FIN CH5, Finance Ch1,5,6,7,8,9,10 non-math ?s, Finance Test 1, Business Finance Exam 1, Corporate Finance CH 2.
This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in forty years. Which one of the following statements is correct?
The present value of this investment is equal to $1,000.
Which one of the following statements concerning net working capital is correct?
A decrease in the cash balance may or may not decrease net working capital.
As of 2012, which one of the following statements concerning corporate income taxes is correct?
A firm's tax is computed on an incremental basis.
annuity
A level stream of cash flows for a fixed period time
Protective Covenant
A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender's interest
Which one of the following statements related to the cash flow to creditors is correct?
A positive cash flow to creditors represents a net cash outflow from the firm.
Which one of the following is an underlying assumption of the dividend growth model?
A stock's value is equal to the discounted present value of the future cash flows which it generates.
Consol
A type of perpetuity
Net Income =
Dividends + Retained Earnings
Cash Flow to Stockholders =
Dividends - New Net Equity Raised
Cash Flow to Stockholders also =
Dividends Paid - New Net Equity Raised
Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?
net present value
Which one of these is most apt to be a fixed cost?
office salaries
Which term relates to the cash flow which results from a firm's ongoing, normal business activities?
operating cash flow
The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?
opportunity cost
The length of time a firm must wait to recoup the money it has invested in a project is called the:
payback period
Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following?
present value
annuity due
An annuity for which the cash flows occur at the beginning of the period
Perpetuity
An annuity in which the cash flows continue forever
Note
An unsecured deb, usually with a maturity under 10 years
Debenture
An unsecured debt, usually with a maturity of 10 years or more
You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the following statements is correct concerning these two annuities?
Annuity B has a smaller present value than annuity A.
You invested $1,650 in an account that pays 5 percent simple interest. How much more could you have earned over a 20-year period if the interest had compounded annually?
$1,077.94 Simple interest = $1,650 + ($1,650 x .05 x 20) = $3,300 Annual compounding = $1,650 x (1.05)^20 = $4,377.94 Difference = $4,377.94 - $3,300 = $1,077.94 CALCULATOR: Enter [20 for N, 5 for I/Y, -1650 for PV, CPT FV --> 4377.94]
Theo needs $40,000 as a down payment for a house 6 years from now. He earns 3.5 percent on his savings. Theo can either deposit one lump sum today for this purpose or he can wait a year and deposit a lump sum. How much additional money must he deposit if he waits for one year rather than making the deposit today?
$1,138.90 Present value = $40,000 x [1/(1 + .035)^6] = $32,540.03 Present value = $26,000 x [1/(1 + .035)^5] = $33,678.93 Difference = $33,678.93 - $32,540.03 = $1,138.90 CALCULATOR Enter N: 6, I/Y:3.5, FV: 40,000, CPT PV --> -32,540.03 Enter N: 5, I/Y: 3.5, FV: 40,000, CPT PV --> -33,678.93
You are depositing $1,500 in a retirement account today and expect to earn an average return of 7.5 percent on this money. How much additional income will you earn if you leave the money invested for 45 years instead of just 40 years?
$11,790.90 Future value = $1,500 x (1 + .075)^45 = $38,857.26 Future value = $1,500 x (1 + .075)^40 = $27,066.36 Difference = $38,857.26 - $27,066.36 = $11,790.90 CALCULATOR: Enter N: 45, I/Y: 7.5, PV: -1500, CPT FV --> 38,857.26 Enter N: 40, I/Y: 7.5, PV: -1500, CPT FV --> 27,066.36
Which one of the following is a use of cash?
Decrease in accounts payable.
Dividends =
Net Income - (Ending Shareholder's Equity - Beginning Shareholder's Equity)
Which form of business structure is most associated with agency problems?
corporation
Which one of the following is an unintended result of the Sarbanes-Oxley Act?
corporations delisting from major exchanges
You just received $225,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 25 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 10.5 percent rather than just 8 percent?
