Finance Exam 1

Which of the following investments will have the highest future value?

$1,000 invested at an annual interest rate of 10% for 10 years

Juan and Rachel Burpo plan to buy a time-share in six years of $16,860. In order to have adequate funds to do so, the Burpo 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 Rachel need to deposit today to achieve their goal? (Round off to the nearest dollar.)

$12,055

Quipe Industries provided the following information for the year ending June 30, 2014. Increase in inventories $ 42 Purchased treasury stock 25 Purchased property and equipment 27 Net income 495 Decrease in accrued income taxes 63 Depreciation and amortization 168 Decrease in accounts payable 15 Increase in accounts receivable 39 Increase in long-term debt 150 What was Quipe Industries' cash flow from financing for the year ending June 30, 2014?

$125

If Kalium Motors has an EBIT of $28 million, interest of $8 million and is taxed at an average rate of 32%, what is its net income?

$13.6 million

Joseph Harris is considering an investment that pays 6.5 percent annually. How much must he invest today such that he will have $25,000 in seven years? (Round to the nearest dollar.)

$16,088

Steve Fisher is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)

$16,670

Steve Fisher is saving for a new car. He needs to have $21,000 for the car in 3 years. How much will he have to invest in an account paying 8% annually to achieve his target?

$16,670

Chandler Sporting Goods produces baseball and football equipment and lines of clothing. This year the company had cash and marketable securities worth $335,485, accounts payables worth $1,159,357, inventory of $1,651,599, accounts receivables of $1,488,121, short-term notes payable worth $313,663, and other current assets of $121,427. What is the company's net working capital?

$2,123,612

You are interested in investing $15,000, a gift from your grandparents, for the next four years in a mutual fund that will earn an annual return of 8%. What will your investment be worth at the end of four years?

$20.407

What is the future value of $1500 after 5 years if the annual return is 6% compounded semiannually?

$2016

The future value of $200,000 invested at a 7% annual rate, compounded quarterly for 3 years is _____. (Do not round your intermediate calculations. Round the final answer to the nearest two decimal places.)

$246,287.86

Trident Manufacturing Company's treasurer identified the following cash flows during this year as significant. The company repaid existing debt of $425,110, while raising additional debt capital of $750,000. It also repurchased stock in the open markets for a total of $63,250 and paid $233,144 in dividends to its shareholders. What is the net cash provided by (used in) financing activities?

$28.496

If Norman invested $100,000 for 3 years at 12%, how much interest on interest will he earn? (Do not round intermediate calculations. Round the final answer to two decimal places.)

$4,492.80

Tre-Bien Bakeries generated net income of $233,412 this year. At year end, the company had accounts receivables of $47,199, inventory of $63,781, and cash of $21,461. It also had accounts payables of $51,369, short-term notes payables of $11,417, and accrued taxes of $6,145. The net working capital of the firm is

$63,510

The following financial data of Convise Corp. for the past fiscal year is given. Net income $34,000 Increase in accounts payable $14,000 Increase in accrued income taxes $14,000 Increase in accounts receivable $16,000 Depreciation $22,000 Calculate company's cash flow to investors from operating activities?

$68,000

Celesta Frank wants to go on a cruise in three years. She could earn 8.2 percent compounded monthly in an account if she deposits the money today. She needs to have $10,000 in three years. How much will she have to deposit today? (Round to the nearest dollar.)

$7,826

Shane, inc., has completed its fiscal year and reported Total Assets of $1,000,000 and Total Liabilities of $300,000. Calculate the value of common equity

$700,000

Contrary Computer Corp. has reported that its net income for 2010 is $2,700,000. The firm has 600,000 shares outstanding and a price-earnings ratio is 15.8 times. What is the firm's share price?

$71.10

Jack Palomo has deposited $2,500 today in an account paying 6 percent interest annually. What would be the simple interest earned on this investment in five years? If the account pays compound interest, what will be the interest on interest in five years?

$750; $95.56

Celesta Frank wants to go on a cruise in three years. She could earn 8 percent compounded daily in an account if she deposits the money today. She needs to have $10,000 in three years. How much will she have to deposit today?

$7866

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? Round your final answer to the nearest dollar.

