FIN202

b

QN=1 (20257) Current liabilities are liabilities that a. will be converted to cash within a year. b. must be paid within a year. c. will be converted to equity within a year. d. none of these

c

QN=1 (20267) Which of the following cannot be engaged in managing the business? a. a sole proprietor b. a general partner c. a limited partner d. none of these

b

QN=1 (20277) An example of a direct agency cost is a. a manager turning down a value-contributing project because of its risks. b. a manager expensing a large dinner on the company expense report. c. a manager using too little debt within the firm's capital structure because of the additional risk associated with debt. d. all of these

d

QN=1 (20298) The major disadvantages of market-value accounting include a. the difficulty in estimating the current value for some assets. b. the difficulty in applying some of the valuation models used to estimate market values. c. the resulting numbers are potentially open to abuse. d. All of these are disadvantages of market-value accounting.

b

QN=1 (20342) Which of the following is not a method of "benchmarking"? a. Conduct an industry group analysis. b. Utilize the DuPont system to analyze a firm's performance. c. Evaluating a single firm's performance over time. d. Identify a group of firms that compete with the company being analyzed.

b

QN=1 (20356) Using lower discount rates will a. not affect the present value of the future cash flow. b. increase the present value of any future cash flow. c. decrease the present value of any future cash flow. d. None of these.

b

QN=1 (20366) In computing the present and future value of multiple cash flows, a. earlier cash flows are discounted at a lower rate. b. each cash flow is discounted or compounded at the same rate. c. earlier cash flows are discounted at a higher rate. d. none of these.

d

QN=10 (20254) Which of the following is a basic source of funds for the firm? a. (i) debt b. (ii) equity c. (iii) asset liquidations d. (i) and (ii)

c

QN=10 (20308) Which of the following is a cash flow from investing activities? a. Cash payment of dividends to shareholders. b. Cash from sale of products. c. Purchase of plant, and equipment. d. Rent received from industrial property owned.

a

QN=10 (20325) All but one of the following is true about the inventory turnover ratio. a. It is calculated by dividing inventory by cost of goods sold. b. It measures how many times the inventory is turned over into saleable products. c. The more times a firm can turnover the inventory, the better. d. Too high a turnover or too low a turnover could be a warning sign.

c

QN=10 (20354) Using higher discount rates will a. not affect the present value of the future cash flow. b. increase the present value of any future cash flow. c. decrease the present value of any future cash flow. d. None of these.

d

QN=10 (20373) Which ONE of the following statements is true about amortization? a. Amortization refers to the way the borrowed amount (principal) is paid down over the life of the loan. b. With an amortized loan, each loan payment contains some payment of principal and an interest payment. c. A loan amortization schedule is just a table that shows the loan balance at the beginning and end of each period, the payment made during that period, and how much of that payment represents interest and how much represents repayment of principal. d. All of these are true.

b

QN=10 (20441) Which one of the following statements is NOT true about auction markets? a. In an auction market, buyers and sellers face each other directly and bargain over price. b. The NASDAQ is the most efficient stockmarket in the United States. c. The New York Stock Exchange is the best-known example of an auction market. d. The auctioneer in this case is the specialist, who is designated by the exchange to represent orders placed by public customers.

c

QN=10 (20490) In order to calculate free cash flow by starting with incremental cash flow from operations, we should a. subtract the incremental capital expenditures and add the incremental additions to working capital. b. add the incremental capital expenditures and the incremental additions to working capital. c. subtract the incremental capital expenditures and the incremental additions to working capital. d. None of these.

c

QN=11 (20282) If a firm establishes maximizing profits at the most important goal of the firm, which of the following would not be given proper consideration? a. Sales revenues b. Expenses c. Risk d. Cost of goods sold

c

QN=11 (20286) The generally accepted accounting principles (GAAP) are a. rules that outline how a firm can operate ethically. b. rules on how the firm will be valued in the event of a merger. c. rules and procedures that define how companies are to maintain financial records and prepare financial reports. d. rules for how a company can issue stock to raise money.

c

QN=11 (20340) Which of the following is a benefit of a common-size income statement? a. It is very useful to assess how effectively a firm collected its accounts receivable. b. It reveals a great deal of information about the adequacy of a firm's net working capital. c. It can tell the analyst a great deal about the firm's efficiency and profitability. d. It reveals how effectively a firm has increased its sales.

b

QN=11 (20352) Which one of the following statements is NOT true? a. Present value calculations involve bringing a future amount back to the present. b. The future value is often called the discounted value of future cash payments. c. The present value factor is more commonly called the discount factor. d. The higher the discount rate, the lower the present value of a dollar.

d

QN=11 (20363) To solve present value problems with multiple cash flows involves which of the following steps? a. First, draw a time line to make sure that each cash flow is placed in the correct time period. b. Second, calculate the present value of each cash flow for its time period. c. Third, add up the present values. d. All of these are necessary steps.

a

QN=11 (20431) Which ONE of the following statements is true about secondary markets? a. In secondary markets, outstanding shares of stock are bought and sold among investors. b. For an investor, the function of secondary markets is to provide profitability for the shares of securities they own. c. An active secondary market causes firms to sell their new debt or equity issues at a higher cost of funds. d. All of these are true statements

c

QN=11 (20524) The capital market may not be able to fund all of a firm's positive NPV project because a. the capital market will always speculate that it is not going to get a fair return. b. even the capital market has a constraint for the amount of capital that it can supply a firm. c. it can be difficult for outside investors to accurately assess the risks and returns associated with the firm's projects. d. none of these.

b

QN=12 (20283) Which of the following does maximizing shareholder wealth not usually account for? a. Risk. b. Government regulation. c. The timing of cash flows. d. Amount of cash flows.

c

QN=12 (20294) The conventional way of preparing a balance sheet is to list all assets in the order of their a. market value. b. risk. c. liquidity. d. historical cost.

d

QN=12 (20320) Which of the following is true of ratio analysis? a. A ratio is computed by dividing one balance sheet or income statement by another. b. The choice of the scale determines the story that can be garnered from the ratio. c. Ratios can be calculated based on the type of firm being analyzed or the kind of analysis being performed. d. All of these are true.

d

QN=12 (20351) Which one of the following statements is NOT true? a. Present value calculations involve bringing a future amount back to the present. b. The present value (PV) is often called the discounted value of future cash payments. c. The present value factor is more commonly called the discount factor. d. All of these are true statements.

a

QN=12 (20375) Which one of the following statements is true about amortization? a. With an amortized loan, a bigger proportion of each month's payment goes toward interest in the early periods. b. With an amortized loan, a bigger proportion of each month's payment goes toward interest in the later periods. c. With an amortized loan, a smaller proportion of each month's payment goes toward interest in the early periods. d. None of these.

d

QN=12 (20482) In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if a. (i) the projects are independent. b. (ii) the cash flows pattern is unconventional. c. (iii) the projects are mutually exclusive. d. both (ii) and (iii).

a

QN=12 (20535) Tumbling Haven, a gymnastic equipment manufacturer, provided the following information to its accountants. The company had current assets of $145,332, net fixed assets of $356,190, and other assets of $4,176. The firm has long-term debt of $76,445, common stock of $200,000, and retained earnings of $134,461. What amount of current liabilities does this firm have? a. $94,792 b. $505,678 c. $171,217 d. none of these

c

QN=13 (20275) Which of the following is a principal within the agency relationship? a. a company engineer b. the CEO of the firm c. a shareholder d. the board of directors

a

QN=13 (20301) Which one of the following is NOT a cash flow from operating activities? a. cash payments on the principal of long-term debt b. payments for utilities and rent c. payments to purchase raw materials d. cash receipts from selling goods and services

a

QN=13 (20329) If firm A has a higher debt-to-equity ratio than firm B, then a. firm A has a lower equity multiplier than firm B. b. firm B has a lower equity multiplier than firm A. c. firm B has lower financial leverage than firm A. d. None of these.

