Finance Test 1

7. Fill in the missing amounts for the Balance Sheet Cash $ 10,000 Accounts Receivable $100,000 Inventory $_________ Total Current Assets $220,000 Gross plant and equipment $500,000 Less: accumulated depreciation __________ Net Plant and equipment $375,000 Total Assets $_________ Liabilities Account Payables $ 12,000 Notes Payable 50,000 Total current liabilities $_________ Long term debt $_________ Total Liabilities $190,000

$110,000 (220,000-110,000) $125,000 (500,000-375,000) $595,000 (220,000+375,000) $62,000 $128,000 (190,000-62,000)

18. You've just taken a job at an investment banking firm and been given the job of calculating the appropriate nominal interest rate for a number of different Treasury bonds with different maturity dates. The real risk-free interest rate that you have been told to use is 2.2%, and this rate is expected to continue on into the future without any change. Inflation is expected to be constant over the future at a rate of 2.1%. Since these are bonds that are issued by the U.S.Treasury, they do not have any default risk or any liquidity risk (that is, there is no liquidity-risk premium). The maturity-risk premium is dependent upon how many years the bond has to maturity. The maturity-risk premiums are Given this information, what should the nominal rate of interest on Treasury bonds maturing in 0-1 year, 1-2 years, 2-3 years, and 3-4 years be?

0-1 YEARS- 4.36 1-2 YEARS- 4.75 2-3 YEARS- 5.10 3-4 YEARS- 5.40

12. The maximum number of shareholders in a S corporation is

100

1. Calculating the default-risk premium) At present, 10-year Treasury bonds are yielding 3.8% while a 10-year corporate bond is yielding 6.8%. If the liquidity-risk premium on the corporate bond is 0.7%, What is the corporate bond's default-risk premium? _____ %

2.3

2. At present, 20-year Treasury bonds are yielding 5.1% while some 20-year corporate bonds that you are interested in are yielding 9.1%. Assuming that the maturity-risk premium on both bonds is the same and that the liquidity-risk premium on the corporate bonds is 0.25% while it is 0.0% on the Treasury bonds, what is the default-risk premium on the corporate bonds? Note that a Treasury security should have no default-risk premium.

3.75

34. Based on the information in Table 4-2, and assuming the company's stock price is $50 per share, the P/E ratio is

A) 10.89.

11. If a firm's sales are $2,000,000, its cost of goods sold is $1,500,000, and its fixed assets are $1,000,000, what is fixed asset turnover?

A. 2.0 times

19. Technology Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Technology Industries net profit margin is equal to

A. 25.67%.

2. What type of business are more likely to form limited liability partnerships

A. Legal and accounting

26. What type of financial ratio relate stock market information to financial statement items:

A. Price/Earning (P/E)

10. The basic format of an income statement is

A. Sales - Expenses = Profits.

1. You are considering three companies that in which to purchase stock. Among other criteria, you want to see how well each company will be able to meet its cash needs. Which one of the following companies would best be able to meet its cash needs: Current Ratio Quick Ratio Yum Brands 1.74 1.45 McDonalds 0.96 0.81 Starbucks 1.04 0.67 Chipotle 1.68 1.45

A. Yum Brands

13. An example of a primary market transaction involving a money-market security is

A. a new issue of a security with a very short maturity.

15. An example of a primary market transaction involving a money-market security is

A. a new issue of a security with a very short maturity.

22. The three main sections of the statement of cash flows include all of the following EXCEPT:

A. cash from saving

2. For a given accounting period, which of the following is MOST likely to represent primarily variable costs?

A. cost of goods sold

19. Compensation for securities that cannot easily be converted to cash without major price discounts is the definition of what term?

A. liquidity premium

14. The extent to which assets are used to support sales is indicated by which of the following ratios:

A. liquidity ratios

15. The ability of a firm to meet its short-term debt obligations as they come due is indicated by which of the following ratios:

A. liquidity ratios

1. The current liabilities of a business may include:

A. notes payable

5. The current ratio of a firm would equal its quick ratio whenever

A. the firm has no inventory.

3. When a company repurchases its own common stock, it is likely that

A. the stock price will increase because the company views the stock as undervalued.

22. Real Scooters Corporation has sales of $5,000,000, net income of $800,000, total assets of $2,000,000, and 100,000 shares of common stock outstanding. If Real Scooters P/E ratio is 12, what is the company's current stock price?

B) $96 per share

23. Given an accounts receivable turnover of 10 and annual credit sales of $900,000, the average collection period is

B) 36.50 days.

4. Jeter Industries has an accounts receivable turnover ratio of 4.5. If Jeter has an accounts receivable balance of $100,000, what is Jeter's average daily credit sales?

B. $1,232.88

26. Find the net profit margin if earnings before interest and taxes is $20,000, net income is $10,000, sales are $50,000, and total assets are $100,000.

B. 20%

8. Find the net profit margin if earnings before interest and taxes is $20,000, net income is $10,000, sales are $50,000, and total assets are $100,000.

