FIN 5352 Test 1
A stream of cash flows that grow at a constant rate for a finite period is called a(n) ______.
growing annuity
PV = C/(r − g) is the formula for the present value of a ______.
growing perpetuity
More frequent compounding leads to ______.
higher EARs higher EAYs
Assets are listed on a balance sheet in which order?
in order of time it would take an ongoing firm to convert them into cash
How are assets on a balance sheet listed?
in order of time taken by an ongoing firm to convert them to cash (most to least liquid)
Revenue minus expenses is the accounting definition of ______.
income
The purpose of a(n) ______ is to measure performance over a set period of time.
income statement
A decrease in depreciation expense _____ earnings per share.
increases
A stock buyback ______ cash flow to stockholders.
increases
Stockholders' equity ______ when retained earnings increase.
increases
When a firm pays out fewer dividends, it ______ the accounting value of its retained earnings.
increases
Cutting costs falls under which of the two basic classifications under which most potential financial goals fall? increasing profits controlling risk
increasing profits
Marginal tax rates are the most important tax rates because ______.
incremental cash flows are taxed at marginal tax rates financial decisions are usually based on new cash flows
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
Which of the following are annuities? Tips to waiter Monthly grocery bill Installment loan payments Monthly rent expenses in a lease
installment loan payments monthly rent payments in a lease
Raw materials are classified as which of the following? cash and equivalents fixed assets accounts receivable inventory
inventory
Cash flows from the acquisition and sale of fixed assets are located in the ______ activities section of the accounting statement of cash flows.
investing
The second step in compiling the accounting statement of cash flows is to calculate the ______.
investing activities
For a positive annual percentage rate (APR) and multiple (more than one) compounding periods per year, the EAR is always ______ the APR.
larger than
Holding too many liquid assets can be harmful for a firm because such assets are generally ______.
less profitable
Changes in capital spending can be negative when the acquisition of fixed assets is ______ the sale of fixed assets.
less than
Changes in capital spending can be negative when the acquisition of fixed assets is______ the sale of fixed assets.
less than
A traditional (non-growing) annuity consists of a(n) ______ stream of cash flows for a fixed period of time.
level
___ refers to the quickness and ease with which assets can be converted to ___.
liquidity, cash
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal
The price at which willing buyers and sellers would trade is called ______ value.
market
The ______ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service.
matching
When comparing rates without a compounding interval, the EAR is ______.
meaningful
The accounting equation shows that stockholders' equity equals assets ______ liabilities.
minus
A firm is in trouble if its operating cash flow is ___ for a long period of time.
negative
If the acquisition of fixed assets is $10,000,000 and the sale of fixed assets is $15,000,000, capital spending will be ______.
negative
Noncash items are expenses that directly affect ______ but do not directly affect ______.
net income; cash flow
Earnings per share is equal to ___ income divided by the number of outstanding ___ of a firm's common stock.
net, shares
The 1934 Securities Exchange Act restricts anyone who has access to ______ information from trading on that information.
non-public
The first step in calculating cash flow from operating activities is to adjust net income for ______.
noncash items and net working capital changes
Cash flow and net working capital are ______.
not the same
The total cash flow of the firm includes ______.
operating, capital spending, and net working capital cash flows
An income statement reflects activity that occurs ______, while a balance sheet reflects values ______.
over a period of time; as of a specific date
The payments in a ______ amortization loan are not based on the life of the loan.
partial
A positive operating cash flow indicates that the firm is generating enough cash to ______.
pay operating costs
The loan balance on partial amortization loans declines so slowly because the ___.
payments are mostly interest
The loan balance on partial amortization loans declines so slowly because the ______.
payments are mostly interest
Which of the following are real-world examples of annuities?
pensions mortgages
C/r is the formula for the present value of a(n) ______.
perpetuity
The present value formula for a(n) _____ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
perpetuity
Which of the following are tangible fixed assets?
plant land
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ______.
