stock and the immediate purchase of the stock
The notes to the financial statements would LEAST likely be used for which of the following purposes?
to disclose the financial implications of any off-balance sheet transactions
Which of the following best describes why a firm produces financial statements?
to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business
Gross profit is calculated as ________.
total sales - cost of sales
) In general, if an action increases a firmʹs value by providing benefits with a value greater than any costs involved, then that action is good for the firmʹs investors
true
) Stock markets provide liquidity for a firmʹs shares
true
) The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly?
true
A firmʹs statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period
true
Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors
true
Costs and benefits must be put in common terms if they are to be compared
true
Dollar amounts received at different points in time cannot be compared in absolute terms
true
If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit.
true
Price-earnings ratios tend to be high for fast-growing firms
true
Stockholdersʹ equity is the difference between a firmʹs assets and liabilities, as shown on the balance sheet.
true
The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market.
true
The one-year discount factor is the discount at which we can purchase money in the future, one year from now
true
Owen expects to receive $30,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 8.2%, how much money can he borrow from the bank on the basis of this information?
$30,000/1.082 = $27,726
Stella deposits $4500 in a savings account at a bank that offers interest of 4.7% on such accounts. What is the value of the money in her savings account in one yearʹs time?
$4500 × 1.047 = $4712
You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it?
. C) (-57 × 1000) + (900 × 63) = -$300
An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made?
.Yes, because the investment will yield $82,840 more than putting the money in a bank. Answer: D Explanation: D) $190,000 × 1.09 = $207,100; $289,940 - $207,100 = $82,840
A company intends to install new management software for its warehouse. The software will cost $47,000 to buy and will cost an additional $148,000 to install and implement. It is anticipated that it will save the company $44,000 through reductions in staff and $69,000 in general inventory costs in the first year after installation. What is the total benefit to the company in the first year if they choose to install the software?
C) $44,000 + $69,000 = $113,000
) Which of the following balance sheet equations is INCORRECT?
C) Assets - Current liabilities = Long-term liabilities
Which of the following organization forms has the most revenue
C) C corporation
If money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment?
C) Calculate the N using the rule of 72. Then, N = 72/8 = 9 years.
. A C corporation earns $4.30 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $3.00 dividend?
C) Corporate tax = $4.30 × 35% = $1.51 ; Personal tax = $3.00 × 20% = $0.60 Total = $1.51 + $0.60 = $2.11
A C corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $6.00 dividend?
C) Corporate tax = $8.30 × 39% = $3.24 , Personal tax = $6 × 15% = $0.90 Total = $3.24 + $0.90 = $4.14
In which of the following ways is a limited liability company like a corporation
C) Its ownersʹ liability is restricted to their investment
Sara wants to have $600,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $600,000 in 20 years?
Calculate the PV with FV = $600,000, N = 20, and interest = 8%, which = $128,729.
What is the present value (PV) of $90,000 received six years from now, assuming the interest rate is 5% per year?
Calculate the PV with FV = $90,000, interest = 5%, and N = 6, which = $67,159.39.
Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?
Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.
You have a used CD store. At an estate sale, you can purchase 230 compact discs for $356.5. You believe you could sell the CDs for an average of $3.05 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store?
D) ($3.05 × 230) - $356.5 = $701.5 - $356.5 = $345
Stella places a market order with her broker to buy 1,000 shares of OneWorld Corp. The broker buys 1,000 shares at $15.80 each, and sells them to Stella at $15.95 each. He also charges a commission of $12.00. What is bid-ask spread in this case?
D) (15.95 - 15.80) × 1,000 = $150
Which of the following is the overarching principle that a financial manager should follow when making decisions?
Decisions should increase the value of the firm to its investors
Financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firmʹs assets and the financing of those assets, and a prediction of the firmʹs future performance.
FALSE
In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.
FALSE
) Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steveʹs major error in reasoning when making this decision?
He ignores the fact that the costs and benefits of the investment are not stated in the same terms.
Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet?
It adds all non-cash entries related to a firmʹs operating activities.
Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?
It includes cash inflows from services rendered.
Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom?
Readers of even fraudulent financial statements can spot signs of a firmʹs financial health, if those statements are read fully and with care.
ʺIf equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets.ʺ What do we call the above statement
The Law of One Price
Which of the following is typically the major factor in limiting the growth of sole proprietorships?
The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts.
Which of the following best describes why the left and right sides of a balance sheet are equal?
The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is the difference between the assets and the liabilities
Walgreens Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreens Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 100 shares?
Yes, buy on NASDAQ and sell on NYSE, make $25 B) Yes, buy 100 shares @ 48.50 and sell 100 shares @ 48.75 = $25.00
A wholesale food retailer is offered $15.60 per two-layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $2.40 per carton, for the first 1000 cartons, and $1.90 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer
Yes, the costs are $2000 less than the benefits.
Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats?
You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price
Which of the following firms would be expected to have a high ROE?
a grocery store chain that has very high turnover, selling many multiples of its assets per year
What is a competitive market?
a market in which a good can be bought and sold at the same price
. Which of the following is a major duty of a financial manager? I. To make investment decisions II. To make financing decisions . III. To manage cash flow from operating activities
all of the above
.What is a firmʹs net income?
all of the above
Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?
by forcing companies to audit financial statements they release
WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldComʹs financial statements more attractive to investors?
by raising its reported earnings
The major components of stockholdersʹ equity are ________.
common stock, paid-in surplus, and retained earnings
To compute the future value of a cash flow, you must ________.
compound it
.Which of the following is NOT considered to be an operating expense on the income statement?
corporate taxes
Over four-fifths of all U.S. business revenue is generated by which type of firms?
corporations
Which ratio would you use to measure the financial health of a firm by assessing that firmʹs leverage?
debt-equity or equity multiplier ratio
Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements
false
The principal goal of a financial manager is to maximize the wealth of the stockholders.
true
The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value.
true
Whenever a good trades in a competitive market, the price determines the value of the good.
true
What is the present value (PV) of $50,000 received twenty years from now, assuming the interest rate is 6% per year?
.Calculate the PV with FV = $50,000, interest = 6%, and N = 20, which = $15,590.24.
If the rate of interest (r) is 9%, then you should be indifferent about receiving $750 in one year or ________.
Benefit = $750/($1.09 in one year / $1.00 today) = $688.07
An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note that very similar cars are selling on the open market for $87,000. You donʹt care for classic cars and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac?
$35,000, since this is the difference between purchase and resale price of the Cadillac.
A coin collector treasures his 1969-S doubled die obverse Lincoln cent because he found it in his pocket change, rather than purchasing it. He can sell it on the open market for $35,000, but would only sell it for at least twice that price, due to its sentimental value to him. It is anticipated that the coin will increase in market value in the foreseeable future. What is the value of the coin?
$35,000, since this is the price that the coin would fetch on the open market
. Why should you approach every problem by drawing a timeline?
A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.
If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today or ________.
$500.00 × (1.08) = $540.00
Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio
($1400 - $218 ) / $504 = 2.35
If $432 invested today yields $450 in a yearʹs time, what is the discount factor
) $432/$450 = 0.96
If the one-year discount factor is equal to 0.94340, the interest must be equal to ________,
) 1 / (1 + r) = 0.94340 1 =(1+r)×0.94340 1 = 0.94340 + 0.94340r 1 - 0.94340 = 0.94340r 0.05660 = 0.94340r r = 0.05660 / 0.94340 = 0.06 = 6%
A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000 bushels, if it also buys 5,000 bushels of wheat at $16.00 per bushel. However, the manufacturer does not use any barley in its products, and currently needs 20,000 bushels of wheat. If the current market price of barley is $3.80 per bushel and that of wheat is $15.80 per bushel, should this opportunity be taken, and why?