a

QN=13 (20348) Which one of the following statements is true? a. Individuals prefer to consume goods right away rather than in the future. b. Individuals prefer to consume goods in the future rather than right away. c. The time of consumption is irrelevant to individuals. d. None of these.

a

QN=13 (20368) The future value of multiple cash flows is a. greater than the sum of the cash flows. b. equal to the sum of all the cash flows. c. less than the sum of the cash flows d. none of these.

b

QN=13 (20465) Two projects are considered to be contingent projects if a. selecting one would automatically eliminate accepting the other. b. the acceptance of one project is dependent on the acceptance of the other. c. rejection of one project does not eliminate the selection of the other. d. None of these.

c

QN=13 (20540) Centennial Brewery produced revenues of $1,145,227 in 2008. It has expenses (excluding depreciation) of $812,640, depreciation of $131,335, and interest expense of $81,112. It pays an average tax rate of 34 percent. What is the firm's net income after taxes? a. $120,140 b. $248,475 c. $79,292 d. $40,848

c

QN=14 (20263) Profitability of a firm can be negatively affected by a. (i) too much inventory. b. (ii) too little inventory. c. either (i) or (ii). d. neither (i) nor (ii).

b

QN=14 (20299) Which one of the following does NOT belong on an income statement? a. depreciation and amortization b. goodwill c. extraordinary items d. nonrecurring expenses

a

QN=14 (20333) For a firm that has both debt and equity, a. ROE > ROA. b. ROE < ROA. c. ROE = ROA d. None of these.

b

QN=14 (20350) The process of converting future cash flows to what its present value is a. time value of money. b. discounting. c. compounding. d. none of these.

b

QN=14 (20381) The true cost of lending is the a. annual percentage rate. b. effective annual rate. c. quoted interest rate. d. none of these.

b

QN=14 (20462) Which of the following are aspects of independent projects? a. Their cash flows are related. b. Their cash flows are unrelated. c. Selecting one would automatically eliminate accepting the other. d. None of these.

c

QN=14 (20532) Trident Corporation had the following cash flows in the current year. Which one of the following is a financing activity cash flow? a. Rent on a warehouse amounting to $1.1 million b. Purchase of $125,000 worth of five-year bonds issued by Towson Utilities c. Preferred dividends to the tune of $330,000 paid to shareholders d. Lease income received on a piece of land

b

QN=15 (20250) A stakeholder is a. anyone geographically close to the firm's headquarters. b. anyone with a claim on the cash flows of the firm. c. any governmental agency. d. all of these.

c

QN=15 (20306) Which of the following statements is not a limitation associated with market valuation of balance sheet accounts? a. It can be difficult to identify the market value of an asset, particularly if there are few transactions involving comparable assets. b. The estimates of market value can involve complex financial modeling, and the resulting numbers can be open to manipulation and abuse. c. Marking to market provides decision makers with a better chance of making the correct economic decision, given the information available. d. Mark-to-market accounting can become inaccurate if market prices deviate from the "fundamental" values of assets and liabilities.

c

QN=15 (20326) Which one of the following statements is NOT true? a. The accounts receivables turnover ratio measures how quickly the firm collects on its credit sales. b. One ratio that measures the efficiency of a firm's collection policy is days' sales outstanding. c. The more days that it takes the firm to collect on its receivables, the more efficient the firm is. d. DSO measures in days, the time the firm takes to convert its receivables into cash.

a

QN=15 (20347) Future value measures a. (i) what one or more cash flows are worth at the end of a specified period. b. (ii) what one or more cash flows that is to be received in the future will be worth today. c. both (i) and (ii) d. None of these

a

QN=15 (20382) Which one of the following statements is NOT true? a. The APR is the appropriate rate to do present and future value calculations. b. The EAR is the appropriate rate to do present and future value calculations. c. The EAR is the true cost of borrowing and lending. d. The EAR takes compounding into account.

a

QN=15 (20506) Which of the following is an example of a fixed cost? a. Cost of equipment purchased for an assembly line to be used in the production of a new product. b. Assembly costs associated with the production of a new product. c. Labor costs associated with the production of a new product. d. Shipping costs associated with the sale of a new product.

b

QN=15 (20548) Liquidity ratio: Zidane Enterprises has a current ratio of 1.92, current liabilities of $272,934, and inventory of 197,333. What is the firm's quick ratio? a. 0.72 b. 1.20 c. 1.92 d. None of these

b

QN=16 (20253) A trademark is an example of a. a productive asset. b. an intangible asset. c. a nebulous asset. d. none of these.

b

QN=16 (20291) The matching principle calls for the accountant of a firm to a. identify an asset with each liability of the firm. b. associate the revenue generated from a sale to the costs incurred to produce the product. c. match each item of inventory with the historical cost at which it was acquired. d. none of these

c

QN=16 (20317) All but one of the following is true of common-size balance sheets. a. Each asset and liability item on the balance sheet is standardized by dividing it by total assets. b. Balance sheet accounts are represented as percentages of total assets. c. Each asset and liability item on the balance sheet is standardized by dividing it by sales. d. Common-size financial statements allow us to make meaningful comparisons between the financial statements of two firms that are different in size.

a

QN=16 (20344) The time value of money refers to the issue of a. what the value of the stream of future cash flows is today. b. why a dollar received tomorrow is worth more than a dollar received today. c. why a dollar received tomorrow is worth the same as a dollar received today. d. None of these.

b

QN=16 (20380) The true cost of borrowing is the a. annual percentage rate. b. effective annual rate. c. quoted interest rate. d. periodic rate.

c

QN=16 (20499) Which of the following is the best example of a sunk cost? a. Future payments on a leased building. b. Future research and development costs. c. Historical research and development costs. d. Historical noncash expenses.

a

QN=16 (20553) Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm's days' sales in inventory? a. 65.2 days b. 64.3 days c. 61.7 days d. 57.9 days

a

QN=17 (20259) Working capital management decisions involve a. how a firm's day-to-day financial matters should be managed. b. how the firm should finance its assets. c. which productive assets the firm should employ. d. all of these.

b

QN=17 (20285) Annual reports are prepared by a firm's management to a. communicate to shareholders the firm's failures in the previous year. b. provide overview of the firm's financial and operating performance. c. highlight the performance of its chief competitors. d. provide a forecast of the economy in the coming years.

d

QN=17 (20319) Common-size financial statements: a. are a specialized application of ratio analysis. b. allow us to make meaningful comparisons between the financial statements of two firms that are different in size. c. are prepared by having each financial statement item expressed as a percentage of some base number, such as total assets or total revenues. d. All of these are true.

c

QN=17 (20358) Which of the following statements is true? a. A dollar received today is worth more than a dollar to be received in the future because future dollars are not affected by inflation. b. A dollar to be received in the future is worth more than a dollar received today because of the positive impact of rates of return. c. A dollar received today is worth more than a dollar to be received in the future because funds received today can be invested to earn a return. d. A dollar to be received in the future is worth more than a dollar received today because it would have less risk associated with it.

d

QN=17 (20378) Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called a. an annuity due. b. a growing perpetuity. c. an ordinary annuity. d. a growing annuity.

