FIL 190 Chapters 1-4 Exam 1 MC Study Guide

A firm's financing costs include A. interest expense B. selling, general, and administrative (SGA) expenses. C. depreciation expense. D. costs of goods sold.

A

A margin is a measure of profit relative to A. sales B. assets C. total assets D. cash E. equity

A

An investor is considering two equally risky investments. Investment A is expected to return $1,000 per year for the next 5 years. Investment B is expected to return $6,000 at the end of 5 years. Which of the following statements is MOST correct if both investments A and B have the same cost? A. The investor may select investment A or investment B depending on the opportunity cost of money. B. A risk averse investor will select investment B because it is expected to provide the most cash ($6,000 vs. $5,000). C. A risk averse investor will select investment A because it provides cash earlier than investment B. D. The investor will select investment A only if the cost is less than $1,000.

A

Charlie wants to retire in 15 years, and he wants to have an annuity of $50,000 a year for 20 years after retirement. Charlie wants to receive the first annuity payment the day he retires. Using an interest rate of 8%, how much must Charlie invest today in order to have his retirement annuity (rounded to nearest $10)? A. $167,130 B. $200,450 C. $256,890 D. $315,240

A

Corporation A borrows $1,000,000 and uses the money to buy back $1,000,000 of its common stock. The corporation pays 6% interest on its borrowed funds which exactly equals the amount of the dividend it used to pay on the common stock it repurchased. Assuming the firm has a positive net income and it will remain positive after the change, Corporation A's A. net income will decrease due to a higher interest expense B. operating income will decrease due to higher interest expense. C. operating income will not change since the interest expense exactly offsets the prior dividend payment. D. gross profit will decrease. E. net income will increase due to the tax deductibility of interest expense.

A

EBIT is know as a(n) A. operating income B. operating expense C. free cash flow D. net income E. inventory

A

Examples of cash outflows A. paying cash dividends to stockholders. B. borrowing an additional amount using a secured loan. C. selling machinery for cash. D. all of the above

A

Shareholder wealth maximization means A. maximizing the price of existing common stock. B. maximizing dividends per share. C. maximizing stockholder's equity. D. maximizing earnings per share.

A

The primary goal of a publicly owned corporation is to ________. A. maximize shareholder wealth B. maximize dividends per share C. maximize earnings per share after taxes D. minimize shareholder risk

A

Which of the following categories of owners enjoy limited liability? A. common shareholders of a corporation B. in a partnership, only the general partners C. all partners in a limited partnership D. sole proprietors

A

Which of the following forms of business organization limits the liability of owners? A. corporation B. general partnership C. sole proprietorship D. two-person partnership

A

Which of the followings is correct? A. Book value of a company's assets reports historical cost of the asset B. Net working capital is the difference between all assets and liabilities C. Liquid assets generate more return than illiquid assets D. On the balance sheet, assets are listed in the order of increasing liquidity E. The balance sheet reports current market values of a company's assets

A

You bought a racehorse that has had a winning streak for six years, bringing in $250,000 at the end of each year before dying of a heart attack. If you paid $1,155,720 for the horse 6 years ago, what was your annual return over this 6-year period? A. 8% B. 33% C. 18% D. 12%

A

Your company has received a $50,000 loan from an industrial finance company. The annual payments are $6,202.70. If the company is paying 9 percent interest per year, how many loan payments must the company make? A. 15 B. 13 C. 12 D. 19

A

Your daughter is born today and you want her to be a millionaire by the time she is 35 years old. You open an investment account that promises to pay 12% per year. How much money must you deposit each year, starting on her 1st birthday and ending on her 35th birthday, so your daughter will have $1,000,000 by her 35th birthday? A. $2,317 B. $3,455 C. $5,777 D. $9,450

A

How much money must you pay into an account at the beginning of each of 20 years in order to have $10,000 at the end of the 20th year? Assume that the account pays 12% per year, and round to the nearest $1. A. $1,195 B. $111 C. $124 D. $139

C

A 65 year-old man is retiring and can take either $500,000 in cash or an ordinary annuity that promises to pay him $50,000 per year for as long as he lives. Which of the following statements is MOST correct? A. Because of the time value of money, the man will always be better off taking the $500,000 up front. B. The higher the interest rate, the more likely the man will prefer the $500,000 lump sum. C. If the man expects to live more than 10 years, then he will prefer the annuity. D. If the man is certain the company will not default on its future payments, he should select the $50,000 per year.