) Because the value of the opportunity is positive, the opportunity should be taken.
Which of the stock markets listed below is the smallest, as judged by trading volume?
) Deutsche Börse
You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow
) It will cause the present value to fall
A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?
) Market cap = $22.15 × 118 = $2.614 billion; Book value of equity = $2.614 / 4.2 = 0.622 billion; Debt = $0.622 × 3.2 = 1.991 ; Enterprise value = $2.614 + $1.991 - $0.800 = $3.805 billion
. Why is a stock exchange like NASDAQ considered a secondary market?
) Shares sold on it are exchanged between investors without any involvement of the issuing corporation.
Samantha has holdings of 250 troy ounces of platinum, currently valued at $820 dollars per ounce. She estimates that the price of platinum will rise to $869.20 per ounce in the next year. If the interest rate is 12%, should she sell the platinum today?
) Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today.
A limited liability company is essentially ________.
) a limited partnership without a general partner
. ) What is the most common way that agency conflict problems are addressed in most corporations?
) by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders
Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity?
. 13,000,000 × ($2.3 - $2.00) = $3,900,000
. Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers?
. A) Bill chooses to pursue a risky investment for the companyʹs funds because his compensation will substantially rise if it succeeds.
. Which of the following statements is FALSE about valuing cash at different points in time? . A) Finding the present value (PV) and compounding are the same. . B) A dollar today and a dollar in one year are not equivalent. . C) If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. D) The equivalent value of two cash flows at two different points in time is sometimes referred to
. A) Finding the present value (PV) and compounding are the same.
Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most
. All buyers and sellers would have the same value for 250 pounds of uranium 308.
Why is the stock price of a company an indication of the performance of the companyʹs senior managers?
. B) In general, people want to invest in a well-managed corporation, which will drive up the price of shares.
. 13) Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?
. B) In most investment projects, costs are incurred up front, but benefits are received in the future.
A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations?
. B) New models will require a lot of money to develop and bring to market before they generate any revenue.
. A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case?
. B) by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors
Which of the following is NOT a reason why a firmʹs financial managers must take great care when making investment decisions? . A) These investment decisions determine whether the firm will add value for its owners. . B) These investments determine the long-term directions in which the company may move. . C) These investment decisions determine the corporationʹs mix of debt and equity. . D) These investment decisions typically involve substantial costs which must be carefully weighed against their potential benefits.
. C) These investment decisions determine the corporationʹs mix of debt and equity.
. ) Which of the following statements is FALSE about valuing cash at different points in time? . A) The process of moving forward along the timeline to determine a cash flowʹs value in the future is known as compounding. . B) The effect of earning interest on interest is known as compound interest. . C) It is only possible to compare or combine values at the same point in time. . D) A dollar in the future is worth more than a dollar today.
. D) A dollar in the future is worth more than a dollar today.
A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met?
. D) In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.
Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property?
. D) It is a legally defined, artificial entity that is separate from its owners.
. In which of the following relationships is an agency conflict problem LEAST likely to arise? . A) the relationship between a hire-car company and the persons who hire that companyʹs cars regarding the treatment of those cars . B) the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks . C) the relationship between a restaurateur and the suppliers of produce to that restaurant regarding the freshness of the produce supplied . D) the relationship between a driver and the passengers in a car regarding the safe driving of that car
. D) the relationship between a driver and the passengers in a car regarding the safe driving of that car
) What is the most important duty of a firmʹs financial officer
. D) to make investment decisions
A 2013 Toyota Camry can be bought in Buffalo, NY, for $18,620. The same model Camry can be purchased across the Canadian border in Hamilton, ON. If cars could be freely traded across the border, what would be the expected price of a 2013 Toyota Camry in Hamilton in Canadian dollars, given that $1 U.S. is equal to $0.92 Canadian?
. The expected price in Hamilton in Canadian dollars is $18,620 ∗ 0.92 = $17,130
) What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership?
. The owners of a limited liability company can take an active role in running the company.
