C708 All Modules
You plan to invest $100,000 in a 3 year Certificate of Deposit that has a simple interest rate of 5%. What is its future value? $105,000 $115,000 $115,763 $115,927
$115,000 FV = $100,000 + (3 × 5% × $100,000) = $115,000.
You plan to invest $100,000 in a 3 year Certificate of Deposit that has a 5% compound interest rate. What is its future value? $115,000 $105,000 $115,927 $115,763
$115,763 FV = $100,000 × 1.053 = $115,763 Using Calculator: N = 3, I/Y = 5, PV = 100,000. [CPT] FV = $115,763.
What is the future value in 30 years of $100,000 invested today in a savings account earning a 1% simple interest rate every year (rounded up to the nearest dollar)? $130,000 $30,000 More than $134,785 $134,785
$130,000 V = $100,000 + (30 × 1% × $100,000) = $130,000.
What is the future value in 30 years of $100,000 invested today in a savings account earning a 1% compound interest rate every year (rounded up to the nearest dollar)? $30,000 More than $134785 $130,000 $134,785
$134,785 FV = $100,000 × 1.0130 = $134,785 Using Calculator: N = 30, I/Y = 1, PV = 100,000. [CPT] FV = $134,785.
You have $300,000 that you want to invest in a one year Certificate of Deposit (CD) with a 4% annual interest rate. What will be the value of that CD in a year? $315,000 $301,200 $420,000 $312,000
$312,000 FV = $300,000 × 1.04 = $312,000 Using Calculator: N = 1, I/Y = 4, PV = 300,000. [CPT] FV = $312,000.
You own a perpetuity that pays $1000 in the first year. It has a 5% annual interest rate and a 2% annual growth rate. What is the present value of the perpetuity? $50,000 $20,000 $14,286 $33,333
$33,333 PVGP = A1/(i - g) = $1000/(0.05 - 0.02) = $33,333.
An annuity has an interest rate of 7% and makes a quarterly payment of $2,000. The annuity is to last for 5 years. What is the present value of the annuity? $33,505 $32,801.58 $2,118.80 $8,200.40
$33,505 The present value of an annuity is the value of a stream of payments, discounted by the interest rate to account for the payments are being made at various moments in the future. The formula is: PV = [1-(1+i)^-n] / i, where n is the number of payments and i is the per period interest rate. Using the TI-BA II Plus calculator: N=5x4=20, I/Y=7/4=1.75, PMT=2000, FV=0 and [CPT] [PV] = 33,505.76.
An investment portfolio has a 30% chance of earning $125,000 in a year, a 40% chance of earning $50,000, a 15% chance of earning nothing and 15% chance of losing $20,000. What is its expected return? $50,000 $62,000 $38,750 $54,500
$54,500 (30% × $125,000) + (40% × $50,000) + (15% × 0) + (15% × -$20,000) = $54,500.
A firm has projected current assets to be $205 million, fixed assets to be $605 million, current liabilities to be $188 million, long-term debt to be $461 million, and owner's equity to be $106 million. Given this information, what is the discretionary financing need? $38 million $9 million $94 million $55 million
$55 million
What is the present value of $100,000 that will be received 5 years from today if you face a 10% compound interest rate every year (rounded up to the nearest dollar)? $52,092 $62,092 $82,092 $72,092
$62,092 PV = $100,000/(1.105) = $62,092 Using Calculator: N = 5, I/Y = 10, FV = 100,000. [CPT] PV = $62,092.
A company had $1 million in sales last year, $1.5 million in sales this year, and projected net income of $250,000. Last year, it had $5 million of its assets tied to sales, $3 million in sales-affected liabilities, and a retention ratio of 0.3. What is its AFN?
$925,000 The correct formula to calculate AFN is: Projected increase in assets - spontaneous increase in liabilities - any increase in retained earnings.
A company had $5,000,000 in total revenues for its fiscal year. Its expenses for the year were $3,500,000. Its total assets were $12,500,000. What is the company's return on assets for the fiscal year? 0.7 0.12 0.4 0.28
0.12 ROA = NI/TA. NI = $5,000,000 - $3,500,000 = $1,500,000. Hence, ROA = $1,500,000/$12,500,000 = 0.12.
During a fiscal year, a company has $20,000,000 in revenue. Its operating expenses are $17,000,000. What is the company's operating margin? 0.85 0.13 0.15 0.73
0.15 Operating margin = EBIT/Revenue. We calculate EBIT = Revenue - Operating expenses = $20,000,000 - $17,000,000 = $3,000,000. Hence, Operating Margin = $3,000,000/$20,000,000 = 0.15.
