BFIN 300 Review Questions

2) Company X has fixed assets of $6million on its balance sheet that were originally purchased for $10million; it can be sold for $7million today. The company's balance sheet also shows current liabilities of $2.6million and NWC of $900,000. In addition, if all the current assets were liquidated today, the company would receive $2.8million cash. What is the book value of Company X's total assets? What is the market value of Company X's total assets? A. BV $9.5million, MV $9.8million B. BV $9.5million, MV $12.8million C. BV $8.6million, MV $12.8million D. BV $8.6million, MV $9.8million

A. BV $9.5million, MV $9.8million

4) XYZ Corporation's balance sheet of 2019 showed net fixed assets of $1.56million, and the 2020 balance sheet showed net fixed assets of $1.78 million. The company's 2020 income statement showed a depreciation expense of $140,000. What was the company's net capital spending for 2020? A. $80,000 B. $360,000 C. $220,000 D. $140,000

B. $360,000

2) Capital One is charging you 1.5% per month on your credit card. What is your Annual Percentage Rate (APR)? A. 1.5% B. 18.0% C. 3.0% D. Can't calculate from information provided.

B. 18.0%

1) What is a financial security? A. Ease with which an owner of an asset can sell it B. A claim against assets of cash flows of a company C. Dow Jones Industrial Average D. Voting rights to elect firm directors.

B. A claim against assets of cash flows of a company

3) During the Global Financial Crisis, Interest Only financial products were a significant problem. Which is the best example of an I/O security? A. Mortgage B. Corporate bond C. A Pure discount loan D. All of the above.

B. Corporate bond

5) Which best explains a fixed coupon bond? A. Sukuk B. Fixed coupon paid until maturity, and lump sum returned at maturity C. Fixed coupon paying bond with no maturity D. A debt security which promises one payment in the future.

B. Fixed coupon paid until maturity, and lump sum returned at maturity

1) ABC Corporation has current assets of $5,200, fixed assets of $26,000, current liabilities of $4,900, and long-term debt of $15,000. What is the ABC Corporation's total equity? What is the NWC of ABC Corporation? A. Total Equity $11,000, NWC $11, 300 B. Total Equity $11,300, NWC $300 C. Total Equity $11,000, NWC $300 D. Total Equity 11,300, NWC $11,000

B. Total Equity $11,300, NWC $300

4) Which of the following is a security traded in the US money market? A. Mortgage-backed securities B. Treasury Bills C. Preferred Stock D. Corporate bonds

B. Treasury Bills

5) Find Current ratio: Company A's balance sheet shows current assets of $6,300, fixed assets of $32,000, total long-term liabilities of $16,200 and total equity of $18,100. A. 0.64x B. 1.98x C. 1.58x D. 2.74x

C. 1.58x

4) Which is the best definition of an annuity? A. A cash flow stream which arises when the stream of consistent cash flows continues forever B. Preferred shares C. A cash flow stream where a fixed amount is received every year D. Effective annual rate.

C. A cash flow stream where a fixed amount is received every year

2) Which of the following is an example of an indirect agency cost? A. Unnecessary corporate expenditure B. Management auditing expense C. A lost opportunity D. All the above

C. A lost opportunity

5) Which one of the following is the financial statement which shows the accounting value of a firm's equity as of a particular date? A. Income statement B. Creditor statement C. Balance sheet D. Statement of cash flows E. Dividend statement

C. Balance sheet

4) The process of determining the present value of future cash flows in order to know their worth today is referred to as: A. Compound interest valuation B. Interest on interest computation C. Discounted cash flow valuation D. Present value interest factoring E. Complex factoring

C. Discounted cash flow valuation

3) What are the relevant cash flows for valuing a share of common stock? A. Investment gains B. Net income C. Dividends D. Bank financing E. Depreciation

C. Dividends

1) A bonds coupon rate is equal to the annual interest divided by which one of the following? A. Call Price B. Current Price C. Face Value D. Clean Price E. Dirty Price.

C. Face Value

2) The bond principal is repaid on which one of these dates? A. Coupon date B. Yield date C. Maturity date D. Dirty date E. Clean dare.

C. Maturity date

1) Which is the best example of a perpetuity? A. Automobile payment B. Tuition C. Pension plan with TIAA. D. Homeowners insurance with Chubb Insurance.

C. Pension plan with TIAA.

2) Who is the primary regulator of the US securities markets? A. Federal Reserve Bank of New York B. Chicago Board of Options Exchange C. Securities and Exchange Commission D. New York Stock Exchange.