plus depreciation
When more cash becomes available than will be paid out over the next 12 months, net working capital is ______.
positive
Interest rates and the ___ value of a perpetuity have an inverse relationship.
present
The value of a future cash flow stated in today's dollars is referred to as the ______.
present value
The value of a firm can be found by taking the ______ value of all ______ cash flows.
present; future
Amortization is the process of paying off loans by regularly reducing the ______.
principal
In a general partnership, each partner shares in the ___ and ___.
profits and losses
Which of these are generally considered to be short-run fixed costs? property taxes overhead expenses income taxes management salaries
property taxes overhead expenses management salaries
The interest rate (r) used in the general compounding formula is the ______ interest rate.
quoted
Which of the following is a variable cost in the short run? property taxes raw materials used in production bond interest monthly rent on the plant
raw materials used in production
Which of the following are examples of short-run fixed costs? rent material costs bond interest sales commissions
rent bond interest
Which of the following cash flows appear in the financing activities section of the accounting statement of cash flows? retirement of long-term debt payment of interest repurchase of stock payment of dividends
retirement of long-term debt repurchase of stock payment of dividends
How is income defined?
revenue minus expenses
Forms of financing are represented on the ______ side of the balance sheet. right left
right
Which of the following are included in cash flow from investing activities? sales of fixed assets retirement of long-term debt depreciation acquisition of fixed assets
sales of fixed assets acquisition of fixed assets
Which of the following will change fixed assets? Multiple select question. amortizing goodwill selling a plant buying a new machine issuing new bonds
selling a plant buying a new machine
The owners of a corporation are called ______. shareholders bondholders government agents partners
shareholders
Which of the following is the formula for the present value of a growing perpetuity?
C/(r − g)
What is the general compounding formula for calculating the annual return on investment when there is more than one compounding period in a year?
C0(1 + r/m)m
______ budgeting is the process of making and managing expenditures on long-term assets. Capital Optional Conventional Performance-based
Capital Reason: Managing expenditures on long-term assets is known as capital budgeting.
Which one of the following is true? The income statement explicitly shows cash flows. Cash flows always exceed earnings. Earnings, net income, and cash flows are identical. Cash flows can be derived from financial statements.
Cash flows can be derived from financial statements.
Which one of the following calculates cash flow from operations?
EBIT + Depreciation − Taxes
On a balance sheet, total assets must always equal total liabilities plus ______.
shareholders' equity
The Securities Act of 1933 and the Securities ___ Act of 1934 provide the basic regulatory framework in the United States for the public trading of securities.
Exchange
True or false: Net income equals cash flow.
False
True or false: Stockholders' equity appears on the left-hand side of the balance sheet.
False
True or false: Receiving $10 today has the same value as receiving $1 today and $9 one year from now.
False Reason: You could invest nine extra dollars now and have more than nine dollars a year from now.
Which of these will result from a firm using cash to buy inventory? Inventory would increase. Net working capital would increase. Cash would decrease. Net working capital would decrease.
Inventory would increase. Cash would decrease.
What is the most important item that can be extracted from financial statements?
The firm's actual cash flows
Which of the following are true about the growing perpetuity model assumptions?
The interest rate must exceed the growth rate. The cash flows occur at regular intervals. The cash flow used is that for next year.
In the Excel setup of a loan amortization problem, which of the following occurs?
To find the principal payment each month, you subtract the interest payment from the total payment. The payment is found using PMT(rate, nper,-pv, fv).
Long-term liabilities are not due in the current year (from the date of the balance sheet).
True
True or false: A balance sheet shows what a firm owns and how it is financed.
True
True or false: An increase in depreciation expense lowers net income.
True
True or false: Bondholders have a higher claim to a firm's cash flow than stockholders do.
True
True or false: Free cash flow is the total of cash flow to creditors and cash flow to stockholders.
True
True or false: Holding too many liquid assets can harm a firm financially given that it is giving up an opportunity to invest in productive assets.