c

QN=17 (20488) The term ___________ refers to the fact that these cash flows reflect the amount by which the firm's total after-tax free cash flows will change if the project is adopted. a. periodic b. ending cash flows c. incremental d. none of these

d

QN=17 (20566) DuPont equation: GenTech Pharma has reported the following information: Sales/Total assets = 2.89; ROA = 10.74%; ROE = 20.36% What are the firm's profit margin and equity multiplier? a. 7.1%; 0.53 b. 7.1%; 1.90 c. 3.7%; 0.53 d. 3.7%; 1.90

c

QN=18 (20276) Shareholders elect ______________ to represent their interest in the firm. a. a chairman b. CEO c. a board of directors d. all of these

b

QN=18 (20302) Cash flows from financing activities include all but one of the following: a. cash payments on the principal of long-term debt b. issuing and paying out on insurance contracts c. cash purchases of treasury stock d. cash proceeds from a bank loan

b

QN=18 (20341) Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio? a. The quick ratio more accurately reflects a firm's profitability. b. It omits the least liquid current asset from the numerator of the ratio. c. The current ratio does not include accounts receivable. d. It measures how "quickly" cash flows through the firm.

b

QN=18 (20377) A firm receives a cash flow from an investment that will increase by 10 percent annually for an infinite number of years. This cash flow stream is called a. an annuity due. b. a growing perpetuity. c. an ordinary annuity. d. a growing annuity.

a

QN=18 (20525) The profitability index is useful in a capital rationing situation because a. it helps identify projects by the amount of value created per dollar invested. b. if followed, then it is only necessary to take the projects with the highest PI first. c. it will rank the best project to be taken in an absolute manner. d. none of these.

d

QN=18 (20613) Future Value: Herbert Hall just received an inheritance of $35,775 from his great aunt. He plans to invest the funds for retirement. If Herbert can earn 4.75% per year with quarterly compounding for 32 years, how much will he have accumulated? (Round off to the nearest dollar.) a. $237,416 b. $71,550 c. $184,622 d. $162,113

b

QN=19 (20262) Financial markets in which equity and debt instruments with maturities greater than one year are traded are called a. money markets. b. capital markets. c. stock markets. d. none of these.

b

QN=19 (20304) Clarity Music Company has a marginal tax rate of 34 percent and an average tax rate of 32 percent this year. It is planning to construct a new recording studio next year. The appropriate tax rate to be applied on the income generated from the new studio is a. the average tax rate. b. the marginal tax rate. c. either one. d. none of these.

a

QN=19 (20323) Which one of the following does NOT change a firm's current ratio? a. The firm collects on its accounts receivables. b. The firm purchases inventory by taking a short-term loan. c. The firm pays down its accounts payables. d. None of these.

b

QN=19 (20369) If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called a. a perpetuity. b. an ordinary annuity. c. an annuity due. d. none of these.

b

QN=19 (20512) A firm is considering two distinct set of circumstances that assume high inflation and low inflation. In the high inflationary set of circumstances, the price per unit will be affected as well as the variable and fixed costs. If the low-inflation set of circumstances is considered the baseline, then the analysis concerning the high inflationary circumstances could be considered a. a sensitivity analysis. b. a scenario analysis. c. a Monte Carlo simulation. d. none of these.

a

QN=19 (20603) Growth rate: Trojan Traps manufactures an innovative mouse trap. Sales this year are $325,000. The company expects its sales to go up to $500,000 in five years. What is the expected growth rate in sales for this firm? (Round to the nearest percent.) a. 9% b. 11% c. 6% d. 12%

c

QN=2 (20265) Which of the following business organizational forms is easiest to raise capital? a. (i) sole proprietorship b. (ii) partnership c. (iii) corporation d. (i) and (ii)

c

QN=2 (20290) Dell Computer Corporation has receivables of $2.5 million and inventory worth $1.8 million. The firm plans to borrow $2 million for working capital purposes from Austin First National Bank. In evaluating the loan request, the bank should place the most emphasis on a. the matching principle. b. the realization principle. c. the going-concern assumption. d. the assumption of arm's-length transactions.

b

QN=2 (20299) Which one of the following does NOT belong on an income statement? a. depreciation and amortization b. goodwill c. extraordinary items d. nonrecurring expenses

d

QN=2 (20343) There are those that believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis? a. Ratio analysis requires the analyst to evaluate a firm's performance over too many years to be of any value. b. Proper ratio analysis requires the analyst to rely upon audited financial statements, which can be easily manipulated. c. Thorough ratio analysis requires the analyst to refer to benchmarking, which is very easy to misinterpret. d. Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market values.

d

QN=2 (20360) Which of the following statements is false with respect to the present value of a future amount? a. The higher the discount rate, the lower the present value of a single sum for a given time period. b. The relation between present value and time is exponential. c. The greater the time period, the lower the present value of a single sum for a given interest rate. d. The lower the discount rate, the lower the present value of a single sum for a given time period.

c

QN=2 (20374) Which one of the following statements is NOT true about amortization? a. Amortization refers to the way the borrowed amount (principal) is paid down over the life of the loan. b. With an amortized loan, each loan payment contains some payment of principal and an interest payment. c. With an amortized loan, a smaller proportion of each month's payment goes toward interest in the early periods. d. A loan amortization schedule is just a table that shows the loan balance at the beginning and end of each period, the payment made during that period, and how much of that payment represents interest and how much represents repayment of principal.

a

QN=20 (20279) Executives that repeatedly put their own interests before that of the firm may find that they have difficulty finding another job after their current one. This is an example of a. the managerial labor market disciplining managers. b. the market for corporate control. c. the board of directors affecting the prospects of a manager. d. none of these.

a

QN=20 (20289) The going concern assumption implies that a. a firm will continue to be in business for the foreseeable future. b. a firm will be going out of business in the near future. c. a firm will continue to operate in the near future but only after being acquired by another firm. d. none of these

d

QN=20 (20312) Shareholders analyze financial statements in order to: a. assess the cash flows that the firm will generate from operations/ b. determine the firm's profitability, their return for that period, and the dividend they are likely to receive. c. focus on the value of the stock they hold. d. All of these.

b

QN=20 (20372) Cash flows associated with annuities are considered to be a. an uneven cash flow stream. b. a cash flow stream of the same amount (a constant cash flow stream). c. a mix of constant and uneven cash flow streams. d. none of these.

b

QN=20 (20520) Which of the following project risk analyses is best able to analyze the effect of a single set of circumstances, with correlated inputs, on the NPV of a project? a. sensitivity analysis b. scenario analysis c. simulation analysis d. none of these

c

QN=20 (20614) Present Value: Juan and Carla Herman plan to buy a time-share in six years in the amount of $16,860. In order to have adequate funds to do so, the Herman's want to make a deposit to their money market fund today. Assume that they will be able to earn an investment rate of 5.75%, compounded annually. How much will Juan and Carla need to deposit today to achieve their goal? (Round off to the nearest dollar.) a. $19,138 b. $ 8,885 c. $12,055 d. $14,243

b

QN=21 (20277) An example of a direct agency cost is a. a manager turning down a value-contributing project because of its risks. b. a manager expensing a large dinner on the company expense report. c. a manager using too little debt within the firm's capital structure because of the additional risk associated with debt. d. all of these

c

QN=21 (20310) Which of the following statements is true? a. Only 20 percent of interest income is taxable income for a corporation. b. Dividend income is fully taxable income. c. Interest paid on debt obligations is a tax-deductible business expense. d. Dividends paid to stockholders are a tax-deductible business expense.

b

QN=21 (20327) One of the following statements is NOT true of asset turnover ratios. a. Asset turnover ratios measure the level of sales per dollar of assets that the firm has. b. The fixed assets turnover ratio is less significant for equipment-intensive manufacturing industry firms than the total assets turnover ratio. c. The higher the total asset turnover, the more efficiently management is using total assets. d. All of these are true.

c

QN=21 (20370) If your investment pays the same amount at the beginning of each year for a period of 10 years, the cash flow stream is called a. a perpetuity. b. an ordinary annuity. c. an annuity due. d. none of these.

