Finance Test 1

Ming is planning to buy a house in one year and will make a downpayment at that time of $25,000. How much would she have to invest today in an account earning 4% to make her downpayment in one year?

$24,038

Uncle Ned has offered you an opportunity to invest in his bait shop in Corpus Christi. The deal involves you investing $1,000 today, with an expected annual return of 8% over the next year. (Hurricanes usually wipe out the investment in a year.) Your next best alternative is a $1,000 CD which would pay $1,050 in one year. What is the NPV of this investment? Do not use "$": just enter the number and sign of your answer.

$28.57

Operating cash flow, capital spending, and change in net working capital

Cash Flow from Assets

Interest paid - net new borrowing

Cash flow to creditors

Dividends paid - net new equity raised

Cash flow to stockholders

What office handles cost and financial accounting, tax payments, and management information systems?

Controller

The daily financial operations of a firm are primarily controlled by managing the: a) working capital. b) capital budget. c) long-term liabilities. d) capital structure. e) total debt level.

a) working capital.

The cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.

assets

The Expresso Roast Corporation (ERC) is considering expanding its product lines by investing in Mellow-Man Tea.. The company's founder is obscenely wealthy and will operate these lines for only one year before retiring and will therefore use only a one-year planning horizon. . Mellow-Man Tea has a cost of $80,000 and is expected to produce benefits of $65,000 in one year. While this line is not as immediately profitable as the other alternative, it is estimated that this line could be sold upon the founder's retirement in one year for $20,000. The health benefits of tea make this a less risky investment and ERC's CFO has recommended a risk-premium of 10%. All future cash benefits will occur at the end of the year. The rate of return on US T-Bills is 4%. What is the NPV of this investment? Do not use "$" or comma. Just type in the number and sign of your answer.

-$5,439

Your tuition for the coming year is due today. You borrow $8,000 from your sister and agree to repay an amount of $8,980 at the end of of the year. What is the interest rate on this loan? Enter your answer in percent.

12.12%

Marilyn wants to borrow $1,000 for a year. She has two choices. Her bank is offering to lend her the amount at 8.5 percent. She can also borrow from her parents and will have to repay a total of $1,050 at the end of the loan. Enter the rate of return for Marilyn's best loan choice.

5%

Which office handles managing the firm's cash and credit, financial planning, and capital expenditures?

Treasurer

A firm's liquidity level decreases when: a) inventory is purchased with cash. b) inventory is sold on credit. c) inventory is sold for cash. d) an account receivable is collected. e) proceeds from a long-term loan are received.

a) inventory is purchased with cash.

Both you and your older brother would like to have $22,500 in 15 in years. Because of your success in this class, you feel that you are a more savvy investor than your brother and will be able to earn an annual return of 10.9 percent compared to your brother's 9.4 percent. How much less than your brother will you have to deposit today? a) $1,080.25 b) $972.23 c) $1,799.66 d) $1,350.32 e) $1,200.28

a) $1,080.25

Simon's Hot Chicken purchased its building seven years ago at a price of $143,300. The building could be sold for $182,500 today. The company spent $67,900 on other fixed assets that could be sold for $60,900. The company has accumulated depreciation of $84,500 on its fixed assets. Currently, the company has current liabilities of $38,800 and net working capital of $20,100. What is the ending book value of net fixed assets? a) $126,700 b) $172,400 c) $165,500 d) $158,900 e) $211,200

a) $126,700

You are in talks to settle a potential lawsuit. The defendant has offered to make annual payments of $16,000, $25,500, $42,000, and $63,000 to you each year over the next four years, respectively. All payments will be made at the end of the year. If the appropriate interest rate is 3.8 percent, what is the value of the settlement offer today? a) $130,904.38 b) $116,359.45 c) $146,500.00 d) $138,702.19 e) $135,878.75

a) $130,904.38

Thornton, Inc., had taxable income of $127,877 for the year. The company's marginal tax rate was 35 percent and its average tax rate was 23.8 percent. How much did the company have to pay in taxes for the year? a) $30,435 b) $27,489 c) $44,757 d) $28,847 e) $29,191