True
True or false: Taxes can be a large cash outflow for a corporation.
True
True or false: The spreadsheet (Excel) formula for calculating the present value of $100 at the end of each year for 2 years at 10 percent per year is: PV(.1,2,-100,0).
True
True or false: There is a correlation between future cash flows and the economic value of an asset.
True
______ costs change as the output of the firm changes.
Variable
Which of these questions can be answered by reviewing a firm's balance sheet?
What is the total amount of assets the firm owns? How much debt is used to finance the firm?
Which of the following is a perpetuity?
a constant stream of cash flows forever
What is inventory an example of?
a current asset
Which of the following will result in a lower present value for a given future cash flow?
a higher interest rate more time more risk
Which of the following represents an infinite and constant stream of cash flows?
a perpetuity
What does stockholders' equity represent?
a residual claim against the firm's assets
What does a balance sheet reflect about a firm?
accounting value on a specific date
A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?
accounts receivable
Identify the current asset(s) in the list below. accounts receivable property accounts payable plant
accounts receivable
When a customer purchases an item on credit, the purchase amount is recorded in the books of the seller in which one of these accounts?
accounts receivable
Which of the following are included in the fixed asset portion of a balance sheet? capital surplus accumulated depreciation cash and equivalents trademarks
accumulated depreciation trademarks
Net earnings refer to income earned ______.
after interest and taxes
Another term for an annuity due is ______.
an annuity in advance
A misclassification of a $100 investment expense as an operating expense will cause ______.
an understatement of investing cash flow an overstatement of operating cash flow no change in total cash flow
A misclassification of a $100 operating expense as an investment expense will cause ______. an understatement of investing cash flow an overstatement of operating cash flow a major change in total cash flow a change in total cash flow no change in total cash flow
an understatement of investing cash flow an overstatement of operating cash flow no change in total cash flow
Which compounding interval will result in the lowest future value assuming everything else is held constant?
annual Reason: All else constant, a lower number of compounding periods per year results in a lower future value.
The EAR is meaningful by itself, but the _____ is only meaningful when the number of compounding periods per year is given.
annual percentage rate
The ______ is the annual interest rate without consideration of compounding.
annual percentage rate
Net working capital will be negative when current assets ______ current liabilities.
are less than
The cash flow identity states that cash flows from ______ should equal cash flows to creditors and equity investors.
assets
Liquidity refers to the ease of changing ______.
assets to cash
Stockholders' equity is defined as ______.
assets − liabilities
An annuity due is a series of payments that are made ______.
at the beginning of each period
Discounting brings money ______ in time and compounding brings money ______ in time.
back; forward
Which of the following reflects financial information as of a specific date?
balance sheet
EBIT stands for earnings ______ and taxes.
before interest
Order the following groups in order of highest claim to lowest claim on a firm's cash flow: bondholders stockholders
bondholders stockholders
On the balance sheet, assets are listed at their ______ value.
book
Which of the following will change fixed assets? issuing new bonds buying a new machine amortizing goodwill selling a plant
buying a new machine selling a plant
If a firm defaults on its bond contract, the bondholders ______.
can sue the firm can force the firm into bankruptcy
Operating cash flow differs from total cash flow in that the latter makes adjustments for ______. net income capital spending retained earnings additions to net working capital
capital spending additions to net working capital
Fixed payment loans are typically used for which of the following?
car loans student loans mortgages
The statement of cash flow explains changes in ______.
cash and equivalents
In determining the economic and financial condition of a firm, ______ is more revealing than net income.
cash flow
Noncash items do not affect ______.
cash flow
Taxes represent which of the following:
cash outflow
In large firms, financial activity is usually associated with which top officer? chief management consultant vice president of production chief financial officer vice president for marketing
chief financial officer
The cash flows from financing activities include changes in ______.
common stock long-term debt
When investing in large U.S. stocks, the reinvestment of dividends and capital gains generates ______.