c

QN=21 (20544) During 2008, Towson Recording Company increased its investment in marketable securities by $36,845, funded fixed assets acquisition by $109,455, and had marketable securities to the tune of $14,215 mature. What is the net cash provided (used) in investing activities? a. $132,085 b. $145,940 c. -$132,085 d. none of these

b

QN=21 (20625) Future value of an annuity: Carlos Menendez is planning to invest $3,500 every year for the next six years in an investment paying 12 percent annually. What will be the amount he will have at the end of the six years? (Round to the nearest dollar.) a. $21,000 b. $28,403 c. $24,670 d. $26,124

a

QN=22 (20256) Cash dividends are paid out of a. residual cash. b. liquidated assets. c. long-term debt. d. all of these.

d

QN=22 (20309) Which of the following best represents cash flows to investors? a. Cash flow from operating activity, plus cash flow generated from net working capital. b. Earnings before interest and taxes times 1 minus the firm's tax rate. c. Net income, minus dividends paid to preferred stockholders. d. Cash flow from operating activity, minus cash flow invested in net working capital, minus cash flow invested in long-term assets.

c

QN=22 (20321) Which of the following is NOT true of liquidity ratios? a. They measure the ability of the firm to meet short-term obligations with short-term assets without putting the firm in financial trouble. b. There are two commonly used ratios to measure liquidity—current ratio and quick ratio. c. For manufacturing firms, quick ratios will tend to be much larger than current ratios. d. The higher the number, the more liquid the firm and the better its ability to pay its short-term bills.

b

QN=22 (20362) Which one of the following steps is NOT involved in solving future value problems? a. First, draw a time line to make sure that each cash flow is placed in the correct time period. b. Second, discount each cash flow for its time period. c. Third, add up the values. d. All of these are necessary steps.

b

QN=22 (20531) Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders? a. current assets, goodwill, and plant and equipment b. current assets, plant and equipment, and goodwill c. goodwill is not an asset and is not listed here d. none of these.

c

QN=22 (20627) Future value of an annuity: You plan to save $1,250 at the end of each of the next three years to pay for a vacation. If you can invest it at 7 percent, how much will you have at the end of three years? (Round to the nearest dollar.) a. $3,750 b. $3,918 c. $4,019 d. $4,589

d

QN=23 (20273) When analysts and investors determine the value of a firm's stock, they should consider a. the size of the expected cash flows associated with owning the stock. b. the timing of the cash flows. c. the riskiness of the cash flows. d. all of these.

c

QN=23 (20303) Which one of the following is NOT a cash flow from investing activities? a. buying and selling bonds or stock of other firms b. buying or selling of land, buildings, and plant and equipment c. cash payments of dividends to shareholders d. issuing and paying out on insurance contracts

a

QN=23 (20318) All but one of the following is true of common-size income statements. a. Each income statement item is standardized by dividing it by total assets. b. Income statement accounts are represented as percentages of sales. c. Each income statement item is standardized by dividing it by sales. d. Common-size financial statement analysis is a specialized application of ratio analysis.

c

QN=23 (20383) Which one of the following statements is NOT true? a. The correct way to annualize an interest rate is to compute the effective annual interest rate (EAR). b. The APR is the annualized interest rate using simple interest. c. The correct way to annualize an interest rate is to compute the annual percentage rate (APR). d. You can find the interest rate per period by dividing the quoted annual rate by the number of compounding periods.

b

QN=23 (20546) Which of the following is the best example of how a market-value balance sheet item differs from the firm's book-value balance sheet item? a. A firm issued long-term bonds five-years ago that currently sell for par value. b. A firm sold common stock twenty-years ago for $20.00 share. The firm's common stock is currently selling for $96.50 per share. c. A firm has $5 million of accrued liabilities on the books. d. A firm issued preferred stock ten-years ago. These shares of preferred stock currently are selling for par value.

d

QN=23 (20633) Computing annuity payment: John Harper has borrowed $17,400 to pay for his new truck. The annual interest rate on the loan is 9.4 percent, and the loan needs to be repaid in four payments. What will be his annual payment if he begins his payment beginning now? (Round to the nearest dollar.) a. $5,229 b. $5,450 c. $4,850 d. $4,953

d

QN=24 (20268) Which organizational form best enables a firm to sell its securities to the market? a. sole proprietorship b. partnership c. private corporation d. public corporation

c

QN=24 (20305) Which one of the following is NOT true for a corporation? a. Interest paid on bonds issued last year is tax deductible. b. Common-stock dividends to be paid this year are not tax deductible. c. Common-stock dividends to be paid this year will be tax deductible if the firm has a net loss for the year. d. Preferred stock dividends to be paid this year are not tax deductible.

d

QN=24 (20339) Limitations of ratio analysis include all but a. Ratios depend on accounting data based on historical costs. b. Differences in accounting practices like FIFO versus LIFO make comparison difficult. c. Trend analysis could be distorted by financial statements affected by inflation. d. All of these are limitations of ratio analysis.

b

QN=24 (20549) Liquidity ratio: Ronaldinho Trading Co. is required by its bank to maintain a current ratio of at least 1.75, and its current ratio now is 2.1. The firm plans to acquire additional inventory to meet an unexpected surge in the demand for its products and will pay for the inventory with short-term debt. How much inventory can the firm purchase without violating its debt agreement if their total current assets equal $3.5 million? a. $0 b. $777,777 c. $1 million d. None of these

b

QN=24 (20666) Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property? a. $112,500 b. $125,000 c. $137,500 d. $150,000

b

QN=25 (20281) _____________occur(s) when one party in a business transaction has information that is unavailable to the other parties in the transaction. a. Profits b. Information asymmetry c. Information efficiency d. None of these

a

QN=25 (20288) The assumption of arm's-length transaction states that a. both parties to a transaction can act independently of each other and make economically rational decisions. b. both parties to a transaction must have had previous transactions. c. one of the parties to the transaction is a bank that has full knowledge of the firm's creditworthiness. d. none of these

c

QN=25 (20332) For a firm that has no debt in its capital structure, a. ROE > ROA. b. ROE < ROA. c. ROE = ROA. d. None of these.

c

QN=25 (20570) DuPont equation: Sorenstam Corp has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm's ROA. a. 6.23% b. 4.53% c. 7.48% d. 5.79%

b

QN=25 (20661) Francis purchased a stock one year ago for $20, and it is now worth $24. The stock paid a dividend of $3 during the year. What was the stock's rate of return from capital appreciation during the year? (Round your answer to the nearest percent.) a. 17% b. 20% c. 29% d. 35%

a

QN=26 (20274) One reason for the existence of agency problems between managers and share holders is that a. there is a separation of ownership and control of the firm. b. managers know how to manage the firm better than shareholders. c. shareholders have unreasonable expectations about managerial performance. d. none of these

d

QN=26 (20287) Accounting standards prescribed by GAAP are important because a. they make the financial statements of all firms standardized. b. they allow one to examine a firm's performance over time. c. they make it possible for management or analysts to compare the firm's performance to that of other competitors. d. all of these.

b

QN=26 (20330) Which one of the following statements is NOT correct? a. A leveraged firm is more risky than a firm that is not leveraged. b. A leveraged firm is less risky than a firm that is not leveraged. c. A firm that uses debt magnifies the return to its shareholders. d. All of these statements are correct.

a

QN=26 (20551) Efficiency ratio: If Viera, Inc., has an accounts receivable turnover of 3.9 times and net sales of $3,436,812, what is its level of receivables? a. $881,234 b. $13,403,567 c. $1,340,357 d. $81,234

a

QN=26 (20677) Sayers purchased a stock with a coefficient of variation equal to 0.125. The expected return on the stock is 20 percent. What is the variance of the stock? a. 0.000625 b. 0.025000 c. 0.625000 d. 0.790500

c

QN=27 (20255) The cash remaining after the firm has met its operating expenses, payments to creditors, and taxes is called a. earnings per share. b. capital contributed in excess of par. c. residual cash. d. assets.