a) $30,435

You find the following financial information about a company: net working capital = $951; fixed assets = $5,897; total assets = $8,446; and long-term debt = $4,489. What are the company's total liabilities? a) $6,087 b) $5,440 c) $6,778 d) $7,878 e) $2,051

a) $6,087

Midwest Fastener Supply stock is expected to return 16 percent in a booming economy, 12 percent in a normal economy, and −3 percent in a recession. The probabilities of an economic boom, normal state, or recession are 12 percent, 80 percent, and 8 percent, respectively. What is the expected rate of return on this stock? a) 11.28 percent b) 10.67 percent c) 10.95 percent d) 11.91 percent e) 11.70 percent

a) 11.28 percent

You own a $58,600 portfolio comprised of four stocks. The values of Stocks A, B, and C are $11,200, $17,400, and $20,400, respectively. What is the portfolio weight of Stock D? a) 16.38 percent b) 15.39 percent c) 10.33 percent d) 12.10 percent e) 12.58 percent

a) 16.38 percent

Roger has just lost a lawsuit and has agreed to make equal annual payments of $12,000 for the next 10 years with the first payment due today. The value of this liability today is $96,000. What is the interest rate on the payments? a) 5.34% b) 4.10% c) 5.07% d) 4.28% e) 4.72%

a) 5.34%

Jenny needs to borrow $5,500 for four years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny? a) 6.5 percent simple interest b) 6.5 percent interest, compounded annually c) 6.6 percent simple interest d) 6.75 percent interest, compounded annually e) 6.80 percent interest, compounded annually

a) 6.5 percent simple interest

Which one of the following situations is most apt to create an agency conflict? a) Basing management bonuses on the length of employment b) Hiring an independent consultant to study the operating efficiency of the firm c) Compensating a manager based on his or her division's net income d) Giving all employees a bonus if a certain level of efficiency is maintained e) Laying off employees during a slack period

a) Basing management bonuses on the length of employment

Which one of the following functions is generally a responsibility assigned to the corporate treasurer? a) Capital expenditures b)Financial accounting c) Corporate taxes d) Cost accounting e) Data processing

a) Capital expenditures

Which one of the following functions should be assigned to the corporate treasurer rather than to the controller? a) Cash management b) Financial accounting c) Tax management d) Data processing e) Cost accounting

a) Cash management

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate? a) Expected return b) Real return c) Market rate d) Systematic return e) Risk premium

a) Expected return

Which one of the following categories has the widest frequency distribution of returns for the period 1926-2014? a) Small-company stocks b) U.S. Treasury bills c) Long-term government bonds d) Inflation e) Large-company stock

a) Small-company stocks

Probably the least effective means of aligning management goals with shareholder interests is: a) automatically increasing management salaries on an annual basis. b) the threat of a takeover of the firm. c) basing all management bonuses on performance goals. d) holding management salaries steady while increasing stock option grants. e) the potential for a proxy fight by an unhappy segment of shareholders.

a) automatically increasing management salaries on an annual basis.

The present value of a lump-sum future amount: a) increases as the interest rate decreases. b) decreases as the time period decreases. c) is inversely related to the future value. d) is directly related to the interest rate. e) is directly related to the time period.

a) increases as the interest rate decreases.

Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners' equity of $21,100. What is the value of the net working capital? a) $9,800 b) $10,400 c) $18,900 d) $21,300 e) $23,200

b) $10,400

Ivan's, Inc., paid $478 in dividends and $584 in interest this past year. Common stock increased by $194 and retained earnings decreased by $120. What is the net income for the year? a) $942 b) $358 c) $584 d) $778 e) $478

b) $358

Your grandparents would like to establish a trust fund that will pay you and your heirs $120,000 per year forever with the first payment one year from today. If the trust fund earns an annual return of 2.3 percent, how much must your grandparents deposit today? a) $4,565,217.39 b) $5,217,391.30 c) $4,347,826.09 d) $4,816,053.51 e) $5,962,732.92