A company has $450,000 in cash, $300,000 in marketable securities, and $500,000 worth of inventory. Its current assets are worth $1,750,000 and its current liabilities are $1,250,000. What is the company's acid test ratio? 0.8 1.16 1.04 1
1 Acid test ratio = (CA - Inv)/CL = ($1,750,000-$500,000)/$1,250,000 = 1
A company has $750,000 in cash, $200,000 in marketable securities and $300,000 worth of accounts receivable. Its current assets are worth $1,500,000 and its current liabilities are $1,000,000. What is the company's quick ratio? 1.25 1.5 1.05 1.3
1.25 Quick ratio = (CA - Inv)/CL. Since we are given all the current assets except for the Inventory, then (CA - Inv) = $750,000 + $200,000 + $300,000 = $1,250,000 and Quick Ratio = $1,250,000/$1,000,000 = 1.25.
During a fiscal year, a company had $25,000,000 in total sales. It had a cost of goods sold (COGS) of $18,000,000, and $4,000,000 in additional expenses. What is the company's gross profit margin? 33.33% 12% 28% 16%
28% Gross Profit Margin = Gross Profit / Sales. Gross Profit = Sales - COGS = $25,000,000 - $18,000,000 = $7,000,000. Hence, GP Margin = $7,000,000/$25,000,000 = 0.28 or 28%.
Last year T&J Inc. reported total assets of $250 million, equity of $120 million, net income of $50 million, dividends of $15 million, and retained earnings of $35 million. What is T&J Inc.'s sustainable growth rate? 20.00% 41.67% 29.17% 12.50%
29.17% SGR = ROE (1-b) = (50/120) x [1- (15/50)] = 29.17%
A company has assets of $2,000,000, net sales of $3,000,000, and $1,500,000 in equity. Its net income is $10,000,000. What is its return on equity? 0.15 3.333 6.667 5
6.667 Return on Equity = Net Income/Equity = $10,000,000/$1,500,000 = 6.667.
A portfolio has $70,000 of bonds and $30,000 of stock. The bonds are 80% likely to have a 10% return and 20% likely to have a 0% return. The stock is 50% likely to have a 20% return and 50% likely to have a 10% loss. What is the expected return? 13% 5.9% 2.9% 7.1%
7.1% Expected return on bonds = (80% × 10%) + (20% × 0) = 8% Expected return on stock = (50% × 20%) + (50% × -10%) = 5% Overall expected return = ( 70/100 × 8%) + (30/100 × 5%) = 7.1%
A portfolio is composed of 30% stock, 20% bonds, and 50% mutual funds. The stock is expected to have a 10% return, the bonds a 5% return and the mutual funds a 7% return. What is the expected return of the portfolio? 7% 8.1% 7.5% 7.3%
7.5% Expected return = (30% × 10%) + (20% × 5%) + (50% × 7%) = 7.5%.
Suppose a firm has a net profit margin of 15%, sales of $155 million, assets of $312 million, and owner's equity of $223 million. If the dividend payout ratio is 10%, what is the firm's sustainable growth rate? 13.5% 9.38% 7.45% 10.43%
9.38% SGR = ROE (1-b) = [0.15 x (155/312) x (312/223)] x (1-0.1) = 9.38%
A US Treasury security matures in 26 weeks. What type of treasury is it? A note A bank deposit A bond A bill
A bill
Which statement regarding bonds and par values is true? Corporate bonds usually have par values equal to $10,000. The par value of a bond changes. Corporate bonds usually have a par value of less than $100,000. A bond selling at par has a coupon rate so the bond is worth its redemption value at maturity.
A bond selling at par has a coupon rate so the bond is worth its redemption value at maturity.
Which answer best defines financial statements in general? A listing of a company's assets and liabilities A detailed report of a company's income and expenses An analysis of the flow of cash into and out of a business A collection of reports that describes a company's financial activities to a third party
A collection of reports that describes a company's financial activities to a third party
A bond pays a coupon rate equal to the LIBOR rate plus 0.30%. The coupon rate is recalculated every three months. What type of bond is this? A floating rate note An inflation-linked bond A stepped-coupon bond A zero-coupon bond
A floating rate note Floating rate notes (FRNs, floaters) have a variable coupon that is linked to a reference rate of interest, such as LIBOR or Euribor. For example, the coupon may be defined as three month USD LIBOR + 0.20%. The coupon rate is recalculated periodically, typically every one or three months.
