Bus Finance Test #1

Which of the following securities has a purely fixed claim against a firm's cash flows? A. bonds B. options C. common stock D. None of the options are correct.

A. bonds

Mike just purchased a bond which pays $40 every six months in interest. The $40 interest payment is also called the A. coupon. B. par value. C. discount. D. call premium. E. yield.

A. coupon.

Which one of the following is a source of cash? A. decrease in accounts receivable B. decrease in common stock C. decrease in long-term debt D. decrease in accounts payable E. increase in inventory

A. decrease in accounts receivable

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. income statement B. balance sheet C. cash flow statement D. sources and uses statement E. market value statement

A. income statement

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. What holding period return, measured in yen, did you earn on the bond? A. 3% B. 7% C. 10% D. 13% E. 30% F. None of the options are correct.

D. 13%

At the end of 2016, Crane Industries, Inc.'s stock price was $30.75. A year later, it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What rate of return did the common stockholders earn in fiscal year 2017? A. 1.79% B. 4.33% C. 13.43% D. 15.22% E. 17.76% F. None of the options are correct.

D. 15.22%

Which of the following formulas describes the calculation of cash flow from operating activities? A. Net income + Noncash items +/− Changes in current assets and liabilities B. Net income + Capital expenditures − Dividends paid C. Net income − Capital expenditures − Dividends paid D. Net income +/− Changes in current assets and liabilities − Dividends paid E. Net income + Noncash items − Capital expenditures

A. Net income + Noncash items +/− Changes in current assets and liabilities

Depreciation expense A. reduces both taxes and net income. B. increases net fixed assets as shown on the balance sheet. C. is a noncash item that increases net income. D. decreases current assets, net income, and operating cash flows.

A. reduces both taxes and net income.

Suppose an acquiring firm pays $100 million for a target firm, and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account? A. $0 million B. $20 million C. $30 million D. $70 million E. $80 million F. None of the options are correct.

B. $20 million

A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company's balance sheet? A. Equity rises $250,000; net plant and equipment falls $250,000. B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000. C. Cash rises $250,000; accounts receivable falls $100,000; goodwill rises $150,000. D. Cash rises $250,000; net plant and equipment falls $250,000.

B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.

Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal? A. Ellsbury changes the credit terms it offers to customers, allowing them to pay in 45 days instead of 30 days. B. Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products. C. Ellsbury starts paying off all outstanding invoices to suppliers twice a month instead of once a month. D. Ellsbury increases its cash/assets ratio from 12% to 15%.

B. Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products.

Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test A. I and III only B. II and IV only C. III and IV only D. I, II, and III only E. I, III, and IV only

B. II and IV only

What is the length of the cash conversion cycle for a firm with $3 million in inventory, $1.5 million in accounts payable, a collection period of 40 days, and an annual cost of goods sold of $18 million? A. 34.0 days B. 51.2 C. 70.4 days D. 131.2 days E. None of the options are correct.

C. 70.4 days

Which of the following statements regarding junk bonds is true? A. Junk bonds typically offer lower yields to maturity than investment-grade bonds. B. Junk bonds have higher priority in bankruptcy than preferred stock. C. Junk bonds offer no coupon payments to investors. D. Junk bonds are typically defined as bonds with default probabilities of 25% or higher.

B. Junk bonds have higher priority in bankruptcy than preferred stock.

The book value of a firm is A. equivalent to the firm's market value provided that the firm has some fixed assets. B. based on historical cost. C. generally greater than the market value when fixed assets are included. D. more of a financial than an accounting valuation. E. adjusted to the market value whenever the market value exceeds the stated book value.

B. based on historical cost.

Which one of the following is a use of cash? A. increase in notes payable B. increase in inventory C. increase in long-term debt D. decrease in accounts receivable E. increase in common stock

B. increase in inventory

Individuals who continually monitor the financial markets seeking mispriced securities A. earn excess profits over the long term. B. make the markets increasingly more efficient. C. are never able to find a security that is temporarily mispriced. D. are overwhelmingly successful in earning abnormal profits. E. are always quite successful using only historical price information as their basis of evaluation.

B. make the markets increasingly more efficient.

Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the A. coupon. B. par value. C. discount. D. yield. E. call premium. F. None of the options are correct.

B. par value.

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥122 at year-end. What holding period return, measured in U.S. dollars, did you earn on the bond? A. −18.03% B. −7.38% C. −5.03% D. 3.0% E. 10.0% F. None of the options are correct.

B. −7.38%

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's price per share? A. $3.50 B. $5 C. $10 D. $25 E. $50 F. None of the options are correct.

C. $10

Which of the following would NOT be considered a use of cash? A. Dividends paid B. A decrease in accounts payable C. Depreciation D. An increase in the cash and marketable securities account

C. Depreciation

Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover A. I and IV only B. II and IV only C. I, II, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV

C. I, II, and IV only

A balance sheet reports the value of a firm's assets, liabilities, and equity A. over an annual period. B. over any period of time. C. at any point in time. D. at the end of the year.

C. at any point in time.

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets? A. income statement B. creditor's statement C. balance sheet D. cash flow statement E. sources and uses statement

C. balance sheet

Which of the following securities has a purely residual claim against a firm's cash flows? A. preferred stock B. callable bonds C. common stock D. non-callable bonds E. None of the options are correct.