b) $5,217,391.30

You want to purchase a new motorcycle that costs $26,400. The most you can pay each month is $570 over the life of the 60-month loan. What is the highest APR that you could afford? a) 9.30% b) 10.70% c) 9.87% d) 12.22% e) 10.99%

b) 10.70%

Jamie is employed as a currency trader in the Japanese yen market. Her job falls into which one of the following areas of finance? a) Corporate finance b) International finance c) Personal finance d) Capital management e) Financial institutions

b) International finance

Jessica invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested? a) She will earn the same amount of interest each year. b) She could have the same future value and invest less than $2,000 initially if she could earn more than 6.5 percent interest. c) She will earn an increasing amount of interest each and every year even if she should decide to withdraw the interest annually rather than reinvesting the interest. d) Her interest for Year 2 will be equal to $2,000 × .065 × 2. e) She will be earning simple interest.

b) She could have the same future value and invest less than $2,000 initially if she could earn more than 6.5 percent interest.

Tomas earned $89 in interest on his savings account last year and has decided to leave the $89 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called: a) discounting. b) compounding. c) duplicating. d) multiplying. e) indexing.

b) compounding.

Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called: a) aggregating. b) discounting. c) simplifying. d) compounding. e) extrapolating.

b) discounting.

All else held constant, the book value of owners' equity will decrease when: a) the market value of inventory increases. b) dividends exceed net income for a period. c) cash is used to pay an accounts payable. d) a long-term debt is repaid. e) taxable income increases.

b) dividends exceed net income for a period.

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the: a) true value. b) future value. c) present value. d) discounted value. e) complex value.

b) future value.

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital: a) had to increase. b) had to decrease. c) remained constant. d) could have either increased, decreased, or remained constant. e) was unaffected as the changes occurred in the firm's current accounts.

b) had to decrease.

A corporation: a) is ultimately controlled by its board of directors. b) is a legal entity separate from its owners. c) has its identity defined by its bylaws. d) has its existence regulated by the rules set forth in its charter. e) is prohibited from entering into contractual agreements.

b) is a legal entity separate from its owners.

You just paid $380,000 for a policy that will pay you and your heirs $14,000 per year forever with the first payment in one year. What rate of return are you earning on this policy? a) 3.87% b) 3.55% c) 3.68% d) 3.93% e) 3.81%

c) 3.68%

Sarina Stable Supply stock has a risk premium of 6.2 percent while the inflation rate is 1.7 percent and the risk-free rate is 3.1 percent. What is the expected return on this stock? a) 10.2 percent b) 7.63 percent c) 9.3 percent d) 10.9 percent e) 12.4 percent

c) 9.3 percent

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent? a) Portfolio variance b) Portfolio standard deviation c) Portfolio weight d) Portfolio expected return e) Portfolio beta

c) Portfolio weight

Over the period of 1926-2014, which one of the following investment classes had the highest volatility of returns? a) Large-company stocks b) U.S. Treasury bills c) Small-company stocks d) Long-term corporate bonds e) Long-term government bonds

c) Small-company stocks

One advantage of the corporate form of organization is the: a) taxation of the corporate profits. b) double taxation of profits. c) ability to raise larger sums of equity capital than other organizational forms. d) unlimited liability for its shareholders. e) ease of formation compared to other organizational forms.

c) ability to raise larger sums of equity capital than other organizational forms.

The capital asset pricing model: a) assumes the market has a beta of zero and the risk-free rate is positive. b) rewards investors based on total risk assumed. c) considers the relationship between the fluctuations in a security's returns versus the market's returns. d) applies to portfolios but not to individual securities. e) assumes the market risk premium is constant over time.

c) considers the relationship between the fluctuations in a security's returns versus the market's returns.

The goal of financial management is to increase the: a) dividends paid per share. b) number of shares outstanding. c) current market value per share. d) future value of the firm's total equity. e) book value of equity.

c) current market value per share.

The interest rate used to compute the present value of a future cash flow is called the: a) prime rate. b) current rate. c) discount rate. d) compound rate. e) simple rate.

c) discount rate.