Of the following car financing options, which one would you prefer while assuming that you prefer paying the least amount of dollars and that you face a 10% annual compound interest rate on all your financial decisions? A lump-sum payment of $20,000 today only. A lump-sum payment of $19,000 today only. A lump-sum payment of $20,000 in two years from today. A payment $10,000 today and another of $10,000 in one year from today.
A lump-sum payment of $20,000 in two years from today. A lump sum payment of $19,000 today is greater than the value today of a payment of $20,000 in two years, which gives PV = $20,000/(1.102) = $16,529. Using Calculator: N = 2, I/Y = 10, FV = 20,000. [CPT] PV = $16,529.
Which prediction based on a description of the yield curve is not correct? A flat yield curve suggest that interest rates will be cut. A normal yield curve suggests that interest rates will remain the same in the future. An inverted yield curve suggests that interest rates will be dramatically cut. A normal yield curve suggests that interest rates will be raised in the future.
A normal yield curve suggests that interest rates will remain the same in the future.
Which description accurately describes a primary market? A primary market is where investors purchase assets from other investors. Securities start trading in primary market venues including the New York Stock Exchange and Nasdaq. A primary market refers to the market where securities are created. A primary market is often referred to as a "stock market".
A primary market refers to the market where securities are created.
Which answer best summarizes how the fields of accounting, finance, and economics relate to each other? Finance is backwards looking, economics projects forward, and accounting studies cause and effect. Finance is backwards looking, economics projects forward, and accounting studies cause and effect. Accounting is backwards looking, finance projects forward, and economics studies cause and effect. Economics is backwards looking, finance projects forward, and accounting studies cause and effect.
Accounting is backwards looking, finance projects forward, and economics studies cause and effect.
Which example is not a correct definition of a basic type of financial ratios? Liquidity Ratios Debt Ratios Profitability Ratios Activity
Activity
Which answer does not give a correct definition of the basic type of financial ratio described? Activity ratios are concerned with shareholder audiences. Debt ratios measure the firm's ability to pay long-term debt. Liquidity ratios measure the availability of cash to pay debt. Profitability ratios measure the firm's use of its assets to generate an acceptable rate of return.
Activity ratios are concerned with shareholder audiences.
Which answer does not describe a step in constructing a multi-step income statement? Add all revenues, then subtract all expenses. Subtract operating expenses from gross profit to determine income from operations. Subtract non-operating expenses from income from operations. Subtract income tax expense from income before taxes.
Add all revenues, then subtract all expenses.
Which answer is an example of a stakeholder in a company? The company's employees The company's shareholders All of these The company's suppliers
All of these
Company X has decided to merge with another business. It is planning on preparing a pro forma income statement. Which condition should be included in the pro forma statement? How much the company's revenues will increase due to the merger If the merged company will have increased Research & Development (R&D) expenses All of these answers How much the merged company's income tax expense will increase
All of these answers
Which answer best describes a type of financial market? Money markets Derivative markets Capital markets All of these answers
All of these answers
Which answer gives the best example of a factor that can be determined through an analysis of a company's financial statements? The accuracy of the company's tax returns The company's profitability The company's creditworthiness All of these answers
All of these answers
Which answer is a reason why a person would study finance? To better understand the economic environment To improve management of personal finances All of these answers To apply financial concepts to business situations
All of these answers
Which answer is the best example of a noncash item that would be included on the income statement? Unrealized losses from investments All of these answers Depreciation and Amortization Write down of inventory
All of these answers
Which answer best describes a characteristic of a corporation? The corporation must have an elected board of directors. The corporation is a separate taxable entity from its owners. Shareholders are generally not personally liable for the business's obligations and liabilities. All of these answers are correct.
All of these answers are correct.
Which answer is a factor that contributes to the conflict of interest between a company's bondholders and its shareholders? Shareholders generally want the company to pursue riskier projects; bondholders do not. All of these answers are correct. Shareholders have a vote in how the company conducts its business; bondholders generally do not. Shareholders are only paid if the company makes a profit, bondholders are paid regardless.
All of these answers are correct.
