FInance Test 1 Study questions
A liquidity-risk premium is the additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuation on those securities caused by interest rate changes.
False
Changes in depreciation expense do not affect operating income because depreciation is a non-cash expense.
False
Earnings available to common shareholders is equal to a corporation's positive net cash flow over a given period, typically one year.
False
Investors expect to receive the highest returns from government-issued securities because the government will not default on securities that it has issued.
False
Investors will be indifferent between two investments if both investments have the same expected return.
False
Profits represent money that can be spent, and as such, form the basis for determining the value of financial decisions.
False
Saving surplus units include individuals and governments, but not corporations.
False
Seasoned secondary offerings occur in the secondary market.
False
The retained earnings balance on IBM's balance sheet at the end of 2010 is equal to IBM's 2010 net income minus dividends paid in 2010.
False
The risk-return trade-off implies that the return on a riskless asset must be zero.
False
A corporation needing cash sells securities to investors in the secondary market.
False
A general partnership, unlike a limited partnership, is an entity that legally functions separate and apart from its owners.
False
Table 3-3 Based on the information in Table 3-3, calculate the cash flow from operations. Assume that there were no changes in any other asset or liability accounts, and that the ending cash balance for 2009 was $100.
A) $4,100
Given the information below, calculate the company's cash balance at the end of the year.
A) $1,880,000
Siskiyou Corp. has cash of $75,000; short-term notes payable of $100,000; accounts receivables of $275,000; inventories of $350,000; and accrued expenses of $75,000. What is the firm's net working capital?
A) $525,000
During the period 1990 to 2014, the average yield on 3-month U.S. Treasury bills was 3.04%, the average inflation rate was 2.64%, the average yield on 30-year Treasury bonds was 5.49%, and the average return on 30-year Aaa-rated corporate bonds was 6.35%. The real risk-free short-term interest rate is (use the approximate relation, not Fisher effect)
A) 0.40%.
If provided the nominal rate of interest (r) of 7.4% and the anticipated rate of inflation (i) of 4.5%, what is the real rate of interest (R)?
A) 2.775%
Given the anticipated rate of inflation (i) of 2.13% and the real rate of interest (R) of 3.1%, find the nominal rate of interest (r).
A) 5.3%
The current rate of return on a one-year U.S. Government security is 3%. The rate of return on a two-year U.S. Government security is 5%. According to the expectations theory, what is the return on a one-year U.S. Government security purchased one year from today?
A) 7.04%
An investor buys a 20-year Bbb-rated corporate bond with a nominal annual rate of return of 10%. The average inflation rate is expected to be 2%. The default risk premium is expected to be 5% and the maturity premium is 4%. Calculate the real rate of interest.
A) 7.84%
You are considering an investment in a AAA-rated U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. corporate bond pay?
A) 8.5%
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.
The expected return on a riskless asset is greater than zero due to
A) an expected return for delaying consumption.
The three basic types of issues addressed by the study of finance are
A) capital budgeting, capital structure decisions, and working capital management.
Which of the following forms of organizations have earnings that are taxed twice, once as business income and once as personal income as the earnings are distributed to the owners in the form of dividends?
A) corporations
Working capital management is concerned with
A) how a firm can best manage its cash flows as they arise in its day-to-day operations.
The ________ is the premium to compensate for the price change expected to occur over the life of the bond or investment instrument.
A) inflation-risk premium
Examples of uses of cash include
A) paying cash dividends to stockholders.
ExxonMobil generates about $50 billion in cash annually from its operations and invests about half of that on new exploration. Therefore, ExxonMobil is an example of a(n)
A) savings surplus unit.
The CEO of High Tech International decides to change an accounting method at the end of the current year. The change results in reported profits increasing by 5%, but the company's cash flows are not changed. If capital markets are efficient, then
A) the stock price will not be affected by the accounting change.
If provided the nominal rate of interest (r) of 10% and the anticipated rate of inflation (i) of 4.5%, what is the real rate of interest (R)?
B) 5.26%
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.
Which of the following securities will likely have the highest default risk premium?
B) Bbb-rated corporate bond maturing in 2020 actively traded on a major exchange
When evaluating an investment project, which of the following best describes the financial information needed by the decision maker?
B) after-tax incremental cash flows to the company as a whole
Rogue 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. Rogue's operating income is equal to
C) $1,100,000.
