Finance Exam 1
Given the corporate tax rates of 15% on income from $0 to $50,000, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000, approximately how much tax would a company pay if it had taxable income of $90,000?
(.15)(50,000)(.25)(25,000)(.34)(15,000)= $18,850
Suppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate?
(1000/100)^(1/10)-1
A credit card charges 1.5 percent interest each month. What is the EAR?
(1.015)^12-1= 19.56%
Which compounding interval will result in the lowest future value assuming everything else is held constant?
Annual
For a subsidized Stafford loan:
Interest does not accrue until repayment begins
Marginal tax rates are the most important tax rates because:
Financial decisions are usually based on new cash flows. Incremental cash flows are taxed at marginal tax rates.
_______ is the income subject to tax.
Taxable income
Which of the following is true about a partial amortization loan?
The amortization period is longer than the loan period. The monthly payments do not fully pay off the loan by the end of the loan period. The borrower makes a large balloon payment at the end of the loan period.
You invest $500 at 10 percent. At the end of 2 years with simple interest you will have ____ and with compound interest you will have _____.
$600; $605
Given the tax rates of 15% on Income from $0 to $50,000, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000, approximately how much tax would a company pay on a taxable income of $60,000?
(.15)(50,000)+(.25)(10,000) = $10,000
How long it will take $40 to grow to $240 at an interest rate of 6.53% compounded annually?
28.33 years
According to the U.S. tax code, marginal and average tax rates equalize at a final tax rate of ______ percent
35
Which of the following are sources of cash?
A decrease in accounts receivable. An increase in notes payable.
Which of the following is the simplest form of loan?
A pure discount loan
What does stockholders' equity represent?
A residual claim against the firm's assets
Which of the following methods can be used to calculate present value?
A time value of money table An algebraic formula A financial calculator
Another common term for the effective annual rate (EAR) is the:
APY
Which of the following are examples of short-run fixed costs?
Bond interest Rent
Which of the following processes can be used to calculate future value for multiple cash flows?
Calculate the future value of each cash flow first and then add them up. Compound the accumulated balance forward one year at a time.
Which of the following do not directly affect cash flow?
Depreciation
What are two ways to calculate a balloon payment?
Find the present value of the payments remaining after the loan term. Amortize the loan over the loan life to find the ending balance.
What does GAAP stand for?
Generally accepted accounting principles
Which of the following is true about a growing annuity?
The cash flows grow at a constant rate. The cash flows grow for a finite period.
Which of the following are true about the amortization of a fixed payment loan?
The principle amount paid increases each period. The amount of interest paid decreases each period.
Which of these questions can be answered by reviewing a firm's balance sheet?
What is the total amount of assets the firm owns? How much debt is used to finance the firm?
A company's _____ tax rate is its tax bill divided by its total taxable income, and its _______ tax rate is the tax rate its pays on the next dollar of income.
average; marginal
The idea behind ______ is that interest is earned on interest.
compounding
Accounting profit ______ cash flow.
differs from
A growing annuity has a(n) ______.
finite number of growing cash flows
An annuity due is a series of payments that begin _______.
immediately
A decrease in depreciation expense __________ earnings per share.
increases
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
For financial decision-making purposes, the most important tax rate is the ________ tax rate.
marginal
If you want to know how much you need to invest today at 12% compounded annually in order to have $4,000 in five years, you will need to find a(n) ______ value.
present
Initial public offerings of stock occur in the _______ market.
primary
Accountants usually distinguish between _______ costs and _______ costs.
product; period
In the long run, all costs are _____.
variable
If the interest rate is 10% per year and there are 10 years, what is the present value discount factor?
1/(1.10)^10= .3855
If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.
10
The general formula for the ______ is (1+r/m)^m-1.
EAR
Which of these is NOT shown on a balance sheet?
Good management Favorable economic conditions Proprietary assets
How are assets on a balance sheet listed?
In order of decreasing liquidity.
Increasing its non-cash liquid assets will enable a firm to do which of the following?
Increase its ability to avoid financial distress. Increase its ability to meet short-term obligations.