Suppose a company is planning to increase its dividend payout ratio next year. Given this information, which of the following cases do you expect to occur in the upcoming year? A reduction in the dividend received by investors A reduction in net income An increase in discretionary financing needed A decrease in the firm's stock price
An increase in discretionary financing needed
Which answer is the correct definition of the accounting equation? Assets = Liabilities + Expenses Liabilities = Assets + Owners Equity Owner's Equity = Assets + Liabilities Assets = Liabilities + Owner's Equity
Assets = Liabilities + Owner's Equity
Which answer is not a cost to the investor that is included in the calculation of an investment's interest rate? Opportunity Cost Risk of a bad investment Inflation Brokerage commissions and fees
Brokerage commissions and fees
Which answer is not a type of ratio used in financial statement analysis? Business ratio Liquidity ratio Activity ratio Profitability ratio
Business ratio
Which of the following is not an example of benchmarking using ratio analysis? Compare the company's gross profit margin to the average gross profit margin of the top three firms in its industry. Calculate a company's debt ratio and compare it to its industry's average debt ratio. Contrast a company's current ratio with its nearest competitors. Calculate the company's current ratio by comparing its current assets with its current liabilities.
Calculate the company's current ratio by comparing its current assets with its current liabilities.
A company needs funds to expand its business by purchasing new equipment. Which financial market should the company use to raise money? Derivative market All of these answers Money market Capital market
Capital market
Which of the following is not a component of the Cash Flow Statement? Cash Flow from Operations Cash Flow from Investing Cash Flow from Sales Cash Flow from Financing
Cash Flow from Sales
The percentage of sales forecasting method is used by management to forecast which of the following? Profit expected for a given percentage increase in sales. Cash needed to finance future sales growth. Debt financing needed by the firm. Capital financing needed to promote marketing efforts.
Cash needed to finance future sales growth.
Which of the following is the correct order of how assets should be presented on a balance sheet? Cash; inventory; property, plant, and equipment (PPE); accounts receivable. Cash; accounts receivable; inventory; property, plant, and equipment (PPE). Accounts receivable; cash; inventory property, plant, and equipment (PPE). Cash; inventory; accounts receivable; property, plant, and equipment (PPE).
Cash; accounts receivable; inventory; property, plant, and equipment (PPE).
Which answer is not a true statement regarding voting rights? Shareholders generally get to vote on who is part of the corporate Board of Directors. Generally each share of common stock equals one vote. Corporate shareholders are prohibited from casting their vote online. Preferred stock generally does not carry voting rights.
Corporate shareholders are prohibited from casting their vote online.
Which statement is false regarding debt vs. equity? Debt can be secured or unsecured, whereas equity is always unsecured. Debt carries high risk to investors as compared to Equity. Debt holders are the creditors whereas equity holders are the owners of the company. Debt can be kept for a limited period and should be repaid back after the expiry of that term. On the other hand, Equity can be kept for a long period.
Debt carries high risk to investors as compared to Equity.
Which answer option is not a job function associated with a corporate finance department? Determining whether to pay a dividend to the corporation's shareholders. Ensuring that the financial statements accurately reflect the firm's performance Valuing the profitability of multiple projects and choosing one in which to invest. Preparing the corporation's budget for the next fiscal quarter.
Ensuring that the financial statements accurately reflect the firm's performance
A firm is evaluating the merits of investing in one of two non-repeatable projects with different lifespans. Start-up costs for each project are equal. If project A has an expected lifetime of five years, and project B has an expected lifetime of eight years, which capital budgeting method provides the best way to compare future cash flows from these projects? Accounting rate of return Equivalent annuity Internal rate of return Payback Period
Equivalent annuity
Financial Ratios help to identify some of the financial strengths and weaknesses of a company. What are two ways that the ratios provide for making meaningful comparisons of a firm's financial data? Examining ratios across time to identify trends and comparing the firm's ratios with those of other firms. Identifying year over year changes in balance sheet and income statement items. Determining how long it takes to collect the firm's receivables and how long it takes to pay it accounts payables. Smoothing out differences when comparing firms that use different accounting practices and restating accounting data in relative terms.
Examining ratios across time to identify trends and comparing the firm's ratios with those of other firms.
True or False: A person buying Barnes and Noble stock from an investor who owns shares in Barnes and Noble is participating in a primary market.
False
True or False: Bond markets and stock markets are two types of money markets. True False
False
True or False: Insider trading occurs when a member of an establishment uses information readily available to the public in an attempt to increase his/her wealth through buying or selling stock. True False
False
Which answer is not a benefit associated with common stock? The right to vote on who gets to sit on the company's Board of Directors Preemptive rights Guaranteed dividends The right to vote on corporate objectives and policy
Guaranteed dividends
Financial markets can address which problem faced by a company's management? Market oscillation All of these answers Emotional factors among market participants Information asymmetry
Information asymmetry
Which answer correctly describes an advantage the internal rate of return has over net present value for capital budgeting purposes? Internal rate of return is an indicator of the efficiency, quality or yield of an investment. The IRR method is clear and easy to understand. The IRR shows the actual annual profitability of an investment. The IRR method recognizes the time value of money.
