Fin 325 Exam 1 practice questions

As the degree of financial leverage increases, the:

probably a firm will encounter financial distress increases

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent? A) Annual B) Semi-annual C) Monthly D) Daily E) Continuous

A) annual

The interest rate that is most commonly quoted by a lender is referred to as the: A) annual percentage rate. B) compound rate. C) effective annual rate. D) simple rate. E) common rate

A) annual percentage rate

You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now? A) Future value B) Present value C) Principal amount D) Discounted value E) Invested principal

A) future value

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following? A) 0 B) 0.5 C) 1.0 D) 1.5 E) 2.0

B) 0.5

Christina invested $3,000 five years ago and earns 2 percent annual interest. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as: A) simplifying. B) compounding. C) aggregating. D) accumulating

B) compounding

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called: A) growth analysis. B) discounting. C) accumulating. D) compounding. E) reducing.

B) discounting

Mortgage lenders probably have the most interest in the ________ ratios. A) return on assets and profit margin B) long-term debt and times interest earned C) price-earnings and debt-equity D) market-to-book and times interest earned E) return on equity and price-earnings

B) long-term debt and time interest earned

Which one of the following best states the primary goal of financial management? A) maximize current dividends per share B) maximize the current value per share C) increase cash flow and avoid financial distress D) minimize operational costs while maximizing firm efficiency

B) maximize the current value per share

An amortized loan: A) requires the principal amount to be repaid in even increments over the life of the loan. B) may have equal or increasing amounts applied to the principal from each loan payment. C) requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term. D) requires that all payments be equal in amount and include both principal and interest. E) repays both the principal and the interest in one lump sum at the end of the loan term.

B) may have equal or increasing amounts applied to the principal from each loan payment

An example of a capital budgeting decision is deciding: A) how many shares of stock to issue B) whether or not to purchase a new machine for the production line C) how to refinance a debt issue that is maturing D) how much inventory to keep on hand

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

The DuPont identity can be used to help managers answer which of the following questions related to a company's operations? I. How many sales dollars are being generated per each dollar of assets? II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generating per dollar of sales? IV. Does the company have the ability to meet its debt obligations in a timely manner? A) I and III only B) II and IV only C) I, II, and III only D) II, III and IV only E) I, II, III, and IV

C) I, II, and III only

Your goal is to have $1 million in your retirement savings on the day you retire. To fund this goal, you will make one lump sum deposit today. If you plan to retire ________ rather than________ and earn a ________ rate of interest, then you can deposit a smaller lump sum today. A) sooner; later; low B) sooner; later; high C) later; sooner; high D) later; sooner; low E) today; later; high

C) If you plan to retire Later rather Sooner and earn a rate of interest, then you can deposit a smaller lump sum today

Which one of the following standardized items on the income statement and balance sheet relative to their values as of a chosen point in time? A) Statement of standardization B) Statement of cash flows C) Common-base year statement D) Common-size statement E) Base reconciliation statement

C) common-based year statement

Sam just opened a savings account paying 3.5 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this, Sam: A) will earn the same amount of interest each year for four years. B) will earn simple interest on his savings every year for four years. C) could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest. D) has an account currently valued at $5,000. E) could earn more interest on this account if the interest earnings were withdrawn annually.

C) could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest

According to the statement of cash flows, an increase in inventory will ________ the cash flow from ________ activities. A) increase; operating B) decrease; financing C) decrease; operating D) increase; financing E) increase; investment

C) decrease; operating

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the ________ rate. A) stated B) discounted annual C) effective annual D) periodic monthly E) consolidated monthly

C) effective annual

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

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) ________ loan. A) amortized B) continuous C) balloon D) pure discount E) interest-only

D) pure discount

What's an example of a source of cash?

Decrease in inventory

Which one of the following will produce the lowest present value interest factor? A) 6 percent interest for 5 years B) 6 percent interest for 8 years C) 6 percent interest for 10 years D) 8 percent interest for 5 years E) 8 percent interest for 10 years

E) 8 percent interest for 10 years highest interest, longest number of years

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? A) Both projects have the same future value at the end of Year 4. B) Both projects have the same value at Time 0. C) Both projects are ordinary annuities. D) Project Y has a higher present value than Project X. E) Project X has both a higher present and a higher future value than Project Y

E) Project X has both a higher present and future value than Project Y

Which one of the following statements correctly defines a time value of money relationship? A) Time and future values are inversely related, all else held constant. B) Interest rates and time are positively related, all else held constant. C) An increase in a positive discount rate increases the present value. D) An increase in time increases the future value given a zero rate of interest. E) Time and present value are inversely related, all else held constant.

E) Time and present value are inversely related, all else held constant

Net working capital is defined as: A) total liabilities minus shareholders' equity. B) current liabilities minus shareholders' equity. C) fixed assets minus long-term liabilities. D) total assets minus total liabilities. E) current assets minus current liabilities.

E) current assets - current liabilities

A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) ________ loan. A) amortized B) modified C) balloon D) pure discount E) interest-only

E) interest-only

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

E) sales

Which ratio is a measure of a firm's liquidity?

Quick ratio

Compounding:

The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest

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

b. good reputation of the company (opinion)

Shareholders' equity: a. decreases whenever new shares of stock are issued. b. represents the residual value of a firm. c. is equal to total assets plus total liabilities. d. is referred to as a firm's financial leverage.

b. represents the residual value of a firm

The book value of a firm is:

based on historical cost

Which one of the following statements concerning the corporate form of business ownership is correct? a. The life of a corporation is limited. b. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. c. The profits of a corporation are subject to double taxation. d. The owner of a corporation is personally responsible for all of the company's debts

c. The profits of a corp are subject to double taxation

Capital structure decisions include determining: a. which one of two projects to accept. b. how to allocate investment funds to multiple projects. c. how much debt should be assumed to fund a project. d. how much inventory will be needed to support a project.

c. how much debt should be assumed to fund a project

Cash flow from assets is also known as the firm's:

free cash flow

Which financial statement summarizes a firm's revenue and expenses over a period of time?

income statement

Capital budgeting:

the process where a business determines and evaluates potential large expenses or investments