FINANCE 1
A firm has a total debt ratio of .38. This means the firm has $.38 in debt for every
$.62 in equity.
First Simple Bank pays 9.5 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 8 years?
.095*8= .076 100*.076= 76 100+76= 176 total Calculator: FV: 176 PV: -100 N:8 CPT->I/Y= 7.32%
First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made a $58,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 8 years?
12The simple interest per year is: $58,000 × .08 = $4,640 So, after 8 years, you will have: $4,640 × 8 = $37,120 in interest The total balance will be: $58,000 + 37,120 = $95,120 COMPOUND INTEREST: N= 8 I/Y = 8 PV = -58,000 CPT->FV = 107,353.95 $107,353.95 - $95,120 = $12,233.95
Which cash coverage ratio would a lender prefer its borrower have?
2.1 highest choice
Teddy's Pillows has beginning net fixed assets of $600 and ending net fixed assets of $730. Assets valued at $400 were sold during the year. Depreciation was $50. What is the amount of net capital spending?
730 - 600 + 50 =
A firm has a debt-equity ratio of .53. What is the total debt ratio?
A debt-equity ratio of .53 implies that for every $.53 of debt there is $1.00 of equity and $1.53 of assets. Total debt ratio = ($1.53 − 1.00)/$1.53 = .35
Which one of these statements related to the time value of money is correct? Assume a positive rate of interest.
A dollar received today is more valuable than a dollar received next month.
Which one of the following statements is correct concerning ratio analysis?
A single ratio is often computed differently by different individuals.
A decrease in which one of the following accounts increases a firm's current ratio and its quick ratio?
Accounts payable
Which one of the following accounts is generally the most liquid?
Accounts receivable
The tax rates are as shown. Your firm, an LLC, currently has taxable income of $73,900. How much additional tax will the firm owe if it increases its taxable income by $20,000?
Additional tax = [($84,200 −73,900) × 22%] + [$20,000 − ($84,200 − 73,900)] × 24% = $4,594
Which one of these terms refers to a conflict of interest between the stockholders and managers of a corporation?
Agency Problem
Which one of the following statements concerning liquidity is correct?
Balance sheet accounts are listed in order of decreasing liquidity.
Find the APR in each of the following cases: # of time compounded: semiannually EAR: 12.5% # of time compounded: monthly EAR: 13.4% # of time compounded: weekly EAR: 11.1% # of time compounded: infinite EAR: 14.8%
Calculator: 2nd -> 2 EFF: 12.5 C/Y: 2 CPT->NOM: 12.13% EFF: 13.4 C/Y: 12 CPT->NOM: 12.64% EFF: 11.1 C/Y: 52 CPT->NOM: 10.54% EFF: 14.8 C/Y: 9999999999 CPT->NOM: 13.80%
Find the EAR in each of the following cases: APR: 9.9% # of time compounded: Quarterly APR: 18.9% # of time compounded: Monthly APR: 14.9% # of time compounded: Daily APR: 11.9% # of time compounded: Infinite
Calculator: 2nd -> 2 NOM: 9.9 C/Y: 4 CPT->EFF: 10.27% NOM: 18.9 C/Y: 12 CPT->EFF: 20.63% NOM: 14.9% C/Y: 365 CPT->EFF: 16.06% NOM: 11.9% C/Y: 9999999999 CPT->EFF: 12.64%
Machine Co. has identified an investment project with the following cash flows. Year 1: CF=$800 Year 2: CF=$1,090 Year 3: CF=$1,350 Year 4: CF=$1,475 If the discount rate is 7 percent, what is the present value of these cash flows?
Calculator: CFo: $0 C01: 800 F01: 1 C02: 1,090 F02: 1 C03: 1,350 F03: 1 C04: 1,475 F04: 1 I= 7 NPV->CPT: $3,926.98
One of your customers is delinquent on his accounts payable balance. You've mutually agreed to a repayment schedule of $750 per month. You will charge 1.9 percent per month interest on the overdue balance. If the current balance is $18,000, how long will it take for the account to be paid off?
Calculator: I/Y: 1.9 PV: 18,000 PMT: -750 CPT->N= 32.35 months
Solve for the unknown number of years in each of the following: Present Value: $580 Interest Rate: 10% Future Value: $1,614
Calculator: I/Y: 10 PV: 580 FV: -$1,614 CPT->N= 10.74
At 6.8 percent interest, how long does it take to double your money?