Internal rate of return is an indicator of the efficiency, quality or yield of an investment.
Which option is an adequate method to reduce an investor's risk through diversification? Invest in a small pool of stocks from companies in the same industry. Invest in a broad pool of US and international stocks and bonds. Invest in the common stocks of the two companies that have performed the best in the last 5 years. Invest in a start-up business that has a broad ownership among a large number of investors.
Invest in a broad pool of US and international stocks and bonds.
In the bond market, firms raise debt financing directly from Government agencies Loan officers Consumer Banks Investors
Investors
Which description is not a drawback of using return on assets in a financial analysis? There is no definitive metric that identifies an ROA as good or bad. ROA is calculated using the assets' carrying value, not its market value. ROA does not identify how assets were financed. It does not measure how effective the company is at using its assets to generate profit.
It does not measure how effective the company is at using its assets to generate profit.
Which of the following is not a statistical forecasting method? Longitudinal data Time Series Cross-sectional Judgmental
Judgmental
Which answer is not a requirement for a financial manager to carry out his or her responsibilities? An understanding of the business's long-term strategy Knowing with certainty what the business cash flows will be in the future The ability to calculate the cost of investing in a product or business opportunity A firm grasp of the business's accounting system
Knowing with certainty what the business cash flows will be in the future
In the percent-of-sales forecasting method, which balance sheet items are not assumed to increase proportionately with sales? Inventories Accounts Receivable Long-term debt Accounts Payable
Long-term debt
Which answer is not a responsibility of a financial manager? Maintaining the company's financial system Figuring out financial projections and whether a project is worth financing Ensuring the business has enough cash to pay its financial obligations Managing the budget
Maintaining the company's financial system
You expect to receive a payment of $1 million in a year. The annual interest rate is 5%. What is the present value of the future payment? $105,000 $952,381 $666,667 $995,025
PV = $1 million/(1.05) = $952,381 Using Calculator: N = 1, I/Y = 5, FV = $1 million. [CPT] PV = $952,381
Which investment proposal ranking method is widely used due to its simplicity, despite having several limitations? Internal Rate of Return (IRR) Net Present Value (NPV) Profitability Index Payback period
Payback period
What is a disadvantage of a partnership? Making business decisions involves a board. Owners must publish financial statements. Filing taxes is overly complicated. Personal assets of owners are not protected.
Personal assets of owners are not protected.
What are the three central components of business ethics? Personal, managerial, and organizational Personal, professional, and corporate Moral, mission, and strategy Practical, tangible, and intangible
Personal, professional, and corporate
What does the principal agent problem refer to? Possible conflicts between a company's financial and operational goals The personal liability risks that some business owners must accept Potential conflicts of interest between shareholders and managers of a company The struggle for power between managers and union representatives of a company
Potential conflicts of interest between shareholders and managers of a company
Which statement is not true regarding preferred stock owners? Preferred stockholders must be paid their due dividends before the company can distribute dividends to common stockholders. Preferred stockholders typically have voting rights. Preferred stockholders enjoy a fixed dividend. Preferred stock owners are paid before common stock shareholders in the event of the company's liquidation.
Preferred stockholders typically have voting rights.
A company issues a bond with the provision that it may pay off the debt early. Which type of risk is this bond subject to? Model risk. Foreign investment risk Prepayment risk. Asset-backed risk
Prepayment risk.
Which answer best summarizes why there may be a difference between a company's pretax income and taxable income? The tax code requires full disclosure, GAAP does not. GAAP requires that companies use historical costs, while the tax code does not. Pretax income is based on revenue recognition; taxable income is based on the company's cash flow. All of these answers are correct.
Pretax income is based on revenue recognition; taxable income is based on the company's cash flow.
Which statement correctly explains the difference between price risk and reinvestment risk? Price risk is positively correlated to interest rates, reinvestment risk is inversely correlated. When market interest rates rise, both price risk and reinvestment risk rise also. For corporate planning, a bond's price risk is a bigger concern than its reinvestment risk. Price risk is positively correlated to maturity, reinvestment risk is inversely correlated.
Price risk is positively correlated to interest rates, reinvestment risk is inversely correlated. Price risk is the risk that the market price of a bond will fall due to a rise in the market interest rate; e.g., price risk rises as market interest rates rise. Reinvestment risk is the risk that a bond is repaid early, typically after market interest rates fall. Thus, Reinvestment risk rises when market interest rates fall.