$79,292

Carlos Lopes is looking to invest for the next three years. He is looking to invest $7,500 today in a bank CD that will earn interest at 5.75 percent annually. How much will he have at the end of three years? (Round to the nearest dollar.)

$8870

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 of $14,215 mature. What is the net cash provided by (used in) investing activities?

-$132,085

If inflation is anticipated to be 5% during the next year, while the real rate of interest for a one-year loan is 5%, then what should the nominal rate of interest be for a risk-free one-year loan?

10%

Patrick Smith 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 that this investment earns?

10.4%

If inflation is anticipated to be 6% during the next year, while the real rate of interest for a one-year loan is 5%, then what should the nominal rate of interest be for a risk-free one-year loan?

11%

At what rate must $4,000 be compounded annually for it to increase to $40,000 in 15 years?

16.59%

Castelda company issues zero coupon bonds which mature in 30 years. These bonds can be bought for $999.38 and then pay no annual interest payments, only $100,000 at maturity. What is the annual percentage cost of these bonds to the issuing company? (Do not round intermediate calculations. Round your final answer to two decimal places of percentage.)

16.59%

Boretti has $400,000 in a stock fund. The fund pays a 10% return, compounded annually. If he does not make another deposit into the account, how long will it take for the account to increase to $2 million?

16.89 years

According to the Fisher equation, if the real rate of interest is 2.5% and the nominal rate of interest is 5.3%, the rate of inflation is forecast to be approximately

2.8%

Winston Baker will invest $25,000 in a spa that his sister is starting. He will triple his investment in six years. What is the rate of return that Winston is being promised?

20%

Your mother is trying to choose one of the following bank CDs to deposit $10,000. Which will have the highest future value if she plans to invest for three years?

3.75% compounded annually

Your tuition for the coming year is due today. You borrow $8,000 from your uncle and agree to repay in the three years an amount of $9,250. What is the interest rate on this loan?

5%

Transient Foods announced that its current sales is $1,233,450 this year. The company forecasts a growth rate of 16 percent for the foreseeable future. How long will it take the firm to produce earnings of $3 million?

6 years

If your investment increased 12% this year and inflation for that period was 4%, what was your real rate of return?

8%

If your investment increased 12% this year and inflation for that period was 4%, what was your real rate of return? (Use simplified/approximate Fisher equation)

8%

Direct financing occurs when:

A borrower-spender borrows directly from a lender-savers

Corporation

A business owned by more than one person; none of them are financially responsible for the actions and obligations of the business

Partnership

A business owned by more than one person; one or more of them is financially responsible for the actions and obligations of the business

An officer of a firm who is a majority owner in a competing firm will probably be subject to

A conflict of interest with his/her stockholders

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 firm sold common stock 20 years ago for $20 a share. The firm's common stock is currently selling for $96.50 per share

Which of the following types of owners cannot be engaged in managing the business?

A limited partner

An example of an agency cost is

A manager expensing a lavish dinner on the company expense report

The financial market where a new security is sold for the first time is:

A primary market

Who among the following is the "principal" in the agency relationship of a corporation?

A stockholder holding 10% or more of any class of voting stock

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 the above

A) $94,792

The legal system and market forces impose substantial costs on individuals and institutions that engage in unethical behavior. Which of the following would NOT be an example of these costs?

Agency conflicts

Which of the following is a major participant in the direct financial market?

All of the above (Large corporations, wealthy individuals, investment banks)

Accounting standards prescribed by GAAP are important because they: Make the financial statements of all firms standardized Allow one to examine a firm's performance with ease over a period of time Make it possible for management or analysts to compare a firm's performance with that of other comeptitors All of these

All of these

Which of the following sections do annual reports typically contain? Financial summary related to the past year's performance Information about the company, its products, and its activities Audited financial statements, including limited historical financial data All three of the above sections are included in the annual report

All three of the above sections are included in the annual report

Which of the following situations will result in an increase in the future value of an investment?

An increase in the rate of interest

Which one of the following characteristics does not pertain to corporations?

Are the easiest type of business to form

In a public corporation, which of the following reports directly to the owners of a firm?

Board of directors

Which of the following business organizations forms creates a tax liability on income at the personal income tax rate?