Why is a dollar received today worth more than a dollar received in the future?
Inflation will make a dollar in the future worth less than a dollar today. Today's dollar can be reinvested, yielding a greater amount in the future.
Which of the following are annuities?
Installment loan payments Monthly rent payments
_______ income is money earned after interest and taxes.
Net
The basic present value equation is:
PV=FV^t= (1+r)^t
Which of the following are ways to amortize a loan?
Pay principle and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of principle.
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
Sales growth Population growth Dividend growth
What should you keep in mind when examining an income statement?
Cash versus non-cash items Time and costs GAAP
Which of the following is an example of a non-cash item on an income statement?
Depreciation
What s an effective annual rate of 12.36 percent equal to?
EAR= (1+.12/2)^2-1= 12.36% 12%, compounded semiannually
If you invest $100 at 10 percent simple interest, how much will you have in 10 years?
FV= $100 + 10($100 x .10)= $200
Which of the following is the correct mathematical calculation of the future value of $100 invested today for 3 years at 10% per year?
FV= $100 x (1.10)^3
If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ______.
FV= $100 x 1.10^2= $121
Which of the following is the multi-period formula for compounding a present value into a future value?
FV= PVx(1+r)^t
True or False: Appreciation of property will be recognized as income even if not realized.
False
Which of the following payment methods amortizes a loan?
Fixed payments that result in a zero loan balance. Interest plus fixed amount.
Why is positive net working capital important?
It means the firm should have sufficient cash to meet its current obligations.
What is a primary concern for a bank lending funds to a business for the short term?
Liquidity
The basic present value equation underlies many of the:
Most important ideas in corporate finance
Which of the following are period costs?
Selling costs General expenses Administrative expenses
Who is entitled to the residual value of a firm's cash flows?
Shareholders
Under a flat-rate tax, all income levels are taxed at _____.
The same average rate. The same marginal rate.
Which of the following is true about U.S. modified flat-rate tax system?
The tax rate becomes flat at very high income levels.
Time value of money tables are not as common as they once were because:
They are available for only a relatively small number of interest rates. It is easier to use inexpensive financial calculators instead.
In the Excel setup of a loan amortization problem, which of the following occurs?
To find the principal payment each month, you subtract the interest payment from the total payment. The payment is found using PMT(rate, nper, -pv, fv).
What is the purpose of the income statement?
To measure performance over a set period of time.
How is the average income tax rate computed?
Total tax bill/Total taxable income
True or False: The formula for a present value factor is (1)/(1+r)^t
True
According to GAAP, when is income reported?
When it is earned or accrued
When is revenue recognized on an income statement?
When the exchange of goods or services is completed. When the earnings process is virtually completed.
What is the future value of $100 at 10 percent simple interest for 2 years?
$100+2(.10x$100)= $120
What is the future value of $100 compounded for 50 years at 10 percent annual interest?
$11,739.09
The U.S. tax rate becomes a flat-rate tax in practice at approximately what corporate income level?
$18 million
Suppose we invest $100 now and get back $236.74 in 10 years. What rate of interest will we achieve?
($236.74/$100)^(1/10)-1= 9%
If you invest for a single period at an interest rate of r, your money will grow to ____ per dollar invested.
(1 + r)
The present value interest factor for a 30-year annuity with an interest rate of 10 percent per year is ______.
[1-(1/1.10^30)]/.10]= 9.4269
For a positive stated annual interest rate and multiple compounding periods per year, the EAR is always _____ the APR.
larger than
Most investments involve:
multiple cash flows
The entire principle of an interest-only loan is the:
original loan amount
The payments in a ______ amortization loan are NOT based on the life of the loan.
partial
C/r is the formula for the present value of a(n) _______.
perpetuity
The present value formula for a(n) _______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
perpetuity
With interest-only loans that are not perpetuities, the entire principal is:
repaid at some point in the future.
The 38 percent tax bracket is ____.
the result of a surcharge.
Because of _________ and __________, interest rates are often quoted in many different ways
tradition; legislation
The relationship between stockholders and management can best be described as a _________ relationship.