The December 31, 2009 balance sheet shows net fixed assets of $150,000 and the December 31, 2010 balance sheet shows net fixed assets of $250,000. Depreciation expense for 2009 is $25,000 and depreciation expense for 2010 is $35,000. Based on this information, the cost of fixed assets purchased during 2010 is
C) $135,000.
A corporation has annual sales of $18 million, total assets of $4 million, a debt ratio of 40%, depreciation expense of $200,000, and a tax rate of 40%. The corporation's total stockholders' equity is equal to
C) $2,400,000.
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
Given the rate information in the table below, estimate the nominal rate for a AA-rated corporate bond. (Assume a liquidity premium of 8 basis points.)
C) 8.08%
Prices of securities that are traded on the organized exchanges are determined by
C) a continuous auction process reflecting the sentiments of buyers and sellers.
Which of the following premiums is NOT factored into the price of a long-term Treasury bond?
C) a default-risk premium
The New York Stock Exchange (NYSE) is
C) a hybrid market, allowing for face-to-face trading on the floor of the stock exchange in addition to automated, electronic trading.
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.
All of the following statements about balance sheets are true EXCEPT
C) balance sheets show average asset balances over a one-year period.
Company A and Company B both report the same level of sales and net income. Therefore
C) both A and B will report the same Net Profit Margin.
A company borrows $2,000,000 and uses the money to purchase high technology machinery for its operations. These are examples of
C) cash flow from financing and cash flow from investing.
The real rate of return is the return earned above the
C) inflation risk premium.
Which of the following is an advantage of the sole proprietorship?
C) no significant legal requirements for starting the business
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.
Which of the following categories of owners have limited liability?
C) shareholders of a corporation
Prices of securities that are traded in the Over-the-Counter Markets are determined by
C) the buyers of these securities.
What is the term for a graphical representation of the relationship between interest rates and the maturities of debt securities?
C) yield curve
Given the following financial statements for ACME Corporation, what amount did the company pay in dividends for 2010?
D) $80,000
Given the following financial statements for ARGON Corporation, and assuming that ARGON paid a common dividend of $80,000 in 2010, what is the company's financing cash flow for 2010?
D) -$20,000
The nominal interest rate is 7% and the expected inflation rate is 2%. Based on the Fisher effect, the real rate of interest is
D) 4.9%.
Which of the following best describes cash flow from financing activities?
D) Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt, minus interest paid, minus dividends paid
The five basic principles of finance include all of the following EXCEPT
D) Incremental profits determine value.
Which of the following are characteristics of a limited partnership? A) Limited partners may not participate in the management of the limited partnership.B) There must be one or more general partners. C) General partners have unlimited liability.
D) all of the above
Which of the following statements best represents the "Agency Problem"?
D) all of the above
Which of the following categories of owners have unlimited liability?
D) both A and B
Money-market transactions include which of the following?
D) securities that have a maturity of less than one year
Which of the following is NOT a benefit provided by the existence of organized security exchanges?
D) standardization of all debt agreements
Which of the following is NOT a valid theory that attempts to explain the shape of the term structure of interest rates?
D) the Fisher Effect theory
The Colorado Jet Boat Company had a cash balance of $3 million at the beginning of 2010. During 2010, Sales were $8 million and expenses were $7 million. Therefore,
D) the cash balance at the end of 2010 cannot be determined from the information given.
Joe, a risk-averse investor, is trying to choose between investment A and investment B. If investment A is riskier than investment B and Joe selects investment A anyway, then
D) the expected return for investment A will be higher than the expected return for investment B.
A liquidity-risk premium is the additional return required by investors for securities that cannot quickly be converted into cash at a reasonably predictable price.
True
An efficient market is one where the prices of the assets traded in that market fully reflect all available information at any instant in time.
True
Determining how a firm should raise money to fund its long-term investments is referred to as capital structure decisions.
True
If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity.
True
It is possible for two companies to have the same financial performance, but their financial statements can be different, depending on how and when the managers choose to report certain transactions.
True
Over time, there has been a high correlation between actual rates of return on securities and the securities' standard deviations of returns.
True
S-type corporations and limited liability companies are taxed like partnerships, but have the advantage of limited liability for their owners.
True
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
The owners of a corporation enjoy limited liability.
True
The root cause of agency problems is conflicts of interest.
True
The term structure of interest rates usually indicates that longer terms to maturity have higher expected returns.
True
When making financial decisions, managers should always look at marginal, or incremental cash flows.
True