C. Securities and Exchange Commission

2) Don Lemon invested $2,000 six years ago at 4.5%. He spends his earnings as soon as he earns any interest so he only receives interest on his initial investment. Which type of interest is Mr. Lemon earning? A. Free interest B. Complex interest C. Simple interest D. Interest on interest E. Compound interest.

C. Simple interest

4) Control of a firm ultimately rests with. . . A. The CEO B. The SEC C. The Stockholders D. The Founder

C. The Stockholders

5) Interest earned on interest is referred to as the ___________ of interest.

Compound

2) How is the Dividend Discount Model get calculated? A. Dividend per share / share price B. P/BV C. Market Cap / Net Income D. A model which determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate E. The sum of money paid regularly by a company to its shareholders from profits

D. A model which determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate

5) What is the best definition of a derivative in the context of securities markets? A. The degree to which an asset or security can be bought or sold in the market without affecting its price B. Buying or selling a stock at the current market price C. Financial decisions and their impact on the value of a company D. A security where the value is based on the value of another security.

D. A security where the value is based on the value of another security.

5) Which of the following should a financial manager take into account when considering an opportunity? A. How much cash they expect to receive B. When will they receive the funds C. How likely they are to receive the funds D. All of the Above

D. All of the Above

3) Which of the following ratios are market-based ratios? A. P/E ratio B. P/BV ratio C. Profit margin D. Both A and B

D. Both A and B

1) Which is a financial leverage ratio? A. Current ratio B. Profit marginterm-11 C. Price to book value D. Debt to equity E. Inventory turnover

D. Debt to equity

1) A Johnson & Johnson bond pays an 8% coupon rate on a bond provided that its earnings exceed an ROE of 8%. What type of security is this? A. Perpetual bond B. Equity C. Dividend D. Income bond.

D. Income bond.

4) Which two cash flows are received by a typical bond? A. Dividends and interest B. Share sale and principal at maturity C. Dividends and share sale D. Interest and principal at maturity.

D. Interest and principal at maturity.

3) Company has sales of $21,000, costs of $11,200, depreciation expense of $2,300, and interest expense of $1,300. If the tax rate is 40 percent, what is the operating cash flow, or OCF? A. OCF $9620= EBIT $9800 + Depreciation $2300-Taxes $2480 B. OCF $6800= EBIT $7500+Depreciation $2300-Taxes $3000 C. OCF $8180=EBIT $9800+Depreciation $2300-Taxes $3920 D. OCF $7320 = EBIT $7500+Depreciation $2300-Taxes $2480

D. OCF $7320 = EBIT $7500+Depreciation $2300-Taxes $2480

3) The Securities and Exchange Commission does all of the following except: A. Licensing securities professionals B. Provide investors with complete disclosure of material information on listed securities C. Regulates US stock exchanges D. Regulates all national banks in the US.

D. Regulates all national banks in the US.

2) Which security has the greatest preference in liquidation? A. Equity B. Preferred shares C. Subordinated debt D. Senior debt.

D. Senior debt.

2) Which is a key turnover ratio? A. Inventory turnover ratio B. Asset turnover ratio C. Receivables turnover ratio D. Fixed asset turnover ratio E. All of the Above

E. All of the Above

3) Protective covenants: A. Apply to short-term debt issues but not to long-term debt issues B. Only apply to privately issued bonds C. Are a feature found only in government-issued bonds D. Only apply to bonds with a deferred call provision E. Are primarily designed to protect bondholders.

E. Are primarily designed to protect bondholders.

1) Interest earned on both the initial principal and the interest reinvested from the prior periods is called: A. Free interest B. Dual interest C. Simple interest D. Interest on interest E. Compound interest

E. Compound interest

3) Alan Fishman just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following? A. Current yield B. Effective rate C. Compound rate D. Simple rate E. Discount rate

E. Discount rate

1) What is the average life of common equity? A. One day B. One year C. 10 years D. 30 years E. Forever

E. Forever

4) Which is not a feature of common stock? A. Dividends B. Cumulative voting C. Listing on an exchange D. Protective covenant E. Interest

E. Interest

4) The items included in an indenture that can limit actions of the issuer in order to protect bondholders interests are referred to as the: A. Trustee relationships B. Bylaws C. Legal bounds D. Trust deeds E. Protective covenants