B

A cash dividend paid by a firm to its shareholder is an example of A. operating cash inflow B. financing cash outflow C. financing cash inflow D. investing cash outflow E. operating cash outflow

B

All else equal, the present value of an annuity will increase if ________ decreases. A. the number of annuity payments B. the discount rate C. the size of the payment D. the frequency of payments

B

All of the following are equity accounts on a balance sheet EXCEPT A. common stock. B. cash. C. paid-in capital. D. retained earnings.

B

All of the following statements about agency problems are true EXCEPT A. Agency problems result from the separation of management and the ownership of a firm. B. Agency costs are paid by the managers who do not act in the shareholders' best interest. C. Agency problems interfere with the goal of maximizing shareholder value. D. The root cause of agency problems is conflicts of interest.

B

Assume that an investor is offered a choice of a risk-free government bond or a high-risk corporate stock. Assume that the expected return is the same for both. According to one of the key principles of finance, which investment would be chosen? A. the investor would be indifferent as long as the expected return is positive for both investments. B. the government bond C. the corporate stock D. the investor would be indifferent because the expected return is the same for both investments.

B

Suppose a corporation can change its depreciation method so that its tax payments will decrease by $5,000 this year but increase by $5,000 next year. A. The change will have no impact on the value of the company because its cash flow over time will be the same. B. The change will increase the value of the company because the value of the cash savings this year exceeds the present value of the cash payments next year. C. The change will decrease the value of the company because lower tax payments this year result from lower reported income. D. The change will decrease the value of the company because investors don't like changes in accounting methods.

B

The goal of the firm should be ______. A. maximization of market share B. maximization of shareholder wealth C. maximization of sales D. maximization of profits (net income per share)

B

To measure value, the concept of time value of money is used A. to bring the future benefits and costs of a project, measured by its cash flows, back to the present. B. to bring the future benefits and costs of a project, measured by its expected profits, back to the present. C. to ensure that expected future profits exceed current profits today. D. to determine the interest rate paid on corporate debt.

B

How much would you be willing to pay (rounded to the nearest dollar) for a 20-year annuity due if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year? A. $84,500 B. $63,445 C. $56,734 D. $53,777

C

Two companies have identical operating income (EBIT). They also face the same interest rates on debt and the same tax rates. The company with less debt will have a _____. A. lower net income B. higher net income C. higher interest expense D. lower tax expense E. both a and d

B

Which of the following accounts does NOT belong on the asset side of a balance sheet? A. cash B. common stock C. marketable securities D. accounts receivable

B

Which of the following forms of business organization has the greatest ability to attract new capital? A. sole proprietorship B. corporation C. limited partnership D. general partnership

B

Which of the following is an advantage of the general partnership form of business organization? A. easy of raise capital B. low cost of formation C. double taxation D. limited liability of business owners

B

Which of the following is true about the statement of cash flows? A. It is also known as the statement of operations B. It includes only those revenues for which cash was received during the period C. It represents the basic accounting equation for a particular business D. It reports revenues, expenses and liabilities E. It represents the financial position of a business at a particular point of time

B

Which of the following ratios would be the poorest indicator of how rapidly the firm's credit accounts are being collected? A. accounts receivable turnover ratio B. times interest earned C. average collection period D. days sales outstanding

B

You estimate you'll need $200,000 per year for 25 years starting on your 65th birthday to live on during your retirement. Today is your 50th birthday and you want to make equal deposits into an account paying 9% interest per year, the first deposit today and the last deposit on your 64th birthday. How much must each deposit be (rounded to the nearest $10)? A. $85,840 B. $66,909 C. $49,380 D. $99,920

B

Your grandparents deposit $2,000 each year on your birthday, starting the day you are born, in an account that pays 7% interest compounded annually. How much will you have in the account on your 21st birthday, just after your grandparents make their deposit? A. $101,802 B. $98,016 C. $86,058 D. $79,640

B

If you invest $750 every six months at 8 percent compounded semiannually, how much would you accumulate at the end of 10 years? A. $10,065 B. $10,193 C. $22,334 D. $21,731

