FINN 3043 Quiz Questions (Test 2)

A certain investment promises to pay you $2,500 per year forever with the first payment starting next year. If you can earn a 5% return on similar investments, what's the most you would pay for this investment today? a) $50,000 b) $5,000 c) $41,667 d) $62,500

A

A & Z Corporation plans to issue new bonds at face value of $1,000. In its efforts to price the issue, A & Z has identified a company of similar risk with an outstanding bond issue that has a 6 percent coupon rate with a maturity of 10 years. This firm's bonds are currently selling for $986. If interest is paid annually for both bonds, what must the coupon rate of A & Z's new bonds be in order for the issue to sell at par? A.5.78% B. 6.88% C. 6.50% D. 6.19%

?

Emily is planning to accumulate $40,000 by the end of 5 years by making 5 equal annual deposits. If she plans to make her deposit today then at the beginning of each following year, and the deposit can earn an annual compound rate of 9 percent on her investment, how much must each deposit be in order to accumulate the $40,000? A.$6,132 B.$6,684 C.$23,844 D.$9,434

??

you deposited $200 today at 8 percent compounded semiannually for three years. The future value after three years is ________ a) $380 b) $158 c) $253 d) $252

??

Assuming that you deposited $100 today in a bank at 6 percent annual interest rate. After four years, ______ is the closest amount of money (principal and interest) you can get back. a) $126 b) $79 c) $124 d) $116

????

If a United States Savings bond can be purchased for $29.50 and has a maturity value of $100 at the end of 25 years, what is the annual rate of return on the bond? A.5 percent B.6 percent C.7 percent D.8 percent

A

If a firm uses any debt financing and if the firm generated positive earnings for common stockholders, then which of the following below if TRUE? a) ROE > ROA b) ROE < ROA c) ROE = ROA d) Gross profit margin < net profit margin

A

The bond indenture identifies any collateral pledged against a bond and specifies how it is to be maintained. A.True B.False

A

The effective rate of interest differs from the nominal rate of interest in that it reflects the impact of compounding frequency a) true b) false

A

Titan Industries has issued a bond which has a $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in 10 years and currently sells for $1,250. Using this information, the yield to maturity (YTM) on the Titan Industries bond is ________. A. 10.79 percent B. 11.39 percent C. 12.19 percent D. 13.29 percent

A

Which of the following is used to analyze a firm's financial performance over difficult years? a) time-series analysis b) break-even anlysis c) gap analysis d) marginal analysis

A

one basic weakness of the simplified pro forma approached lies in the assumption that the firm's past financial condition is an accurate indicator of its future a) true b) false

A

the percent-of-sales method of developing a pro forma income statement forecasts sales and other line items as a ________. a) percentage of projected sales b) percentage of average sales over a period c) percentage of projected total assets d) percentage of average total assets over a period

A

the process of taking cash flow that is received or paid in the future and stating that cash flow in present value terms is called discounting a) True b) false

A

Find the future value at the end of year 3 of the following stream of cash flows received at the end of each year, assuming the firm can earn 17 percent on its investments. Year 1: $3,000 Year 2: $6,000 Year 3: $9,000 a) $16,320 b) $20,127 c) $23,548 d) $27,551

B

If the required return is greater than the coupon rate, a bond will set at ________ a) par b) discount c) premium d) book value

B

Operating profit is known as _______ a) earnings after interest and taxed b) earnings before interest and taxes (EBIT) c) earnings before depreciation and taxes d) earnings after tax

B

The Sarbanes-Oxley Act of 2002 was designed to _________ a) limit the compensation that could be paid to corporate CEOs b) eliminate the many disclosure and conflict-of-interest problems of corporations c) provide uniform international accounting standards d) provides the guidelines to minimize the tax

B

The future value of an ordinary annuity of $1,000 each quarter for 10 years, deposited at 12 percent compounded quarterly is ________. A.$17,549 B.$75,401 C.$93,049 D.$11,200

B

You have been offered a project paying $300 at the beginning of each year for the next 20 years. What is the maximum amount of money you would invest in this project if you require 9 percent rate of return to your investment? a) $2,739 b) $2,985 c) $15,348 d) $16,729

B

a firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement -- called the external financing required -- of $230,000. The firm should prepare to _________ a) repurchase common stock totaling $230,000 b) arrange for a loan of $230,000 c) do nothing; the balance sheet balances d) invest in marketable securities totaling $230,000

B

the time value of money is based on the belief that a dollar that will be received at some future data is worth more than a dollar today. a) true b) false

B

A(n) ________ is secured by collateral of real estate or mortgaged assets. A. income bond B. debenture C. mortgage bond D. subordinated debenture

C

Adam borrows $4,500 at 12 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year payment is ________. A.$942 B.$1,125 C.$1,482 D.$2,641

C

The less certain a cash flow, the ______ the risk, the ________ the present value of the cash flows a) lower; higher b) lower; lower c) higher; lower d) higher; higher

C

What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent? A. $604 B. $1,090 C. $1,060 D. $1,073

C

Which of the following represents a current asset? a) automobiles b) buildings c) marketable securities d) equipment

C

A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent (investors regard this rate as their required return), the firm's bond will sell for ________ today. A. $1,000 B. $805.20 C. $1,115.50 D. $1,268.40

D

Bill plans to fund his individual retirement account (IRA) by contributing $2,000 at the end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have at the end fo the twentieth year? a) $19,293 b) $14,939 c) $40,000 d) $144,105

D

Retained earnings on the balance sheet represents the ________ a) net profit after taxes b) amount of proceeds in excess of the par value received from the original sale of common stock c) net profit after taxes minus preferred dividends d) cumulative total of all earnings reinvested in the firm

D

The best way to adjust for the presence of fixed costs when preparing a pro forma income statement is ________ a) the proportionately vary the fixed costs with the change in sales b) to adjust for projected fixed-asset outlays c) to disproportionately vary the costs with the charge in sales d) to break the firms historical costs into fixed and variable components

D

The value of a bond is the present value of the ________. A. dividends and maturity value B. interest and dividend payments C. maturity value D. periodical interest payments and maturity value

D

Which of the following is TRUE of the current ratio? a) the more predictable a firm's cash outflows, the higher the acceptable current ratio b) a higher current ratio indicated a higher return on equity c) the more predictable a firm's current ratio, the higher the current liabilities d) a higher current ratio indicates a greater degree of liquidity

D

Earnings per share (EPS) results from dividing earnings available for common stockholders by the number of shares of common stock authorized True False

False

The higher the debt ratio, the more the financial leverage a firm has and thus, the greater will be its risk and return True False

Tru

As a bond approached maturity, the price of the bond will approach its par value until, the bond is worth its face value at maturity True False

True

As a general valuation process, the value of an asset is determined by discounting the expected cash flows back to its present value, using an appropriate discount rate True False

True

Generally accepted accounting principles are authorized by the Financial Accounting Standards Boards (FASB). True False

True

The required return on a bond is likely to differ from the stated interest rate for either of two reasons: 1) economic conditions have changed, causing a shift in the basic cost of long-term funds, 2) the firm's risk has changed True False

True

The purpose of the restrictive debt covenant that limits the distribution of profits to shareholders is to ________. A. assure the lender that additional borrowing may be subordinated to the original loan B. limit the amount of lender to invest on stocks C. ensure the company will never pay dividends to shareholders D. avoid default of payments to bondholders

d