E. Protective covenants

5) What are pro forma financial statements? a) Financial statement projecting future years operations b) Working capital summaries c) Changes to working capital d) The three components of a cash flow statement e) All of the above

a) Financial statement projecting future years operations

2) Which type of company analysis considers the inter-relationships between different cash flow components? a) Simulation Analysis b) Break-even Analysis c) Sensitivity Analysis d) Scenario analysis e) Cash flow analysis

a) Simulation Analysis

1) You purchase a run-down home in Albany for $25,000 and spend another $25,000 to repair it. Your total in-cost is $50,000. When the work is done, you place the home back on the market and find that it's worth $60,000. What is your NPV? a) Zero b) $10,000 c) $25,000 d) $50,000 e) $60,000

b) $10,000

1) Carlos "Cookie" Carrasco is looking to build a winter home on Margarita Island in his native Venezuela. The amount of money he will spend is $17 mn. He will finance the new home with $14 mn in borrowings at 7%, and the remainder with equity. If Mr. Carrasco calculates his weighted average cost of capital (WACC) at 15%, what would his cost of equity be? a) 10.25% b) 9.24% c) 8.23% d) 7.22% e) 6.21%

b) 9.24%

2) What is considered a relevant cash flow for a project? a) A change in the Firm's overall future cash flows that comes about as a direct consequence of a decision to take on that project b) A cash flow for project evaluation consists of any and all changes in the firm's future cash flows with a project that are a direct consequence of taking on the project c) Capital gains from disposal d) Sunk cost e) Cannibalization of other projects

b) A cash flow for project evaluation consists of any and all changes in the firm's future cash flows with a project that are a direct consequence of taking on the project

4) An example of erosion when taking on a new project would be? a) Trustco Bank opening a branch in Guilderland next to a Bank of America branch b) Disney adding a new park in Shanghai which would erode or cannibalize Hong Kong Disney and Tokyo Disney revenues c) Tides at a beach moving sand to another location d) Home Depot purchasing a chain of hardware stores in a locale that it doesn't exist e) All of the above

b) Disney adding a new park in Shanghai which would erode or cannibalize Hong Kong Disney and Tokyo Disney revenues

3) What are some common pitfalls when looking at incremental cash flows? a) Not including sunk costs b) Including opportunity costs c) Including financing costs d) Not including side effects of doing the deal e) All of the above

b) Including opportunity costs

2) What is the difference between an investment's market value and cost? a) Internal Rate of Return (IRR) b) Net Present Value (NPV) c) Capital budgeting process d) Discounted Cash Flow (DCF) e) All of the above

b) Net Present Value (NPV)

3) As a financial manager, what will you do with an investment if its Net Present Value (NPV) is negative? a) Estimate the cash flows of the business b) Reject the investment c) Accept the investment d) Be agnostic with the investment e) None of the above

b) Reject the investment

2) Tom "Tom Terrific" Seaver is looking to eliminate unsystematic risk in his portfolio which comprises 2 mm shares of Tesla. What is the best way he can go about doing that? • a) Buy more of the same security b) Diversify with shares of other automobile companies c) Diversify with shares in multiple industries d) Buy puts on the shares of Tesla e) Call his professor

c) Diversify with shares in multiple industries

3) If a company in in violation of a financial covenant, and is precluded from accessing funding to undertake a positive NPV project, what type of situation what kind of capital rationing would this be considered? a) Soft rationing b) Bankruptcy c) Hard rationing d) S#@t out of luck e) FTX Company

c) Hard rationing

4) Which investment technique yields the same result as Net Present Value (NPV)? a) Payback Rule b) Discounted Payback Period c) Internal Rate of Return d) Average Accounting Return e) Profitability Index

c) Internal Rate of Return

1) Which type of company analysis only allows for one variable to change? a) Simulation Analysis b) Break-even Analysis c) Sensitivity Analysis d) Scenario analysis e) Cash flow analysis

c) Sensitivity Analysis

1) What is the best definition of an opportunity cost? a) Sunk cost b) Erosion c) The most valuable investment alternative given up if a particular investment is undertaken d) Net working capital e) Cost to prepare pro forma financial statements

c) The most valuable investment alternative given up if a particular investment is undertaken

