FIN 3716 TEST 1

If $17,000 is invested at 10% per year, in approximately how many years will the investment double? A) 7.3 years B) 8.4 years C) 11.0 years D) 14.6 years

7.3 years

If the interest rate is 9%, the one-year discount factor is equal to ________. A) 0.090 B) 1.090 C) 0.917 D) 0.981

0.917

T/F: Cash flows from an annuity occur every year in the future.

FALSE

T/F: In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.

FALSE

T/F: The shares of private corporations are traded on a stock market.

FALSE

T/F: Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.

FALSE

An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright? A) Leasing costs $116 more than buying. B) Leasing costs $174 more than buying. C) Leasing costs $145 more than buying. D) Leasing costs $289 more than buying.

Leasing costs $145 more than buying.

In an effort to maintain price stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on short-term and long-term interest rates in Europe? A) Long-term interest rates will tend to be higher than short-term interest rates. B) Long-term interest rates will be about the same as short-term interest rates. C) Both long- and short-term interest rates would be expected to fall sharply. D) No relative change in short and long term interest rates could be predicted.

Long-term interest rates will tend to be higher than short-term interest rates.

Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon? A) Most investment opportunities bear far greater risk than those offered by U.S. Treasury securities. B) The return from U.S. Treasury securities generally attracts less tax than the returns from other investments. C) The opportunity cost of capital for a given horizon is generally based on U.S. Treasury securities with that same horizon. D) U.S. Treasury securities are generally considered to be the best alternative to most investments.

Most investment opportunities bear far greater risk than those offered by U.S. Treasury securities.

Which of the following formulas is INCORRECT? A)PV of a growing annuity=C× 1 /r-g(1-( 1+r/1+g)^ N) B)PV of an annuity=C× 1 1- r C) PV of a growing perpetuity = D) PV of a perpetuity = Cr

PV of a growing annuity=C× 1 /r-g(1-( 1+r/1+g)^ N)

Which of the following statements regarding perpetuities is FALSE? A) To find the value of a perpetuity by discounting one cash flow at a time would take forever. B) A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever. C) PV of a perpetuity = Cr D) One example of a perpetuity is the British government bond called a consol.

PV of a perpetuity = Cr

T/F: A firmʹs statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.

TRUE

T/F: In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.

TRUE

T/F: Price-earnings ratios tend to be high for fast-growing firms.

TRUE

T/F: The one-year discount factor is the discount at which we can purchase money in the future, one year from now.

TRUE

The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board? A) Germany B) France C) United States D) United Kingdom

United States

Which of the following statements regarding growing perpetuities is FALSE? A) We assume that r < g for a growing perpetuity. B) PV of a growing perpetuity = C C) To find the value of a growing perpetuity one cash flow at a time would take forever. D) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.

We assume that r < g for a growing perpetuity.

A lender lends $10,100, which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lenderʹs perspective?

Year 0: -$10,100 Year 1: $2070 Year 2: $2070 Year 3: $2070 Year 4: $2070 Year 5: $2070 Year 6: $2070

What is a firmʹs net income? A) the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period B) the last or "bottom" line of the income statement C) a measure of the firmʹs profitability over a given period D) all of the above

all of the above

Which of the following is a major duty of a financial manager? I. To make investment decisions II. To make financing decisions III. To manage cash flow from operating activities A) I only B) I and II only C) I and III only D) all of the above

all of the above

Consider the above statement of cash flows. What were AOS Industriesʹ major means of raising money in 2008? A) from investment activities B) by sale of stock C) from its operations D) by issuing debt

by issuing debt

Which of the following is NOT considered to be an operating expense on the income statement? A) administrative expenses and overhead B) corporate taxes C) salaries D) depreciation and amortization

corporate taxes

Over four-fifths of all U.S. business revenue is generated by which type of firms? A) sole proprietorships B) partnerships C) limited partnerships D) corporations

corporations

Which of the following is NOT a function of the board of directors? A) determining how top executives should be compensated B) monitoring the performance of the company C) answering to shareholders of the company D) day-to-day running of the company

day-to-day running of the company

A firm has contracted to supply 500,000 gallons of propane fuel for $1.46 million to the local municipality. The municipality wants to break the contract. What does the minimum current A) greater than $2.90 per gallon B) greater than $2.92 per gallon C) greater than $2.94 per gallon D) greater than $2.96 per gallon

greater than $2.92 per gallon

A sole proprietorship is owned by ________. A) one person B) two or more persons C) shareholders D) bankers

one person

Whenever a good trades in a competitive market, the ________ determines the value of the good. A) supply B) price C) demand D) cost

price

Which of the following is NOT a role of financial institutions? A) moving funds from savers to borrowers B) spreading out risk-bearing C) printing money for borrowers D) moving funds though time

printing money for borrowers

A bank offers an account with an APR of 5.8% and an EAR of 5.88%. How does the bank compound interest for this account? A) weekly compounding B) monthly compounding C) semiannual compounding D) annual compounding

semiannual compounding

What is the most common type of firms in the United States and the world? A) sole proprietorships B) partnerships C) limited partnerships D) corporations

sole proprietorships

The yield curve is typically ________. A) downward sloping B) upward sloping C) flat D) inverted

upward sloping

If the current rate of interest is 7%, then the future value (FV) of an investment that pays $1200 per year and lasts 18 years is closest to ________. A) $24,479 B) $40,799 C) $48,959 D) $57,119

$40,799

A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000 . Which of the following is closest to the interest rate being offered by the dealer? A) 5.8% B) 6.8% C) 7.8% D) 9.8%

6.8%

If money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment? A) 7 years B) 8 years C) 9 years D) 11 years

9 years

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steveʹs major error in reasoning when making this decision? A) He ignores the fact that the costs and benefits of the investment are not stated in the same terms. B) He ignores the benefits of consuming the $1.00 today against the benefits of consuming the $1.00 five years from now. C) He fails to consider the costs of not consuming the $1.00 today. D) He considers that the value of the cash he may have in the future is the same as the value of cash he has today.

He ignores the fact that the costs and benefits of the investment are not stated in the same terms.

A vintner is deciding when to release a vintage of Sauvignon Blanc. If it is bottled and released now, the wine will be worth $2.2 million. If it is barrel aged for a further year, it will be worth 15% more, though there will be additional costs of $528,000 incurred at the end of the year. If the interest rate is 7%, what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now? A) He will earn $1,980,000 less if he releases the wine now. B) He will earn $328,972 more if he releases the wine now. C) He will earn $328,972 less if he releases the wine now. D) He will earn $356,400 more if he releases the wine now.

He will earn $328,972 more if he releases the wine now.

Put the following steps of the financial cycle in the correct order. I. Money flows to companies who use it to fund growth through new products. II. People invest and save their money. III. Money flows back to savers and investors. A) I, II, and III B) II, I, and III C) III, II, and I D) II, III, and I

II, I, and III

Why is it usually necessary to use the time value of money when performing a cost-benefit analysis? A) For an investment project to be considered, costs must have a higher dollar value than benefits. B) In most investment projects, costs are incurred up front, but benefits are received in the future. C) For practical purposes, a dollar today may be considered to be equal to a dollar at some future time. D) Although costs and benefits generally occur concurrently, the benefits will accrue value over time, due to interest.

In most investment projects, costs are incurred up front, but benefits are received in the future.

Which of the following statements regarding the cost-benefit analysis is NOT correct? A) The first step in evaluating a project is to identify its costs and benefits. B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values. C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.

In the absence of competitive markets, we can use one-sided prices to determine exact cash values.

The table above shows the rate of return (APR) for four investment alternatives. Which offers the highest EAR? A) Investment A B) Investment B C) Investment C D) Investment D

Investment A

20) Consider the following investment alternatives: Which alternative offers you the highest effective rate of return? A) Investment A B) Investment B C) Investment C D) Investment D

Investment D

Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r) and cash flows. The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true? A) Investment X has a higher growth rate than Investment Y. B) Investment X has a lower growth rate than Investment Y. C) The answer cannot be determined without knowing the interest rate for both investments. D) With the same initial cash flow and the same interest rate, Investment X and Investment Y should have the same present value.

Investment X has a higher growth rate than Investment Y.

A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded? A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows. B) It will be depreciated over time on the income statement and subtracted as Inventory on the statement of cash flows. C) It will be depreciated over time on the income statement and therefore not be recorded separately on the statement of cash flows. D) It will be subtracted from Gross Profit on the income statement and therefore, not be recorded separately on the statement of cash flows.

It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows.