$1,189,576 Future value = $225,000 x (1 + .105)^25 = $2,730,483 Future value = $225,000 x (1 + .08)^25 = $1,540,907 Difference = $2,730,483 - $1,540,907 = $1,189,576 CALCULATOR: Enter N: 25, I/Y 10.5, PV: -225,000, CPT FV --> 2,730,483 Enter N: 25, I/Y: 8, PV: -225,000, CPT FV --> 1,540,907
Which one of the following is an example of a sunk cost?
$1,200 paid to repair a machine last year
Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes?
$1,269.46
At 6 percent interest, how long would it take to quadruple your money?
23.79 years
Cash Flow =
Net Source - Net Use
Which one of the following statements is correct?
The capital gains yield is the annual rate of change in a stock's price.
Which one of the following accounts is the most liquid?
accounts receivable
Which one of the following relationships is stated correctly?
Decreasing the time to maturity increases the price of a discount bond, all else constant.
The book value of a firm is:
based on historical cost.
Which one of the following is a capital structure decision?
Determining how much debt should be assumed to fund a project.
A company that utilizes the MACRS system of depreciation will have a greater:
tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life.
Which one of the following best describes the concept of erosion?
the cash flows of a new project that come at the expense of a firm's existing cash flows
If a project has a net present value equal to zero, then:
the project earns a return exactly equal to the discount rate.
Which one of the following variables is the exponent in the present value formula?
time
Which one of the following is classified as an intangible fixed asset?
trademark
Which one of the following accurately defines a perpetuity?
unending equal payments paid at equal time intervals
Which of the following are advantages of the payback method of project analysis? I. works well for research and development projects II. liquidity bias III. ease of use
works well for research and development projects AND ease of use
Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?
yield to maturity
You collect old coins. Today, you have two coins each of which is valued at $250. One coin is expected to increase in value by 6 percent annually while the other coin is expected to increase in value by 4.5 percent annually. What will be the difference in the value of the two coins 15 years from now?
$115.32 Future value = $250 x (1 + .06)^15 = $599.14 Future value = $250 x (1 + .045)^15 = $483.82 Difference = $599.14 - $483.82 = $115.32 CALCULATOR: Enter N: 15, I/Y: 6, PV: -250, CPT FV --> 599.14 Enter N: 15, I/Y: 4.5, PV: -250, CPT FV --> 483.82
Alex invested $10,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years?
$13,020 Ending value = $10,500 + ($10,500 .06 4) = $13,020
Your father invested a lump sum 33 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest?
$13,035.72
Your father invested a lump sum 26 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest?
$17,444.86 Present value = $51,480.79 x [1/(1 + .0425)^26] = $17,444.86 CALCULATOR: Enter N: 26, I/Y: 4.25, FV: 51,480.79, CPT PV --> -17,444.86
A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?
$18,700
You would like to give your daughter $75,000 towards her college education 17 years from now. How much money must you set aside today for this purpose if you can earn 8 percent on your investments?
$20,270.17 Present value = $75,000 x [1/(1 + .08)^17] = $20,270.17 CALCULATOR Enter N: 17, I/Y: 8, FV: 75,000, CPT PV --> -20,270.17
The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What is the amount of the cash flow to stockholders?
$20,680
You own a classic automobile that is currently valued at $147,900. If the value increases by 6.5 percent annually, how much will the automobile be worth ten years from now?
$277,628.63 Future value = $147,900 x (1 + .065)^10 = $277,628.63 CALCULATOR: Enter N: 10, I/Y: 6.5, PV: -147,900, CPT FV --> 277,628.63
Today, you earn a salary of $36,000. What will be your annual salary twelve years from now if you earn annual raises of 3.6 percent?
$55,032.54 Future value = $36,000 x (1 + .036)^12 = $55,032.54 CALCULATOR: Enter N: 12, I/Y: 3.6, PV: -36,000, CPT FV --> 55,032.54
When you retire 40 years from now, you want to have $1.2 million. You think you can earn an average of 12 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 2 years from today. How much more will you have to deposit as a lump sum if you wait for 2 years before making the deposit?