Calculator: I/Y: 6.8 PV: 1 FV: -2 CPT-> N= 10.54
At 6.8 percent interest, how long does it take to quadruple your money?
Calculator: I/Y: 6.8 PV: 1 FV: -4 CPT-> N= 21.07
Investment X offers to pay you $5,800 per year for nine years, whereas Investment Y offers to pay you $8,300 per year for five years. Calculate the present value for Investments X and Y if the discount rate is 5 percent.
Calculator: Investment X: N: 9 I/Y: 5 PMT: 5,800 CPT->PV: $41,225.37 Investment Y: N: 5 I/Y: 5 PMT: 8,300 CPT->PV: $35,934.66
For each of the following, compute the present value: Years: 12 Interest Rate: 6 Future Value: $16,251
Calculator: N: 12 I/Y: 6% FV: $16,251 CPT-> PV: $8,076.25
Although appealing to more refined tastes, art as a collectible has not always performed so profitably. In 2010, an auction house sold a painting at auction for a price of $1,200,000. Unfortunately for the previous owner, he had purchased it three years earlier at a price of $1,780,000. What was his annual rate of return on this painting?
Calculator: N: 3 PV: -1,780,000 FV: 1,200,000 CPT->I/Y= -12.32%
Solve for the unknown interest rate in each of the following: Present Value: 270 Years: 4 Interest Rate: ???? Future Value: $338
Calculator: N: 4 PV: $270 FV: -$338 CPT->I/Y= 5.78%
You are planning to save for retirement over the next 25 years. To do this, you will invest $700 per month in a stock account and $300 per month in a bond account. The return of the stock account is expected to be an APR of 9 percent, and the bond account will earn an APR of 5 percent. When you retire, you will combine your money into an account with an APR of 6 percent. All interest rates are compounded monthly. How much can you withdraw each month from your account assuming a withdrawal period of 20 years?
Calculator: Stock: N: 300 I/Y: 9/12 PMT: 700 CPT->FV: 784,785.36 Bond: N: 300 I/Y: 5/12 PMT: 300 CPT->FV: 178,652.91 Savings at retirement= 784,785.36 + 178,652.91= 963,438.27 N: 240 I/Y: 6/12 PV:963,438.27 CPT->PMT: 6,902.37
Suppose an investment offers to quadruple your money in 30 months (don't believe it). What rate of return per quarter are you being offered?
Calculator: N: (30/12)*4= 10 PV: -1 FV: 4 CPT->I/Y= 14.87%
From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts?
Cash coverage ratio
A firm has sales of $215,600, costs of $124,800, interest paid of $3,600, and depreciation of $11,400. The tax rate is 34 percent. What is the value of the cash coverage ratio?
Cash coverage ratio = ($215,600 − $124,800)/$3,600 = 25.22 times
_____ refers to a firm's interest payments minus any net new borrowing.
Cash flow to creditors
At the beginning of the year, Austin Equipment Rentals had long-term debt of $687 and total debt of $911. At the end of the year, the long-term debt is $579 and total debt is $898. If $58 of interest was paid during the year, what is the cash flow to the creditors?
Cash flow to the creditors = $58 - (579 - 687) = $166
Cookie's Cookies has net income of $2,918. The firm pays out 35 percent of the net income to its shareholders as dividends. During the year, the company sold $150 worth of common stock. What is the cash flow to the stockholders?
Cash flow to the stockholders = .35($2,918) - $150 = $871.30
A supplier who requires payment this week should be most concerned about which one of its customer's ratios?
Cash ratio
At the beginning of the year, a firm has current assets of $360 and current liabilities of $190. At the end of the year, the current assets are $510 and the current liabilities are $240. What is the change in net working capital?
Change in net working capital = ($510 - $240) - ($360 - $190) = $100
A firm has sales of $3,900, net income of $1,304, total assets of $4,200, and total equity of $2,850. Interest expense is $80. What is the common-size statement value of the interest expense?
Common-size interest = $80/$3,900 = .0205, or 2.05%
Blue Mountain Foods has net fixed assets of $89,700 and current assets of $38,400, of which $21,400 is inventory. What is the common-size statement value of inventory?
Common-size inventory value = $21,400/($38,400 + 89,700) = .1671, or 16.71%
Assume a stated rate of interest of 8 percent. Which form of compounding will produce the highest effective rate of interest?
Continuous
Which form(s) of business is a treated as a distinct legal entity separate from its owners?