22) You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow? A) It will cause the present value to fall. B) It will cause the present value to rise. C) It will have no effect on the present value. D) The effect cannot be determined with the information provided.

It will cause the present value to fall.

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow? A) It will cause the future value to fall. B) It will cause the future value to rise. C) It will have no effect on the future value. D) The effect cannot be determined with the information provided.

It will have no effect on the future value.

In which of the following ways is a limited liability company like a corporation? A) It was created and developed first in the United States. B) It can choose to be considered a partnership for tax purposes. C) Its ownersʹ liability is restricted to their investment. D) It is directly managed by the owners

Its ownersʹ liability is restricted to their investment.

Whose cash flow is best described by the timeline shown below? A) Joe, who puts down $3,500 to buy a car, and then makes annual payments of $1,000 B) Harry, who borrows $3,500, and then receives an annual payment of $1,000 C) Karen, who loans a friend $3,500, which friend then pays back the loan in four annual installments of $1,000 D) Leo, who borrows $3,500, and then pays back the loan in four annual payments of $1,000

Karen, who loans a friend $3,500, which friend then pays back the loan in four annual installments of $1,000

How do the shareholders of most corporations exercise their control of that corporation? A) by voting on issues that concern them B) by electing members of a board of directors C) by vetting the decisions of the board of directors D) by providing oversight of the day-to-day running of the corporation

by electing members of a board of directors

The major components of stockholdersʹ equity are ________. A) cash, common stock, and paid-in surplus B) common stock, paid-in surplus, and net income C) common stock, paid-in surplus, and retained earnings D) common stock, liabilities, and retained earnings

common stock, paid-in surplus, and retained earnings

Which ratio would you use to measure the financial health of a firm by assessing that firmʹs leverage? A) debt-equity or equity multiplier ratio B) market-to-book ratio C) market debt-equity ratio D) current or quick ratio

debt-equity or equity multiplier ratio

Which of the following computes the growth in purchasing power? A) growth of money + growth of prices B) (1 + real rate) / (1 + nominal rate) C) (1 + inflation rate) / (1 + nominal rate) D) growth of money / growth of prices

growth of money / growth of prices

Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their childʹs college education. They decide to make deposits into an educational savings account on each of their daughterʹs birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughterʹs first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughterʹs 18th birthday, then the amount available for the daughterʹs college expenses on her 18th birthday is closest to ________. A) $80,232 B) $160,463 C) $112,324 D) $176,509

$160,463

Since your first birthday, your grandparents have been depositing $1200 into a savings account on every one of your birthdays. The account pays 6% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________. A) $37,086.78 B) $22,252.07 C) $44,504.14 D) $51,921.49

$37,086.78

If the current market rate of interest is 8%, then the present value (PV) of this stream of cash flows is closest to ________. A) $242 B) $581 C) $484 D) $774

$484

A business promises to pay the investor of $6000 today for a payment of $1500 in one yearʹs time, $3000 in two yearsʹ time, and $3000 in three yearsʹ time. What is the present value of this business opportunity if the interest rate is 6% per year? A) $603.94 B) $301.97 C) $724.73 D) $966.30

$603.94

If the current market rate of interest is 13%, then the value of the cash flows in year 0 and year 2 as of year 1 is closest to ________. A) $167.35 B) -$98.7 C) $98.7 D) -$70

-$98.7

Which of the following statements is FALSE about valuing cash at different points in time? A) The process of moving forward along the timeline to determine a cash flowʹs value in the future is known as compounding. B) The effect of earning interest on interest is known as compound interest. C) It is only possible to compare or combine values at the same point in time. D) A dollar in the future is worth more than a dollar today.

A dollar in the future is worth more than a dollar today.

Which of the following organization forms has the most revenue? A) S corporation B) limited partnership C) C corporation D) limited liability company

C corporation

Inflation is calculated as the rate of change in the _______. A) unemployment rate B) Gross Domestic Product C) Consumer Price Index D) risk-free rate

Consumer Price Index

Samantha enters a rent-to-own agreement for living room furniture. She will pay $60 per month for one year. Which of the following shows the timeline for her payments if the first payment is one month from now?

Date (Months) 0 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flows 0 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60

A tenant wants to lease a building for $50,000 per year. She signs a five-year rental agreement that states that she will pay $25,000 every six months for the next five years. Which of the following is the timeline for her rental payments, assuming she makes the first payment immediately?

Date (years) 0 1/2 1 1 1/2 2 2 1/2 3 3 1/2 4 4 1/2 5 Cash Flows (thousands) -$25 -$25 -$25 -$25 -$25 -$25 -$25 -$25 -$25 -$25 0

Consider the following investment alternatives: Which alternative offers you the lowest effective rate of return? A) Investment A B) Investment B C) Investment C D) Investment D

Investment A

Which of the following is a measure of the aggregate price level of collections of pre-selected stocks? A) NASDAQ B) S&P 500 C) NYSE D) Euronext

S&P 500

Which of the following statements regarding annuities is FALSE? A)PV of an annuity=C× 1 1- 1r (1 + r)N B) The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments. C) An annuity is a stream of N equal cash flows paid at regular intervals. D) Most car loans, mortgages, and some bonds are annuities.

The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments.

Which of the following is NOT an operating expense? A) interest expense B) depreciation and amortization C) selling, general, and administrative expenses D) research and development

interest expense

A U.S.-based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors is the most relevant when analyzing this decision? A) the cost of the machine used to produce the sunscreen B) the manufacturing process of the sunscreen C) the cost of the existing advertising campaign D) the cost of the courtside advertising at the tennis matches

the cost of the courtside advertising at the tennis matches

3) What is a firmʹs gross profit? A) the difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by a firm in a given period B) the difference between sales revenues and the costs C) the difference between sales revenues and cash expenditures associated with those sales D) all of the above

the difference between sales revenues and the costs

Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $40,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 10%. The future value (FV) at retirement (age 65) of your savings is closest to ________. A) $722,766 B) $1,445,531 C) $1,011,872 D) $1,590,084

$1,445,531

You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 7% per year forever. If the appropriate interest rate is 3%, then the value of this mining operation is closest to ________. A) $100,000 B) $500,000 C) $250,000 D) This problem cannot be solved.

$100,000

If the current market rate of interest is 8%, then the future value (FV) of this stream of cash flows is closest to ________. A) $11,699 B) $5850 C) $14,039 D) $18,718

$11,699

Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,000 per year. On average, tuition and other costs have historically increased at a rate of 5% per year. Assuming that college costs continue to increase an average of 5% per year and that all her college savings are invested in an account paying 8% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to ________. A) $110,793 B) $55,397 C) $77,555 D) $132,952

$110,793

Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%? A) $58,334 B) $93,334 C) $116,667 D) $70,000

$116,667

A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV) of her winnings at the time of her final payment, given that the interest rate is 8.6% per year? A) $94.40 million B) $118.00 million C) $165.20 million D) $188.80 million

$118.00 million

You are offered an investment opportunity that costs you $28,000, has a net present value (NPV) of $2278, lasts for three years, has interest rate of 10%, and produces the following cash flows: The missing cash flow from year 2 is closest to ________. A) $12,500 B) $12,000 C) $13,000 D) $10,000

$12,000

You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years? A) $7291.00 B) $14,582.00 C) $17,012.34 D) $12,151.67

$12,151.67

If the current rate of interest is 8%, then the present value (PV) of an investment that pays $1200 per year and lasts 24 years is closest to ________. A) $7581 B) $15,162 C) $12,635 D) $17,689

$12,635

A perpetuity has a PV of $20,000 . If the interest rate is 6%, how much will the perpetuity pay every year? A) $600 B) $960 C) $1200 D) $720

$1200

A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year? A) $15,888.95 B) $18,537.11 C) $21,185.26 D) $13,240.79

$13,240.79

An annuity pays $13 per year for 53 years. What is the future value (FV) of this annuity at the end of that 53 years given that the discount rate is 9%? A) $8258.91 B) $16,517.82 C) $19,270.79 D) $13,764.85

$13,764.85

An annuity pays $10 per year for 98 years. What is the present value (PV) of this annuity given that the discount rate is 7%? A) $85.60 B) $171.20 C) $142.67 D) $199.74

$142.67

A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900 . After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 5% per year.) A) $145 B) $160 C) $175 D) $190

$145

Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $5000 per year. If he can get a four-year loan with an interest rate of 7.9%, what is the maximum price he can pay for the car? A) $16,598 B) $19,918 C) $23,237 D) $26,557