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the: a) average tax rate. b) variable tax rate. c) marginal tax rate. d) fixed tax rate. e) ordinary tax rate.

c) marginal tax rate.

By definition, a bank that pays simple interest on a savings account will pay interest: a) only at the beginning of the investment period. b) on interest. c) only on the principal amount originally invested. d) on both the principal amount and the reinvested interest. e) only if all previous interest payments are reinvested.

c) only on the principal amount originally invested.

Retirement Investment Advisors, Inc., has just offered you an annual interest rate of 4.9 percent until you retire in 35 years. You believe that interest rates will increase over the next year and you would be offered 5.5 percent per year one year from today. If you plan to deposit $15,500 into the account either this year or next year, how much more will you have when you retire if you wait one year to make your deposit? a) $19,110.01 b) $4,548.17 c) $20,587.96 d) $13,006.79 e) $19,417.67

d) $13,006.79

Wes Motors has total assets of $98,300, net working capital of $11,300, owners' equity of $41,600, and long-term debt of $38,600. What is the value of the current assets? a) $21,600 b) $18,100 c) $28,900 d) $29,400 e) $6,800

d) $29,400

For the past year, Momsen, Ltd., had sales of $45,797, interest expense of $3,620, cost of goods sold of $16,134, selling and administrative expense of $11,481, and depreciation of $5,980. If the tax rate was 35 percent, what was the company's net income? a) $6,007 b) $8,582 c) $13,041 d) $5,578 e) $4,311

d) $5,578

Crabby Shores stock is expected to return 15.7 percent in a booming economy, 9.8 percent in a normal economy, and 2.3 percent in a recession. The probabilities of an economic boom, normal state, or recession are 15 percent, 73 percent, and 12 percent, respectively. What is the expected rate of return on this stock? a) 10.07 percent b) 10.74 percent c) 10.61 percent d) 9.79 percent e) 8.68 percent

d) 9.79 percent

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock? a) An increase in the rate of return in a recessionary economy b) An increase in the probability of an economic boom c) A decrease in the probability of a recession occurring d) A decrease in the probability of an economic boom e) An increase in the rate of return for a normal economy

d) A decrease in the probability of an economic boom

Which one of the following is an advantage of being a limited partner? a) Active market for ownership interest b) Unlimited profits without risk of incurring a loss c) Nontaxable share of any profits d) Losses limited to capital invested e) Control over the daily operations of the firm

d) Losses limited to capital invested

Which one of these is correct? a) Depreciation has no effect on taxes. b) Interest paid is a noncash item. c) Taxable income must be a positive value. d) Net income is distributed either to dividends or retained earnings. e) Taxable income equals net income divided by (1 + Average tax rate).

d) Net income is distributed either to dividends or retained earnings.

Which one of the following is the correct formula for the current value of $600 invested today at 5 percent interest for 6 years? a) PV = $600/ [(1 + .06) × 5] b) PV = $600/ [(1 +.05) × 6] c) PV = $600/ (.06 × 5) d) PV = $600 / (1 + .05)6 e) PV = $600 / (1 + .06)5

d) PV = $600 / (1 + .05)6

A portfolio is: a) a single risky security. b) any security that is equally as risky as the overall market. c) any new issue of stock. d) a group of assets held by an investor. e) an investment in a risk-free security.

d) a group of assets held by an investor.

Firms that compile financial statements according to GAAP: a) record income and expenses at the time they affect the firm's cash flows. b) have no discretion over the timing of recording either revenue or expense items. c) must record all expenses when incurred. d) can still manipulate their earnings to some degree. e) record both income and expenses as soon as the amount for each can be ascertained.

d) can still manipulate their earnings to some degree.

Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called: a) simple interest. b) complex interest. c) accrued interest. d) interest on interest. e) discounted interest.

d) interest on interest.

Item13 3/3points awarded ItemScored Net income increases when: a) fixed costs increase. b) depreciation increases. c) the average tax rate increases. d) revenue increases. e) dividends cease.

d) revenue increases.

Portfolio diversification eliminates: a) all investment risk. b) the portfolio risk premium. c) market risk. d) unsystematic risk. e) the reward for bearing risk.

d) unsystematic risk.