Both sole proprietorship and partnership

The nominal rate of interest is comprised of

Both the real rate of interest and compensation for inflation

Which of the following forms of business organization is subject to double taxation?

C-corp

Among the following, who is typically responsible for managing a large corporation's financial function?

CFO

Which of the following is primarily responsible for managing all financial aspects of a firm?

CFO

Which of the following factors or activities can be controlled by a firm's managers?

Capital budgeting

Which of the following statements is correct?

Capital market instruments include both long-term debt and common stocks.

Which of the following is a financial institution involved in indirect financing in a financial system?

Commercial banks

The going concern assumption implies that a firm will:

Continue to be in business for the foreseeable future

Which form(s) of business organization generate(s) the majority of business revenues and profits in the United States?

Corporation

Corruption in business

Creates inefficiencies in an economy, inhibits growth in an economy, slows the rate of economic growth in a country

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?

Current assets, plant and equipment, and goodwill

You loaned $100 to a friend for one year at a nominal rate of interest of 5%. Inflation during that year was 8%. How much did the purchasing power of your money change (an increase is positive and a decrease is negative)?

Decrease by approximately 3%

Which of the following is NOT one of the goals of the Sarbanes-Oxley Act of 2002?

Dictate maximum compensation levels

The two methods by which funds are transferred from savers to borrowers within an economy's financial system include

Direct and indirect transfers

What is the difference between FIFO and LIFO accounting?

During a period of rising prices, LIFO implies that a firm is selling the higher cost, newer inventory first, leaving the lower cost, older inventory on the balance sheet

What is one of the actions that is NOT an objective of the Sarbanes-Oxley Act of 2002?

Ensuring that an IRS employee is present at the firm's headquarters

A society's ideas about what actions are right and wrong are termed as:

Ethics

Which of the following is responsible for performing an independent audit of a firm's financial statements?

External auditor

Assets that are claims on the cash flows from other assets, business loans, stocks, and bonds, are real assets.

False

Companies receive funds when their securities are sold by an investor in a secondary market

False

Starting to invest early for retirement reduces the benefits of compound interest

False

The value of a dollar invested at a positive interest rate grows over time but at a slower rate further into the future.

False

The process of converting financial securities with one set of characteristics into securities with another set of characteristics is called:

Financial intermediation

The critical role of the financial system in an economy is to

Gather money from savers and channel it to borrowers

Which of the following does NOT belong to an income statement?

Goodwill

Which of the following is an advantage of the corporate form of organization?

Greater access to capital markets

Underwriting is the process by which an investment banker

Helps a company sell its new security issue

When prices are falling, the value of inventory using the LIFO method rather than FIFO gives inventory a:

Higher value and net income a higher value

Savings by ____ in small dollar amounts is the origin of much of the money that funds business loans in an economy

Households

The principal lender-savers in the economy

Households

Working capital management decisions help to determine:

How a firm's day-to-day financial matters should be managed

You loaned $100 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during that year was 2 percent. How much did the purchasing power of your money change (an increase is positive and a decrease is negative)?

Increased by 1%

Which of the following would generally NOT increase shareholders' wealth?

Increased government regulation

If your firm obtains most of its financing from commercial banks, then it primarily accesses the capital markets through:

Indirect financing

_________________occur(s) when one party in a business transaction has information that is unavailable to the other parties in the transaction.

Information asymmetry

Which of the following is a tax-deductible expense for a corporation?

Interest paid

Which of the following balance sheet items generally takes the longest time to convert to cash?

Inventory

Net cash flow:

Is the difference between a firm's actual cash receipts and cash payments in a given period

Which of the following statements about the time value of money concept is true?

It means a dollar received today is worth more than a dollar received tomorrow

Which of the following transactions is a secondary market transaction?

Johnny appleseed buying 1000 shares of Dell through NYSE

On June 30, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountant should recognize the sale on:

June 23, 2008

The income statement is:

Like a video recording of a firm's revenues and expenses during a period of time

The main responsibility of a financial manager is to

Make decisions that are in the best interests of the firm's owners

One reason for the existence of agency problems between managers and stockholders is that:

Management is separate from ownership

When a firm estimates future taxes, it should consider the:

Marginal tax rate

The main objective of a firm's management should be to

Maximize its stock value

Depreciation and amortization expenses are:

Noncash expenses that cause a firm's after-tax cash flows to exceed its net income.