$16,598

You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years? A) $10,062.20 B) $20,124.40 C) $16,770.33 D) $23,478.46

$16,770.33

If the current market rate of interest is 6%, then the future value (FV) of this stream of cash flows is closest to ________. A) $1723 B) $1,500 C) $2068 D) $2757

$1723

A bank is negotiating a loan. The loan can either be paid off as a lump sum of $80,000 at the end of four years, or as equal annual payments at the end of each of the next four years. If the interest rate on the loan is 6%, what annual payments should be made so that both forms of payment are equivalent? A) $14,630 B) $18,287 C) $25,602 D) $29,259

$18,287

Dan buys a property for $210,000 . He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make? A) $18,653.76 B) $22,384.51 C) $26,115.26 D) $29,846.02

$18,653.76

If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to ________. A) $10,114 B) $20,227 C) $24,272 D) $32,363

$20,227

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest? A) $100,000.00 B) $160,000.00 C) $200,000.00 D) $240,000.00

$200,000.00

Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity? A) $125,000.00 B) $200,000.00 C) $300,000.00 D) $250,000.00

$250,000.00

An annuity pays $47 per year for 22 years. What is the future value (FV) of this annuity at the end of those 22 years, given that the discount rate is 8%? A) $1563.88 B) $3127.76 C) $3649.06 D) $2606.47

$2606.47

Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 11%. The amount of money will you have in ten years is closest to which of the following? The amount you will have in 50 years is closest to which of the following? A) $1420 ; $110,739 B) $2271 ; $166,109 C) $2839 ; $184,565 D) $3123 ; $221,478

$2839 ; $184,565

An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows? A) $304.91 B) $307.69 C) $300.29 D) $320.00

$300.29

If $8000 is invested in a certain business at the start of the year, the investor will receive $2400 at the end of each of the next four years. What is the present value of this business opportunity if the interest rate is 6% per year? A) $158.13 B) $316.25 C) $379.50 D) $506.00

$316.25

Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%? A) -$3189.80 B) -$5907.57 C) 5907.57 D) $3189.80

$3189.80

An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note that very similar cars are selling on the open market for $87,000. You donʹt care for classic cars and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac? A) $87,000, since the Cadillac could be sold for this price. B) $52,000, since the Cadillac could be bought for this price. C) $35,000, since this is the difference between purchase and resale price of the Cadillac. D) $35,000, since this is the value of the car that you really want to buy.

$35,000, since this is the difference between purchase and resale price of the Cadillac.

A coin collector treasures his 1969-S doubled die obverse Lincoln cent because he found it in his pocket change, rather than purchasing it. He can sell it on the open market for $35,000, but would only sell it for at least twice that price, due to its sentimental value to him. It is anticipated that the coin will increase in market value in the foreseeable future. What is the value of the coin? A) $0.01, since he paid nothing to obtain the coin and it has a face value of one cent. B) $35,000, since this is the price that the coin would fetch on the open market. C) At least $35,000, since he could replace the coin for $35,000, but the coin he owns has additional intangible value due to its sentimental value. D) At least $35,000, since the value of the coin will increase in the future.

$35,000, since this is the price that the coin would fetch on the open market.

What is the present value (PV) of an investment that will pay $500 in one yearʹs time, and $500 every year after that, when the interest rate is 10%? A) $2500 B) $4000 C) $3000 D) $5000

$5000

If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________. A) $502 B) $653 C) $600 D) $1004

$502

Since your first birthday, your grandparents have been depositing $100 into a savings account every month. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________. A) $32,181 B) $53,635 C) $64,362 D) $75,089

$53,635

A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%? A) $2695 B) $4312 C) $5390 D) $3234

$5390

If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today or ________. A) $462.96 in one year B) $500.00 in one year C) $540.00 in one year D) None of the above

$540.00 in one year

Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 9%. The present value (PV) (at age 30) of your retirement savings is closest to ________. A) $61,303 B) $30,652 C) $42,912 D) $67,433

$61,303

If the current market rate of interest is 7%, then the value as of year 1 is closest to ________. A) $0 B) $1000 C) $570 D) $68

$68

You are interested in purchasing a new automobile that costs $33,000 . The dealership offers you a special financing rate of 9% APR (0.75% per month) for 60 months. Assuming that you do not make a down payment on the auto and you take the dealerʹs financing deal, then your monthly car payments would be closest to ________. A) $548 B) $685 C) $959 D) $1096

$685

If the rate of interest (r) is 9%, then you should be indifferent about receiving $750 in one year or ________. A) $688.07 today B) $750 today C) $825.68 today D) None of the above

$688.07 today

A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the hospital will receive a payment 6% larger than the previous payment, with the last payment occurring in ten yearsʹ time. What is the present value (PV) of this donation, given that the interest rate is11 %? A) $3,840,628.87 B) $5,376,880.42 C) $6,913,131.97 D) $7,681,257.74

$7,681,257.74

An investment pays you $30,000 at the end of this year, and $10,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year? A) $39,614 B) $63,382 C) $79,228 D) $95,074

$79,228

An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV) of this annuity given that the discount rate is 9%? A) $5776 B) $9626 C) $11,551 D) $13,476

$9626

A pottery factory purchases a continuous belt conveyor kiln for $68,000 . A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22 , over what term is this loan being paid? A) 8 years B) 9 years C) 10 years D) 11 years

10 years

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form? A) 10-A B) 10-K C) 10-Q D) 10-SEC

10-K

You are considering purchasing a new home. You will need to borrow $290,000 to purchase the home. A mortgage company offers you a 20-year fixed rate mortgage (240 months) at 12% APR (1% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to ________. A) $2554 B) $4470 C) $3193 D) $5109

3193

How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000 ? A) 4.25 years B) 3.25 years C) 5.25 years D) 6.25 years

4.25 years

What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one yearʹs time? A) 37% B) 44% C) 43% D) 40%

40%

Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000 ? A) 4.3 years B) 6.3 years C) 5.3 years D) 7.3 years

5.3 years

A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton? A) 3010 U.S. dollars per ton B) 3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL D) 105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR

5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL

If the one-year discount factor is equal to 0.94340, the interest must be equal to ________, A) 3.0% B) 4.8% C) 5.5% D) 6.0%

6.0%

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97 , then the internal rate of return (IRR) for investing in this bond is closest to ________. A) 5.0% B) 7.1% C) 6.0% D) 8.2%

6.0%

Consider the following investment alternatives: The highest effective rate of return you could earn on any of these investments is closest to ________. A) 6.0860 % B) 6.1110 % C) 6.1610 % D) 6.1360 %

6.1610 %

Consider the following investment alternatives: The lowest effective rate of return you could earn on any of these investments is closest to ________. A) 6.3830 % B) 6.4080 % C) 6.4330 % D) 6.4580 %

6.3830 %

Why should you approach every problem by drawing a timeline? A) A timeline allows you to quickly sum cash flows over time. B) A timeline eliminates the majority of flawed financial decisions. C) A timeline can be used to schedule events which are yet to occur. D) A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.

A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.

Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most? A) a power station that uses uranium 308 to produce electrical energy B) a metals trader who stockpiles and sells actual physical quantities of uranium 308 C) a speculator who buys and sells uranium 308 on the market without ever using the metal D) All buyers and sellers would have the same value for 250 pounds of uranium 308.

All buyers and sellers would have the same value for 250 pounds of uranium 308.

What is the major advantage corporations have over other business entities? A) It is easier for a corporation to raise capital than other forms of businesses. B) A corporation is treated as a separate legal entity for tax and legal purposes. C) A corporationʹs shares can be freely traded among its shareholders. D) All of the above are advantages that a corporation has over other business forms.

All of the above are advantages that a corporation has over other business forms.

Which of the following is true about perpetuities? A) All else equal, the present value of a perpetuity is higher when the periodic cash flow is higher. B) All else equal, the present value of a perpetuity is higher when the interest rate is lower. C) If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. D) All of the above are true statements.

All of the above are true statements.

Consider the above statement of cash flows. Which of the following is true of AOS Industriesʹ operating cash flows? A) It collected more cash from its customers than it charged. B) It sold more inventory than it bought. C) It charged more on its accounts payable back than it paid back. D) All of the above are true.

All of the above are true.

Which of the following statements regarding the Law of One Price is INCORRECT? A) At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. B) One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we can use any competitive price to determine a cash value, without checking the price in all possible markets. C) If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. D) An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.

An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.

Which of the following is an example of arbitrage? A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted. B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%. C) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit. D) A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%.

An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit.