Corporation
Which one of the following business types is best suited to raising large amounts of capital?
Corporation
Which type of business organization has all the respective rights and privileges of a legal person?
Corporation
A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivables, $100 in accounts payable, and $50 in cash. What is the amount of the current assets?
Current assets = $300 + $200 + $50 = $550
Walker Corp. has current liabilities of $420,000, a quick ratio of .76, inventory turnover of 5.2, and a current ratio of 1.3. What is the cost of goods sold for the company?
Current ratio = Current assets/Current liabilities 1.3 = Current assets/$420,000 Current assets = $546,000 Using the quick ratio, we can solve for inventory: Quick ratio = (CA − Inventory)/CL 76 = ($546,000 − Inventory)/$420,000 Inventory = $546,000 − (.76 × $420,000) Inventory = $226,800 Using the quick ratio, we can solve for inventory: Inventory turnover = COGS/Inventory 5.2 = COGS/$226,800 COGS = $1,179,360
Which one of these is calculated as: 365/(Cost of goods sold/Inventory)?
Days' sales in inventory
Which one of the following is a capital budgeting decision?
Deciding whether to open an office in a foreign location
Which of the following actions will increase earnings per share?
Decreasing the unit cost of inventory sold
Kate starts saving for retirement today and plans to make annual contributions into this retirement account. Which one of these is most appropriate to increase the total amount she has saved on the day she retires? Assume she earns a positive rate of return each year.
Delaying her retirement by one year
Al's new business has a positive net income and a marginal tax rate of 21 percent. Given this, an increase in which one of the following will cause the operating cash flow to increase?
Depreciation
Which one of these measures a firm's operating and asset use efficiency as well as its financial leverage?
DuPont identity
What is the formula for computing operating cash flow?
EBIT + Depreciation − Current taxes
Lancaster Bakery has net fixed assets of $329,700, current assets of $87,200, a price-earnings ratio of 12.8, a debt-equity ratio of .42, and earnings per share of $1.97. What is the market-to-book ratio if there are 36,000 shares of stock outstanding?
Equity multiplier = 1 + .42 = 1.42 Total equity = ($87,200 + $329,700)/(1.42) = $293,591.55 Market-to-book ratio = (12.8 × $1.97)/($293,591.55/36,000) = 3.09 times
Bello Company has a debt-equity ratio of .6. Return on assets is 7.1 percent and total equity is $500,000. a.What is the equity multiplier? b.What is the return on equity? c.What is the net income?
Equity multiplier = 1 + D/E Equity multiplier = 1 + .60 Equity multiplier = 1.60 ROE = ROA(Equity multiplier) ROE = .071(1.60) ROE = .1136, or 11.36% ROE = Net income/Total equity Net income = ROE(Total equity) Net income = .1136($500,000) Net income = $56,800
Friendly's Quick Loans, Inc., offers you "eleven for fourteen or I knock on your door." This means you get $11 today and repay $14 when you get your paycheck in one week (or else). a.If you were brave enough to ask, what APR would Friendly's say you were paying? b.What's the effective annual return Friendly's earns on this lending business?
FV = PV(1 + r) $14 = $11(1 + r) r = FV/PV - 1 r = $14/$11 − 1 r = .2727, or 27.27% per week The interest rate is 27.27 percent per week. To find the APR, we multiply this rate by the number of weeks in a year, so: APR = (52)27.27% APR = 1,418.18% Calculator: 2nd -> 2 NOM: 1,418.18 C/Y: 52 CPT->EFF: 27,940,660.78%
Compute the future value of $2,500 continuously compounded for: 5 years at an annual percentage rate of 11 percent.
FV=PVe^rt FV= 2500e^(11*5) =4,333.13
A change in which one of these accounts will appear as an investing activity in an accounting statement of cash flows?
Fixed Assets
Which term applies to a set of cash flows that are finite in number and increase in amount at a steady rate?
Growing annuity
Which one of the following would have the greatest value assuming each has a Year 0 cash flow of zero and a Year 1 annual cash flow of $100? Assume a discount rate of 8 percent, compounded annually. Also, assume any growth rate is positive.
Growing perpetuity
You are comparing two investments, A and B, with unequal annual cash flows and varying numbers of years. Which one of these statements is correct regarding this comparison?
If B has a higher net present value, then B will have the higher net future value at any point in time, given a stated discount rate.
