FINANCE MIDTERM STUDY GUIDE

Andrea's opportunity cost rate is 12 percent compounded annually. How much must she deposit in an account today if she wants to receive $2,100 at the beginning of each of the next seven years? Use the equation method to determine the amount.

$10,734

Greenwood Builders Ltd. Has a debt ratio of 35 percent and it has total assets of $750,000. What is the value of their total liabilities?

$262,500

Violet Solutions Ltd. Has net sales of $850 million, variable operating costs of $475 million, and fixed operating costs including depreciation of $100 million. What is the net operating income of Violet Solutions?

$275 million

If the opportunity cost rate is 8 percent, compounded annually, what is the present value of $8,200 due to be received in 12 years?

$3,256

Kim has just graduated from law school. She had taken an education loan of $45,000, which now must be repaid in equal monthly installments over the next six years. What is the amount of the monthly loan repayment, if the loan carries a simple annual interest of 5 percent? The first payment will be made in one month.

$724.72

Dwayne plans to invest $4,700 in a savings account at the beginning of each of the next 12 years. If his opportunity cost rate is 7 percent compounded annually, how much will his investment be worth at the end of 12 years?

$89,961.02

The proportion of a firm's funds that is provided by shareholders is equal to:

1 minus the debt ratio

If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that the interest is paid once per year, the effective annual rate of the investment is _____.

11.5%

A firm has profit margin of 15 percent on sales of $20,000,000. If the firm has a debt of $7,500,000, total assets of $22,500,000, and an interest cost on a total debt of 5 percent, what is the firm return on total assets (ROA)?

13.3%

Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday?

15.19 yrs

If Rachel invests $1700 today in an account that pays 6 percent interest compounded annually, how long will it take for her to accumulate $6,500 in her account?

23.02 years

A bond purchased for $950 was sold for $980 after one year. The interest received during the year is $25. Which of the following is the bond's yield?

5.79%

Which of the following is the yield of a bond that offers a risk-free rate of 4 percent and a risk premium of 2 percent?

6%

A leading bank offers an investment that pays 8 percent interest, compounded semiannually. What is the investment's effective annual rate (rEAR)?

8.16%

LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of Investment A and Investment B?

9.38 percent and 10.25 percent, respectively

Zoey is planning to invest $5,000 in a fixed income security at the end of each of the next four years. She will receive $23,000 at the end of four years. If interest is compounded annually, what is the annual rate of return earned on the investment?

9.4%

All else equal, in which of the following forms of business would the possibility of an agency problem be the greatest?

A U.S. corporation in which individual stockholders own extremely small proportions of the company

Which of the following changes is considered a source of cash when preparing a statement of cash flow?

A decrease in inventories

Identify the correct statement about a limited liability partnership (LLP)

A general partner of a limited liability partnership is personally liable for all business debts.

Paying Payroll Service (PPS) recently declared bankruptcy. The price of PPS's stock has dropped from approximately $10 per share one year ago to $1 today. You can imagine that stockholders are not happy that the value of their stock has dropped so significantly. At the same time the financial position of the firm was deteriorating, PPS executives increased their salaries and perquisites substantially. Nothing they did violated any laws or was considered an unethical act. We would most likely describe this situation as

An agency problem

The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded _____.

Annually

Which of the following bonds has the greatest default risk?

Ans: A CCC corporate bond with a 10-year-maturity

Inflation leads to an increase in the purchasing power of investors.

Ans: False

Because financial institutions in other countries are generally less regulated than those in the United States, they generally:

Ans: can provide businesses a greater variety of services than U.S. banks can.

Assuming that other things are constant, the price-earnings (P/E) ratio:

Ans: is higher for firms with high growth prospects and lower for riskier firms.

Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment.

Ans:True

The change in the market value of an asset over a particular time period is called the _____

Capital Gain

During or near peaks of business activity, yield curves generally are either flat or downward sloping.

Correct Ans: False (It was not True)

The production opportunities that exist in the economy represent one of the four fundamental factors that affect the:

Cost of Money

A firm's net income reported on its income statement must equal the operating cash flows on the statement of cash flows.

False

Having the manager's compensation tied to the company's performance increases the agency problem that corporations face.

False

The real rate of interest is composed of a risk-free rate of interest plus the default risk premium and liquidity premium that reflects the riskiness of the security.

False

Which of the following factors will lead to an increase in interest rates?

Federal Deficit

Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)

Future value = Present value × (1 + r)n

Which of the following statements is correct?

In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms.

Retained earnings is the total amount of:

Income that has been saved and reinvested in assets since the firm started business

Which of the following indicates that the cost of money will increase?

Increase in the rate of inflation in an economy

Which of the following statements is true?

Institutional differences among countries can cause significant problems in coordination of subsidiaries

The value of an asset is determined by discounting the future cash flows generated by the asset using the:

Interest rate

Assume that the expectations theory of the term structure of interest rates is correct, and other term structure theories are invalid. If a downward sloping yield curve is observed, which of the following is a correct statement?

Investors expect interest rates to decrease in the future.

Which of the following statements describes a liquidity premium?

It is a premium that is added to the rate on a security if the security cannot be converted to cash on short notice that is close to the original cost.

The _________ theory that has been developed to explain the shape of the yield curve suggests that the curve should normally be upward sloping, because, everything else equal, an upward sloping curve implies that lenders prefer to lend short-term funds at lower rates than they lend long-term funds.