Which of the following balance sheet equations is INCORRECT? A) Assets - Liabilities = Shareholdersʹ equity B) Assets = Liabilities + Shareholdersʹ equity C) Assets - Current liabilities = Long-term liabilities D) Assets - Current liabilities = Long-term liabilities + Shareholdersʹ equity

Assets - Current liabilities = Long-term liabilities

A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000 bushels, if it also buys 5,000 bushels of wheat at $16.00 per bushel. However, the manufacturer does not use any barley in its products, and currently needs 20,000 bushels of wheat. If the current market price of barley is $3.80 per bushel and that of wheat is $15.80 per bushel, should this opportunity be taken, and why? A) Because the company has no need of barley, the opportunity should not be taken. B) Because the opportunity does not meet the companyʹs need for wheat, the opportunity should not be taken. C) Because the value of the opportunity is positive, the opportunity should be taken. D) Because the value of the opportunity is negative, the opportunity should not be taken

Because the value of the opportunity is positive, the opportunity should be taken.

Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers? A) Bill chooses to pursue a risky investment for the companyʹs funds because his compensation will substantially rise if it succeeds. B) Sue instructs her staff to skip safety inspections in one of the companyʹs factories, knowing that it will likely fail the inspection and incur significant costs to fix. C) James ignores an opportunity for his company to invest in a new drug to fight Alzheimerʹs disease, judging the drugʹs chances of succeeding as low. D) Michael chooses to enhance his firmʹs reputation at some cost to its shareholders by sponsoring a team of athletes for the Olympics.

Bill chooses to pursue a risky investment for the companyʹs funds because his compensation will substantially rise if it succeeds.

Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company? A) Both decisions involve the purchase of assets that are essential for the existence of the investor B) Both decisions involve the rental of a useful asset. C) Both decisions have the potential to affect the firm. D) Both decisions should be made based upon the tradeoff benefits and costs across time.

Both decisions should be made based upon the tradeoff benefits and costs across time.

Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $180,000 up front, or she can lease it for five years for $4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven or should she lease it? A) Lease, since the present value (PV) of the lease is $12,224 less than the cost of the oven. B) Lease, since the present value (PV) of the lease is $8,642 less than the cost of the oven. C) Lease, since the present value (PV) of the lease is $2,212 less than the cost of the oven. D) Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven.

Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven.

Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information? A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs. B) Company A has greater leverage than Company B. C) Company A has less leverage than Company B. D) Company A and Company B have roughly equivalent enterprise values.

Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.

Which of the following is the overarching principle that a financial manager should follow when making decisions? A) Decisions should generate the greatest benefits for the firm. B) Decisions should provide benefit to the firm without incurring costs. C) Decisions should be on behalf of the firmʹs owners that give the greatest benefit to those owners, the firmʹs employees and the firmʹs other stakeholders. D) Decisions should increase the value of the firm to its investors.

Decisions should increase the value of the firm to its investors.

Which of the stock markets listed below is the smallest, as judged by trading volume? A) Deutsche Börse B) London Stock Exchange C) NASDAQ D) NYSE Euronext (US)

Deutsche Börse

Which of the following features of a corporation is LEAST accurate? A) The ownersʹ identity is separate from a corporation. B) The owners of a corporation are not liable for any obligations the corporation enters into. C) Changes in ownership do not result in the dissolution of the corporation. D) Earnings from a corporation are taxed only once.

Earnings from a corporation are taxed only once.

T/F: A dollar today and a dollar in one year may be considered to be equivalent.

FALSE

T/F: Financial decisions require that you weigh alternatives in strictly monetary terms.

FALSE

T/F: Financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firmʹs assets and the financing of those assets, and a prediction of the firmʹs future performance.

FALSE

T/F: If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85.

FALSE

T/F: In most corporations, the owners exercise direct control of a corporation.

FALSE

T/F: In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline.

FALSE

T/F: International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty -first century.

FALSE

T/F: It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.

FALSE

T/F: Partnerships are the most common type of business firms in the world.

FALSE

T/F: Raising new capital by issuing bonds is an example of a commercial banking activity.

FALSE

T/F: The balance sheet shows the assets, liabilities, and stockholdersʹ equity of a firm over a given length of time.

FALSE

T/F: The fact that corporationsʹ shares are easily traded within the market has a net effect of acting as a disincentive for managers to favor the interests of shareholders over their own interests.

FALSE

T/F: The management of public companies is not legally required to disclose any off -balance sheet transactions.

FALSE

T/F: To calculate a cash flowʹs present value (PV), you must compound it.

FALSE

T/F: To enable costs and benefits to be compared, they are typically converted into cash value at the time the benefit is received.

FALSE

T/F: Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements.

FALSE

Which of the following statements is FALSE about valuing cash at different points in time? A) Finding the present value (PV) and compounding are the same. B) A dollar today and a dollar in one year are not equivalent. C) If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. D) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.

Finding the present value (PV) and compounding are the same.

The above data is for four regional trucking firms. Based on price-earnings ratios, which firmʹs stock is the best value? A) Firm A B) Firm B C) Firm C D) Firm D

Firm B

Above are portions of the balance sheet and income statement for two companies in 2008. Based upon this information, which of the following statements is most likely to be true? A) Asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B. B) Fixed asset turnover ratios indicate that firm A generating fewer sales for the assets it employs than firm B. C) Both asset turnover ratios and fixed asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B. D) Fixed asset turnover ratios indicate that firm A generating more sales for the assets it employs than firm B.

Fixed asset turnover ratios indicate that firm A generating fewer sales for the assets it employs than firm B.

Which of the following statements is FALSE? A) The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted. B) Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk. C) The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.

For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.

Which of the following statements is FALSE? A) The interest rates that banks offer on investments or charge on loans depend on the horizon of the investment or loan. B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates. D) Fundamentally, interest rates are determined by the Federal Reserve.

Fundamentally, interest rates are determined by the Federal Reserve.

A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met? A) The financial manager should seek to make investments that do not harm the interests of the stockholders. B) The decisions taken by the financial manager should be solely influenced by the benefit to the company since, by maximizing its fitness, he or she will also maximize the benefits of that company to the shareholders. C) The financial manager should consider the interests and concerns of large shareholders a priority so the needs of those who hold a controlling interest in the company are met. D) In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.

In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.

Why is the stock price of a company an indication of the performance of the companyʹs senior managers? A) Well-run companies are invariably highly profitable, which leads to a higher share price. B) In general, people want to invest in a well-managed corporation, which will drive up the price of shares. C) Investors who can see that a company is well-run will hold on to their shares, even if the company faces setbacks, since they know that the stock price will likely rise again. D) Larger companies tend to be better run and so have higher stock prices.

In general, people want to invest in a well-managed corporation, which will drive up the price of shares.

Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments? A) Investment X has a higher present value. B) Investment Y has a higher present value. C) Investment X and Investment Y have the same present value, since the total of the cash flows is the same for both. D) No comparison can be made-we need to know the interest rate to calculate the present value.

Investment Y has a higher present value.

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company? A) Investors may consider this firm to be a growth company. B) Investors believe the companyʹs assets are not likely to be profitable since its market value is worth less than its book value. C) The firmʹs market value is more than its book value. D) The value of the firmʹs assets is greater than their liquidation value.

Investors believe the companyʹs assets are not likely to be profitable since its market value is worth less than its book value.

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. If the company has 5 million shares outstanding, and these shares are trading at a price of $6.39 per share, what does this tell you about how investors view this firmʹs book value? A) Investors consider that the firmʹs market value is worth very much less than its book value. B) Investors consider that the firmʹs market value is worth less than its book value. C) Investors consider that the firmʹs market value and its book value are roughly equivalent. D) Investors consider that the firmʹs market value is worth more than its book value.

Investors consider that the firmʹs market value and its book value are roughly equivalent.

Given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered a rate of 2.9%, which of the following statements is correct? A) The purchasing power of investors in these bonds grew over the course of the year. B) The real interest rate for investors in these bonds was greater than the rate of inflation. C) Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year. D) The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds.

Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year.

Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet? A) It subtracts all expenses and costs related to a firmʹs operating activities. B) It adds all non-cash entries related to a firmʹs operating activities. C) It adds the cash that flows from investors to a firm. D) It removes the cash used for investment purposes.

It adds all non-cash entries related to a firmʹs operating activities.

Which of the following should be true for an asset to be considered liquid? A) It pays regular dividends. B) It can be bought and sold at an organized stock market or bourse. C) It is offered for sale on both primary and secondary markets. D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.

It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.