A company has $1,371 in inventory, $4,818 in net fixed assets, $658 in accounts receivable, $294 in cash, $618 in accounts payable, and $5,413 in equity. What is the company's long-term debt? a) $1,147 b) $1,688 c) $1,289 d) $1,728 e) $1,110

e) $1,110

Smashed Pumpkins Co. paid $80 in dividends and $519 in interest over the past year. The company increased retained earnings by $432 and had accounts payable of $510. Sales for the year were $16,020 and depreciation was $692. The tax rate was 35 percent. What was the company's EBIT? a) $1,184 b) $5,607 c) $1,578 d) $788 e) $1,307

e) $1,307

You expect to receive $3,900 upon your graduation and will invest your windfall at an interest rate of .59 percent per quarter until the account is worth $5,350. How many years do you have to wait until you reach your target account value? a) 11.76 years b) 13.55 years c) 12.54 years d) 14.47 years e) 13.43 years

e) 13.43 years

Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value? a) 3 percent simple interest b) 3 percent interest, compounded annually c) 2 percent interest, compounded annually d) 4 percent simple interest e) 4 percent interest, compounded annually

e) 4 percent interest, compounded annually

Which statement is correct? a) A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0. b) Any portfolio that is correctly valued will have a beta of 1.0. c) A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph. d) A risk-free security plots at the origin on a security market line graph. e) An underpriced security will plot above the security market line.

e) An underpriced security will plot above the security market line.

Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount? a) Shortening the investment time period b) Paying interest only on the principal amount c) Paying simple interest rather than compound interest d) Paying interest only at the end of the investment period rather than throughout the investment period e) Increasing the interest rate

e) Increasing the interest rate

Which one of the following statements correctly applies to a sole proprietorship? a) The business entity has an unlimited life. b) Debt financing is easy to arrange in the firm's name. c) The owner enjoys limited liability for the firm's debts. d) The ownership can easily be transferred to another individual. e) Obtaining additional equity is dependent on the owner's personal finances.

e) Obtaining additional equity is dependent on the owner's personal finances.

Which one of the following is the vertical intercept of the security market line? a) Market rate of return b) Individual security rate of return c) Market risk premium d) Individual security beta multiplied by the market risk premium e) Risk-free rate

e) Risk-free rate

Which one of the following correctly defines a common chain of command within a corporation? a) The chief financial officer reports directly to the board of directors. b) The controller reports directly to the corporate treasurer. c) The credit manager reports directly to the controller. d) The treasurer reports directly to the board of directors. e) The controller reports directly to the chief financial officer.

e) The controller reports directly to the chief financial officer.

Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as: a) simple interest. b) interest on interest. c) discounted interest. d) complex interest. e) compound interest.

e) compound interest.

Net working capital is defined as: a) the depreciated book value of a firm's fixed assets. b) the value of a firm's current assets. c) available cash minus current liabilities. d) total assets minus total liabilities. e) current assets minus current liabilities.

e) current assets minus current liabilities.

The recognition principle states that: a) costs should be recorded on the income statement whenever those costs can be reliably determined. b) costs should be recorded when paid. c) the costs of producing an item should be recorded when the sale of that item is recorded as revenue. d) sales should be recorded when the payment for that sale is received. e) sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

e) sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

Levi had an unexpected surprise when he returned home this morning. He found that a chemical spill from a local manufacturer had spilled over onto his property. The potential claim that he has against this manufacturer is that of a(n): a) agent. b) shareholder. c) general creditor. d) debtholder. e) stakeholder.

e) stakeholder.

An agency issue is most apt to develop when: a) a firm is structured as a general partnership. b) a firm downsizes. c) the firm's owner is also its key manager. d) a firm encounters a period of stagnant growth. e) the control of a firm is separated from the firm's ownership.

e) the control of a firm is separated from the firm's ownership.

The primary goal of financial management is to maximize: a) current dividends. b) revenue growth. c) current profits. d) market share. e) the market value of existing stock.

e) the market value of existing stock.