compound interest
The annual percentage rate is the annual interest rate without consideration of ______.
compounding
The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.
compounding
The idea behind ______ is that interest is earned on interest.
compounding
The limiting case of compounding periods is ___ compounding.
continuous
The officer responsible for corporate tax reporting is the Blank______. treasurer chief operating officer ombudsman controller
controller
Which of the following positions generally report to the chief financial officer (CFO)? controller treasurer director of marketing chief executive officer (CEO)
controller treasurer
Which of the following business forms is easiest to transfer ownership stakes in? sole proprietorship corporation partnership
corporation
The main job of a financial manager is to ______.
create value for shareholders
The purpose of a firm is to ______. maximize its expenses in current assets create value for the creditors create value for the owner decrease its shareholders' value
create value for the owner
The cash flow identity states that cash flow from assets equals cash flows to ______.
creditors and stockholders
If interest rates go up, the present value of a perpetuity will _____.
decrease
The principal balance ______ over time of a fixed payment loan.
decreases
Net capital spending is equal to the change in net fixed assets plus ______.
depreciation
Which of the following do not directly affect cash flow? cash sales depreciation wages interest payments
depreciation
The actual economic value of an asset varies ______ the asset's future cash flows.
directly with
The acronym EBIT stands for ______.
earnings before interest and taxes
A corporation's earnings divided by number of outstanding shares of a firm's common stock is called ______.
earnings per share
Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.
effective
How frequently does continuous compounding occur?
every infinitesimal instant
If a company buys back $100 worth of stock, this increases the cash flow to the stockholders by ______.
exactly $100
The matching principle of GAAP requires revenues be matched with ______.
expenses
Noncash items are ______ that ______ cash flow.
expenses; do not directly affect
Changes in notes payables are included in the ______ section of the accounting statement of cash flows.
financing
The activity of making net payments to creditors and owners (excluding interest) is called a(n) ______ activity in the accounting statement of cash flows.
financing
Which of the following are included in a firm's inventory?
finished goods work in progress raw materials to be used in production
A growing annuity has a(n) ______.
finite number of growing cash flows
Selling a firm's plant and equipment results in a change in ______.
fixed assets
Which one of the following is shown on the left-hand side of the balance sheet?
fixed assets
Which type of amortization is most commonly used in the real world for mortgages and car loans?
fixed payment
Which of the following payment methods amortizes a loan?
fixed payments that result in a zero loan balance interest plus fixed amount
The present value of a growing perpetuity requires the interest rate to be ______ the growth rate.
greater than
When would individuals prefer to receive cash flows? in equal payments over a long period of time later rather than sooner the timing of cash flows does not matter to individuals sooner rather than later
sooner rather than later Reason: Cash flows received sooner are more valuable than the same cash flow received later.
A ___ is someone other than an owner or a creditor who potentially has a claim on the cash flows of a firm.
stakeholder
An official accounting statement that helps to explain the change in cash and cash equivalents is called the ______.
statement of cash flows
Cash flow from operations is calculated by adding depreciation to EBIT and ______ current taxes.
subtracting
If a firm defaults on its bond contracts, bondholders can do which of the following to get their money back? recover their losses from the federal government appeal to their state or provincial government for reimbursement automatically assume ownership of the firm sue the firm in court
sue the firm in court
Operating cash flow reflects which one of these?
tax payments
Income from a partnership is ______. taxed as personal income to the partners not taxed at all taxed as dividend income to the partners taxed as corporate income
taxed as personal income to the partners
Which of these are used to calculate the present value of multiple cash flows in Excel?
the NPV function the PV function
Balloon payments on partial amortization loans are typically quite large because _____.
the loan balance declines slowly
On which side of the balance sheet do liabilities appear?
the right side
What is the difference in the future value of $100 at 7 percent interest for 5 years if the interest is compounded semiannually rather than annually?
$0.80 Reason: ($100 × 1.035^10) − ($100 × 1.07^5) = $0.80.