An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one yearʹs time. The investor decides to make the investment as there is a net difference between the absolute cost and benefit. Which of the following is NOT a reason that the investorʹs decision may be flawed? A) It does not consider the current market interest rate. B) It does not consider the fact that though costs are incurred today, the benefits occur in one yearʹs time. C) It does not consider the value of the $10,000 in one yearʹs time if invested elsewhere. D) It does not consider whether the $10,000 will be needed elsewhere.

It does not consider whether the $10,000 will be needed elsewhere.

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned? A) It includes entries for the depreciation of assets. B) It does not include entries for expenditures on inventory. C) It does not include entries for collection of money from account receivables. D) It includes cash inflows from services rendered.

It includes cash inflows from services rendered.

Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property? A) The number of owners, and hence the spread of risk among these owners, is not limited. B) Its owners are liable for any obligations it enters into. C) The state in which a corporation is incorporated provides safeguards against any wrongdoing by the corporation. D) It is a legally defined, artificial entity that is separate from its owners.

It is a legally defined, artificial entity that is separate from its owners.

What is the effective annual rate (EAR)? A) It is the interest rate that would earn the same interest with annual compounding. B) It is the ratio of the number of the annual percentage rate to the number of compounding periods per year. C) It is the interest rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction). D) It refers to the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year.

It is the interest rate that would earn the same interest with annual compounding.

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements? A) It ensures that the market value of assets and debt are reported accurately. B) It ensures that information on the performance of public companies is reported on cash-basis accounting. C) It ensures that important budgetary information is not omitted. D) It makes it easier to compare the financial results of different firms.

It makes it easier to compare the financial results of different firms.

What are the requirements of section 404 of SOX? A) It requires that senior management return any profits or bonuses resulting from stock sales during any period covered by financial statements that must later be restated. B) It requires that auditors do not perform any non-auditing tasks for the companies they audit. C) It requires that audit partners rotate every five years. D) It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process.

It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process.

Which of the following best describes why the Valuation Principle is a key concept in making financial decisions? A) It shows how to assign monetary value to intangibles such as good health and well -being. B) It allows fixed assets and liquid assets to be valued correctly. C) It gives a good indication of the net worth of a person, item, or company and can be used to estimate any changes in that net worth. D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.

It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.

The balance sheet and income statement of a particular firm are shown above. What does the account receivable days ratio tell you about this company? A) It takes on average about 4 weeks to collect payment from its customers. B) It takes on average about 6 weeks to collect payment from its customers. C) It takes on average about 7 weeks to collect payment from its customers. D) It takes on average about 11 weeks to collect payment from its customers.

It takes on average about 4 weeks to collect payment from its customers.

When the costs of an investment come before that investmentʹs benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors? A) It will make it more attractive, since it will increase the investmentʹs net present value (NPV). B) It will make it more attractive, since it will decrease the investmentʹs net present value (NPV). C) It will make it less attractive, since it will increase the investmentʹs net present value (NPV). D) It will make it less attractive, since it will decrease the investmentʹs net present value (NPV).

It will make it less attractive, since it will decrease the investmentʹs net present value (NPV).

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows? A) It would be an expense on the income statement so it would be reflected in operating cash flows. B) It would be an addition to property, plant and equipment so it would be an investing activity. C) It would be an addition to cash so it would be reflected in the change in cash. D) None of the above answers is correct.

It would be an addition to property, plant and equipment so it would be an investing activity.

Consider the above statement of cash flows. In 2008, AOS Industries had contemplated buying a new warehouse for $3 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of the 2008? A) It would have $3,000,000 less cash at the end of 2008. B) It would have $2,925,000 less cash at the end of 2008. C) It would have $1,500,000 less cash at the end of 2008. D) It would have an additional $7,500,000 in cash at the end of 2008.

It would have $2,925,000 less cash at the end of 2008.

Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct? A) Joe has no management authority within the partnership. B) Jane is legally involved in the managerial decision making of the firm. C) Janeʹs liability for the firmʹs debts consists solely of her investment in the firm. D) Withdrawal of Jane from the partnership will dissolve the partnership.

Janeʹs liability for the firmʹs debts consists solely of her investment in the firm.

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the companyʹs long -term assets were judged to depreciate at an extra $5 million per year? A) Net property, plant, and equipment would rise to $126 million, and total assets and stockholdersʹ equity would be adjusted accordingly. B) Net property, plant, and equipment would fall to $116 million, and total assets and stockholdersʹ equity would be adjusted accordingly. C) Long-term liabilities would rise to $131 million, and total liabilities and stockholdersʹ equity would be adjusted accordingly. D) Long-term liabilities would fall to $111 million, and total liabilities and stockholdersʹ equity would be adjusted accordingly.

Net property, plant, and equipment would fall to $116 million, and total assets and stockholdersʹ equity would be adjusted accordingly.

A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations? A) Profits from the sales of popular models will be lost when returned to the shareholders in the form of dividends. B) New models will require a lot of money to develop and bring to market before they generate any revenue. C) The company will have built up debts which must be repaid in order to bring the current models to market. D) Equity must be raised to finance the development of new models to replace the existing models.

New models will require a lot of money to develop and bring to market before they generate any revenue.

You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity? A) No, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360. B) No, because the market for a used XBOX 360 is a competitive market. C) Yes, because the market for a used XBOX 360 is a competitive market. D) Yes, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.

No, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.

Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Dutyʹs marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one? A) No, since costs are $7,800,000 more than benefits. B) No, since costs are $6,800,000 more than benefits. C) Yes, since the benefits are $3,400,000 more than the costs. D) Yes, since the benefits are $7,300,000 more than the costs.

No, since costs are $6,800,000 more than benefits.

Which of the following is unique for an S corporation? A) The profits and losses of an S corporation are not taxed at the corporate level, but shareholders must include these profits and losses on their individual tax returns. B) The shareholders of an S corporation must include the firmʹs profit and losses in their individual income taxes even if no money is distributed to them. C) There is a maximum limit on the number of shareholders for an S corporation. D) None of the above statements is unique

None of the above statements is unique

Why are arbitrage opportunities short-lived? A) Federal regulations will kick in to restrict trade and effectively shut the opportunity down. B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values. C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal. D) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.

Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal.

Which of the following is/are TRUE? The EAR can never exceed the APR. The APR can never exceed the EAR. The APR and EAR can never be equal. A) Only I is true. B) Only II is true. C) Only II & III are true. D) Only I & III are true.

Only II is true.

Given the above term structure of interest rates, which of the following is most likely in the future? Option I. Option II. Option III. Interest rates will fall.Economic growth will slow.Long-term rates will rise relative to short term rates. A) Option I only B) Option II only C) Option III only D) Options I and II

Option I only

Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom? A) The usefulness of financial statements to investors is entirely dependent on the ethics of those constructing them. B) It is not possible to effectively evaluate a company unless all the financial statements are fully and correctly prepared. C) The information in financial statements should be viewed extremely critically. D) Readers of even fraudulent financial statements can spot signs of a firmʹs financial health, if those statements are read fully and with care.

Readers of even fraudulent financial statements can spot signs of a firmʹs financial health, if those statements are read fully and with care.

A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of the company ask experts in marketing to determine how much an effective ad campaign for such a service would cost, and by how much sales would increase. They consult experts in economics to calculate the increases in revenue from the success of the campaign, experts in operations to determine the cost of offering the service, and experts in strategy to anticipate possible counter-moves by competitors. Which of the following points about the role of financial managers does this example illustrate? A) Real-world decisions are complex and require information from many sources if the decisions are to be valid. B) Determining the costs associated with making a decision is easier than determining the potential benefits of the decision. C) All of the costs and benefits associated with a decision can never be fully identified. D) Ultimately the decision whether to take a certain course of action rests with the financial managers of a company.

Real-world decisions are complex and require information from many sources if the decisions are to be valid.

As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, what should you do? A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude. B) Do nothing; refine the 10,000 bbl of WTI crude. C) Trade the 10,000 bbl WTI crude with the other refiner and refine the 10,150 bbl of ANS crude. D) Trade the 10,000 bbl WTI crude with the other refiner and then sell the 10,150 bbl of ANS crude.

Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude.

Why must care be taken when comparing a firmʹs share price to its operating income? A) Both share price and operating income are related to the whole firm. B) Share price is a quantity related to the entire firm, while operating income is an amount that is related solely to equity holders. C) Both share price and operating income are related solely to equity holders. D) Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.

Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.

Why is a stock exchange like NASDAQ considered a secondary market? A) It trades the second largest volume of shares in the world. B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation. C) The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart. D) NASDAQ is called a secondary market because NYSE is considered a primary market.