$3,280.78 Present value = $1,200,000 x [1/(1 + .12)^40] = $12,896.16 Present value = $1,200,000 x [1/(1 + .12)^38] = $16,176.94 Difference = $16,176.94 - $12,896.16 = $3,280.78 CALCULATOR Enter N: 40, I/Y: 12, FV: 1,200,000, CPT PV --> -12896.16 Enter N: 38, I/Y: 12, FV: 1200000, CPT PV --> -16,176.94
This morning, TL Trucking invested $80,000 to help fund a company expansion project planned for 4 years from now. How much additional money will the firm have 4 years from now if it can earn 5 percent rather than 4 percent on its savings?
$3,651.82 Future value = $80,000 x (1 + .05)^4 = $97,240.50 Future value = $80,000 x (1 + .04)^4 = $93,588.68 Difference = $97,240.50 - $93,588.68 = $3,651.82 CALCULATOR: Enter N: 4, I/Y: 5, PV: -80,000, CPT FV --> 97,240.50 Enter N: 4, I/Y: 4, PV: -80,000 CPT FV --> 93,588.68 Find difference.
Your older sister deposited $5,000 today at 8.5 percent interest for 5 years. You would like to have just as much money at the end of the next 5 years as your sister will have. However, you can only earn 7 percent interest. How much more money must you deposit today than your sister did if you are to have the same amount at the end of the 5 years?
$360.43 Future value = $5,000 x (1 + .085)^5 = $7,518.28 Present value = $7,518.28 x [1/(1 + .07)^5] = $5,360.43 Difference = $5,360.43 - $5,000 = $360.43 CALCULATOR Enter N: 5, I/Y: 8.5, PV: -5000, CPT FV --> 7518.28 Enter N: 5, I/Y: 7, FV: 7518.28, CPT PV --> -5,360.43
What is the future value of $11,600 invested for 17 years at 7.25 percent compounded annually?
$38,125.20
You just received a $5,000 gift from your grandmother. You have decided to save this money so that you can gift it to your grandchildren 50 years from now. How much additional money will you have to gift to your grandchildren if you can earn an average of 7.5 percent instead of just 7 percent on your savings?
$38,663.60
What is the future value of $7,189 invested for 23 years at 9.25 percent compounded annually?
$54,999.88 Future value = $7,189 x (1 + .0925)^23 = $54,999.88 CALCULATOR: Enter [23 for N, 9.25 for I/Y, -7,189 for PV, CPT FV --> 54,999.88]
A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390, and fixed assets are $3,910. What is the amount of the total liabilities?.
$6,890
You just received a $5,000 gift from your grandmother. You have decided to save this money so that you can gift it to your grandchildren 50 years from now. How much additional money will you have to gift to your grandchildren if you can earn an average of 8.5 percent instead of just 8 percent on your savings?
$60,923.52 Future value = $5,000 x (1 + .085)^50 = $295,431.58 Future value = $5,000 x (1 + .08^)50 = $234,508.06 Difference = $295,431.58 - $234,508.06 = $60,923.52 CALCULATOR: Enter N: 50, I/Y: 8.5, PV: -5,000, CPT FV --> 295,431.58 Enter N: 50, I/Y: 8, PV: -5,000, CPT FV --> 234,508.06
What is the present value of $150,000 to be received 8 years from today if the discount rate is 11 percent?
$65,088.97 Present value = $150,000 x [1/1 + .11)^8] = $65,088.97 CALCULATOR Enter N:8, I.Y: 11, FV: 150,000, CPT PV --> -65,088.97
A firm's balance sheet showed beginning net fixed assets of $3.6 million, and ending net fixed assets of $3.4 million. The depreciation expense is $900,000. What was the net capital spending for the year?
$700,000
A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. What is the amount of the net working capital?
$720
You want to have $35,000 saved 6 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 5.5 percent rather than 5 percent on your savings? Today's deposit is the only deposit you will make to this savings account.