B. 20%

9. What would be the return on total assets of a firm if net income is $50,000, total sales are $100,000, and total assets are $175,000?

B. 28.6%

12. If a firm's inventories on hand are $200,000, its cost of goods sold is $600,000, and its sales are $800,000, what is the inventory turnover?

B. 3 times

14. If you expect the inflation premium to be 2%, the default risk premium to be 1% and the real interest rate to be 4%, what interest would you expect to observe in the marketplace under the simplest form of market interest rates?

B. 7%

19. All of the following statements about agency problems are true EXCEPT

B. Agency costs are paid by the managers who do not act in the shareholders' best interest.

17. Which financial statement would you use to get financial data debt to equity ratio?

B. Balance Sheet

25. Which financial statement would you use to get financial data debt to equity ratio?

B. Balance Sheet

19. All the following is why analysts do financial ratio analysis except:

B. Gives you a method to compare firms across industries

2. You have been researching four consumer cyclical companies in which to invest in their stocks. You are wanting to compare profitability factors for each company as a selection criteria. Which one of these four companies would you consider? Gross Margin Net Profit Margin Return on Assets Netflix 31.72 % 2.11 % 2.74 % O'Reilly Automotive 52.47 % 12.08 % 14.95 % Lowe's 34.60 % 4.71 % 9.32 % MGM Resorts 41.88 % 11.65 % 4.13 %

B. O'Reilly Automotive

12. Wheeler Corporation had retained earnings as of 12/31/10 of $15 million. During 2011, Wheeler's net income was $7 million. The retained earnings balance at the end of 2011 was equal to $20 million. Therefore,

B. Wheeler paid a dividend in 2010 of $2 million.

20. When comparing inventory turnover ratios, other things being equal,

B. a higher inventory turnover is preferred to improve liquidity.

14. In finance, we assume that investors are generally

B. averse to risk.

22. Which of the following forms of business organization has the greatest ability to attract new capital?

B. corporation

The recent financial crises was exacerbated by

B. managers who underestimated the real risks of their decisions and borrowed excessively.

16. The primary goal of a publicly owned corporation is to ________.

B. maximize shareholder wealth

3. Net income is:

B. profits remaining after income taxes are paid

18. The relationship of assets and sales is shown in the _____________________.

B. total assets turnover ratio

14. Rogue Corp. has sales of $4,250,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. What is Rogue's tax liability?

C. $360,000

13. Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; long-term assets of $800,000; and long-term debt of $600,000. How much is the firm's total equity?

C. $900,000

29. Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; long-term assets of $800,000; and long-term debt of $600,000. How much is the firm's total equity?

C. $900,000

10. The current ratio of a firm with current assets of $300,000, current liabilities of $100,000, and inventory of $100,000 is:

C. 3

9. If the total asset turnover of a firm is 1.5, total assets are $500,000, and net income is $50,000, what is the profit margin?

C. 6.7%

3. A financial market is considered information efficient when

C. Any point in time the prices of securities reflect all information available to the public

25. The financial ratio that indicates how long to sell the average inventory held during the year is:

C. Days in Inventory

27. All the following is why analysts do financial ratio analysis except:

C. Financial ratios are predictive of company earnings

17. Which of the following is an example of both a capital market and a primary market transaction?

C. Ford Motor Company sells a new issue of common stock to raise funds through a public offering.

15. Which financial statement would you refer to get financial data to calculate profit margin?

C. Income Statement

11. The "perfect financial storm" that developed in 2008, which put the U.S. economy on the verge of collapse is best identified by which of the following statements:

C. Many of the mortgage-related debt securities originated and sold to others, or held, by banks became difficult to value during the perfect financial storm and quickly became known as "troubled" or "toxic" assets.

10. During the Financial Crisis, financial institutions came under financial solvency stress due toxic financial assets backed by mortgage-backed securities. When lending money to borrower's a prudent financial firm will have a financial background underwriting criterion to match the creditworthiness of the applicant. Prior to the Financial crisis a loan applicant could get a loan with no verification of employment, no verification of income or any other documentation to support the ability to repay the loan. This type of loan was referred to as a ___________ loan:

C. Ninja

9. A major factor in the severity of the 2007 - 2009 financial crisis was primarily due to:

C. The decline in housing prices exposing risky mortgage assets in mortgage-backed securities.

9. The principle of risk-return trade-off means that

C. a rational investor will only take on higher risk if he expects a higher return.

18. A limited partnership is comprised of:

C. both general and limited partners

24. The true owners of the corporation are the

C. common stockholders.

13. S-type corporations have all of the following advantages EXCEPT

C. distributions are taxed twice, similar to corporate dividend payments.

20. Which of the following represents an attempt to measure the net results of the firm's operations (revenues versus expenses) over a given time period?