Which of the following best describes the valuation principle?
. The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm.
A backhoe can dig 180 feet of trench per hour and costs $720 per hour to hire and operate. A ditch digger can dig 6 feet of trench per hour. Based on this information, what is the most a ditch digger can charge for per hour when digging ditches?
. To be competitive, the ditch digger could not charge more than what the backhoe costs; cost per feet of ditch for backhoe = $720 /180 < = $4.0; charge per hour by ditch digger = $4.0 × 6 = $24.0
How can we convert the value of money from one point in time to another
. using the current interest rate
What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 12% per year?
.Calculate the FV with PV = $50,000, interest = 12%, and N = 30, which = $1,497,996.11.
What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 6% per year?
.Calculate the FV with PV = $50,000, interest = 6%, and N = 30, which = $287,174.56.
GenCorp. has a total debt of $140 million and stockholdersʹ equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorpʹs market debt-equity ratio?
.D) 140 / ($4.00 × 26) = 1.35
Which of the following best describes why the Valuation Principle is a key concept in making financial decisions?
.It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.
Which of the following is NOT one of the financial statements that must be produced by a public company?
.the statement of activities
What are the four financial statements that all public companies must produce?
1. balance sheet 2. income statement 3. statement of cash flows 4. statement of stockholdersʹ equity
U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?
10-K
An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows?
120/(1.04) + 200/(1.042) = 115.38 + 184.91 = 300.29
A company decides to close down its plastics division. It has on hand 20 tons of styrene monomer, a raw material that has a market price of $800 per ton, which had been originally purchased at $750 per ton. Given that the company has no use for the styrene monomer, and that it would cost the company $5200 to store it, what is the total value of the 20 tons of styrene monomer to the company?
20 × 800 = $16,000
You are watching TV late one night and see an ad from Ronco for the Dial-o-matic food slicer. You learn that the Dial-o-matic sells for $29.95. Ronco also includes a set of Ginsu steak knives worth $10.95 and another free gift worth $7.95 in this deal. Assuming that there is a competitive market for Ronco items, at what price must Ronco offer this three item Dial-o-matic deal to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?
29.95 + 10.95 + 7.95 = $48.85
An S corporation earns $6.00 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $2.00 dividend?
: D) $6.00 × 39% = $2.34
Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp. retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments. If the corporate tax rate was 35% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings received after-tax by a holder of 100,000 shares of Valiant Corp.?
A) Corporate tax paid on $3.4 earnings = $3.4 × 0.35 = 1.190 earnings after-tax = 3.4 - 1.190 = $2.210 earnings distributed as dividends = $2.210 - $1 = $1.2100 taxes paid on dividends by a shareholder =1.2100 × 0.125 = 0.1513 after-tax dividends per share = 1.2100 - 0.1513 = $1.0588 hence a holder of 100,000 shares receives 1.0588 × 100,000 = $105,875
. On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction?
A) The transaction was between the corporation and investors.
) In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?
A) [($30 × 3.9%) - ($20 × 2.8%)] × 1,000,000 = $330,000
A factory owner wants his workers to produce as many widgets as they can so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case?
A) by supplying incentives so the agents act in the way principal desires
Which of the following would be more typically the responsibility of a controller rather than a treasurer?
A) overseeing accounting and tax functions
Whose interests should a financial manager consider paramount when making a decision?
A) the stockholders who have risked their money to become owners of the company
Which of the following statements regarding the Law of One Price is INCORRECT?
An important property of the Law of One Price is that it holds even in markets where arbitrage is possible
) In a trade with the government of an oil producing nation, a manufacturer will deliver 13 Caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels of oil, valued at $120 per barrel. What is the net benefit of this trade to the manufacturer?
B) -13 × 320,000 + 120 × 45,000 = -4,160,000 + 5,400,000 = $1,240,000
Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend payment of$25,000,000 paid proportionally to its shareholders,how much of this amount would Helen receive, disregarding tax?