From the owner's perspective, which of the following should be the primary focus of managers?

None of the above should be the primary focus (profit maximization, revenue maximization, COGS minimization)

A good capital budgeting decision is:

One in which the perceived benefits of the project are more than the cost of the asset

Sole proprietorship

Owned by a single person who is financially responsible for the actions and obligations of the business

Which of the following types of owners is protected by limited liability?

Owner of a corporation

Which organizational form best enables the owners of a firm to monitor the professional conduct of each other owners of the firm?

Partnership

Which of the following assets is an intangible asset?

Patents and copyrights

Trident Corporation had the following cash flows in the current year. Which of the following will be categorized under the financing activities section of the statement of cash flows?

Preferred dividends of $300,000 paid to shareholders

Which of the following organization forms is subject to the Securities and Exchange Commission (SEC) regulations?

Public corporation

Which organizational form is best suited for a firm to sell its securities to the market?

Public corporation

Which of the following is a cash flow from investing activities?

Purchase of plant and equipment

The presence of a financial market increases the marketability of a financial security by:

Reducing the transaction costs for selling the security

According to the realization principle, revenue from a sale of a firm's products are recognized when the:

Sale occurs whether or not cash is actually received

Anne Morgan wants to borrow $6,000 for a period of four years. She has two choices. Her bank will lend her the amount at 7.25 percent compounded annually. She can also borrow from her firm and will have to repay a total of $8,130.93 at the end of four years. Should Anne choose her bank or the firm, and what is the interest rate if she borrows from her firm? (Round to the nearest percent.)

She should borrow from the bank as the firm is charging a higher interest of 8%

From the owner's perspective, which of the following should be the goal of a firm?

Stockholders' wealth maximization

Who among the following is the "agent" in the agency relationship of a corporation?

The CEO of the firm

The generally accepted accounting principles (GAAP) are set by:

The Financial Accounting Standards Board (FASB)

Which of the following statements about the time value of money is true?

The further in the future you receive a dollar, the less it is worth today

Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced during the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate:

The inventory acquired on April 23 with the products sold

Executives that repeatedly put their own interests before that of the firm may find that they have difficulty in finding another job after their current one. This is an example of:

The managerial labor market disciplining managers

A highly liquid financial instrument with a maturity of 90 days would be traded in:

The money market

Which of the following statements is incorrect?

The retail individual investor is a common direct participant in the direct financial markets

When analysts and investors determine the value of a firm's stock, they shoulder consider:

The size of the expected cash flows associated with owning the stock, the timing of the cash flows, the riskiness of the cash flows

Large firms are most likely to use money markets for the following reason:

To adjust their liquidity position

An important function of the financial system

To direct money to the best investment opportunities in the economy

Cash raised by issuing common stock is an example of financing activities.

True

Direct financial markets could be broadly labeled as wholesale markets for funding

True

If the discount rate increases, then the present value of a potential investment would fall

True

Major buyers and sellers of securities in direct financial markets include commercial banks, large corporations, the federal government, hedge funds, and some wealthy individuals.

True

Most companies use indirect market funding from financial institutions to obtain financing

True

The role of the financial system is to gather money from people, businesses and government that have funds to invest and to channel that money to those who need it

True

The time value of money concept recognizes that people require additional compensation for deferring consumption:

True

The statement of cash flows can be described as:

Tying together the income statement with the balance sheets from the beginning of the period and the end.

Information asymmetry is a situation in which one party in a business transaction has information that is ________ to the other parties in the transaction.

Unavailable

Investment banking firms provide

Underwriting services

Which of the following mechanisms can help align the behavior of managers with the goals of stockholders?

Well-designed management compensation, managerial labor market, an independent board of directors

The capital budgeting decision process can be described as

Which productive assets a firm should purchase

Under which of the following discounting methods will the present value of an investment be the highest, assuming the same annual interest rate?