Shares sold on it are exchanged between investors without any involvement of the issuing corporation.

Which of the following is true about perpetuities? A) Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate. B) Since a perpetuity generates cash flows every period infinitely, initial cash outflow must be discounted to calculate the present value. C) Since a perpetuity generates cash flows every period infinitely, there is no way to solve for the cash flow using the present value and the interest rate. D) Since a perpetuity generates cash flows every period infinitely, its FV is the same as its PV.

Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate.

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true? A) Since net working capital is negative, the company will not have enough funds to meet its obligations. B) Since net working capital is high, the company will likely have little difficulty meeting its obligations. C) Since net working capital is very high, the company will have ample money to invest after it meets its obligations. D) Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors.

Since net working capital is negative, the company will not have enough funds to meet its obligations.

A companyʹs board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employeesʹ diligence and industry. What general principle is being argued by the board of directors? A) In a conflict between stakeholders in a company, the most important stakeholder is not always the stockholders. B) Some activities that decrease shareholdersʹ wealth may have intangible benefits which increase the strength of the company overall. C) When a conflict of interest arises between shareholders and other stakeholders, in general, the correct solution is the one that creates the greatest good for the greatest number of stakeholders. D) Ethical decisions should be assessed on their moral value, not on their value in dollars and cents.

Some activities that decrease shareholdersʹ wealth may have intangible benefits which increase the strength of the company overall.

T/F: A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV).

TRUE

T/F: Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors.

TRUE

T/F: Costs and benefits must be put in common terms if they are to be compared.

TRUE

T/F: Dollar amounts received at different points in time cannot be compared in absolute terms.

TRUE

T/F: If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit.

TRUE

T/F: In general, if an action increases a firmʹs value by providing benefits with a value greater than any costs involved, then that action is good for the firmʹs investors.

TRUE

T/F: Stock markets provide liquidity for a firmʹs shares.

TRUE

T/F: Stockholdersʹ equity is the difference between a firmʹs assets and liabilities, as shown on the balance sheet.

TRUE

T/F: The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market.

TRUE

T/F: The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly.

TRUE

T/F: The income statement reports the firmʹs revenues and expenses, and it computes the firmʹs bottom line of net income, or earnings.

TRUE

T/F: The internal rate of return (IRR) is the interest rate that sets the net present value (NPV) of the cash flows equal to zero.

TRUE

T/F: The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.

TRUE

T/F: The principal goal of a financial manager is to maximize the wealth of the stockholders.

TRUE

T/F: The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value.

TRUE

T/F: Whenever a good trades in a competitive market, the price determines the value of the good.

TRUE

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation? A) The State Bank would experience a surge in demand for loans. B) The Colonial Bank would experience a surge in demand for deposits. C) The State Bank would experience a fall in demand for deposits. D) The Colonial Bank would experience a surge in demand for loans.

The Colonial Bank would experience a surge in demand for loans.

"If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets."What do we call the above statement? A) The Net Present Value rule B) The Law of One Price C) The Valuation Principle D) The Time Value of Money

The Law of One Price

Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the gross margin for 2008 and 2009. What does the change in the gross margin between these two years imply about the company? A) The efficiency of Xenon Manufacturing has significantly risen between 2008 and 2009. B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2008 and 2009. C) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2008 and 2009. D) The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.

The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2008 and 2009.

Which of the following is typically the major factor in limiting the growth of sole proprietorships? A) The organizational structure of such firms tends to become extremely complicated over time. B) It is extremely difficult to transfer control of such firms to a new owner if the present owner dies or wishes to sell the firm. C) The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts. D) Investors have a great deal of control over the day-to-day running of such firms, leading to confusion when conflicts in direction arise.

The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts.

Which of the following statements is FALSE about interest rates? A) As interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of cash flows. B) The effective annual rate indicates the amount of interest that will be earned at the end of one year. C) The annual percentage rate indicates the amount of simple interest earned in one year. D) The annual percentage rate indicates the amount of interest including the effect of compounding.

The annual percentage rate indicates the amount of interest including the effect of compounding.

Which of the following best describes why the left and right sides of a balance sheet are equal? A) In a properly run business, the value of liabilities will not exceed the assets held by the company. B) By definition, the assets plus the liabilities will be the same as the stockholdersʹ equity. C) The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is the difference between the assets and the liabilities. D) By accounting convention, the assets of a company must be equal to the liabilities of that company.

The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is the difference between the assets and the liabilities.

19) Which of the following statements regarding the balance sheet is INCORRECT? A) The balance sheet provides a snapshot of a firmʹs financial position at a given point in time. B) The balance sheet lists a firmʹs assets and liabilities. C) The balance sheet reports stockholdersʹ equity on the right-hand side. D) The balance sheet reports liabilities on the left-hand side.

The balance sheet reports liabilities on the left-hand side.

If the above balance sheet is for a retail company, how has the companyʹs leverage changed between 2007 and 2008? A) The company has experienced a very significant decrease in its leverage. B) The company has experienced a significant decrease in its leverage. C) The company has experienced no significant change in its leverage. D) The company has experienced a significant increase in its leverage.

The company has experienced a significant increase in its leverage.

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in quick ratio between 2007 and 2008? A) The company has eliminated the risk that it will experience a cash shortfall in the near future. B) The company has reduced the risk that it will experience a cash shortfall in the near future. C) The risk that the company will experience a cash shortfall in the near future is unchanged. D) The company has increased the risk that it will experience a cash shortfall in the near future.

The company has increased the risk that it will experience a cash shortfall in the near future.

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2007 and 2008? A) The company is having difficulties selling its product. B) The company has reduced its debt. C) The company has added a major new asset in terms of plant and equipment. D) The company has experienced a significant rise in its market value.

The company is having difficulties selling its product.

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in stockholdersʹ equity between 2007 and 2008? A) The company is very profitable because it is obviously collecting receivables faster. B) The company is selling its property, plant and equipment, which may result in a long-term deficiency in production capacity. C) The companyʹs net income in 2008 was negative. D) No conclusions can be drawn regarding stockholdersʹ equity without additional information.

The companyʹs net income in 2008 was negative.

What is the process of double taxation for the stockholders in a C corporation? A) Their shares are taxed when they are both bought and sold. B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. C) The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares. D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation.

The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them.

Which of the following situations would result in lowering of interest rates by the banking authority of a country? A) The economy is slowing down. B) Inflation is rising rapidly. C) The level of investment is quite high. D) The rate of savings is quite low.

The economy is slowing down.

Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the operating margin for 2008 and 2009. What does the change in the operating margin between these two years imply about the company? A) The efficiency of Xenon Manufacturing has significantly risen between 2008 and 2009. B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2008 and 2009. C) The efficiency of Xenon Manufacturing has significantly fallen between 2008 and 2009. D) The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.

The efficiency of Xenon Manufacturing has significantly fallen between 2008 and 2009.

Which of the following is the LEAST likely explanation for a firmʹs high ROE? A) The firm is growing. B) The firm is able to find investment opportunities that are very profitable. C) The firm has very efficient use of its assets. D) The firm enjoys high sales margins.

The firm is growing.

Which of the following statements is FALSE? A) The actual return kept by an investor will depend on how the interest is taxed. B) The equivalent after-tax interest rate is r(1 - ). C) The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities. D) It is important to use a discount rate that matches both the horizon and the risk of the cash flows.

The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities.

Which of the following statements regarding the income statement is INCORRECT? A) The income statement shows the cash flows and expenses at a given point in time. B) The income statement shows the flow of revenues and expenses generated by a firm between two dates. C) The last or "bottom" line of the income statement shows a firmʹs net income. D) The first line of an income statement lists the revenues from the sales of products or services.

The income statement shows the cash flows and expenses at a given point in time.

Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate? A) There is a greater chance that inflation may fall in a longer time-frame. B) The penalties for closing out a long term loan early make them unattractive to many investors. C) Long-term loans typically have ongoing costs that accumulate over the life of the loan. D) The loan values are very sensitive to changes in market interest rates.

The loan values are very sensitive to changes in market interest rates.

Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower? A) The number of borrowers seeking funds is low. B) The expected inflation rate is expected to be low. C) The borrower is judged to have a low degree of risk. D) The loan will be for a long period of time.

The loan will be for a long period of time.

Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000. If you were to refinance the mortgage today for 20 years at an APR of 4.25%, how much would your monthly payment change by? A) The monthly payment will increase by $104.79. B) The monthly payment will decrease by $104.79 C) The monthly payment will increase by $343.12. D) The monthly payment will decrease by $343.12.