Which one of the following will increase the present value of a finite stream of even cash flows? Assume a positive rate of return.
Increasing the Time 2 cash flow by $100 and lowering the Time 3 cash flow by $100
Given a firm with positive annual cash flows, which one of the following will increase the current value of that firm?
Increasing the annual growth rate of the cash flows
Which one of these is handled differently in calculating cash flows for accounting versus financial purposes?
Interest expense
Which type(s) of loan repays the interest as an annuity and the principal as a lump sum?
Interest-only loans
Which one of the following statements is correct if a firm has an accounts receivable turnover measure of 10?
It takes the firm 36.5 days to collect payment for a sale. 365/10=
Assume a firm is operating at full capacity. Which one of these accounts is least apt to vary directly with sales?
Long-term debt
Which one of these statements is correct?
Long-term debt requires a payout of cash within a stated time period.
_____ refers to the difference between a firm's current assets and its current liabilities.
Net working capital
Total assets are $2,630, fixed assets are $1,825, long-term debt is $1,015, and short-term debt is $530. What is the amount of net working capital?
Net working capital = $2,630 - $1,825 - $530 = $275
Which ratio computes the amount of net income generated by each $1 of sales?
Profit margin
A company has net income of $188,000, a profit margin of 7.1 percent, and an accounts receivable balance of $127,370. Assuming 70 percent of sales are on credit, what is the company's days' sales in receivables?
Profit margin = Net income/Sales. 071 = $188,000/Sales Sales = $2,647,887 Credit sales are 70 percent of total sales, so: Credit sales = $2,647,887(.70) Credit sales = $1,853,521 Now we can find receivables turnover by: Receivables turnover = Credit sales/Accounts receivable Receivables turnover = $1,853,521/$127,370 Receivables turnover = 14.55 times Days' sales in receivables = 365 days/Receivables turnover Days' sales in receivables = 365/14.55 Days' sales in receivables = 25.08 days
In which type of loan does the borrower initially receive the present value of the future lump sum loan repayment amount?
Pure discount loan
Shaurya's Kitchen has cash of $4,300, accounts receivable of $2,500, accounts payable of $900, and inventory of $1,200. What is the value of the current ratio?
Quick ratio = ($4,300 + $2,500 + $1,200)/$900 = 8.89 times
Which ratio measures the number of times a firm lends money to customers, collects that money, and relends it within a year?
Receivables turnover
Gutierrez Event Management has sales of $397,000, total debt of $151,000, total equity of $133,000, and a profit margin of 28.0 percent. What is the return on assets?
Return on assets = .28 × $397,000/($151,000 + $133,000) = .391, or 39.1%
Martin's Lumber has a profit margin of 7 percent and a dividend payout ratio of 30 percent. The total asset turnover is .90, and the debt-equity ratio is .45. What is the sustainable rate of growth?
Return on equity = .07 × .90 × (1 + .45) = .09135 Sustainable growth = [.09135 × (1 − .30)]/[1 − .09135 × (1 − .30)] = .0683, or 6.83%
Y3K, Inc., has sales of $6,239, total assets of $2,855, and a debt-equity ratio of 1.3. If its return on equity is 15 percent, what is its net income?
So, we begin with the DuPont Identity: ROE = .15 = (PM)(TAT)(EM) = (PM)(S/TA)(1 + D/E) Solving the DuPont Identity for profit margin, we get: Profit margin = [(ROE)(TA)]/[(1 + D/E)(S)] Profit margin = [(.15)($2,855)]/[(1 + 1.30)($6,239)] Profit margin = .0298, or 2.98% Now that we have the profit margin, we can use this number and the given sales figure to solve for net income: Profit margin = Net income/Sales = .0298 Net income = .0298($6,239) Net income = $186.20
Which form of business structure is least likely to experience agency problems?
Sole proprietorship
Which type of business is the easiest and cheapest to form?
Sole proprietorship
Which one of the following statements is correct?
Sole proprietorships and partnerships are taxed in a similar fashion.
Given the tax rates as shown, what is the average tax rate for a sole proprietorship taxable income of $145,000?
Tax = [($9,700 − 0) × 10%] + [($39,475 − 9,700) × 12%] + [($84,200 − 39,475) × 22%] + [($145,000 − 84,200) × 24%] = $28,974.50 Average tax rate = $28,974.50 / $145,000 = .1998, or 19.98%
Art's Boutique has sales of $640,000 and costs of $480,000. Interest expense is $40,000 and depreciation is $60,000. The tax rate is 34%. What is the net income?