C

A financial advisor tells you that you can make your child a millionaire if you just start saving early. You decide to put an equal amount each year into an investment account that earns 7.5% interest per year, starting on the day your child is born. How much would you need to invest each year (rounded to the nearest dollar) to accumulate a million for your child by the time he is 35 years old? (Your last deposit will be made on his 34th birthday.) A. $12,500 B. $20,347 C. $6,031 D. $7,910

C

Anthony borrowed $50,000 today that he must repay in 15 annual end-of-year installments of $5,000. What annual interest rate is Anthony paying on his loan? A. 3.333% B. 33.33% C. 5.556% D. 2.222%

C

Baker Corp. is required by a debt agreement to maintain a current ratio of at least 2.5, and Baker's current ratio now is 3. Baker wants to purchase additional inventory for its upcoming Christmas season, and will pay for the inventory with short-term debt. How much inventory can Baker purchase without violating its debt agreement if their total current assets equal $15 million? A. $0.50 million B. $4.50 million C. $1.67 million D. $2.5 million E. $6.00 million

C

Determining the best way to raise money to fund a firm's long-term investments is called A. the money flow processing decision. B. the portfolio decision. C. the capital structure decision. D. the capital budgeting decision.

C

Ethical behavior A. in the corporate world means not breaking any laws. B. is the fifth basic principle of finance. C. is essential in business because unethical behavior destroys trust and business relationships. D. cannot be a concern to managers who are expected to maximize shareholder value.

C

How much money do I need to place into a bank account that pays a 1.08% rate in order to have $500 at the end of 7 years? A. $332.54 B. $751.81 C. $463.78 D. $629.51

C

In an ideal world, which of the following would be used to evaluate firm performance? A. corporate retained earnings from the day of incorporation B. book value of assets C. market value of assets D. accounting assets and profits

C

Jeter Industries has an accounts receivable turnover ratio of 4.5. If Jeter has an accounts receivable balance of $100,000, what is Jeter's average daily credit sales? A. $1,893.45 B. $745.23 C. $1,232.88 D. $22,222.22

C

Last National Bank is offering you a loan at 10%; payments on the loan are to be made monthly. Credit Onion is offering you a loan where payments are to be made semiannually; the rate on the loan is also 10%. Local Bank down the street is also offering a loan at 10% where the payments are made quarterly. Which loan has the lowest annual cost? A. Last National Bank's loan B. Local Bank's loan C. Credit Onion's loan D. All of the loans will have the same annual cost.

C

Limited partnerships are not as prevalent as corporations because A. the general partner has no liability, making it difficult for the partnership to borrow money. B. limited partnerships have the disadvantage of double taxation. C. it is easier to transfer ownership by selling common stock than it is to sell partnership. D. limited partners can lose up to three times the amount they invested in the partnership if the business goes bankrupt.

C

Manny and Irene will be retiring in fifteen years and would like to buy a Mexican villa. The villa costs $500,000 today, and housing prices in Mexico are expected to increase by 6% per year. Manny and Irene want to make fifteen equal annual payments into an account, starting today, so there will be enough money to purchase the villa in fifteen years. If the account earns 10% per year, what is the amount of each deposit? A. $79,885 B. $72,623 C. $34,286 D. $32,947

C

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 ______. A. open at $20 per share on Tuesday and then increase as more investors read the announcement in the Wall Street Journal. B. remain at $20 per share because in efficient markets the price already reflects all information. C. open above $20 because the positive news will result in a higher valuation even though the stock has not yet traded. D. open below $20 because the surprise announcement creates more uncertainty.

C

The CEO of JLI Corp. decided to expand into a new market in 2020. At the end of 2020, JLI's stock price had decreased 5% since the beginning of the year. Which of the following statements is MOST correct? A. The CEO made a poor decision to expand because the company's profits for the year obviously decreased, causing the drop in stock price. B. CEO decisions are irrelevant because the efficient market determines the value of a company's stock. C. The CEO's decision may have been optimal, keeping the stock price from falling more than 5% for the year. D. The CEO made a poor decision to expand because the stock price decreased during the year.