According to the Example Case from the Essential Reading section, a CEO was charged with which crime from the Securities and Exchange Commission (SEC)? Providing a friend with confidential information about his company's merger Failing to appear in court on his assigned date Issuing false claims about its company's technology Defrauding seniors by pressuring them to invest
Providing a friend with confidential information about his company's merger
Which answer is not one of the four basic GAAP principles? Assets and liabilities should be reported based on acquisition cost Expenses should be recognized when the product it is associated with generates recognized revenue Deciding which information to disclose should be based on a trade-off analysis Revenue should be recorded when realized or realizable and when cash is received
Revenue should be recorded when realized or realizable and when cash is received
ou are considering investing in the common stock of a major US Corporation. Which answer is an example of systematic risk? Risk related to the possibility of foreign expropriation of the company's property Risk related to an impending lawsuit against the company Risk resulting from a general decline in the US stock markets Risk resulting from general unrest in the company's labor force
Risk resulting from a general decline in the US stock markets
Government bonds have lower interest rates than do actively traded corporate bonds of the same maturity because the default premium is lower for government bonds. This illustrates which of the major factors influencing market interest rates?
Risks of investment
Internal sources of financing include which of the following? Debenture Sale of stock Factoring Trade credit
Sale of stock
Which answer is not a factor that influences market interest rates? Stock market activity Deferred consumption Inflationary expectations Alternative investments
Stock market activity
Which statement accurately describes systematic risk? By diversifying your stock portfolio, you can minimize systematic risk. Systematic risk is uncertainty associated with a company or industry in which you invest. Systematic risk is what provides a stock's "risk premium." An example of a systematic risk is if you own stock in a company that has liquidity problems.
Systematic risk is what provides a stock's "risk premium."
Which answer describes a characteristic of a sole proprietorship? Liability is shared among stakeholders. It requires election of a board. It requires formal incorporation. Taxes are filed as personal income.
Taxes are filed as personal income.
Which description is not a benefit associated with using the DuPont Equation? Analysts can determine which factor is dominant in determining a company's return on equity. The DuPont equation is very useful in analyzing any business regardless of industry. Analysts can use the DuPont equation to understand the fluctuations of a company's Return on Equity. The DuPont equation can show whether a high level of leverage is risky or necessary for a company.
The DuPont equation is very useful in analyzing any business regardless of industry.
Which regulation's primary purpose is to ensure that buyers of securities receive complete and accurate information before they invest? Regulation S Rule 144 The Securities Act of 1933 The Securities Exchange Act of 1934
The Securities Act of 1933
A company issues a bond with a coupon rate of 5%. Since the bond was issued, market interest rates have decreased. What effect will this decrease have on the bond's market price and its current yield? The bond will trade above par and its current yield will decrease. The bond will trade below par and its current yield will decrease. The bond will trade below par and its current yield will increase. The bond will trade above par and its current yield will increase.
The bond will trade above par and its current yield will decrease. Current yield is the annual interest payment divided by current market price. When market interest rates decrease, the market price of existing bonds rises above par. The bond's annual interest payment is now divided by a larger market price for the bond, which makes the current yield decrease.
Which of the following is an example of trend analysis? The company's gross profit margin is compared with its industry's average profit margins. All of these answers. The company compares its current assets to its current liabilities. The company's current gross profit margin is compared with its gross profit margin from past years.
The company's current gross profit margin is compared with its gross profit margin from past years.
A firm is trying to choose the most profitable project to invest in. Which feature should be used as the company's discount rate? The company's profitability index The company's reinvestment rate The company's internal rate of return The company's weighted average cost of capital
The company's reinvestment rate Selection of the discount rate is dependent on the use to which it will be put. If the intent is simply to determine whether a project will add value to the company, using the firm's weighted average cost of capital may be appropriate. If trying to decide between alternative investments in order to maximize the value of the firm, the corporate reinvestment rate would be a better choice.
A company has $100,000 in cash, $300,000 in accounts receivable, $50,000 in inventory and a $300,000 office building. Its current liabilities are $250,000. What is the company's current ratio, and does that ratio show good short-term financial strength? The current ratio is 3, and the ratio indicates good short-term financial strength. The current ratio is 1.8, and the ratio indicates poor short-term financial strength. The current ratio is 3, and the ratio indicates poor short-term financial strength. The current ratio is 1.8, and the ratio indicates good short-term financial strength.