$733.94 Present value = $35,000 x [1/(1 + .05)^6] = $26,117.54 Present value = $35,000 x [1/(1 + .055)^6] = $25,383.60 Difference = $26,117.54 - $25,383.60 = $733.94 CALCULATOR Enter N:6, I/Y: 5, FV: 35,000, CPT PV --> -26,117.54 Enter N: 6, I/Y: 5.5, FV: 35,000, CPT PV --> -25,383.60
Travis invested $9,250 in an account that pays 6 percent simple interest. How much more could he have earned over a 7-year period if the interest had compounded annually?
$773.58 Simple interest = $9,250 + ($9,250 x .06 x 7) = $13,135 Compound interest = $9,250 x (1 + .06)^7 = $13,908.58 Difference = $13,908.58 - $13,135 = $773.5 CALCULATOR: Enter [7 for N, 6 for I/Y, -9250 for PV, CPT FV-->13,908.58]
A year ago, you deposited $30,000 into a retirement savings account at a fixed rate of 5.5 percent. Today, you could earn a fixed rate of 6.5 percent on a similar type account. However, your rate is fixed and cannot be adjusted. How much less could you have deposited last year if you could have earned a fixed rate of 6.5 percent and still have the same amount as you currently will when you retire 38 years from today?
$9,234.97 less Future value = $30,000 x (1 + .055)^38+1 = $242,084.61 Present value = $242,084.61 x [1/(1 + .065)^38+1] = $20,765.03 Difference = $30,000 - $20,765.03 = $9,234.97 CALCULATOR Enter N: 39, I/Y: 5.5, PV: -30,000, CPT FV --> 242,084.61 Enter N: 39, I/Y: 6.5, FV: 242,084.61, CPT PV --> -20,765.03
Gerold invested $6,200 in an account that pays 5 percent simple interest. How much money will he have at the end of ten years?
$9,300 Ending value = $6,200 + ($6,200 .05 10) = $9,300
You own a classic car that is currently valued at $64,000. If the value increases by 2.5 percent annually, how much will the car be worth 15 years from now?
$92,691.08
You hope to buy your dream car four years from now. Today, that car costs $82,500. You expect the price to increase by an average of 4.8 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it?
$99,517.41 Future value = $82,500 x (1 + .048)^4 = $99,517.41 CALCULATOR: Enter N: 4, I.Y: 4.8, PV: -82,000, CPT FV --> 99,517.41
Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year?
$990
The Daily News had net income of $121,600 of which 40 percent was distributed to the shareholders as dividends. During the year, the company sold $75,000 worth of common stock. What is the cash flow to stockholders?
-$26,360
Why is payback often used as the sole method of analyzing a proposed small project?
. It is the only method where the benefits of the analysis outweigh the costs of that analysis
Which one of the following increases the net present value of a project?
. an increase in the aftertax salvage value of the fixed assets
Changes in the net working capital requirements:
. can affect the cash flows of a project every year of the project's life.
A firm has a debt-equity ratio of .57. What is the total debt ratio?
.36
If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?
.5
Duke's Garage has cash of $68, accounts receivable of $142, accounts payable of $235, and inventory of $318. What is the value of the quick ratio?
.89
Taylor's Men's Wear has a debt-equity ratio of 56 percent, sales of $829,000, net income of $38,300, and total debt of $206,300. What is the return on equity?
10.40 percent
Forty years ago, your mother invested $5,000. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment?
11.78 percent $430,065.11 = $5,000 (1 + r)40; r = 11.78 percent CALCULATOR Enter N: 40, PV: -5000, FV: 430,065.11, CPT I/Y -->11.78
Current Yield
A bond's annual coupon divided by its price
Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land is valued at $214,800. How long has she owned this land if the price of the land has been increasing at 10.5 percent per year?
17.64 years $214,800 = $36,900 x (1 + .105)^t; t = 17.64 years CALCULATOR Enter I/Y: 10.5, PV: -36900, FV: 214,800, CPT N --> 17.64
Which one of the following bonds is the least sensitive to interest rate risk?