d

QN=27 (20297) Which one of the following is NOT true about goodwill? a. It is an intangible asset. b. It represents the value of all unrecorded assets acquired in a merger. c. It equals the premium paid over the fair market value of the assets acquired in a merger. d. When goodwill appears on a firm's balance sheet, it reduces the firm's net worth by that amount.

b

QN=27 (20311) Financial statements can be analyzed from the following three different perspectives: a. management, regulator, and bondholder b. management, shareholder, and creditor c. regulator, shareholder, and creditor d. shareholder, creditor, and regulator

d

QN=27 (20600) Interest rate: Ray Seo has $5,000 to invest in a small business venture. His partner has promised to pay him back $8,200 in five years. What is the return earned on this investment? a. 9.3% b. 8.7% c. 11.1% d. 10.4%

b

QN=27 (20703) Bond price: Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Round to the nearest dollar.) a. $1,037 b. $1,085 c. $861 d. $923

d

QN=28 (20264) Which of the following business organizational forms subjects the owner(s) to unlimited liability? a. (i) sole proprietorship b. (ii) partnership c. (iii) corporation d. (i) and (ii)

c

QN=28 (20331) Coverage ratios, like times interest earned and cash coverage ratio, allow a. a firm's management to assess how well they meet short-term liabilities. b. a firm's shareholders to assess how well the firm will meet its short-term liabilities. c. a firm's creditors to assess how well the firm will meet its interest obligations. d. a firm's creditors to assess how well the firm will meet its short-term liabilities other than interest expense.

b

QN=28 (20585) Compounding: Chung Lee wants to invest $3,000 in an account paying 5.25 percent compounded quarterly. What is the interest on interest after four years? a. $695.98 b. $65.98 c. $630.00 d. None of these

d

QN=28 (20716) Yield to maturity: John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity? a. 6.7% b. 6.2% c. 5.9% d. 5.7%

c

QN=29 (20258) Capital budgeting involves a. how a firm's day-to-day financial matters should be managed. b. how the firm should finance its assets. c. which productive assets the firm should employ. d. all of these.

c

QN=29 (20337) Which one of the following is NOT an advantage of using ROE as a goal? a. ROE is highly correlated with shareholder wealth maximization. b. ROE and the DuPont analysis allow management to break down the performance and identify areas of strengths and weaknesses. c. ROE does not consider risk. d. All of these are advantages of using ROE as a goal.

c

QN=29 (20609) Time to attain goal: Elegant Designers have generated sales of $625,000 for the current year. If they can grow their sales at a rate of 12 percent every year, how long will they take to triple their sales? (Round off to the nearest year.) a. 8 years b. 7 years c. 10 years d. 9 years

c

QN=29 (20712) Yield to maturity: Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on such bonds? (Round to the closest answer.) a. 10.4% b. 9.5% c. 8.4% d. 7.5%

d

QN=3 (20252) Which of the following are stakeholders? a. a shareholder b. a lender c. the IRS d. all of these

c

QN=3 (20295) When prices are rising, valuing ending inventory using the FIFO method rather than LIFO gives a. inventory a higher value but lowers net income. b. inventory a lower value and also lowers net income. c. both inventory and net income a higher value. d. inventory a lower value and net income a higher value.

b

QN=3 (20328) Which one of the following statements is correct? a. The lower the level of a firm's debt, the higher the firm's leverage. b. The lower the level of a firm's debt, the lower the firm's equity multiplier. c. The lower the level of a firm's debt, the higher the firm's equity multiplier. d. The tax benefit from using debt financing reduces a firm's risk.

c

QN=3 (20337) Which one of the following is NOT an advantage of using ROE as a goal? a. ROE is highly correlated with shareholder wealth maximization. b. ROE and the DuPont analysis allow management to break down the performance and identify areas of strengths and weaknesses. c. ROE does not consider risk. d. All of these are advantages of using ROE as a goal.

d

QN=3 (20338) Peer group analysis can be performed by a. (i) management choosing a set of firms that are similar in size or sales, or who compete in the same market. b. (ii) using the average ratios of this peer group, which would then be used as the benchmark. c. (iii) identifying firms in the same industry that are grouped by size, sales, and product lines in order to establish benchmark ratios. d. Only (i) and (ii) relate to peer group analysis.

d

QN=3 (20346) Which one of the following statements is NOT true? a. The value of a dollar invested at a positive interest rate grows over time. b. The further in the future you receive a dollar, the less it is worth today. c. A dollar in hand today is worth more than a dollar to be received in the future. d. The further in the future you receive a dollar, the more it is worth today.

c

QN=3 (20367) The present value of multiple cash flows is a. greater than the sum of the cash flows. b. equal to the sum of all the cash flows. c. less than the sum of the cash flows. d. none of these.

b

QN=30 (20257) Current liabilities are liabilities that a. will be converted to cash within a year. b. must be paid within a year. c. will be converted to equity within a year. d. none of these

b

QN=30 (20322) All but one of the following is true about quick ratios. a. The quick ratio is calculated by dividing the most liquid of current assets by current liabilities. b. Service firms that tend not to carry too much inventory will see significantly higher quick ratios than current ratios. c. Inventory, being not very liquid, is subtracted from total current assets to determine the most liquid assets. d. Quick ratios will tend to be much smaller than current ratio for manufacturing firms or other industries that have a lot of inventory.

d

QN=30 (20645) Growing perpetuity: Norwood Investments is putting out a new product. The product will pay out $25,000 in the first year, and after that the payouts will grow by an annual rate of 2.5 percent forever. If you can invest the cash flows at 7.5 percent, how much will you be willing to pay for this perpetuity? (Round to the nearest dollar.) a. $312,000 b. $233,000 c. $250,000 d. $500,000

c

QN=30 (20700) Bond price: Triumph Corp. issued five-year bonds that pay a coupon of 6.375 annually. The current market rate for similar bonds is 8.5 percent. How much will you be willing to pay for Triumph's bond today? Round to the nearest dollar. a. $1,023 b. $1,137 c. $916 d. $897

d

QN=31 (20280) Corruption in business a. creates inefficiencies in an economy. b. inhibits growth in an economy. c. slows the rate of economic growth in a country. d. all of these

b

QN=31 (20328) Which one of the following statements is correct? a. The lower the level of a firm's debt, the higher the firm's leverage. b. The lower the level of a firm's debt, the lower the firm's equity multiplier. c. The lower the level of a firm's debt, the higher the firm's equity multiplier. d. The tax benefit from using debt financing reduces a firm's risk.

a

QN=31 (20635) Perpetuity: Your father is 60 years old and wants to set up a cash flow stream that would be forever. He would like to receive $20,000 every year, beginning at the end of this year. If he could invest in account earning 9 percent, how much would he have to invest today to receive his perpetual cash flow? (Round to the nearest dollar.) a. $222,222 b. $200,000 c. $189,000 d. $235,200

d

QN=31 (20706) Bond price: Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Round to the nearest dollar.) a. $951 b. $882 c. $1,033 d. $1,195

c

QN=32 (20261) A good capital budgeting decision is a. one in which the benefits of the project are equal to the cost of the asset. b. one in which the benefits of the project are less than the cost of the asset. c. one in which the benefits of the project are more than the cost of the asset. d. all of these.

d

QN=32 (20334) Which one of the following statements is NOT correct? a. The DuPont system is based on two equations that relate a firm's ROA and ROE. b. The DuPont system is a set of related ratios that links the balance sheet and the income statement. c. Both management and shareholders can use this tool to understand the factors that drive a firm's ROE. d. All of these are correct.