The current ratio is 1.8, and the ratio indicates good short-term financial strength. Current ratio = CA/CL. CA = $100,000 + $300,000 + $50,000 = $450,000. (Note: office building is a Fixed Asset). Current ratio = $450,000/$250,000 = 1.8. The firm has $1.80 in current assets for every $1 it owes in current liability so this reflects good short-term financial strength.
Which statement regarding shareholder and market value is correct? All of these answers are correct. Market value is not the price at which a shareholder is willing to sell. The idea of maximizing market value is related to the idea of maximizing shareholder value. Short-term focus on shareholder value is never detrimental to long-term shareholder value.
The idea of maximizing market value is related to the idea of maximizing shareholder value.
Under the internal rate of return rule in capital budgeting, which statement does not apply? The cash inflows can be estimates. The initial investment for all projects under consideration can require the same amount of capital. The internal rate of return can vary throughout the life of a project. The internal rate of return can be equal to the cost of capital.
The internal rate of return can vary throughout the life of a project.
Which definition is a correct description of a capital budgeting method? The internal rate of return is the discount rate that gives a net present value of zero. Real option analysis is the ratio of payoff to investment of a proposed project. Equivalent annuity method essentially value projects as if they were risk bonds. The profitability index is the time required for an investment to "repay" the original investment.
The internal rate of return is the discount rate that gives a net present value of zero.
Which statement regarding financial forecasting is correct? Strategic planners do not rely on financial forecasts to understand the possible outcomes from different investments options. The most difficult aspect of preparing a financial forecast is predicting revenue. Forecasting is straightforward and does not require making many assumptions. Only a cash budget is needed to prepare a financial forecast.
The most difficult aspect of preparing a financial forecast is predicting revenue.
Which answer is not a characteristic of a sole proprietorship? The owner is personally liable for the business's debt and obligations. There is only one owner. The owner must file a separate tax return for the business. A sole proprietorship does not elect board members.
The owner must file a separate tax return for the business.
Which statement reflects the best reason to use the payback method to evaluate investments? The payback method is easy to use and understandable for most people, regardless of training. If you use the payback method, you do not need to perform additional analyses. The payback method helps gauge a project's risk. The payback method covers all cash inflows and outflows for the duration of the investment.
The payback method is easy to use and understandable for most people, regardless of training.
Which statement accurately describes a shareholder's preemptive rights? The right to retain their proportional ownership in a company should it issue another stock offering The right to vote on directors The right to claim a company's remaining assets after a liquidation The right to purchase new shares issued by the company
The right to retain their proportional ownership in a company should it issue another stock offering
Which yield curve theory is based on the premises that financial instruments of different terms are not substitutable and therefore the supply and demand in the markets for short-term and long-term instruments is determined largely independently? The segmented market hypothesis The liquidity premium theory The expectation hypothesis Time Value of Money Theory
The segmented market hypothesis
Which answer gives a definition of finance? The study of fund management and asset allocation over time Recording of all the financial transactions of the company The process of evaluating financial risk A means for evaluating the time value of money
The study of fund management and asset allocation over time
When crowding out occurs, investment spending decreases. What causes this phenomenon? The total money supply is increased, increasing interest rates. The total money supply is increased, decreasing interest rates. The total money supply is decreased, decreasing interest rates. The total money supply is decreased, increasing interest rates.
The total money supply is increased, increasing interest rates.
Which answer is a legal characteristic of a general partnership? The partnership is taxed as a separate entity from its partners. Partners are not personally liable for the business's debts and obligations. There must be at least two business owners. All of these answers are correct.
There must be at least two business owners.
Which statement does not accurately describe the Sarbanes-Oxley Act of 2002? This act is a federal law that set new or enhanced standards for all public company boards, management, and public accounting firms in the United States. It is also known as the Public Company Accounting Reform and Investor Protection Act and the Corporate and Auditing Accountability and Responsibility Act. As a result of this act, top management must now individually certify the accuracy of financial information. This act was amended by the Maloney Act, which authorized the formation and registration of national securities associations to supervise the conduct of their members subject to the oversight of the SEC.
This act was amended by the Maloney Act, which authorized the formation and registration of national securities associations to supervise the conduct of their members subject to the oversight of the SEC.