3-year; 6 percent coupon
Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200 in interest and $18,000 in dividends. It also increased retained earnings by $62,138 for the year. The depreciation was $76,400. What is the average tax rate?
32.83 percent
Which one of the following will produce the highest present value interest factor?
6 percent interest for five years
Fifteen years ago, Jackson Supply set aside $130,000 in case of a financial emergency. Today, that account has increased in value to $330,592. What rate of interest is the firm earning on this money?
6.42 percent $330,592 = $130,000 x (1 + r)^15; r = 6.42 percent CALCULATOR Enter N: 15, PV: -130,000, FV: 330,592, CPT I/Y --> 6.42
One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn?
6.92 percent $1,924.62 = $1,800 x (1 + r)^1; r = 6.92 percent CALCULATOR Enter N: 1, PV: -1800, FV: 1,924.64, CPT I/Y --> 6.92
TJ's has annual sales of $813,200, total debt of $176,000, total equity of $395,000, and a profit margin of 5.63 percent. What is the return on assets?
8.02 percent
Deferred Call Provision
A call provision prohibiting the company from redeeming a bond prior to a certain date
Penn Station is saving money to build a new loading platform. Two years ago, they set aside $24,000 for this purpose. Today, that account is worth $28,399. What rate of interest is Penn Station earning on this investment?
8.78 percent $28,399 = $24,000 (1 + r)2; r = 8.78 percent CALCULATOR Enter N: 2, PV: -24000, FV: 28399, CPT I/Y --> 8.78
Fourteen years ago, your parents set aside $7,500 to help fund your college education. Today, that fund is valued at $26,180. What rate of interest is being earned on this account?
9.34 percent $26,180 = $7,500 x (1 + r)^14; r = 9.34 percent CALCULATOR Enter N: 14, PV: -7500, FV: 26180, CPT I/Y --> 9.34
Some time ago, Tracie purchased 11 acres of land costing $77,900. Today, that land is valued at $54,800. How long has she owned this land if the price of the land has been decreasing by 3.5 percent per year?
9.87 years
Call-Protected Bond
A bond that during a certain period, cannot be redeemed by the issuer
Zero Coupon Bond
A bond that makes no coupon payments and thus initially priced at a deep discount
Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002? I. increased foreign stock exchange listings of U.S. stocks II. decreased compliance costs III. increased privatization of public corporations IV. increased public disclosure by all corporations
A. I and III only I. increased foreign stock exchange listings of U.S. stocks II. decreased compliance costs
Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications?
ACRS
How might agency problems arise in partnerships?
Agency conflicts typically arise when there is a separation between the ownership and the management of a business. In a general partnership, especially if the partnership is small, there is less of a chance of an agency conflict if all the partners are involved with the business on a regular basis. However, in a limited partnership, the opportunity exists for an agency problem to arise between the general and the limited partners.
Sinking Fund
An account managed by the bond trustee for early bond redemption
Call provision
An agreement giving the corporation the option to repurchase a bond at specified price prior to maturity
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?
Balance sheet.
Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?
Barb will earn interest on interest
Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?
Barb will earn interest on interest.
Why should financial managers strive to maximize the current value per share of the existing stock?
Because they have been hired to represent the interests of the current shareholders.
Discount
Calculate the present value of some future amount
Discounted Cash Flow (DCF) Valuation
Calculating the present value of a future cash flow to determine its value today
Free Cash Flow is also Called
Cash Flow from Assets
Cash Flow from Assets also =
Cash Flow to Creditors - Cash Flow to Stock Holders
The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the:
Cash flow from assets.
Which one of the following statements is correct?
Corporations can raise large amounts of capital generally easier than partnerships can.
Which one of the following is true according to Generally Accepted Accounting Principles?
Costs of goods sold are recorded based on the matching principle.