C

Which of the following accounts belongs in the equity section of a balance sheet? A. dividends B. long-term debt C. retained earnings D. cash

C

Which of the following categories of owners have limited liability? A. general partners B. sole proprietors C. shareholders of a corporation D. both A and B

C

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. sole proprietorships B. S-corporations C. C-corporations (regular corporations) D. limited partnerships E. general partnerships

C

Which of the following items belongs on the asset side of a balance sheet? A. depreciation expense B. accounts payable C. inventory D. accrued expenses E. retained earnings

C

Which of the following statements is NOT correct? A. Financial managers should maximize the price of the firm's common stock B. Maximizing shareholder wealth can benefit all the stakeholders including the society. C. Using day-to-day changes in the firm's stock value is the best way to evaluate firm managers' financial decisions. D. Cash flows are more relevant than accounting profits when determining the firm's value. E. All of the above statements are correct.

C

You are currently earning 12% compounded semiannually. Your investment company is switching all accounts to daily compounding. What rate will give you the same effective annual rate of return as you are receiving now? A. 10.83% B. 10.97% C. 11.66% D. 11.89%

C

You have been accepted to study international economy at the European Central Bank (ECB) in Frankfurt. You will need $10,500 every 6 months (beginning today) for the next three years to cover tuition and living expenses. Mom and Dad have agreed to pay for your education, and want to make one deposit today in a bank account earning 6% interest, compounded semiannually. How much must they deposit now so that you can withdraw $10,500 at the beginning of each semester over the next 3 years? A. $54,187 B. $55,797 C. $58,587 D. $56,639

C

You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment? A. 0.055 B. 0.010 C. 0.110 D. 0.220

C

You inherit $300,000 from your parents and want to use the money to supplement your retirement. You receive the money on your 65th birthday, the day you retire. You want to withdraw equal amounts at the end of each of the next 20 years. What constant amount can you withdraw each month and have nothing remaining at the end of 20 years if you are earning 7% interest compounded monthly? A. $1,200 B. $1,829 C. $2,326 D. $2,943

C

You own an annuity due contract that will pay you $3,000 per year for 12 years. You need money to pay back a loan in 5 years, and you are afraid if you get the annuity payments annually you will spend the money and not be able to pay back your loan. You decide to sell your annuity for a lump sum of cash to be paid to you five years from today. If the interest rate is 8%, what is the equivalent value of your 12-year annuity if paid in one lump sum five years from today? A. $22,008 B. $18,000 C. $35,876 D. $38,880

C

Auto Loans R Them loans you $24,000 for four years to buy a car. The loan must be repaid in 48 equal monthly payments. The annual interest rate on the loan is 9 percent. What is the monthly payment? A. $500.92 B. $543.79 C. $563.82 D. $597.24

D

A financial analyst tells you that investing in stocks will allow you to double your money in 7 years. What annual rate of return is the analyst assuming you can earn? A. 8.76% B. 9.87% C. 10.01% D. 10.41%

D

Advantages of the corporate form of business organization include A. double taxation. B. minimal legal requirements. C. unlimited liability D. easier transfer of ownership.

D

All of the following measure liquidity EXCEPT A. current ratio. B. inventory turnover. C. acid-test ratio. D. operating return on assets. E. All of the above measure liquidity.

D

An inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate that A. the firm is managing its inventory inefficiently. B. the firm has higher sales than the industry average. C. the firm is selling a product mix that includes more high margin items. D. the firm's products are in inventory for fewer days before they are sold than is average for the industry.

D

Assume you are to receive a 10-year annuity with annual payments of $1000. The first payment will be received at the end of Year 1, and the last payment will be received at the end of Year 10. You will invest each payment in an account that pays 9 percent compounded annually. Although the annuity payments stop at the end of year 10, you will not withdraw any money from the account until 25 years from today, and the account will continue to earn 9% for the entire 25-year period. What will be the value in your account at the end of Year 25 (rounded to the nearest dollar)? A. $48,359 B. $35,967 C. $48,000 D. $55,340

D

Efficiency of security markets depends on A. how well firms ensure shareholder interests B. the dispersion of opinions of market participants regarding security prices C. the level of competition among firms in the product markets D. how fast new information is incorporated into security prices E. how well firms make financial decisions

D

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 A. the actual return for investment A will be higher than the expected return for investment B. B. the actual return for investment A will be higher than the actual return for investment B. C. the expected return for investment A will be higher than the actual return for investment B. D. the expected return for investment A will be higher than the expected return for investment B.

D

Prepaid expenses are a(n) A. equity B. liability C. revenue D. asset E. expense

D

The current ratio of a firm would equal its quick ratio whenever A. the firm's inventory is equal to its other current assets. B. the firm's current ratio is equal to one. C. the firm's inventory is equal to its current liabilities. D. the firm has no inventory and no prepaid expenses.