Suppose you expect to receive $600 at the end of 1 year and $700 at the end of 2 years. What is the present value of these cash flows if the interest rate is 10 percent compounded annually?
$1,123.97 Reason: PV = $600/1.101 + $700/1.102 = $1,123.97.
A firm has cash flows of $100 at the end of years 1-4. What is the net present value of an investment in this firm if we pay $300 to purchase the firm and the discount rate is 10 percent?
$16.99 Reason: $100 × [(1 − (1/1.10)4))/0.10] − $300 = $16.99.
What is the present value of an ordinary annuity that pays $100 per year for 3 years if the interest rate is 10 percent per year?
$248.69 Reason: $100{[1 − (1/(1.10)3)]/0.10}
What is the present value of $100 each year for 20 years at 10 percent per year?
$851.36 Reason: $100{[1 − (1/(1.10)^20)]/0.10} = $851.36.
The purchase of unneeded artwork for an executives office is an example of what type of agency cost?
direct
Some of the cash flow generated by a firm goes back to the financial markets in the form of ______. Multiple choice question. taxes and other payments to the government reinvested cash flows products and services dividends and debt payments
dividends and debt payments
Value is created if the cash paid to shareholders and bondholders is ______ the cash raised in financial markets. equal to less than greater than
greater than
A sole proprietorship is a business owned by Blank______ person(s). four or more two one three
one Reason: A sole proprietorship is a business owned by one person.
A business without separate legal authority formed by two or more people is known as a ______. corporation conglomerate sole proprietorship partnership
partnership
How is ownership transferred in a corporation? Ownership is transferred by gifting or selling shares of stock. Ownership can be transferred only if the firm is sold. Ownership in a corporation cannot be transferred. Ownership is transferred only with prior approval from the board of directors.
Ownership is transferred by gifting or selling shares of stock.
Assuming interest rates are positive and are greater than the inflation rate, one dollar received today is worth ______ one dollar received next year. either more than or less than (but which is uncertain) the same as less than more than
more than
True or false: Discounting is the opposite of compounding.
True
True or false: More money can be earned with compound interest than with simple interest.
True
True or false: Accounting profit does not adequately account for cash flow.
True Reason: Accounting profit records sales made and expenses incurred but not the timing of cash receipts and expenditures.
Which of the following would lower the present value of a future amount? a longer period of time a higher interest rate a higher level of risk a shorter time period
a longer period of time a higher interest rate a higher level of risk
The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.
agency
The relationship between stockholders and management can best be described as a(n) ______ relationship.
agency
A bad financial decision is defined as a decision that ______ owners' equity.
decreases
Discounting is the process of converting ______ dollars into ______ value.
future; present
You invest $100 today. With positive interest rates, the concept of future value implies that the future value of your $100 will be ______ $100.
greater than Reason: If interest rates are positive, $100 given to you today will be worth more than $100 in the future (for example, if the interest rate is 5%, your $100 will be worth $100 x (1 + 0.05)1 = $105 in 1 year).
The 1934 Securities Exchange Act deals with the important issue of ______ trading.
insider
A sole proprietorship is a business that ______. is owned by one person is organized with bylaws provides limited personal liability to its owner is similar to a limited partnership
is owned by one person
The life of a corporation ______. ends when all of the original shareholders are deceased is limited to 65 years ends when a founding shareholder wants to sell his shares is unlimited
is unlimited
A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons. legal illegal patriotic retributive
legal
A dollar tomorrow is worth ______ a dollar today.
less than
Which one of these is a correct version of the balance sheet equation?
Assets = Liabilities + Stockholders' equity
Long-term liabilities represent obligations of the firm lasting over ______.
1 year
From highest to lowest, rank the following compounding periods effective annual rates:
1. continuous 2. weekly 3. semiannually 4. annually
What is the order of payments received of the following parties, from first to last. Assume all parties have a legitimate claim on the firm's assets.