Net Working Capital =
Current Assets - Current Liabilities
Which one of the following represents the most liquid asset? A. $100 account receivable that is discounted and collected for $96 today B. $100 of inventory which is sold today on credit for $103 C. $100 of inventory which is discounted and sold for $97 cash today D. $100 of inventory that is sold today for $100 cash E. $100 accounts receivable that will be collected in full next week
D
An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.
Decrease in the quick ratio.
Operating Cash Flow =
EBIT+ Depreciation - Taxes
Net Borrowing =
Ending Long-Term Debt - Beginning Long-Term Debt
Capital Spending =
Ending Net Fixed Assets - Beginning Net Fixed Assets + Depreciation
Change in Retained Earnings (With no sale of stock) =
Ending Shareholder's Equity - Beginning Shareholder's Equity
Which one of the following accurately describes the three parts of the DuPont identity?
Equity multiplier, profit margin, and total asset turnover.
Which one of the following statements is correct concerning the two-stage dividend growth model?
G1 can be greater than R.
The common set of standards and procedures by which audited financial statements are prepared is known as the:
Generally Accepted Accounting Principles.
Which of the following are included in current liabilities? I. note payable to a supplier in eight months II. amount due from a customer next month III. account payable to a supplier that is due next week IV. loan payable to the bank in fourteen months
I and III only
Which of the following parties are considered stakeholders of a firm? I. employee II. long-term creditor III. government IV. common stockholder
I and III only
You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I. Invest in a different account paying a higher rate of interest. II. Invest in a different account paying a lower rate of interest. III. Retire later. IV. Retire sooner.
I and III only
All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero? I. purchase of $1,400 of parts inventory needed to support the project II. loan of $125,000 used to finance the project III. depreciation tax shield of $1,100 IV. $6,500 of equipment needed to commence the project
I and IV only
Which of the following are expenses for accounting purposes but are not operating cash flows for financial purposes? I. interest expense II. taxes III. costs of goods sold IV. depreciation
I and IV only
Which of the following increase the price sensitivity of a bond to changes in interest rates? I. increase in time to maturity II. decrease in time to maturity III. increase in coupon rate IV. decrease in coupon rate
I and IV only
An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate
I, III and IV only
Which of the following is (are) included in the market value of a firm but are excluded from the firm's book value? I. value of management skills II. value of a copyright III. value of the firm's reputation IV. value of employee's experience
I, III, and IV only
Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project?
I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project
An increase in the depreciation expense will do which of the following? I. increase net income II. decrease net income III. increase the cash flow from assets IV. decrease the cash flow from assets
II and III only
A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond? I. discounted price II. premium price III. yield-to-maturity that exceeds the coupon rate IV. yield-to-maturity that is less than the coupon rate
II and IV only
Which of the following are characteristics of a premium bond? I. coupon rate < yield-to-maturity II. coupon rate > yield-to-maturity III. coupon rate < current yield IV. coupon rate > current yield
II and IV only
Which of the following are current assets? I. patent II. inventory III. accounts payable IV. cash
II and IV only
Which of the following relationships apply to a par value bond? I. coupon rate < yield-to-maturity II. current yield = yield-to-maturity III. market price = call price IV. market price = face value
II and IV only
Which of the following apply to a partnership that consists solely of general partners? I. Double taxation of partnership profits. II. Limited partnership life. III. Active involvement in the firm by all the partners. IV. Unlimited personal liability for all partnership debts.
II, III, and IV only.
Which of the following should be included in the analysis of a new product?
II. reduction in sales for a current product once the new product is introduced III. increase in accounts receivable needed to finance sales of the new product IV. market value of a machine owned by the firm which will be used to produce the new product
Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?
In today's dollars, Luis' money is worth more than Soo Lee's
Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?
In today's dollars, Luis' money is worth more than Soo Lee's.
Cash Flow to Creditors =
Interest Paid - Net Borrowing
Compound Interest
Interest earned on both the initial principal and the interest reinvested from prior periods
Interest on Interest
Interest earned on the reinvestment of previous interest payments
Simple Interest
Interest earned only on the original principal amount invested
A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:
Limited partner.
Which one of the following statements related to liquidity is correct?