Agency
The threat of _____ motivates managers to make good decisions.
a hostile takeover
Long term liabilities represent obligation of the firm lasting over ________.
1 year
If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?
Agency problem
The responsibility of financial managers is to increase the value of:
Common Stock
The Sarbanes-Oxley Act requires corporate officers to:
Confirm the validity of the financial statements and be responsible for errors in the annual report.
Which corporate officer is responsible for accurate financial reporting of the firm's activities?
Controller
Which positions generally report to the CFO?
Controller Treasurer
The federal government taxes which of the following?
Corporate earnings and shareholders dividends.
A general partnership has which of the following characteristics?
Each owner has unlimited liability for all firm debts. It is difficult to transfer ownership.
True or False: "Profit maximization" is the best goal for the management of a corporation.
False
True or False: The Sarbanes-Oxley Act provides incentives for companies to go public in US markets.
False
Which one of the following is shown on the left-hand side of the balance sheet?
Fixed assets
A general partnership has which of the following characteristics?
It is difficult to transfer ownership. Each owner has unlimited liability for all firm debts.
What is true of a sole proprietorship?
It is the simplest type of business to form. A proprietorship has a limited life.
Which one of these provides a manager an incentive to perform well?
Job prospects
Corporations in other countries are often called:
Joint stock companies Public limited companies Limited Liability companies
The financial goal of profit maximization is associated with which of the following?
Maintenance deferment Critical inventory reduction Cost cutting
In a shareholder-manager relationship, who is the agent?
Managers
The owners of a corporation are called ________.
Shareholders
Which of the following, are possible financial goals for a company?
Survival Maximize profits Minimize costs
The controller is responsible for which of the following tasks?
Tax reporting Financial accounting
A shareholders' liability is limited to which of these?
The amount the shareholder invested in the corporation.
Which one of these motivates managers to make good decisions?
Threat of hostile takeover.
What are among the most important questions to be asked when a business is started?
What long-term investments should be made? How will everyday financial activities be handled? Where will long-term financing be obtained to pay for investments?
Which of the following are included in a firm's inventory?
Work in process Raw materials Finished goods
The conflict of interest between and agent and a principal is called a:
agency problem
Liquidity refers to the ease of changing _________.
assets to cash
Which of the following are important when considering a partnership?
Fund raising limitations Personal liability for firm debts Taxation of partnership income
Which of the following are considered stakeholders in a company?
Government, Employees, and Suppliers.
How is income defined?
Revenue minus expenses
There is a potential for ____ problems when you hire a real estate company to sell your house.
agency
The costs incurred due to the conflict of interest between stockholders and management are called:
agency costs
An organization must prepare ___________ and bylaws when forming a corporation.
articles of incorporation
A person who brings buyers and sellers together is called a(n) __________.
broker
The rules used by a corporation to regulate its existence are known as ___________.
bylaws
Net working capital equals ________.
current assets minus current liabilities.
The more debt a firm has, the greater its:
degree of financial leverage
Some of the cash flow generated by a firm goes back to the financial markets in the form of _____________?
dividends and debt payments
Fixed costs are costs that will not change due to _______.
fixed commitments over a stated period of time
Indirect agency costs are often due to lost __________.
opportunities
A business without separate legal authority formed by two or more people is known as a __________.
partnership
A limited liability company is taxed like a _________ and its owners have _________ liability.
partnership; limited
Stock price reporting has increasingly moved from traditional print media to the _______ in recent years.
internet
The life of a corporation __________.
is unlimited.
A corporation is a distinct ________ entity and as such can have a name and take advantage of the legal powers of natural persons
legal
In a limited partnership, a limited partner's liability for business debts is __________.
limited to their cash contribution to the company.
The goal of a for-profit business is to _______ existing owners' equity.
maximize
The accounting equation shows that stockholders' equity equals assets ______ liabilities.
minus
A sole proprietorship is a business owned by ________ person(s).
one
An important mechanism used by unhappy stockholders to replace management is called a _____ fight.
proxy
The trading of existing shares occurs in the ________ market.
secondary
When one owner or creditor sells to another, the transaction takes place in the _________ market.
secondary
The officer responsible for managing the firm's cash flows is the ________.
treasurer
The Sarbanes-Oxely Act requires corporate officers to do which of the following?