B) Helen will receive 10.2 % of the dividend payment proportional to her ownership: 0.102 × 25,000,000 = $2,550,000
A companyʹs board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employeesʹ diligence and industry. What general principle is being argued by the board of directors?
B) Some activities that decrease shareholdersʹ wealth may have intangible benefits which increase the strength of the company overall.
What is the process of double taxation for the stockholders in a C corporation?
B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them.
How do the shareholders of most corporations exercise their control of that corporation
B) by electing members of a board of directors
International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty -first century.
FALSE
The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case?
B) by raising the companyʹs equity by encouraging new owners to take a stake in the company
.Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company?
Both decisions should be made based upon the tradeoff benefits and costs across time.
You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation announces a profit of $6 per share, of which it retains $1 for reinvestment and distributes the rest as dividend payments. Given that the personal tax rate is 35%, how much tax must you pay per share?
C) Tax paid by shareholder of S corporation = 5 × 0.35 = $1.75
Which of the following people may not manage the operations of a firm in which they are part or full owners?
C) limited partners in a limited partnership
In most corporations, to whom does the chief financial officer report
C) the chief executive officer
Which of the following is NOT an advantage of a sole proprietorship?
C) unlimited liability
On the day Harry was born, his parents put $1200 into an investment account that promises to pay a fixed interest rate of 6 percent per year. How much money will Harry have in this account when he turns 21?
Calculate the FV with PV = $1200, interest = 6%, and N = 21, which = $4079.
What is the future value (FV) of $20,000 in four years, assuming the interest rate is 4% per year
Calculate the FV with PV = $20,000, interest = 4%, and N = 4, which = $23,397.17.
. ) If $17,000 is invested at 10% per year, in approximately how many years will the investment double?
Calculate the N with FV = $34,000, PV = $17,000, and interest = 10%, which = 7.3 years.
What is the present value (PV) of $100,000 received six years from now, assuming the interest rate is 8% per year?
Calculate the PV with FV = $100,000, interest = 8%, and N = 6, which = $63,016.96.
What is the major advantage corporations have over other business entities
D) All of the above are advantages that a corporation has over other business forms.
) Which of the following features of a corporation is LEAST accurate?
D) Earnings from a corporation are taxed only once
. Which of the following should be true for an asset to be considered liquid? . A) It pays regular dividends. . B) It can be bought and sold at an organized stock market or bourse. . C) It is offered for sale on both primary and secondary markets. . D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.
D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.
.What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?
D) It makes it easier to compare the financial results of different firms
A C corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00 per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the after-tax amount an individual would receive from the dividend?
D) Personal tax = $4 × 15% = $0.60 ; Total = $4.00 - $0.60 = $3.40
Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves?
D) There are often many owners, and they can often change as they buy and sell stock.
Why is it difficult to determine the market price of a private corporationʹs shares at any point in time?
D) There is no organized market for its shares.
A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO
D) hostile takeover
A vintner is deciding when to release a vintage of Sauvignon Blanc. If it is bottled and released now, the wine will be worth $2.2 million. If it is barrel aged for a further year, it will be worth 15% more, though there will be additional costs of $528,000 incurred at the end of the year. If the interest rate is 7%, what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now?
He will earn $328,972 more if he releases the wine now. $2,200,000 × 0.15 = $330,000; Cash to be received after the end of the year: $2,200,000 + $$330,000- $528,000 = $2,002,000 $2,002,000 /1.07=$1,871,028.04 $2,200,000 - $1,871,028 = $328,972
Which of the following statements regarding the cost-benefit analysis is NOT correct?
In the absence of competitive markets, we can use one-sided prices to determine exact cash values.
A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?
Investors believe the companyʹs assets are not likely to be profitable since its market value is worth less than its book value
An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one yearʹs time. The investor decides to make the investment as there is a net difference between the absolute cost and benefit. Which of the following is NOT a reason that the investorʹs decision may be flawed?