The monthly payment will decrease by $104.79

Assume your current mortgage payment is $900 per month. If you begin to pay $1,000 per month (with the extra $100 per month going to principal), which of the following will be TRUE? A) The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments. B) The total amount paid (principal and interest) will increase with $1,000 monthly payment compared to $900 monthly payments. C) The total interest expense will increase with $1,000 monthly payment compared to $900monthly payments. D) The total principal paid will decrease with $1,000 monthly payment compared to $900 monthly payments.

The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments.

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive? A) The assets should have been listed on the balance sheet as long-term assets. B) Cash raised by selling assets should not be recorded as revenue. C) The cash raised should have been recorded as short-term loans. D) The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.

The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.

What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership? A) The owners of a limited liability company have personal obligation for debts incurred by the company. B) There is no separation between the company and its owners in a limited liability company. C) The owners of a limited liability company can withdraw from the company without the company being dissolved. D) The owners of a limited liability company can take an active role in running the company.

The owners of a limited liability company can take an active role in running the company.

You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true? A) The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. B) The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. C) The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. D) No comparison can be madewe need to know the cash flows to calculate the present value.

The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B

Historically, why were high inflation rates associated with high nominal interest rates? A) Individuals will spend more when they expect their investments to increase in value. B) Growth in investment and savings is encouraged when consumers are judged to be overspending. C) High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term. D) The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.

The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.

A printing company prints a brochure for a client and then bills them for this service. At the time the printing companyʹs financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded? A) The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows. B) The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows. C) The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows. D) The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows.

The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.

On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction? A) The transaction was between the corporation and investors. B) Shares of Google from this time onward could be traded between investors on a stock exchange. C) The shares were the first to be privately issued by Google. D) Google was at the time a recently founded company seeking capital with which to expand.

The transaction was between the corporation and investors.

Which of the following best describes the valuation principle? A) It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks. B) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm. C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. D) If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.

The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm.

Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves? A) It is best for the control of the finances of a corporation to be in the hands of a disinterested third party. B) The interests of the various owners may conflict with each other. C) The owners may not be U.S. citizens or residents. D) There are often many owners, and they can often change as they buy and sell stock.

There are often many owners, and they can often change as they buy and sell stock.

Why is it difficult to determine the market price of a private corporationʹs shares at any point in time? A) It is difficult to obtain enough information to accurately value such a company. B) The price of its shares is fixed by the owners. C) It has a limited number of owners. D) There is no organized market for its shares.

There is no organized market for its shares.

A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the future value (FV) of this perpetuity, given that the interest rate is 3%? A) $1456 B) $19,867 C) $21,320 D) There is no solution to this problem.

There is no solution to this problem.

Which of the following is NOT a reason why a firmʹs financial managers must take great care when making investment decisions? A) These investment decisions determine whether the firm will add value for its owners. B) These investments determine the long-term directions in which the company may move. C) These investment decisions determine the corporationʹs mix of debt and equity. D) These investment decisions typically involve substantial costs which must be carefully weighed against their potential benefits.

These investment decisions determine the corporationʹs mix of debt and equity.

Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis? A) They can be used to determine how much an asset can be sold for. B) They can be used to convert different services and commodities into equivalent cash values which can be compared. C) They allow all commodities and services to be assigned a fixed and unchanging value. D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.

They can be used to convert different services and commodities into equivalent cash values which can be compared.

What is the main problem in using a balance sheet to provide an accurate assessment of the value of a companyʹs equity? A) Valuable assets such as the companyʹs reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet. B) The balance sheet does not accurately represent the book value of assets held by the company. C) The equity shown on the balance sheet does not reflect the market capitalization of the company. D) Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.

Valuable assets such as the companyʹs reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet.

Which of the following statements is INCORRECT based on the time value of money? A) In general, money today is worth more than money in one year. B) We define the risk-free interest rate (rf) for a given period as the interest rate at which money can be borrowed or lent without risk over that period. C) We refer to (1 - rf) as the interest rate factor for risk-free cash flows. D) For most financial decisions, costs and benefits occur at different points in time.

We refer to (1 - rf) as the interest rate factor for risk-free cash flows.

Which of the following statements regarding arbitrage and security prices is INCORRECT? A) We call the price of a security in a normal market the no-arbitrage price for the security. B) In financial markets it is possible to sell a security you do not own by doing a short sale. C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds. D) The general formula for the no-arbitrage price of a security is Price(security) = PV (all cash flows paid by the security).

When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.

Samantha has holdings of 250 troy ounces of platinum, currently valued at $820 dollars per ounce. She estimates that the price of platinum will rise to $869.20 per ounce in the next year. If the interest rate is 12%, should she sell the platinum today? A) Yes, as the difference between the present value of selling now and selling in one year is $12,300 dollars today. B) Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today. C) Yes, as the difference between the present value of selling now and selling in one year is $9840 dollars today. D) No, as the difference between the present value of selling now and selling in one year is - $8786 dollars today.

Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today.

An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made? A) No, because the investment will yield $82,840 less than putting the money in a bank. B) Yes, because the investment will yield $66,272 more than putting the money in a bank. C) Yes, because the investment will yield $74,556 more than putting the money in a bank. D) Yes, because the investment will yield $82,840 more than putting the money in a bank.

Yes, because the investment will yield $82,840 more than putting the money in a bank.

A McDonaldʹs Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assume that there is a competitive market for McDonaldʹs food items and that McDonaldʹs sells the Big Mac value meal for $4.59. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal? A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67. B) No, no arbitrage opportunity exists. C) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.34. D) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.67.

Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67.

Walgreens Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreens Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 100 shares? A) No, no arbitrage opportunity exists. B) Yes, buy on NASDAQ and sell on NYSE, make $25. C) Yes, buy on NYSE and sell on NASDAQ, make $25. D) Yes, buy on NASDAQ and sell on NYSE, make $250.

Yes, buy on NASDAQ and sell on NYSE, make $25.

A wholesale food retailer is offered $15.60 per two-layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $2.40 per carton, for the first 1000 cartons, and $1.90 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer? A) No, the costs are $1500 more than the benefits. B) No, the costs and the benefits are the same. C) Yes, the costs are $2500 less than the benefits. D) Yes, the costs are $2000 less than the benefits.

Yes, the costs are $2000 less than the benefits.

Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats? A) You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price. B) The posted prices of oats can vary widely between grocery stores, even within the same local area. C) Grocery stores mark up the prices of their oats up to make a profit. D) Grocery stores typically sell oats in different packaging, which results in different prices within the same store.

You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price.

Which of the following situations is best described by the timeline shown below? A) You make payments of $250 per month for six months. B) You receive payments of $250 per month for six months. C) You make payments of $250 per month for five months. D) You receive payments of $250 per month for five months.

You make payments of $250 per month for six months.

When computing a present value, which of the following is TRUE? A) You should adjust the discount rate to match the interval between cash flows. B) You should adjust the future value to match the present value. C) You should adjust the time period to match the present value. D) You should adjust the cash flows to match the time period of the discount rate.

You should adjust the discount rate to match the interval between cash flows.

Which of the following firms would be expected to have a high ROE? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a high-end fashion retailer that has a very high mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of its assets per year

a grocery store chain that has very high turnover, selling many multiples of its assets per year