Accept responsibility for material errors in the annual report. List any deficiencies in internal reports. Confirm the validity of the annual financial reporting.
A customer has yet to pay the bill for products purchased on credit. This debt is recorded in which balance sheet account?
Accounts receivable
The relationship between stockholders and management can be described as a ___ relationship.
Agency
The costs incurred due to a conflict of interest between stockholders and management are called __________.
Agency costs
A corporation receives cash from financial markets by selling ________ and _________.
Bonds Stocks
___________ budgeting is the process of making and managing expenditures on long-term assets.
Capital
Which term applies to the mixture of debt and equity maintained by a firm?
Capital structure
Rank the ease of turning the following assets into cash.
Cash equivalents Accounts receivable Inventory Plant and equipment
In large firms, financial activity is usually associated with which top officer?
Chief financial officer
A bad financial decision is defined as a decision that _____ owners' equity.
Decreases
Which of the following are classified as liabilities on a firm's balance sheet?
Deferred taxes Accounts payable
What are the two basic classifications under which most potential financial goals fall?
Earning or increasing profits Controlling risk
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
Enron, WorldCom, and Tyco
Which of the following are included in a firm's capital structure?
Equity Long-term debt
A good financial decision will do which of the following?
Increase shareholders equity Increase the value of the firm's existing stock
A good financial decision will do the following for a firm:
Increase the value of the firm and increase shareholders' equity.
Which of the following are current assets?
Inventory Accounts receivable
Which of the following can be used to encourage managers to act in the best interests of shareholders?
The threat of termination. Stock options and bonuses. Managerial compensation tied to performance. Monitoring through reports.
What is the primary purpose of awarding stock options to managers?
To increase shareholders' wealth
What is the main goal of financial management?
To maximize shareholder wealth
Which of the following are included in the fixed asset portion of a balance sheet?
Trademarks Accumulated depreciation
A balance sheet reflects a firm's _______ value on a particular date.
accounting
In the long-run, __________ are variable.
all costs
The short run is ____.
an imprecise period of time
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _________ of each period.
end
Non-cash items are ______ that _____ cash flow.
expenses; do not directly affect
Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ________.
dealer
Depreciation is the accountant's estimate of the cost of _________ used up in the production process
equipment
Which of these are generally considered to be short-run fixed costs?
Management salaries Property taxes Overhead expenses
The goal of a "for profit" business is to ____ the value of owner's equity.
Maximize
NASDAQ has which of these features?
Multiple market maker system. Computer network of securities dealers.
The two most important stock markets in the U.S. are the New York Stock Exchange and ________.
NASDAQ
The short run for a firm is the period of time during which ________.
Output can vary Some costs are fixed
How is ownership transferred in a corporation?
Ownership is transferred by gifting or selling stocks.
Which are true concerning product costs?
Product costs are reported as costs of goods sold. Product costs contain both fixed and variable costs.
Assets can be described as items that:
Provide market value to the firm. Generate revenue. A firm owns.
Which one of these is an important mechanism used by unhappy stockholders to replace current management?
Proxy fight
Which of the following is a variable cost in the short run?
Raw materials
Because shareholders get paid last after all other obligations are satisfied, they are often called:
Residual owners
Which one of the following parties would be the last party to receive payment if a firm were to close? Assume all parties have a legitimate claim on the firm's assets.
Shareholders
The NYSE differs from the NASDAQ primarily because the NYSE has:
Specialists An auction market A physical location
______ ______ can be used to encourage managers to maximize the value of the stock.
Stock options
__________ are frequently used to encourage key managers to maximize the value of the firm's stock.
Stock options
On which side of the balance sheet do liabilities appear?
The right side
Net working capital is defined as current assets minus current ________.
liabilities
The price at which willing buyers and sellers would trade is called ________ value.
market
A _____ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm.
stakeholder
A ___________ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm.
stakeholder