1. employees 2. bondholders 3. stockholders
If the cash flows of an annuity start at the end of year 4, the present value of an annuity formula will discount all of the annuity cash flows back to the end of year
3
If the cash flows of an annuity start at the end of year 6 (date 6), the present value of an annuity formula will discount all of the annuity cash flows back to the end of year ______.
5 Reason: If the cash flows of an annuity start at the end of year 6 (date 6), the present value of an annuity formula will discount all of the annuity cash flows back to the end of year 5. The annuity value is as of the period before the payments begin.
Which of the following spreadsheet (Excel) functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year?
= PV(0.10, 10, −100, 0, 0)
Which of the following Excel functions can be used to compute the present value of multiple cash flows?
=NPV
In Excel, which of the following formulas is used to compute the payment of an amortized loan?
=PMT
What are the implications of the time value of money concept? A dollar has the same value no matter which day it is. A dollar tomorrow is worth less than a dollar today. A dollar today is worth less than a dollar tomorrow. A dollar today is worth more than a dollar tomorrow.
A dollar tomorrow is worth less than a dollar today. A dollar today is worth more than a dollar tomorrow.
______ frequent compounding leads to a ______ EAR, all else equal.
More; higher Less; lower
______ income is earnings after interest and taxes.
Net
Which of the following is true about a partial amortization loan?
The amortization period is longer than the loan period. The borrower makes a large balloon payment at the end of the loan period. The monthly payments do not fully pay off the loan by the end of the loan period.
Which of the following are true about the amortization of a fixed payment loan?
The amount of interest paid decreases each period. The principal amount paid increases each period.
Which of the following is true about a growing annuity?
The cash flows grow for a finite period.
What is the primary purpose of awarding stock options to managers? to decrease managers' wealth so they will no longer have the incentive to increase shareholders' wealth to increase bondholders' wealth to give managers the incentive to pursue shareholders' goals, such as increasing shareholder value to satisfy the requirements of the SEC.
to give managers the incentive to pursue shareholders' goals, such as increasing shareholder value
What is the purpose of the income statement?
to measure performance over a set period of time
Free cash flow is better described as ______.
total distributable cash flow
In a growing perpetuity model, if the growth rate is larger than the interest rate, then the present value will be
undefined
The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $100, and the third cash flow at the end of year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.
uneven Reason: The cash flows for an annuity must happen at regular intervals. These do not (week, month, year).
The EAR is meaningful for comparisons ______.
without a compounding interval
______ is the process of converting future dollars into a current value.
Discounting
A general partnership has which of the following characteristics? Each owner has unlimited liability for all firm debts. It is expensive to form. Each partner shares profits and losses. Large amounts of cash can be raised easily.
Each owner has unlimited liability for all firm debts. Each partner shares profits and losses.
True or false: Limited partners manage the day to day operations of a business.
False
True or false: Shareholders are the ONLY stakeholder in a firm as they are the owners.
False
What determines when a sale is recorded for accounting purposes? The international monetary fund doctrine Robert's rules of order The last-in-first-out principle Generally accepted accounting principles
Generally accepted accounting principles
Which of the following is true concerning government regulation? Regulation can help reduce conflicts of interest between managers and shareholders. Regulation generally imposes costs without any benefits. Regulation can help ensure firms disclose relevant information to investors. Regulation can be costly to a firm.
Regulation can help reduce conflicts of interest between managers and shareholders. Regulation can help ensure firms disclose relevant information to investors. Regulation can be costly to a firm.
A firm's balance sheet shows a snapshot of its finances Blank______. over the given period for all times past and present for the year at a point in time
at a point in time Reason: The balance sheet incorporates all activities of the firm during its life. At any point in time, a person can view its financial standing by looking at the balance sheet.