Yearly

If you are a borrower, which would you prefer to occur during the life of your loan?

a level of inflation that is higher than that anticipated at the outset of the loan

An example of an agency cost is:

a manager expensing a lavish dinner on the company expense report.

the major disadvantages of market-value accounting include:

all of the above are disadvantages of market-value accounting

Which of the following is a stakeholder?

an employee, a lender, and the IRS

The golden rule is an example of:

an ethical norm

A mutual fund is an example of:

an investment fund

the GAAP are rules

and procedures that define how companies are to maintain financial records and prepare financial statements

Stakeholder

anyone other than an owner (shareholder) with a claim on the cash flows of a firm, e.g., employees, suppliers, creditors, and the government

Your uncle is planning to sell his second home in Bethany Beach, Delaware in the next few weeks. You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of the:

assumption of arm's-length transactions

Interest is a tax-deductible expense. This causes firms to have a preference for financing with:

bonds

Which of the following is a basic source of funds for a firm?

both debt and equity

Which of the following business organizational forms create(s) a tax liability on income at the personal income tax rate?

both sole proprietorship and partnership

The nominal rate of interest is comprised of:

both the real rate of interest and compensation for inflation.

the average tax rate is:

calculated by dividing the total taxes paid by the taxable income.

Long-term assets/Productive assets

can be tangible assets, such as equipment, machinery, or a manufacturing facility, or intangible assets, such as patents, trademarks, technical expertise, or other types of intellectual capital

which of the following best represents cash flows to investors?

cash flow from operating activity - cash flow invested in NWC - cash flow invested in LT assets

which of the following is not a cash flow from investing activities?

cash payments of dividends to shareholders

Which of the following is not a cash flow from operating activities?

cash payments on the principal of long-term debt

A primary market is a market for

companies to sell new securities directly to investors.

If a firm has had an agency conflict which is reflected by a poor performing stock for a long period of time, then the firm may become a target of:

corporate raider

Working Capital

decide how to manager short-term resources and obligations by adjusting current assets and current liabilities to promote growth in cash flow

Capital Budgeting

decision-making process through which the firm purchases productive assets; one of the most important decision processes in a firm

When the discount rate:

decreases, the present value of any future cash flow increases.

Financing

determine how to pay for short-term and long-term assets by finding the best combination of short-term debt, long-term debt, and equity

Wealth

economic value of the assets the owner possesses

If the interest rate per year and the number of years involved remain the same, the total amount of interest earned on an investment will remain the same irrespective of the frequency of compounding

false

which of the following does not belong to an income statement?

goodwill

The cost principle states that an asset should be recognized on the balance sheet at the:

historical cost

Savings by _____ in small dollar amounts is the origin of much of the money that funds business loans in an economy.

households

When the discount rate:

increases, the present value of a future cash flow decreases.

The cost of borrowing money is called:

interest

A financial system's primary function is funneling money from:

lender-savers to borrower-spenders

The ease with which a security can be sold and converted into cash is called:

marketability

Which of the following should be the goal of the firm?

maximizing market price of the share

which of the following equations describes a firm's net cash flow from operating activities?

net cash flow = net income - non cash revenues + non cash expenses

common stockholders are

owners of a firm

Money has a time value because:

people can earn interest on money that is invested.

which of the following ratios is an indicator of market value?

price-earnings ratio

Casualty insurance companies sell:

protection against loss of property from fire, theft, accidents, and other predictable causes.

annual reports are prepared by a firm's management to:

provide a broad overview of the firm's financial and operating performance

Residual cash flows

remaining cash that managers of the firm distribute to the owners as a cash dividend or by repurchasing some shares or reinvest the cash in the business

which of the following is an income statement item?

selling and administrative expenses

Money markets are markets where

short-term financial instruments are traded

A stakeholder is:

someone who has a claim on the cash flows of the firm.

If you have loaned capital to a firm, then you could be

stakeholder

Financial markets and financial institutions are both part of:

the financial system

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:

the marginal tax rate

which of the following presents a summary of the changes in a firm's balance sheet from the beginning of an accounting period to the end of an accounting period?

the statement of cash flows

An important function of the financial system is:

to direct money to the best investment opportunities in the economy.

According to the balance sheet identity, total assets must equal:

total liabilities plus owners' equity

Future value measures:

what one or more cash flows are worth at the end of a specified period.