It does not consider whether the $10,000 will be needed elsewhere
What are the requirements of section 404 of SOX?
It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process
You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow?
It will have no effect on the future value
Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?
It would be an addition to property, plant and equipment so it would be an investing activity.
You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity?
No, because the market fora used XBOX 360 is not the same as the market for a new XBOX 360.
Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Dutyʹs marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one?
No, since costs are $6,800,000 more than benefits.
Which of the following is unique for an S corporation?
None of the above statements is unique.
Why are arbitrage opportunities short-lived?
Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal.
Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0 . Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7 .How much asset turnover should manufacturer B have to match manufacturer Aʹs ROE?
ROEA = 2.2 × 1.7 × 5.0 = 18.7; 18.7 / (2.5 × 4.7) = 1.59
. A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of the company ask experts in marketing to determine how much an effective ad campaign for such a service would cost, and by how much sales would increase. They consult experts in economics to calculate the increases in revenue from the success of the campaign, experts in operations to determine the cost of offering the service, and experts in strategy to anticipate possible counter-moves by competitors. Which of the following points about the role of financial managers does this example illustrate?
Real-world decisions are complex and require information from many sources if the decisions are to be valid.
Why must care be taken when comparing a firmʹs share price to its operating income?
Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.
A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?
Since net working capital is negative, the company will not have enough funds to meet its obligations.
The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?
The Colonial Bank would experience a surge in demand for loans
Which of the following is the LEAST likely explanation for a firmʹs high ROE? A) The firm is growing. B) The firm is able to find investment opportunities that are very profitable. C) The firm has very efficient use of its assets.
The firm is growing
Which of the following statements regarding the income statement is INCORRECT?
The income statement shows the cash flows and expenses at a given point in time.
One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?
The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement
A printing company prints a brochure for a client and then bills them for this service. At the time the printing companyʹs financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?
The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.
.Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?
They can be used to convert different services and commodities into equivalent cash values which can be compared
Advanced Micro Devices (NYSE: AMD) is currently trading at $20.75 on the NYSE. Advanced Micro Devices is also listed on NASDAQ. Assume it is currently trading on NASDAQ at $20.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 1000 shares?
Yes, buy 1,000 shares × 20.50 ($20,500) and sell 1,000 shares × 20.75 ($20,750) = $250.00.
Which of the following firms would be expected to have a high ROE based on that firmʹs high profitability?
a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals
A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?
a patent for a drug held by the company
If the exchange rates, after fees, in Tokyo are ¥1,000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171, which of the following is most likely to occur?
a surge in conversion of euros to yen in Paris
Which of the following is NOT a function of the board of directors? A) determining how top executives should be compensated B) monitoring the performance of the company C) answering to shareholders of the company D) day-to-day running of the company
day to day running of the company
) In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline
false
A dollar today and a dollar in one year may be considered to be equivalent
false
Financial decisions require that you weigh alternatives in strictly monetary terms.
false
If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85.
false
In most corporations, the owners exercise direct control of a corporation
false
A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded?
it will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows.
Investments by wealthy individuals and endowments is a major source of money for each of the following EXCEPT ________.
mutual funds
A sole proprietorship is owned by ________.
one person
Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 4% per year?
one that pays $1350 in five years
Whenever a good trades in a competitive market, the ________ determines the value of the good.
price
Which of the following is NOT a role of financial institutions?
printing money for borrowers
A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?
revenue received for the delivery of items that have not yet been delivered
Which of the following is a measure of the aggregate price level of collections of pre-selected stocks? A) NASDAQ B) S&P 500 C) NYSE D) Euronext
s & p 500
Which of the following types of firms does NOT have limited liability?
sole proprietorships
Which of the following is NOT a financial statement that every public company is required to produce?
statement of sources and uses of cash
A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firmʹs management discussion and analysis (MD&A)?
that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages
Which of the following amounts would be included on the right side of a balance sheet?
the amount of deferred tax liability held by the company