D

The principle of risk-return trade-off means that A. higher risk investments must earn higher returns. B. an investor who takes more risk will earn a higher return. C. an investor who bought stock in a small corporation five years ago has more money than an investor who bought U.S. Treasury bonds five years ago. D. a rational investor will only take on higher risk if he expects a higher return.

D

The two principal sources of financing for corporations are A. debt and accounts payable. B. common equity and preferred equity. C. cash and common equity. D. debt and equity. E. assets and liabilities

D

Two sisters each open IRAs in 2021 and plan to invest $3,000 per year for the next 30 years. Mary makes her first deposit on January 1, 2021, and will make all future deposits on the first day of the year. Jane makes her first deposit on December 31, 2021, and will continue to make her annual deposits on the last day of each year. At the end of 30 years, the difference in the value of the IRAs (rounded to the nearest dollar), assuming an interest rate of 7% per year, will be A. $12,456. B. $210. C. $6,300. D. $19,837.

D

What is the present value of an annuity of $120 received at the end of each year for 11 years? Assume a discount rate of 7%. The first payment will be received one year from today (round to nearest $1.) A. $250 B. $400 C. $570 D. $900

D

Which of the following is NOT true for a limited partnership? A. Only the name of general partners can appear in the name of the firm. B. Limited partners may sell their interest in the company. C. One general partner must exist who has unlimited liability. D. It has limited liability for its owners.

D

Which of the following is true if a firm wishes to collect its accounts faster by imposing stricter credit terms on its customers? A. The firm's average collection period is likely to fall. B. The firm's accounts receivable turnover might rise. C. The firm's sales might decrease. D. all of the above

D

Which of the following ratios would be the most useful to assess the risk associated with a firm being able to pay off its short-term line of credit? A. times interest earned B. the operating profit margin C. the fixed asset turnover D. the acid test ratio E. return on equity

D

Which of the following statements about the corporate form of business organization is true? A. The corporate form has the advantage of unlimited liability. B. The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation. C. Sole proprietorships are the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor. D. The corporate form has the disadvantage of double taxation relative to a sole proprietorship.

D

Which of the following statements is correct? A. The costs associated with the agency problem are difficult to measure B. The root cause of agency problems is conflicts of interest C. compensation packages can help align the interests of managers and shareholders D. All of the above E. None of the above

D

Which of the statements below are true? A. The sole proprietorship and the general partnership both feature unlimited liability. B. A corporation is the business form that is typically the most complicated (legally) to establish. C. The corporation and the limited partnership both provide at least some owners with limited liability. D. all of the above

D

XYZ Corporation has a P/E ratio of 20 and EFG Corporation has a P/E ratio of 10. It is likely that A. investors believe that for the same level of earnings growth, XYZ is a higher risk company. B. XYZ's earnings per share are twice the earnings per share of EFG. C. investors believe XYZ stock is overvalued. D. investors expect XYZ's earnings to grow faster than EFG's earnings.

D

You are going to pay $100 into an account at the beginning of each of the next 40 years. At the beginning of the 41st year you buy a 30 year annuity whose first payment comes at the end of the 41st year (the accounts earn 12%). How much will you receive at the end of the 41st year (i.e., the first annuity payment). Round to nearest $100. A. $11,400 B. $7,800 C. $93,000 D. $10,700

D

You just graduated and landed your first job in your new career. You remember that your favorite finance professor told you to begin the painless job of saving for retirement as soon as possible, so you decided to put away $2,000 at the end of each year in a Roth IRA. Your expected annual rate of return on the IRA is 7.5%. How much will you accumulate at retirement after 40 years of investing? (Note: this may assume that you are even retiring early). A. $94,426 B. $247,921 C. $1,088,632 D. $454,513

D

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. What is the firm's total equity? A. $800,000 B. $1,200,000 C. $1,100,000 D. $2,000,000 E. $900,000

E

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. Limited partners have limited liability. E. all of the above

E

Which of the following statement is NOT correct? A. Cost of goods sold is the cost of producing or acquiring a product or service to be sold B. Operating income is not affected by how much debt the company owes C. Firm's financing expense resulting from borrowing money has no effect on operating income D. Depreciation expense is a component of operating expense E. Operating income is equivalent to the sales less cost of goods sold add operating expenses

E