d

QN=32 (20623) Present value of an annuity: Lorraine Jackson won a lottery. She will have a choice of receiving $25,000 at the end of each year for the next 30 years, or a lump sum today. If she can earn a return of 10 percent on any investment she makes, what is the minimum amount she should be willing to accept today as a lump-sum payment? (Round to the nearest hundred dollars.) a. $750,000 b. $334,600 c. $212,400 d. $235,700

a

QN=32 (20747) Nonconstant growth: Lincoln, Inc. expects to pay no dividends for the next four years. It has projected a growth rate of 35 percent for the next four years. After four years, the firm will grow at a constant rate of 6 percent. Its first dividend to be paid in year 5 will be worth $4.25. If your required rate of return is 20 percent, what is the stock worth today? a. $14.64 b. $32.18 c. $36.43 d. $21.82

a

QN=33 (20271) Which of the following is responsible for seeing that the best possible financial analysis is presented? a. CFO b. CEO c. board of directors d. audit committee

d

QN=33 (20315) Anyone analyzing a firm's financial statements should a. use audited financial statements only. b. do a trend analysis. c. perform a benchmark analysis. d. All of these.

b

QN=33 (20693) The expected return on Kiwi Computers stock is 16.6 percent. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, then what is Kiwi's beta? a. 1.26 b. 2.10 c. 2.80 d. 3.15

b

QN=33 (20736) Constant growth: Prior, Inc., is expected to grow at a constant rate of 9 percent. If the company's next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this stock? (Round to the nearest percent.) a. 13% b. 16% c. 20% d. 21%

d

QN=34 (20278) Which of the following can help align the behavior of managers with the goals of shareholders? a. management compensation b. managerial labor markets c. an independent board of directors d. all of these

d

QN=34 (20694) The expected return on Mike's Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Kiwi is 1.7, then what is the risk-free rate? a. 4.5% b. 5.0% c. 5.5% d. 6.0%

d

QN=34 (20726) PV of dividends: Givens, Inc., is a fast growing technology company that paid a $1.25 dividend last week. The company's expected growth rates over the next four years are as follows: 25 percent, 30 percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth rate of 8 percent annually. If the required rate of return is 12 percent, what is the present value of the dividends over the fast growth phase? a. $1.25 b. $6.46 c. $8.37 d. $7.23

b

QN=35 (20710) Zero coupon bonds: Jarmine Corp. is planning to fund a project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual coupons to be the norm, what will be the price of these bonds if the appropriate discount rate is 14 percent? (Round to the closest answer.) a. $852 b. $258 c. $419 d. $841

a

QN=35 (20756) Payback: Binder Corp. has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000, $715,250, $823,330, and $907,125 over the next four years. What is the payback period for this project? a. 2.12 years b. 1.88 years c. 4.00 years d. 3.00 years.

d

QN=36 (20714) Yield to maturity: Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.) a. 11.5% b. 11.8% c. 12.5% d. 12.2%

d

QN=36 (20759) Payback: Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. What is the payback period for this project? If their acceptance period is three years, will this project be accepted? a. 2.67 years; yes b. 2.67 years; no c. 3.33 years; yes d. 3.33 years; no

a

QN=37 (20698) Bond price: Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Round to the nearest dollar.) a. $872 b. $1,066 c. $990 d. $945

d

QN=37 (20768) Internal rate of return: Lowell Communications, Inc., has been installing a fiber-optic network at a cost of $18 million. The firm expects annual cash flows of $3.7 million over the next 10 years. What is this project's internal rate of return? (Round to the nearest percent.) a. 10% b. 12% c. 14% d. 16%

c

QN=38 (20741) Preferred stock: Each quarter, Transam, Inc., pays a dividend on its perpetual preferred stock. Today, the stock is selling at $83.45. If the required rate of return for such stocks is 10.5 percent, what is the quarterly dividend paid by this firm? a. $8.76 b. $10.50 c. $2.19 d. $2.63

b

QN=38 (20757) Payback: Elmer Sporting Goods is getting ready to produce a new line of golf clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $812,500, and 1,200,000 over the next three years. What is the payback period for this project? a. 3 years b. 2.43 years c. 1.57 years d. More than 3 years

b

QN=39 (20739) Preferred stock valuation: The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5 percent? a. $23.06 b. $65.88 c. $37.57 d. $43.25

b

QN=39 (20751) Net present value: The Cyclone Golf Resorts is redoing its golf course at a cost of $2,744,320. It expects to generate cash flows of $1, 223,445, $2,007,812, and $3,147,890 over the next three years. If the appropriate discount rate for the firm is 13 percent, what is the NPV of this project? a. $7,581,072 b. $2,092,432 c. $4,836,752 d. $3,112,459

c

QN=4 (20266) Which of the following owners is protected by limited liability? a. a sole proprietor b. a general partner c. a limited partner d. none of these

d

QN=4 (20292) According to the realization principle, revenue from a sale of the firm's products are recognized a. when the products are shipped to the buyer. b. when the buyer orders the goods. c. when cash is realized from the sale of the products. d. at the time of the sale.

d

QN=4 (20313) The creditors of a firm analyze financial statements so that they can focus on a. the firm's amount of debt. b. the firm's ability to generate sufficient cash flows to meet all legal obligations first and still have sufficient cash flows to meet debt repayment and interest payments. c. the firm's ability to meet its short-term obligations. d. All of these.

d

QN=4 (20345) Which one of the following statements is NOT true? a. The time value money refers to what the value of the stream of future cash flows today is. b. A dollar received today is worth more than a dollar received tomorrow. c. A dollar received tomorrow is worth less than a dollar received today. d. A dollar received today is worth less than a dollar received tomorrow.

a

QN=4 (20359) Which of the following statements is true? a. The longer the time period that funds are invested, the greater the future value, regardless of investment rate. b. The lower the discount rate that funds are invested at, the greater the future value. c. The shorter the time period that funds are invested, the greater the future value, regardless of investment rate. d. The higher the interest rate, the slower the value of an investment will grow.

d

QN=4 (20360) Which of the following statements is false with respect to the present value of a future amount? a. The higher the discount rate, the lower the present value of a single sum for a given time period. b. The relation between present value and time is exponential. c. The greater the time period, the lower the present value of a single sum for a given interest rate. d. The lower the discount rate, the lower the present value of a single sum for a given time period.

d

QN=4 (20361) To solve future value problems with multiple cash flows involves which of the following steps? a. First, draw a time line to make sure that each cash flow is placed in the correct time period. b. Second, calculate the future value of each cash flow for its time period. c. Third, add up the future values. d. All of these are necessary steps.