Which of the following shows a snapshot of a firm's finances at a given point in time? balance sheet analyst forecast stock price
balance sheet
Which term applies to the mixture of debt and equity maintained by a firm? capital structure net working capital cash management capital budget
capital structure
The primary purpose of issuing debt or equity shares is to raise ______ for the firm. dividends cash awareness taxes
cash Reason: Firms issue debt and equity securities to raise cash.
What are the two basic classifications under which most potential financial goals fall?
earning or increasing profits controlling risk
A good financial decision will do which of the following? increase the value of the firm's existing stock increase current dividends per share increase the market value of shareholders' equity increase the cost of capital
increase the value of the firm's existing stock increase the market value of shareholders' equity Reason: A good financial decision will increase the market value of shareholders' equity and the value of the firm's shares.
Which of the following are features of a partnership? inexpensive and easy to form general partners have unlimited liability for all debts cumulative dividend payment policy difficult to raise large amounts of cash
inexpensive and easy to form general partners have unlimited liability for all debts difficult to raise large amounts of cash
In a limited partnership, a limited partner's liability for business debts is ______. limited to their cash contribution to the partnership limited by their average annual income over the life of the partnership $0 unlimited
limited to their cash contribution to the partnership
Capital budgeting is concerned with making and managing expenditures on ______. long-term liabilities long-term assets current assets current liabilities
long-term assets Reason: Managing expenditures on long-term assets is known as capital budgeting.
Which of the following are included in a firm's capital structure? net sales long-term debt current assets equity
long-term debt equity Reason: The mix of debt and equity is referred to as a firm's capital structure.
If reinvestment of interest or dividends does not occur, then the future value of an investment will be ______ and the realized yield will be ______ than if reinvestment had occurred.
lower; lower
When a corporation is formed, it is granted which of the following rights? provincial citizenship for jurisdictional purposes legal powers to sue corporate life of up to 100 years the ability to issue stock
provincial citizenship for jurisdictional purposes legal powers to sue the ability to issue stock
Which of the following are owners of a corporation? shareholders bondholders directors partners
shareholders
Which one of the following parties would be the last party to receive payment if a firm were to close? Assume all parties have a legitimate claim on the firm's assets. government chief executive officer shareholders bondholders
shareholders
A _____ is someone other than an owner or a creditor who potentially has a claim on the cash flows of a firm.
stakeholder
Which one of these motivates managers to make good decisions? complacent shareholders threat of a hostile takeover complacent board of directors lack of stock options
threat of a hostile takeover
What is the main goal of financial management?
to maximize current share value
Present value represents what an amount of money promised or expected in the future is worth ______.
today
One of the most basic principles of finance is that rational individuals prefer to receive a dollar ______ than a dollar ______.
today; tomorrow
Shareholders' equity is the difference between which of the following? total assets and total debt current assets and current liabilities total assets and long-term debt fixed assets and long-term debt
total assets and total debt Reason: Shareholders' equity = Total assets - Total debt
A partnership must have at least ______ owners. ten four three two
two
Semiannual compounding means that interest is paid ______ per year.
two times
A sole proprietor has ______ personal liability for all business debts and obligations. limited no unlimited little
unlimited
If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ______.
$121.00 Reason: FV = $100 × 1.10 2 = $121. --> FV = PV x (1 + r)^t
Suppose you expect to receive $80 at the end of Year 1, $90 at the end of Year 2, $100 at the end of Year 3, and $110 at the end of Year 4. What is the present value of these cash flows if the interest rate is 7 percent compounded annually?
$318.92 PVF = 1 / (1 + r)^t PV = cash flow x PVF Year 1: cash flow = $80; PVF = 0.935; PV = 74.77 Year 2: cash flow = $90; PVF = 0.873; PV = 78.61 Year 3: cash flow = $100; PVF = 0.816; PV = 81.63 Year 4: cash flow = $110; PVF = 0.763; PV = 83.92 Total PV = $318.92
If the future value is $500 in 1 year and the interest rate is 12 percent per year, what is the present value?
$446.43 Reason: $500/1.12 = $446.43.