Taxable income = $640,000 - $480,000 - $40,000 - $60,000 = $60,000; Tax = .34($60,000) = $20,400; Net income = $60,000 - $20,400 = $39,600
Assume two annuities will each provide $500 annual cash flows for five years. One is an ordinary annuity and the other is an annuity due. Which statement concerning these annuities is correct?
The annuity due is more valuable than the ordinary annuity.
Which one of the following statements is correct concerning the organizational structure of a corporation?
The chief operations officer reports to the chief executive officer.
What is the amount of the non-cash expenses for 2010?
The non-cash expense is depreciation in the amount of $1,370.
Which one of the following statements concerning a sole proprietorship is correct?
The owner of a sole proprietorship may be forced to sell personal assets to pay company debts.
The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $17,000 per year forever. If the required return on this investment is 5.6 percent, how much will you pay for the policy? Suppose the company told you the policy costs $400,000. At what interest rate would this be a fair deal?
This cash flow is a perpetuity PV = C/r PV=$17,000/.056 PV = $303,571.43 PV = C/r $400,000 = $17,000/r r = $17,000/$400,000r = .0425, or 4.25%
Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be $166,000, received two years from today. Subsequent annual cash flows will grow at 2.6 percent in perpetuity. What is the value today of the technology if the discount rate is 9 percent?
This is a growing perpetuity. PV = C/(r − g)PV = $166,000/(.09 − .026)PV = $2,593,750.00 It is important to recognize that when dealing with annuities or perpetuities, the present value equation calculates the present value one period before the first payment. In this case, since the first payment is in two years, we have calculated the present value one year from now. To find the value today, we can discount this value as a lump sum. Doing so, we find the value of the cash flow stream today is: PV = FV/(1 + r)tPV = $2,593,750.00/(1 + .09)1PV = $2,379,587.16
Which ratio calculates the amount of sales generated by each $1 of debt and equity invested in the firm?
Total asset turnover
Western Wear has net working capital of $5,200, net fixed assets of $128,000, sales of $114,000, and current liabilities of $9,800. From each $1 in total assets, the firm generates sales of
Total asset turnover = $114,000/($5,200 + $9,800 + $128,000) = .80 times Every $1 in total assets generates $.80 in sales.
Guo Marketing has sales of $430,000, cost of goods sold of $124,000, inventory of $16,000, and accounts receivable of $42,000. How many days, on average, does it take the firm to collect payment from its customers?
Total days in receivables = $42,000/($430,000/365) = 35.7 days
Which position is generally directly responsible for financial planning and capital expenditures?
Treasurer
If Hailey, Inc., has an equity multiplier of 1.58, total asset turnover of 1.6, and a profit margin of 6.8 percent, what is its ROE?
Using the DuPont identity, the ROE is: ROE = (PM)(TAT)(EM)ROE = (.068)(1.6)(1.58) ROE = .1719, or 17.19%
Assume the following ratios are constant: Total asset turnover 2.6 Profit margin 6.6% Equity multiplier 1.5 Payout ratio 25% What is the sustainable growth rate?
We must first calculate the ROE using the DuPont ratio to calculate the sustainable growth rate. The ROE is: ROE = (PM)(TAT)(EM) ROE = (.066)(2.6)(1.5) ROE = .2574, or 25.74% The plowback ratio is one minus the dividend payout ratio, so: b = 1 − .25b = .75 We can now calculate the sustainable growth rate. Sustainable growth rate = (ROE × b)/[1 − (ROE × b)] Sustainable growth rate = [.2574(.75)]/[1 − .2574(.75)] Sustainable growth rate = .2392, or 23.92%
SGS Corp. has an ROE of 12 percent and a payout ratio of 29 percent. What is its sustainable growth rate?
We need to calculate the retention ratio to calculate the sustainable growth rate. The retention ratio is: b = 1 − Payout ratiob = 1 − .29b = .71 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b)/[1 − (ROE × b)] Sustainable growth rate = [.12(.71)]/[1 − .12(.71)] Sustainable growth rate = .0931, or 9.31%
The only difference between Anita's and Zita's is that Anita's has old, fully depreciated equipment, while Zita's has purchased all new equipment that will be depreciated over eight years. Assuming all else equal,
Zita's will have a lower profit margin.