a

QN=40 (20750) Preferred Stock Yield-to-Maturity: Durango Water Works has an outstanding issue of preferred stock that has a par (maturity value) of $75.00. The stock, which pays a quarterly dividend of $1.10, will be retired by the firm in 20 years. If the preferred stock is currently selling for $68.00, what is the preferred stock's yield-to-maturity? (Round off to the nearest 0.01%) a. 6.72% b. 5.64% c. 4.28% d. 7.73%

a

QN=40 (20752) Net present value: Johnson Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $1,750,000. Expected cash flows over the next four years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the company's required rate of return of 15 percent, what is the NPV of this project? a. $1,169,806 b. $2,919,806 c. $4,669,806 d. $3,122, 607

d

QN=41 (20753) Net present value: Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV of this project? a. $1,802,554 b. $197,446 c. -$1,802,554 d. -$197,446

a

QN=41 (20764) Internal rate of return: Quick Sale Real Estate Company is planning to invest in a new development. The cost of the project will be $23 million and is expected to generate cash flows of $14,000,000, $11,750,000, and $6,350,000 over the next three years. The company's cost of capital is 20 percent. What is the internal rate of return on this project? (Round to the nearest percent.) a. 22% b. 20% c. 24% d. 28%

b

QN=42 (20762) Discounted payback: Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. The firm's cost of capital is 12 percent. What is the discounted payback period for this project? If the firm's acceptance period is five years, will this project be accepted? a. 5.4 years; no b. 6.1 years; no c. 4.6 years; yes d. 4.2 years; yes

b

QN=42 (20767) Internal rate of return: Casa Del Sol Property Development Company is refurbishing a 200-unit condominium complex at a cost of $1,875,000. It expects that this will lead to expected annual cash flows of $415,350 for the next seven years. What internal rate of return can the firm earn from this project? (Round to the nearest percent.) a. 10% b. 12% c. 14% d. 16%

c

QN=43 (20758) Payback: Creighton, Inc., has invested $2,165,800 on equipment. The firm uses payback period criteria of not accepting any project that takes more than four years to recover costs. The company anticipates cash flows of $424,386, $512,178, $561,755, $764,997, $816,500, and $825,375 over the next six years. What is the payback period, and does this investment meet the firm's payback criteria? a. 4.13 years; no b. 4.13 years; yes c. 3.87 years; yes d. 3.87 years; no

b

QN=43 (20765) Internal rate of return: Modern Federal Bank is setting up a brand new branch. The cost of the project will be $1.2 million. The branch will create additional cash flows of $235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of capital is 12 percent. What is the internal rate of return on this branch expansion? (Round to the nearest percent.) a. 20% b. 23% c. 25% d. 27%

c

QN=44 (20773) Windy Burgers is trying to determine when to harvest a herd of cows that it currently owns. If it harvests the herd in year 1, the NPV of the project would increase over an immediate harvest by 25 percent. A year 2 harvest would create an NPV increase of 15 percent over that of year 1 and year 3 would create an NPV increase of 7 percent over that of year 2. If the cost of capital is 12 percent for Windy, then which harvest year would maximize the NPV for the firm? Assume that all NPVs are calculated from the perspective of today. a. Harvest immediately. b. Harvest in year 1. c. Harvest in year 2. d. Harvest in year 3.

c

QN=44 (20780) Projects with different lives: Your firm is deciding whether to purchase a durable delivery vehicle or a short-term vehicle. The durable vehicle costs $25,000 and should last five years. The short-term vehicle costs $10,000 and should last two years. If the cost of capital for the firm is 15 percent, then what is the equivalent annual cost for the best choice for the firm? (Round to the nearest dollar.) a. $5,000, either vehicle b. $5,000, short-term vehicle c. $6,151, short-term vehicle d. $7,458, long-term vehicle

b

QN=45 (20774) Stillwater Drinks is trying to determine when to harvest the water from the fountain of youth that it currently owns. If it harvests the water in year 1, the NPV of the project would increase over an immediate harvest by 18 percent. A year 2 harvest would create an NPV increase of 12 percent over that of year 1 and year 3 would create an NPV increase of 8 percent over that of year 2. If the cost of capital is 17 percent for Stillwater, then which harvest year would maximize the NPV for the firm? Assume that all NPVs are calculated from the perspective of today. a. Harvest immediately. b. Harvest in year 1. c. Harvest in year 2. d. Harvest in year 3.

a

QN=45 (20783) When to replace an asset: Burt's Pizzas is considering whether to purchase an oven. Burt's calculates that its current oven generates $4,000 of cash flow per year. A new oven would cost $15,000 and would provide cash flow of $6,000 per year for six years. What is the equivalent annual cash flow for the new oven (round to the nearest dollar), and should Burt's purchase the new oven? Assume the cost of capital for Burt's is 12 percent. a. $2,352, do not purchase the oven b. $6,000, purchase the oven c. $9,668, purchase the oven d. $24,668, purchase the new oven

b

QN=46 (20770) A firm is considering taking a project that will produce $12 million of revenue per year. Cash expenses will be $5 million, and depreciation expenses will be $1 million per year. If the firm takes that project, then it will reduce the cash revenues of an existing project by $2 million. What is the free cash flow on the project, per year, if the firm is in the 40 percent marginal tax rate? a. $2.4 million b. $3.4 million c. $4.6 million d. $5.0 million

b

QN=46 (20782) When to replace an asset: Nemo Haulers is considering whether to purchase a new mini tractor for moving furniture within its warehouse. Nemo calculates that its current mini tractor generates $3,100 of cash flow per year. A new mini tractor would cost $3,000 and would provide cash flow of $4,000 per year for five years. What is the equivalent annual cash flow for the new mini tractor (round to the nearest dollar), and should Nemo purchase the new tractor? Assume the cost of capital for Nemo is 10 percent. a. $3,000, do not purchase the new tractor b. $3,209, purchase the new tractor c. $4,000, purchase the new tractor d. $12,163, purchase the new tractor

b

QN=47 (20786) Capital rationing. You are considering a project that has an initial cost of $1,200,000. If you take the project, it will produce net cash flows of $300,000 per year for the next six years. If the appropriate discount rate for the project is 10 percent, what is the profitability index of the project? a. 0.09 b. 1.09 c. 2.09 d. 2.18

d

QN=47 (20789) Capital Rationing: Myers Limited is considering the purchase of automated equipment that is expected to generate an NPV of $632,500. The cost of the equipment is $2,375,500. What is the profitability index of the project? (Round off to the nearest 0.01) a. 1.54 b. 1.12 c. 1.44 d. 1.27

c

QN=48 (20787) Capital rationing. TuleTime Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project? a. 0.11 b. 0.90 c. 1.11 d. 1.90

a

QN=48 (20788) Capital rationing. The profitability index for a project is 1.18. If the project will produce cash inflows of $60,000 for the next 12 years, what is the initial outlay for the project if the appropriate discount rate is 5 percent? (Round to the nearest $10.) a. $450,670 b. $627,520 c. $1,016,950 d. none of these

c

QN=49 (20785) Capital rationing. Mick's Pub's is considering expanding the number of restaurants it owns. If it decides on the expansion, it will invest $2,300,000, and the NPV of the project is $900,000. What is the profitability index of the project? a. 0.39 b. 1.00 c. 1.39 d. 2.39

d

QN=49 (20789) Capital Rationing: Myers Limited is considering the purchase of automated equipment that is expected to generate an NPV of $632,500. The cost of the equipment is $2,375,500. What is the profitability index of the project? (Round off to the nearest 0.01) a. 1.54 b. 1.12 c. 1.44 d. 1.27

a

QN=5 (20260) Capital budgeting decisions generally involve a. the fixed asset portion of the balance sheet. b. the short-term portion of the balance sheet. c. the current liability portion of the balance sheet. d. all of these.

d

QN=5 (20307) Which of the following is an income statement item? a. Accumulated depreciation. b. Accrued taxes. c. Retained earnings. d. Selling and administrative expenses.

a

QN=5 (20335) The DuPont equation shows that a firm's ROE is determined by three factors: a. net profit margin, total asset turnover, and the equity multiplier b. operating profit margin, ROA, and the ROE c. net profit margin, total asset turnover, the ROA d. ROA, total assets turnover, and the equity multiplier

a

QN=5 (20353) The Rule of 72 a. can be used to determine the amount of time it takes to double an investment. b. is fairly accurate for interest rates between 25 and 50 percent. c. states that the time to double your money (TDM) approximately equals 72/i, where 72 represents the years it takes to double your investment. d. None of these describe the Rule of 72.

d

QN=5 (20373) Which ONE of the following statements is true about amortization? a. Amortization refers to the way the borrowed amount (principal) is paid down over the life of the loan. b. With an amortized loan, each loan payment contains some payment of principal and an interest payment. c. A loan amortization schedule is just a table that shows the loan balance at the beginning and end of each period, the payment made during that period, and how much of that payment represents interest and how much represents repayment of principal. d. All of these are true.