If a shareholder purchases $5,000 of Coca-Cola stock, what is the maximum amount they could lose? $0 unlimited amount $1,000 $5,000
$5,000
You invest $500 at 10 percent interest per annum. At the end of 2 years with simple interest, you will have ______ and with compound interest, you will have ______.
$600; $605 Reason: Simple interest = 500(0.10)=$50 per year. Times two years = $100 total. Adding the original principal yields $600. With compound interest, the total is $500(1.10)2 = $605. The FV will always be higher with compound interest.
If the future value is $750 in 1 year and the interest rate is 15 percent, what is the present value?
$652.17 Reason: $750/1.15 = $652.17. --> PV = FV / (1 + r)
Which of the following are true of a sole proprietorship? A sole proprietor can issue stock to raise capital. A proprietorship has a limited life. It is one of the simplest types of businesses to form. It is not difficult to transfer ownership.
A proprietorship has a limited life. Reason: A sole proprietorship is limited to the life of the proprietor. It is one of the simplest types of businesses to form. Reason: A sole proprietorship is simple to form. It requires no formal charter and few government regulations must be satisfied in most industries.
What happens when a firm creates value? Shareholder wealth increases. Total expenses decrease. Shareholder wealth decreases. Shareholder wealth remains unchanged.
Shareholder wealth increases. Reason: Shareholder wealth increases when a firm creates value.
Which of the following statements are true about shareholders' equity? Shareholders' equity is a residual claim on a firm's assets. Shareholders' equity represents the claim on a firm's assets by the firm's creditors. Shareholders' equity is the difference between the value of a firm's assets and its debt. Shareholders' equity is the difference between the value of a firm's debt and its current assets.
Shareholders' equity is a residual claim on a firm's assets. Reason: Shareholders' equity = Total assets - Total debt Shareholders' equity is the difference between the value of a firm's assets and its debt. Reason: Shareholders have a residual claim on the firm's assets.
______ are frequently used to encourage key managers to maximize the value of the firm's stock.
Stock options
The cash flows paid into a corporation by its bondholders and stockholders should be ______ the cash flows paid out to bondholders and stockholders. less than equal to greater than unrelated to
less than Reason: The cash flows paid into a corporation by its bondholders and stockholders should be less than the cash flows paid out to bondholders and stockholders. This is why investors buy stock and bonds.
Businesses are motivated to organize as corporations because stockholders in a corporation have Blank______ liability for corporate debts. no limited unlimited personal
limited
Businesses are motivated to organize as corporations because stockholders in a corporation have ______ liability for corporate debts.
limited Reason: Unlike partners and sole proprietors, stockholders' liability is limited to their investment in the company.
Which of the following are reasons why businesses organize as corporations? limited liability federal tax treatment ease of ownership transfer perpetual succession
limited liability ease of ownership transfer perpetual succession
The threat of a hostile takeover motivates managers to ______.
make good decisions
Since ______ and ownership are separated, a corporation's life is unlimited. taxation management debt profitability
management
In a shareholder-manager relationship, who is the agent?
managers Reason: Shareholders are the principals and managers are the agents.
The goal of financial management is to (maximize/minimize) shareholder wealth.
maximize
The concept of future value implies that a dollar today is worth ______ a dollar in the future, assuming positive interest rates.
more than
Indirect agency costs are often due to lost ______.
opportunities
Which of the following groups are considered as owners of a company? customers stockholder suppliers government
stockholder
Agency costs refer to the costs of the conflict of interest between ___ and ___.
stockholders, management
The controller is responsible for which of the following tasks? tax reporting and payments financial accounting raising capital capital expenditures
tax reporting and payments financial accounting
A shareholder's liability is limited to which of these? the corporation's current liabilities the amount the shareholder invested in the corporation the corporation's outstanding long-term debt The percentage of corporate debt that equals the shareholder's ownership percentage
the amount the shareholder invested in the corporation