Liquid assets are valuable to a firm.
The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate.
Marginal.
Martin invested $1,000 six years ago and expected to have $1,500 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, Martin only has $1,420 in his account today. Which one of the following must be true?
Martin earned a lower interest rate than he expected.
Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?
Maximum loss limited to the capital invested.
During the year, Al's Tools decreased its accounts receivable by $160, increased its inventory by $115, and decreased its accounts payable by $70. How did these three accounts affect the firm's cash flows for the year?
Net use of cash of $25.
Which one of the following statements concerning net working capital is correct?
Net working capital may be a negative value.
Sixteen years ago, Alicia invested $1,000. Eight years ago, Travis invested $2,000. Today, both Alicia's and Travis' investments are each worth $2,400. Assume that both Alicia and Travis continue to earn their respective rates of return. Which one of the following statements is correct concerning these investments?
One year ago, Alicia's investment was worth less than Travis' investment. Alicia: $2,400 = $1,000 x (1 + r)^16; r = 5.62 percent Travis: $2,400 = $2,000 x (1 + r)^8; r = 2.31 percent CALCULATOR Alicia: Enter N: 16, PV: -1000, FV: 2400, CPT I/Y --> 5.62 Travis: Enter N: 8, PV: -2000, FV: 2400, CPT I/Y --> 2.31 Since both Alicia and Travis have equal account values today and since Alicia earns the higher rate of return, her account had to be worth less than Travis' account one year ago.
Cash Flow from Assets =
Operation Cash Flow - Change in Net Working Capital - Capital Spending
You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?
Option B has a higher present value at time zero than does option A.
Which one of the following statements related to payback and discounted payback is correct?
Payback is used more frequently even though discounted payback is a better method.
DuPont ROE =
Profit Margin * Total Asset Turnover * Equity Multiplier
Samantha opened a savings account this morning. Her money will earn 5 percent interest, compounded annually. After five years, her savings account will be worth $5,600. Assume she will not make any withdrawals. Given this, which one of the following statements is true?
Samantha could have deposited less money and still had $5,600 in five years if she could have earned 5.5 percent interest.
Samantha opened a savings account this morning. Her money will earn 3.5 percent interest, compounded annually. After four years, her savings account will be worth $5,000. Assume she will not make any withdrawals. Given this, which one of the following statements is true?
Samantha could have deposited less money today and still had $5,000 in four years if she could have earned a higher rate of interest.
You are considering two separate investments. Both investments pay 7 percent interest. Investment A pays simple interest and Investment B pays compound interest. Which investment should you choose, and why, if you plan on investing for a period of 5 years?
Simple interest is interest earned on the initial principal amount only. Compound interest is interest earned on both the initial principal and all prior interest earnings that have been reinvested. You should choose Investment B which pays compound interest as you will earn more interest income over the 5 years by doing so.
Renee invested $2,000 six years ago at 4.5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?
Simple interest.
A business owned by a solitary individual who has unlimited liability for its debt is called a:
Sole proprietorship.
How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial intent of that Act?
Some of the key requirements of Sarbanes-Oxley are: the prohibition of personal loans from the company to its officers, an annual report by management of the internal control and financial reporting within the firm along with an independent auditor's assessment of that report, a review and sign off by the corporate officers of the annual financial statements, and the responsibility for the accuracy of the financial reports placed directly on senior management of the firm. While firms that have opted to remain publicly-owned are complying with these requirements, they are paying a cost to do so. This cost has caused other firms to "go dark" or to opt for listing on a foreign exchange rather than a U.S. exchange. While some of the results do match the intent of the Act, the costs, "going dark", and foreign listings were most likely not intended by the supporters of the Act.
Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?
Sue will have more money than Neal as long as they retire at the same time.
Which one of the following statements related to an income statement is correct?
Taxes reduce both net income and operating cash flow.
Future Value
The amount an investment is worth after one or more periods
Call Premium
The amount by which the call price exceeds the par value of a bond
Coupon Rate
The annual coupon divided by the face value of a bond
A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?