According to the Insider Trading Act of 1988, the SEC is allowed to order a penalty of up to how much of the profit of the guilty parties? Five times the profit Four times the profit Three times the profit Six times the profit
Three times the profit
Which concept describes the underlying driver behind all finance? Time Risk Fund management and asset allocation Profit
Time
In which situation would it be appropriate to use the IRR method to make an investment decision? To compare two projects that have an equal initial investment To compare two investments that have different lifespans To assess a project in which cash flows fluctuate To rate the desirability of mutually exclusive projects
To compare two projects that have an equal initial investment
Which answer correctly describes a way the internal rate of return (IRR) is used in capital budgeting? As a means to compare the profitability of different investments As the effective interest rate for savings and loans To determine which discount rate results in a net present value (NPV) of zero To determine the actual annual profitability of an investment
To determine which discount rate results in a net present value (NPV) of zero
Which answer does not represent how finance is used in organizations? To choose between different potential investments To maximize short-term profit To maximize shareholder value To ensure that money is at the right place at the right time
To maximize short-term profit
Which of the following is a function of corporate capital budgeting? To encourage managers to operate independently of other business operations and departments To assist managers with reacting to problems after they arise To rank projects by profitability To provide a history of past revenues and expenditures
To rank projects by profitability
A financial institution is a company involved in the business of dealing with monetary transactions, such as loans, investments and deposits. True False
True
Company directors and high-level executives, ("insiders"), are legally permitted to buy and sell shares of the company that they work for.
True
True or False: One of the main functions of financial markets is matching those who need capital with those who have capital.
True
True or False: The U.S. Financial System is composed of financial institutions and markets that allow the exchange of funds between lenders, investors, and borrowers. True False
True
A US Treasury security matures in 7 years. What type of security is it? A bond A bill A note A money market instrument
U.S. Treasury notes are medium-term instruments with maturities ranging between 2 years and 10 years.
What type of risk can an investor reduce through the process of diversification? Uncertainty All risk can be reduced Unsystematic risk Systematic risk only
Unsystematic risk
Which answer is not a true statement regarding the valuation process? Valuation is the process of estimating what something is worth. Valuation can be done on assets or on liabilities. Valuation is a forward-looking process, so historical data is unimportant. Valuation often relies on fundamental analysis, such as discounted cash flow or net present value.
Valuation is a forward-looking process, so historical data is unimportant.
Which answer is generally not a right granted to owners of preferred shares? Callability Convertibility to common shares Preference with regards to receiving dividends Variable dividend amounts
Variable dividend amounts
Which feature is generally not associated with preferred stock? Convertibility to common stock Preference in dividends Callability at the option of the corporation Voting rights
Voting rights
Which answer is not a correct description of a type of yield curve? When long-term yields fall below short-term yields, the curve is inverted. When long-term yields are higher than short-term yields, the curve is normal. When long-term yields fall below short-term yields, the curve is flat. When all maturities have similar yields, the resulting curve is flat.
When long-term yields fall below short-term yields, the curve is flat.
Which of the following describes the relationship between present value and future value? The more time that passes, the higher the present value and the lower the future value. The higher the interest rate, the higher the present value and the lower the future value. When one increases, the other increases, assuming all variables are constant. When present value increases, the future value decreases, assuming all variables are constant.
When one increases, the other increases, assuming all variables are constant.
Which factor is not something a corporation must consider when making an investment decision? Whether the investment maximizes the value of the firm Whether the investment can be financed appropriately Whether the investment is too risky for the corporation and its shareholders Whether you can accurately calculate the guaranteed return on the investment
Whether you can accurately calculate the guaranteed return on the investment
Which type of bond will not be affected by reinvestment risk? Inflation linked Zero-Coupon Stepped-coupon Floating rate
Zero-Coupon
A bond makes only one payment—the payment of the face value on the maturity date. The bond is sold at a discount. What type of bond is this? Floating rate note Inflation-linked bond Zero-coupon bond Stepped-coupon bond
Zero-coupon bond
The balance sheet is the only financial statement which must conform to accounting standards uses operating revenues applies to a single point in time of a business's calendar year uses estimates
applies to a single point in time of a business's calendar year
External sources of financing include debt collection retained earnings sale of fixed assets commercial paper
commercial paper
The cost of money is not related to the concept of depreciation opportunity cost the time value of money time preference
depreciation
In using the percentage of sales forecasting method, the assumption is that retained earnings will increase proportionately with sales there is a direct relationship between notes payable and sales inventories will increase proportionately with sales there is a direct relationship between long-term debt and sales
inventories will increase proportionately with sales
The most common measure of risk in finance is the expected return standard deviation expected outcome standard outcome
standard deviation
The risk that remains after an investor has extensively diversified his portfolio is primarily variance risk unsystematic risk systematic risk standard deviation risk
systematic risk