Discounting cash flows involves
adjusting all expected future cash flows to their current value.
A conflict of interest between the stockholders and management of a firm is called:
an agency problem
The interest rate charged per period multiplied by the number of periods per year is called the
annual percentage rate.
The _____ tax rate measures the total taxes you paid divided by total taxable income.
average
If a firm decreases its operating costs, all else constant, then
both the return on assets and the return on equity increase.
The mixture of debt and equity used by a firm to finance its operations is called:
capital structure
The process of planning and managing a firm's long-term investments is referred to as
capital-budgeting
A current asset is best defined as
cash and other assets owned by the firm that should convert to cash within the next year.
The treasurer and the controller of a corporation generally report to the
chief financial officer
Capital structure decisions involve the ______
choices related to long-term debt and equity financing.
The person generally directly responsible for overseeing the tax management, cost accounting, financial accounting, and information system functions is the:
controller
A business created as a distinct legal entity composed of one or more individuals or entities is called a(n):
corporation
Sole proprietorships
create unlimited liability for their owners.
The quick ratio is calculated as
current assets minus inventory, divided by current liabilities.
All of the following are financial leverage ratios except the: -current ratio. -cash coverage ratio. -total debt ratio. -times interest earned ratio. -equity multiplier.
current ratio.
An interest rate expressed as if it were compounded once per year is called the
effective annual rate.
The effective annual rate (EAR) of a loan will increase if
either the annual percentage rate (APR) or the compounding frequency is increased.
The cash flow of a firm, also referred to as cash flow from assets, must be equal to the cash flow to
equity holders plus the cash flow to debt holders.
On a common-size income statement, depreciation will be
expressed as a percentage of sales
If Bowen Co. has a return on assets of 11 percent and also a return on equity of 11 percent, then the firm
has no debt of any kind.
Firms with high enterprise value multiples are most apt to have
high growth opportunities.
The sustainable rate of growth can be increased by
increasing the profit margin.
The cash flow to creditors increases when
interest is paid on outstanding debt.
Current assets include
inventory and accounts receivable
Depreciation
is a noncash expense that reduces the pretax income.
An annuity
is a stream of equal payments that occur in equal periods of time for a finite period.
Short-term finance _________________.
is concerned with managing net working capital.
A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a
limited liability company.
A(n) ____ asset is one that can be quickly converted into cash without significant loss in value.
liquid
Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are often referred to as
liquidity measures
The lower a firm's inventory turnover, the
longer inventory sits on the firm's shelves.
When making a financial decision, the most relevant tax rate is the _____ rate.
marginal
Your _____ tax rate is the percentage of the highest taxable dollar of income you earned that is payable as a tax.
marginal
According to the textbook, the primary goal of financial management is to
maximize the current value per share of the existing stock.
The internal rate of growth is based on the assumption that
no external funding of any type is obtained.
Ratio analysis works best when evaluating the financial statements of two firms
of differing sizes in the same industry.
Annuities with payments occurring at the end of each time period are called __________, whereas annuities with payments occurring at the beginning of each time period are called __________.
ordinary annuities; annuities due
The division of profits and losses among the members of a partnership is formalized in the
partnership agreement.
An annuity stream where the payments occur forever is called a(n)
perpetuity.
The net present value of an investment is best defined as the
present value of the investment's future cash flows minus the investment's cost.
The amount shareholders are willing to pay for each $1 per share of annual earnings a firm generates is indicated by the
price-earnings ratio.
The primary purpose of the Sarbanes-Oxley Act of 2002 is to
protect investors from corporate abuses.
Assume Castillo Corp. increases its operating efficiency such that costs decrease while sales remain constant. As a result, given all else constant, the
return on equity will increase.
A firm's total asset turnover measure of .63 means that a firm has $.63 in
sales for every $1 in total assets
The long-term debts of a firm are liabilities
that do not come due for at least 12 months.
Agency costs refer to
the costs of any conflicts of interest between stockholders and management.
The goal of financial management focuses on the fact that
the current stockholders are the owners of the corporation.
Cash flow to stockholders must be positive when
the dividends paid exceed the net new equity raised.
The issuance of new equity shares is a cash flow from _______ to _______
the financial markets; the firm.
A common-size balance sheet will express accounts receivable as a percentage of
total assets
The value of a firm is best defined as the
total present value of all the firm's future cash flows.
The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the:
treasurer
The management of a firm's short-term assets and liabilities is called:
working capital management