C. common stock

Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. All else held constant, how will this accomplishment be reflected in the firm's financial ratios? A. decrease in the fixed asset turnover rate B. decrease in the financial leverage ratio C. increase in the inventory turnover rate D. increase in the days' sales in inventory E. decrease in the total asset turnover rate

C. increase in the inventory turnover rate

At the end of 2017, Stacky Corp. had $500,000 in liabilities and a debt-to-assets ratio of 0.5. For 2017, Stacky had an asset turnover of 3.0. What were annual sales for Stacky in 2017? A. $333,333 B. $1,200,000 C. $1,800,000 D. $3,000,000

D. $3,000,000

Carbon8 Corporation wants to raise $120 million in a seasoned equity offering, net of all fees. Carbon8 stock currently sells for $28.00 per share. The underwriters will require a fee of $1.25 per share, and indicate that the issue must be underpriced by 7.5%. In addition to the underwriter's fee, the firm will incur $785,000 in legal, administrative, and other costs. How many shares must Carbon8 sell in order to raise the desired amount of capital? A. 4.3 million B. 4.5 million C. 4.6 million D. 4.9 million

D. 4.9 million

In March, with the spot price of wheat at $5.75 per bushel, Hollywood Bakery longs 100 July wheat futures contracts (5,000 bushels each) on the CBOE at a futures price of $5.90 per bushel. In June, Hollywood Bakery closes out its futures contracts when the futures price is $5.80 per bushel. What is Hollywood Bakery's gain (or loss) on the futures contracts? A. A gain of $50,000 B. A gain of $25,000 C. A loss of $25,000 D. A loss of $50,000 E. None of the options are correct.

D. A loss of $50,000

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2016 period)? A. Short-term government bills, long-term corporate bonds, long-term government bonds, common stocks B. Long-term corporate bonds, long-term government bonds, common stocks, short-term government bills C. Common stocks, long-term government bonds, long-term corporate bonds, short-term government bills D. Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills E. Long-term corporate bonds, common stocks, short-term government bills, long-term government bonds F. None of the options are correct.

D. Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills

Which one of the following statements is true? A. Equity securities offer fixed claims on future cash payouts. B. Unlike bondholders, for their returns, shareholders rely entirely on price appreciation. C. In theory, common shareholders exercise very little control over company decisions. D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds. E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation. F. None of the options are correct.

D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds.

In comparison to industry averages, Okra Corp. has a low inventory turnover, a high current ratio, and an average quick ratio. Which of the following would be the most reasonable inference about Okra Corp.? A. Its current liabilities are too low. B. Its cost of goods sold is too low. C. Its cash and securities balance is too low. D. Its inventory level is too high.

D. Its inventory level is too high.

A company purchases a new $10 million building financed half with cash and half with a bank loan. How would this transaction affect the company's balance sheet? A. Net plant and equipment rises $10 million; cash falls $10 million; bank debt rises $5 million. B. Net plant and equipment rises $5 million; cash falls $10 million; bank debt rises $5 million. C. Net plant and equipment rises $5 million; cash falls $5 million; bank debt rises $5 million. D. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

D. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

Which of the following statements regarding preferred stock is true? A. Holders of preferred stock have the same voting rights as common stockholders. B. Preferred stock dividend payments are a deductible expense for corporate tax purposes. C. Almost all public corporations are at least partly financed with preferred stock. D. None of the options are correct.

D. None of the options are correct.

Which one of the following ratios identifies the amount of sales a firm generates for every $1 in assets? A. current ratio B. debt-to-equity C. retention D. asset turnover E. return on assets

D. asset turnover

The sources and uses of cash over a stated period of time are reflected in the: A. income statement. B. balance sheet. C. shareholders' equity statement. D. cash flow statement. E. statement of operating position.

D. cash flow statement.

A times-interest-earned ratio of 3.5 indicates that the firm A. pays 3.5 times its earnings in interest expense. B. has interest expense equal to 3.5% of EBIT. C. has interest expense equal to 3.5% of net income. D. has EBIT equal to 3.5 times its interest expense.

D. has EBIT equal to 3.5 times its interest expense.

Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan? A. current ratio B. debt-to-equity ratio C. times-interest-earned ratio D. times-burden-covered ratio E. None of the options are correct.

D. times-burden-covered ratio

A $1,000 par value bond with a fixed 10% rate of interest pays coupons semiannually. What amount will the bondholder receive on the bond's maturity date? A. $50 B. $100 C. $500 D. $1,000 E. $1,050 F. $1,100

E. $1,050

Ptarmigan Travelers had sales of $420,000 in 2016 and $480,000 in 2017. The firm's current asset accounts remained constant. Given this information, which one of the following statements must be true? A. The total asset turnover rate increased. B. The days' sales in receivables increased. C. The inventory turnover rate increased. D. The fixed asset turnover decreased. E. The collection period decreased.

E. The collection period decreased.

Which one of the following is a source of cash? A. increase in accounts receivable B. decrease in notes payable C. decrease in common stock D. increase in inventory E. increase in accounts payable

E. increase in accounts payable