C. income statement

12. The real rate of return is the return earned above the

C. inflation risk premium.

8. Which group of ratios might be most interesting to potential creditors of a firm?

C. leverage ratios

5. A basis point is equal to

C. one-hundredth of one percent.

7. Suppose XYZ Corporation is traded on the New York Stock Exchange. XYZ's closing price on Monday is $20 per share. After the market closes on Monday, XYZ makes a surprise announcement that it has obtained a major new customer. XYZ's stock will likely

C. open above $20 because the positive news will result in a higher valuation even though the stock has not yet traded

7. A "normal" yield curve is

C. upward sloping

21. Investors generally don't like risk. Therefore, a typical investor

C. will only take on additional risk if he expects to be compensated in the form of additional return.

11. Git'R'Done Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Git'R'Done's gross profit is equal to

D. $1,500,000.

4. The nominal interest rate is 7.25 % and the expected inflation rate is 2.5%. The real rate of interest is

D. 4.75%.

20. Inflation is expected to be 3% over the next year. You desire an annual real return rate of 2.5 percent on your investments. A corporate bond is being offered at 2 percentage points over the one-year Treasury security rate that meets your requirements. What would be the nominal interest rate on the corporate security?

D. 7.5%

10. What are some red flags for a Ponzi Scheme

D. ALL OF THE ABOVE A. High investment returns with little or no risk B. Overly consistent investment returns C. Secretive and/or complex strategies

27. Which of the following is NOT true regarding mortgaged-backed securities (MBS)?

D. ALL OF THE ABOVE STATEMENTS ARE TRUE. A. MBS are sold to investors who can hold them as an investment or resell them to other investors. B. The MBS process allows the mortgage bank or other financial institution that made the original mortgage loan to get its money back out of the loan and lend it to someone else. C. Securitization provides liquidity to the mortgage market and makes it possible for banks to loan more money to home buyers.

6. The risk premium would be greater for an investment in an oil and gas exploration in unproven fields than an investment in preferred stock because

D. BOTH A AND B A. oil and gas exploration investments have a greater variability in possible returns. B. the preferred stock is more liquid.

8. Investors want a return that satisfies the following expectation(s):

D. BOTH A AND B. A. A return for delaying consumption B. An additional return for taking on risk

5. Two risky assets can be combined to lower the overall risk of a portfolio. This is commonly referred to as:

D. Diversification

18. The five basic principles of finance include all of the following EXCEPT

D. Incremental profits determine value.

1. The simplest form of a business structure is:

D. Sole Proprietorship

16. You have been researching four consumer cyclical companies in which to invest in their stocks. You are wanting to compare profitability factors for each company as a selection criteria. Which one of these four companies would you consider?

D. United Technologies

4. Which of the following would not be considered an asset?

D. accounts payable

3. Which of the following ratios would be the best way to determine how customers are paying for their purchases?

D. average collection period

24. Net working capital is equal to

D. current assets minus current liabilities.

23. Which of the following is NOT considered to be a disadvantage of the sole proprietorship form of business organization?

D. fewer regulations and reporting requirements

16. _______________ ratio is computed as earnings before interest and taxes divided by interest expense:

D. interest coverage

11. Of the following forms of business organization, which have the advantage of limited liability but no stockholders?

D. limited partnerships

7. All of the following measure liquidity EXCEPT

D. operating return on assets.

21. Gross profit is equal to

D. sales - cost of goods sold.

28. Gross profit is equal to

D. sales - cost of goods sold.

17. Partnership income is taxed at the partnership income tax rate.

FALSE

6. Lower asset turnover ratios are generally indicative of more efficient asset management.

FALSE

6. The balance sheet equation or accounting identity can be written as: assets equal liabilities minus owners' equity.

FALSE

8. The interest rate that is observed in the marketplace is called a real interest rate.

FALSE

13. Financial leverage ratios indicate the extent to which borrowed funds are used to finance assets.

TRUE

15. The goal of the firm's financial managers should be the maximization of the total value of the firm's stock.

TRUE

16. The term structure of interest rates usually indicates that longer terms to maturity have higher expected returns.

TRUE

17. The purchase of a pool of mortgages is often financed through the sale of securities called mortgage-backed securities, or MBS. This is a key part of the securitization process.

TRUE

21. If company A has a lower average collection period than company B, then company A will have a higher accounts receivable turnover.

TRUE

23. Common-sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm's financial performance across time and with competitors.

TRUE

24. If company A has a lower average collection period than company B, then company A will have a higher accounts receivable turnover.

TRUE

25. The corporation is a legal entity separate from its owners; thus it is possible for the corporation to continue even upon the death of one or more shareholders.

TRUE

26. Its ability to raise capital by selling stock makes the corporation the best form of organization in terms of raising capital.

TRUE

27. Common-sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm's financial performance across time and with competitors.

TRUE

28. Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too low.

TRUE

4. The principle of finance that "lower returns are expected for taking less risk" implies that rational investors would choose a risky investment only if they feel the expected return is high enough to justify the greater risk.

TRUE

5. Accounting is primarily concerned with matching revenues and expenses while finance focuses on identifying cash inflows and outflows.

TRUE

6. Shareholders react to poor investment or dividend decisions by causing the total value of the firm's stock to fall, and they react to good decisions by bidding the price of the stock up.

TRUE