Liquidity preference

Ibiza Corporation invested $20,000 for the last four years in an investment that will pay the firm $120,000 at the end of this year. The $120,000 received at the end of this year is an example of a(n) ___

Lump-sum amount

At the beginning of the year, William bought 20 shares of Zync Corporation at $18.50 per share. Zync pays dividends at the end of each year based on annual profits, which generally vary substantially from year to year. In its 25 years history, Zync has paid dividends every year without fail. The initial investment by William and the receipt of dividend at the end of every year are examples of a(n) _____ and a(n) _____, respectively.

Lump-sum payment, uneven cash flow stream

Which of the following actions should be taken by managers to avoid takeover threats?

Managers should take action to maximize stock prices.

Sarah invests $2,700 today in an account that pays 6 percent interest compounded annually. She wants to know the total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to determine the total balance.

N = 5, I/Y = 6%, PV = -2,700

Which of the following is the rate of return on the best available alternative investment of equal risk?

Opportunity Cost Rate; See. 4-1 Cash flow patterns.

A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of cash flow pattern represents a(n):

Ordinary Annuity

Which of the following statements is correct?

Reinvestment rate risk is lower, other things held constant, on long term than on short-term bonds.

Which of the following financial statements is prepared to show the changes in the common equity accounts between balance sheet dates?

Statement of Retained Earnings

Which of the following statements is true about the values recorded in the balance sheet of a firm?

The book value of a firm's debt generally is equal to or very close to the market value of the firm's liabilities

Which of the following statements concerning the complexity of the manager's task in a multinational corporation is correct?

The currency values of different countries in which a multinational corporation operates often experience fluctuations

Which of the following statements is true about the annual report of a company?

The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends.

Everything else equal, if the United States runs a large foreign trade deficit, the financing of the deficit will:

Trade deficits are financed through debt

Industrial groups are organizations comprised of companies in different industries with common ownership interests, which include firms necessary to sell and manufacture products.

True

The disadvantages associated with a proprietorship are similar to those of a partnership. A major difference between these two forms of business organization is that a partnership requires legal agreement that commits the partners' personal assets, which means that partnerships have little difficulty raising large amounts of capital (similar to corporations).

True

The effective annual rate (rEAR) considers the effect of compounding, whereas annual percentage rate (APR) does not consider the effect of compounding.

True

The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.

True

Which of the following statements is correct?

Under partnership law, if any partner is unable to meet his or her pro rata claim in the event the partnership goes bankrupt, the remaining partners must make good on the unsatisfied claims.

A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of cash flow pattern is a(n) _____.

Uneven cash flow stream

Techniques employed by firms to make their financial statements look better than they actually are, are called:

Window-dressing techniques

Everything else equal, including firm size, dollar, sales, type of product sold, and so forth, the primary difference between proprietorship and partnership business forms is that:

a partnership has more owners than a proprietorship

The investment function of finance helps in:

determining the values, risks, and returns associated with such financial assets as stocks and bonds

A limitation of ratio analysis is that:

firms can employ window-dressing techniques to make their financial statements look better.

Securities that can be easily converted into cash on short notice at a price that is close to the original cost generally have a:

low liquidity premium

Helium Brands Ltd. Has a beginning balance of retained earnings of $185 million. Helium has a net income of $48 million and has paid a dividend of $15 million in the current year. The ending balance of retained earnings is:

•$218 million

Sapphire Industries Ltd. has a net income of $60 million and the total depreciation on its assets is $20 million. What is the net cash flow of Sapphire Industries?

•$80 million

Pelican Corporation is planning to invest $12,000 at the beginning of each of the next eight years. This form of cash flow pattern is known as a(n) _____.

•Annuity due

Nations do not have the sovereignty to takeover (expropriate) the assets of a firm without compensation.

•False

Which of the following financial statements summarizes the revenue generated and the expenses incurred by a firm during the accounting period?

•Income Statement

If an analyst's goal is to determine how effectively a firm is managing its assets, which of the following sets of rations would he or she examine?

•Inventory turnover ration, days sales outstanding, fixed asset turnover ration

Which of the following actions is consistent with social responsibility and is not necessarily inconsistent with stockholder wealth maximization

•Investing in a smokestack filter to reduce sulphur-dioxide emissions to decrease the tax being levied on the firm by the state for pollution it produces each year.

The primary goal of a publicly owned firm interested in serving its stockholders should be to:

•Maximize the stock price per share

Paul wants to accumulate $14,500 for the down payment for a new condo. He plans to start investing $2,500 annually beginning today. The investment account will pay 10 percent interest compounded annually. How long would it take him to accumulate enough money to make the down payment?

•Possible Ans: 4.4 years

A firm current ration has steadily increased over the past 5 years, from 1.9 to 3.8. What would a financial analyst probably conclude from this information?

•The firm's liquidity position has improved

Which of the following statements is correct?

•The potential for agency problems is greater when individuals stockholders own extremely small proportions of the companies and managers have little, if any, of their own wealth tied up in these companies.

Which of the following mathematical expressions calculates the debt ratio?

•Total liabilities / total assets

The credit manager is supervised by the:

•Treasurer

The balance sheet includes historical values that can impact the validity of a firm's financial rations.

•True