2) The Flushing Queens Brewery is 70% funded with debt at an after-tax cost of 9%, while the cost of equity is 12%. What is the Flushing Queens Brewery weighted average cost of capital (WACC)? a) 9.0% b) 12.0% c) 10.5% d) 9.9% e) 0.0%

d) 9.9%

2) How is return on investment (ROI) of an equity security calculated? a) It cannot be calculated b) Adding the dividend to a company's share price c) Adding the dividend yield to the coupon rate d) Adding the capital gain percentage to the dividend yield e) All of the above

d) Adding the capital gain percentage to the dividend yield

3) How is return volatility on a security measured? a) Variance and standard deviation b) Normal distribution c) Bell curve d) a, b, and c e) None of the above

d) a, b, and c

3) How is the cost of equity calculated? a) Dividend Growth model approach b) Security Market Line approach c) Bloomberg terminal d) a, b, and c e) None of the above

d) a, b, and c

1) Brandon Nimmo has a $10,000,000 portfolio, of which $500,000 is in bond, $3,000,000 is in alternative investments, and the remainder in equities. What is his equity portfolio weight? a) 5% b) 30% c) 100% d) 0.5% e) 65%

e) 65%

1) Steve "Uncle Stevie" Cohen is speaking to Sandy Alderson about "efficient capital markets theory". Uncle Stevie would be correct if he stated the following about "efficient capital markets": a) A market in which a security trades is priced efficiently b) Based on available information, there is no reason that the current share price is too high or too low c) Although market inefficiencies may exist, they are relatively small and uncommon d) The theory is nonsense and is just taught so professors can sell textbooks e) All of the above

e) All of the above

3) Mike Piazza is asking you to tell him about the Capital Asset Pricing Model (CAPM). What will you tell him? a) CAPM shows the expected return for a particular asset b) CAPM incorporates the pure time value of money c) CAPM explains the reward for bearing systematic risk d) CAPM alerts you to the amount of systematic risk of a particular security e) All of the above

e) All of the above

4) Which of the following is a true statement about "operating leverage"? a) The greater the degree of operating leverage, the greater the potential for forecasting risk b) Suggests that a business is capital intensive c) The degree to which a business relies on fixed costs d) Small errors in operating leverage can magnify problems in forecasting e) All of the above

e) All of the above

5) Which statement is true regarding the Internal Rate of Return (IRR)? a) It is the most important alternative to Net Present Value b) The IRR is a single rate of return which summarizes the merits of the project c) It is the discount rate which makes the Net Present Value of an investment equate to zero d) An investment is acceptable if its IRR exceeds the required return e) All of the above

e) All of the above

1) The process of planning and managing a firm's long-term investments is called . . A. Capital Budgeting - the investment opportunities that give more return than they cost. ROI. B. Working Capital - managing short term assets and short-term liabilities. Makes sure business has enough liquidity C. Profit Maximization D. Capital Structure - decisions, long term vs short term debt, debt vs equity, how much to borrow, cost of borrowing?, how and where to raise that money. How to finance business. Making one decision over another is at the heart of capital structure. Give and take between risk and reward Short term assets are cash, accounts receivable, and certain kinds of inventory. Short term liability is anything owed within a year.

A. Capital Budgeting - the investment opportunities that give more return than they cost. ROI.

3) Which of the following forms of business organization is subject to double taxation? A. Corporation - legal person, differentiates managers from shareholders, shareholders select board of directors, and the board of directors hire management. Ownership is Easily transferred, shareholder have limited liability, company must pay taxes. Double taxation is when corporation pays taxes on its earnings, distributes dividends, and the shareholders pay taxes on their dividends. Most important business in US. B. Partnership - business formed by 2 or more people. General partner is where partners share gains and losses and have unlimited liability. Limited partner is where there is 1 or more partners and the limited partner does not actively act in the business, if they did they would have unlimited liability C. Limited Partnership D. Sole Proprietorship - business owned by 1 person. Simplest form of business, owner keeps all profits, unlimited liability for debt or any legal issues that arise

A. Corporation - legal person, differentiates managers from shareholders, shareholders select board of directors, and the board of directors hire management. Ownership is Easily transferred, shareholder have limited liability, company must pay taxes. Double taxation is when corporation pays taxes on its earnings, distributes dividends, and the shareholders pay taxes on their dividends. Most important business in US.

3) Which security has a "residual claim" on a company's cash flows? A. Equity B. Preferred shares C. Subordinated debt D. Senior debt.

A. Equity

4) Which of the followings are the correct set of components of ROE? A. Profit margin, asset turnover, equity multiplier B. NWC ratio, fixed asset turnover, enterprise value C. Current ratio, receivables turnover, total debt ratio

A. Profit margin, asset turnover, equity multiplier