c

QN=5 (20376) The annuity transformation method is used to transform a. a present value annuity to a future value annuity. b. a present value annuity to an annuity due. c. an ordinary annuity to an annuity due. d. a perpetuity to an annuity.

b

QN=5 (20380) The true cost of borrowing is the a. annual percentage rate. b. effective annual rate. c. quoted interest rate. d. periodic rate.

b

QN=50 (20786) Capital rationing. You are considering a project that has an initial cost of $1,200,000. If you take the project, it will produce net cash flows of $300,000 per year for the next six years. If the appropriate discount rate for the project is 10 percent, what is the profitability index of the project? a. 0.09 b. 1.09 c. 2.09 d. 2.18

b

QN=50 (20790) If assets are $199,000 and liabilities are $132,000, then equity equals a. $32,000. b. $67,000. c. $99,000. d. $131,000. e. $198,000.

c

QN=6 (20270) Which of the following reports directly to the owners of the firm (assume the firm is a public corporation) a. CFO b. CEO c. board of directors d. audit committee

c

QN=6 (20296) When prices are falling, valuing inventory using the LIFO method rather than FIFO gives a. inventory a higher value but lowers net income. b. inventory a lower value and also lowers net income. c. both inventory and net income a higher value. d. inventory a lower value and net income a higher value.

c

QN=6 (20324) All else being equal, which one of the following will decrease a firm's current ratio? a. a decrease in the net fixed assets b. a decrease in depreciation c. an increase in accounts payable d. None of these

b

QN=6 (20355) Using higher interest rates will a. not affect the future value of the investment. b. increase the future value of any investment. c. decrease the future value of any investment. d. None of these.

b

QN=6 (20364) Which one of the following steps is NOT involved in solving present value problems? a. First, draw a time line to make sure that each cash flow is placed in the correct time period. b. Second, compound each cash flow for its time period. c. Third, add up the values. d. All of these are necessary steps.

d

QN=6 (20388) Which of the following investment classes had the greatest variability in returns for recent historical data? a. Intermediate-Term Government Bonds b. Long-Term Government Bonds c. Large U.S. Stocks d. Small U.S. Stocks

b

QN=6 (20392) A portfolio with a level of systematic risk the same as that of the market has a beta that is a. equal to zero. b. equal to one. c. less than the beta of the risk-free asset. d. less than zero.

c

QN=7 (20272) Which of the following is an appropriate goal for the firm? a. profit maximization b. revenue maximization c. shareholder wealth maximization d. tax minimization

b

QN=7 (20300) Which one of the following are NOT all noncash items? a. depreciation, deferred taxes, and prepaid expenses b. depletion charges, taxes, and amortization c. depletion charges, deferred taxes, and prepaid expenses d. depreciation, amortization, and prepaid taxes

d

QN=7 (20336) Which one of the following is a criticism of equating the goals of maximizing the ROE of a firm and maximizing the firm's shareholder wealth? a. ROE is based on after-tax earnings, not cash flows. b. ROE does not consider risk. c. ROE ignores the size of the initial investment as well as future cash flows. d. All of these are criticisms of ROE as a goal.

a

QN=7 (20359) Which of the following statements is true? a. The longer the time period that funds are invested, the greater the future value, regardless of investment rate. b. The lower the discount rate that funds are invested at, the greater the future value. c. The shorter the time period that funds are invested, the greater the future value, regardless of investment rate. d. The higher the interest rate, the slower the value of an investment will grow.

a

QN=7 (20371) If your investment pays the same amount at the end of each year forever, the cash flow stream is called a. a perpetuity. b. an ordinary annuity. c. an annuity due. d. none of these.

c

QN=7 (20416) Which one of the following statements is NOT true? a. Interest rate risk is the risk that bond prices will change as interest rates change. b. Interest rate changes and bond prices are inversely related. c. As interest rates increase, bond prices increase. d. Long-term bonds are more price volatile than short-term bonds of similar risk.

a

QN=7 (20424) Which ONE of the following statements is true? a. The longer the maturity of a security, the greater its interest rate risk. b. If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping. c. The real rate of interest varies with the business cycle, with the lowest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession. d. The interest risk premium always adds a downward bias to the slope of the yield curve.

d

QN=8 (20269) Which of the following organizational forms is subject to the most SEC regulations? a. sole proprietorship b. partnership c. private corporation d. public corporation

d

QN=8 (20284) Which of the following sections do annual reports typically contain? a. financial summary related to the past year's performance b. information about the company, its products, and its activities c. audited financial statements, including limited historical financial data d. All of these sections are included in the annual report.

d

QN=8 (20314) A firm's management analyzes financial statement's so that: a. (i) they can get feedback on their investing, financing, and working capital decisions by identifying trends in the various accounts that are reported in the financial statements. b. (ii) similar to shareholders, they can focus on profitability, dividend, capital appreciation, and return on investment. c. (iii) they can get more stock options. d. (i) and (ii).

c

QN=8 (20349) The process of converting an amount given at the present time into a future value is called a. time value of money. b. discounting. c. compounding. d. None of these.

d

QN=8 (20379) Which one of the following statements is TRUE about the effective annual rate (EAR)? a. The effective annual interest rate (EAR) is defined as the annual growth rate that takes compounding into account. b. The EAR conversion formula accounts for the number of compounding periods and, thus, effectively adjusts the annualized interest rate for the time value of money. c. The EAR is the true cost of borrowing and lending. d. All of these are true.

d

QN=8 (20401) Which ONE of the following statements is true? a. The largest investors in corporate bonds are life insurance companies and pension funds. b. The market for corporate bonds is thin. c. Prices in the corporate bond market also tend to be more volatile. d. All of these are true.

b

QN=8 (20436) The least efficient of all the different types of secondary markets is the a. auction market. b. direct search market. c. dealer market. d. broker market.

b

QN=9 (20251) If you have loaned capital to a firm, then you could be a. a shareholder. b. a stakeholder. c. a partner. d. all of these.

c

QN=9 (20293) The cost principle states that an asset should be recognized on the balance sheet at a. the market value of the asset. b. at the market value less the accumulated depreciation on the asset. c. at its historical cost. d. at its historical cost less the accumulated depreciation on the asset.

a

QN=9 (20316) An individual analyzing a firm's financial statements should do all but one of the following: a. Use unaudited financial statements. b. Do a trend analysis. c. Perform a benchmark analysis. d. Compare the firm's performance to that of its direct competitors.

a

QN=9 (20357) Using lower interest rates will a. decrease the future value of any investment. b. increase the future value of any investment. c. not affect the future value of the investment. d. None of these.

a

QN=9 (20365) In computing the present and future value of multiple cash flows, a. each cash flow is discounted or compounded at the same rate. b. each cash flow is discounted or compounded at a different rate. c. earlier cash flows are discounted at a higher rate. d. later cash flows are discounted at a higher rate.

a

QN=9 (20456) Which of the following statements is true about the general dividend valuation model? a. It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate. b. It implies that the value of a firm's common stock can be determined only if the expected future dividends are infinite. c. It implies that the value of a growth stock can be determined by forecasting the future price of the stock. d. The model cannot be used to calculate the value of a common stock unless the dividends exceed the firm's expected growth rate.

b

QN=9 (20476) Which one of the following statements about the discounted payback method is NOT true? a. The discounted payback method represents the number of years it takes a project to recover its initial investment. b. The discounted payback method calls for the project to be accepted if the payback period is greater than a target period. c. The discount payback method is a risk indicator. d. The expected cash flows from the project are discounted at the cost of capital.