A limited liability company is essentially ________. A) a limited partnership without limited partners B) a limited partnership without a general partner C) just another name for a limited partnership D) just another name for a corporation

a limited partnership without a general partner

What is a competitive market? A) a market in which goods have a different ask price and bid price B) a market in which a good can be bought and sold at the same price C) a market in which a good is sold at a lower price than that for which it can be bought D) a market in which a good is bought for a lower price than that for which it can be sold

a market in which a good can be bought and sold at the same price

Which of the following firms would be expected to have a high ROE based on that firmʹs high profitability? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a low-end retailer that has a low mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of its assets per year

a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet? A) commercial paper held by the company B) the inventory of chemicals used to produce the drugs made by the company C) a patent for a drug held by the company D) the cash reserves of the company

a patent for a drug held by the company

If the exchange rates, after fees, in Tokyo are ¥1,000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171, which of the following is most likely to occur? A) a surge in conversion of dollars to yen in Tokyo B) a surge in conversion of euros to yen in Tokyo C) a surge in conversion of euros to dollars in Paris D) a surge in conversion of euros to yen in Paris

a surge in conversion of euros to yen in Paris

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows? A) as an outflow under operating activities B) as an outflow under investment activities C) as an outflow under financial activities D) not recorded on the statement of cash flows

as an outflow under investment activities

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________. A) NYSE Enforcement Board B) Accounting Standards Board C) Securities and Exchange Commission (SEC) D) auditor

auditor

Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders? A) by increasing the penalties to firms for providing false information B) by increasing the independence of auditors and clients C) by decreasing the non-audit fees that an auditor can receive from a client D) by forcing companies to audit financial statements they release

by forcing companies to audit financial statements they release

What is the most common way that agency conflict problems are addressed in most corporations? A) by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders B) by terminating the employment of employees who are found to have put their own interests above those of the company C) by using disinterested outside bodies to adjudicate between managers and shareholders when such conflicts arise D) by prosecuting managers who have been found to have illegally used company moneys for their own benefit

by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders

WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldComʹs financial statements more attractive to investors? A) by decreasing depreciation B) by reducing capital expenditures C) by raising its reported earnings D) by boosting its cash flows

by raising its reported earnings

The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case? A) by increasing the debt burden carried by the company B) by raising the companyʹs equity by encouraging new owners to take a stake in the company C) by decreasing the ratio of equity to debt held by the company D) by increasing the value of shares held by the existing owners of the company

by raising the companyʹs equity by encouraging new owners to take a stake in the company

A factory owner wants his workers to produce as many widgets as they can so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case? A) by supplying incentives so the agents act in the way principal desires B) by ensuring that all workers co-operate to maximize the gains of their section C) by making the agents into principals themselves D) by maximizing the information that the principal obtains about the behavior of the agents

by supplying incentives so the agents act in the way principal desires

A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case? A) by the sale of the assets held by the company that hold most of its value B) by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors C) by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company D) by removing the employees expectations of the continued poor performance of the company

by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors

To compute the future value of a cash flow, you must ________. A) discount it B) compound it C) double it D) arbitrage it

compound it

Cash is a ________. A) long-term asset B) current asset C) current liability D) long-term liability

current asset

Accounts payable is a ________. A) long-term liability B) current asset C) long-term asset D) current liability

current liability

A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO. A) shareholder proposal B) leveraged buyout C) shareholder action D) hostile takeover

hostile takeover

What is the shape of the yield curve and what expectations are investors likely to have about future interest rates? A) inverted; higher B) normal; higher C) inverted; lower D) normal; lower

inverted; lower

Which of the following people may not manage the operations of a firm in which they are part or full owners? A) stockholders in S corporations B) stockholders in C corporations C) limited partners in a limited partnership D) general partners in a limited partnership

limited partners in a limited partnership

A 30-year mortgage loan is a ________. A) long-term liability B) current liability C) current asset D) long-term asset

long-term liability

Investments by wealthy individuals and endowments is a major source of money for each of the following EXCEPT ________. A) private equity funds B) hedge funds C) venture capital funds D) mutual funds

mutual funds

Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 4% per year? A) one that pays $900 now B) one that pays $1080 in two years C) one that pays $1350 in five years D) one that pays $1620 in ten years

one that pays $1350 in five years

Which of the following accounts has the highest EAR? A) one that pays 5.4% every six months B) one that pays 1.0% per month C) one that pays 9.6% per year D) one that pays 2.4% every three months

one that pays 1.0% per month

Which of the following would be more typically the responsibility of a controller rather than a treasurer? A) overseeing accounting and tax functions B) capital budgeting C) managing credit D) making investment decisions

overseeing accounting and tax functions

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet? A) the depreciation over the last year in the value of the vehicles owned by the company B) revenue received for the delivery of items that have not yet been delivered C) a loan which must paid back in two years D) prepaid rent on the offices occupied by the company

revenue received for the delivery of items that have not yet been delivered

Which of the following types of firms does NOT have limited liability? A) sole proprietorships B) limited partnerships C) corporations D) none of the above

sole proprietorships

Which of the following is NOT a financial statement that every public company is required to produce? A) income statement B) statement of sources and uses of cash C) balance sheet D) statement of stockholdersʹ equity

statement of sources and uses of cash

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firmʹs management discussion and analysis (MD&A)? A) that a large number of funds were allocated to advertising to increase awareness of the firmʹs brand in new areas it had expanded into this year B) that some senior members of the management team have retired in this financial year C) that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages D) that the firm has plans to expand into the organic food business in the next financial year by purchasing several small organic food retailers

that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages

Which of the following amounts would be included on the right side of a balance sheet? A) the value of government bonds held by the company B) the cash held by the company C) the amount of deferred tax liability held by the company D) the amount of money owed to the company by customers who have not yet paid for goods and services they have received

the amount of deferred tax liability held by the company

In most corporations, to whom does the chief financial officer report? A) shareholders B) the board of directors C) the chief executive officer D) the controller

the chief executive officer

What is the bid-ask spread? A) the difference in price available for an immediate sale of a stock and the immediate purchase of the stock B) all of the costs and fees that a stock exchange charges in order to process a transaction C) the rise or fall in the value of a stock between the time it is acquired by an investor and sold by that investor D) the difference in the selling price of a stock between different exchanges

the difference in price available for an immediate sale of a stock and the immediate purchase of the stock

What, typically, is used to calculate the opportunity cost of capital on a risk-free investment? A) the best expected return offered in any investment available in the market B) the interest rate on U.S. Treasury securities with the same term C) the interest rate of any investments alternatives that are available D) the best rate of return offered by U.S. Treasury securities

the interest rate on U.S. Treasury securities with the same term

Which of the following best describes the annual percentage rate? A) the quoted interest rate which, considered with the compounding period, gives the effective interest rate B) the effective annual rate, after compounding is taken into account C) the discount rate, when compounded more than once a year or less than once a year D) the discount rate, when effective annual rate is divided by the number of times it is compounded in a year

the quoted interest rate which, considered with the compounding period, gives the effective interest rate

In which of the following relationships is an agency conflict problem LEAST likely to arise? A) the relationship between a hire-car company and the persons who hire that companyʹs cars regarding the treatment of those cars B) the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks C) the relationship between a restaurateur and the suppliers of produce to that restaurant regarding the freshness of the produce supplied D) the relationship between a driver and the passengers in a car regarding the safe driving of that car

the relationship between a driver and the passengers in a car regarding the safe driving of that car

Which of the following is NOT one of the financial statements that must be produced by a public company? A) the balance sheet B) the income statement C) the statement of cash flows D) the statement of activities

the statement of activities

Whose interests should a financial manager consider paramount when making a decision? A) the stockholders who have risked their money to become owners of the company B) the employees and associated stakeholders who are employed by the company C) the public who consume the companyʹs goods and services D) the senior management and associated colleagues at the executive level within the company

the stockholders who have risked their money to become owners of the company

The notes to the financial statements would LEAST likely be used for which of the following purposes? A) to provide information regarding the context in which these financial numbers were generated B) to disclose the financial implications of any off-balance sheet transactions C) to show how the value of assets listed in the financial statements were arrived at D) to explain the method of accounting that was used in the preparation of the financial statements

to disclose the financial implications of any off-balance sheet transactions

What is the most important duty of a firmʹs financial officer? A) to ensure that the firm has enough cash on hand to meet its commitments at any given time B) to decide how to pay for investments C) to manage working capital D) to make investment decisions

to make investment decisions

Which of the following best describes why a firm produces financial statements? A) to use as a tool when planning future investments within a firm B) to increase the intrinsic value of a firm C) to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business D) to show the daily activities a firm has undertaken in the previous financial year, and what activities are planned for the near future

to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business.

Gross profit is calculated as ________. A) total sales - cost of sales - selling, general, and administrative expenses - depreciation and amortization B) total sales - cost of sales - selling, general, and administrative expenses C) total sales - cost of sales D) none of the above

total sales - cost of sales

Which of the following is NOT an advantage of a sole proprietorship? A) single taxation B) ease of setup C) unlimited liability D) no separation of ownership and control

unlimited liability

How can we convert the value of money from one point in time to another? A) using the current exchange rate B) using a cost-benefit analysis C) using the valuation principle D) using the current interest rate

using the current interest rate

In which of the following situations would it not be appropriate to use the following formula: PV = C0 + C1/(1 + r) + C2/(1 + r)2 + . . . . + Cn/(1 + r)n when determining the present value (PV) of a cash flow stream? A) when yield curves are flat B) when short-term and long-term interest rates vary widely C) when the inflation rate is high D) when the discount rate is high

when short-term and long-term interest rates vary widely