The cash flow in year two is valued just as highly as the cash flow in year one.
Present Value
The current value of future cash flows discounted at the appropriate discount rate
What is the relationship between present value and future value interest factors?
The factors are reciprocals of each other.
Which one of the following must be true if a firm had a negative cash flow from assets?
The firm utilized outside funding.
Bearer Form
The form of bond issue in which the bond is issued without record of the owner's name; payment is made to whomever holds the bond
Registered Form
The form of bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record
What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
The future value formula is: FV = PV (1 + r)t. Time is the exponent. While the rate of return is important and has a direct affect on the growth of an investment account, time is critical. To maximize retirement income, workers need to commence saving when they are young so that reinvested earnings have time to compound.
Annual Percentage Rate (APR)
The interest rate changed per period multiplied by the number of periods per year
Effective Annual Rate (EAR)
The interest rate expressed as if it were compounded once per year
Stated Interest Rate
The interest rate expressed in terms of the interest payment made each period. Also known as the quoted interest rate
Which one of the following statements related to an income statement is correct? Assume accrual accounting is used.
The labor costs for producing a product are expensed when the product is sold
Which one of the following statements related to taxes is correct?
The marginal tax rate for a firm can be either higher than or the same as the average tax rate.
Give some examples of ways in which manager's goals can differ from those of shareholders.
The primary goal of a financial manager should be to maximize the current value of the outstanding stock. This goal focuses on enhancing the returns to stockholders who are the owners of the firm. However, managers frequently are more concerned with their personal benefits from employment, the prestige of their position, and the perks to which they feel entitled. There are numerous examples, some of which are excessive compensation packages, large corporate offices, excessive staffing, and first-class travel and conference locations, to name a few.
Face Value
The principal amount of a bond that is repaid at the end of the term. Also called par value
Compounding
The process of accumulating interest on an investment over time to earn more interest
A project has a net present value of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in current dollar terms.
Yield to Maturity (YTM)
The rate required in the market on a bond
Discount Rate
The rate used to calculate the present value of future cash flows
Maturity
The specified date on which the principal amount of a bond is paid
coupon
The stated interest payment made on a bond
Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?
The stock has a negative capital gains yield.
Indenture
The written agreement between the corporation and the lender detailing the terms of the debt issue
A 6 percent, annual coupon bond is currently selling at a premium and matures in 7 years. The bond was originally issued 3 years ago at par. Which one of the following statements is accurate in respect to this bond today?
The yield-to-maturity is less than the coupon rate.
Stockholders Equity =
Total Assets - Total Liabilites
You own a bond that has a 6 percent annual coupon and matures 5 years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?
You will realize a capital gain on the bond if you sell it today
Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:
a decrease in all stock values.
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
a discount; less than
Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:
discounting.
On your ninth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today?
age 30 $756 = $300 (1 + .045)t; t = 21 years; Age today = 9 + 21 = 30 CALCULATOR Enter I/Y: 4.5, PV: -300, FV: 756, CPT N --> 21
Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?
agency problem
Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. I. compensation based on the value of the stock II. stock option plans III. threat of a company takeover IV. threat of a proxy fight
all I. compensation based on the value of the stock II. stock option plans III. threat of a company takeover IV. threat of a proxy fight
The dividend growth model: I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point in time. III. can be used to value zero-growth stocks. IV. requires the growth rate to be less than the required return.
all of the above
Net present value is the best method of
analyzing mutually exclusive projects.
A stakeholder is:
any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.
The _____ tax rate is equal to total taxes divided by total taxable income.
average
What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?
dividend growth
Cash flow to stockholders is defined as:
dividend payments less net new equity raised.
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?
balance sheet
Why should financial managers strive to maximize the current value per share of the existing stock?
because they have been hired to represent the interests of the current shareholders
Which one of the following is NOT included in cash flow from assets?
interest expense
The specified date on which the principal amount of a bond is payable is referred to as which one of the following?
maturity
Which one of the following best states the primary goal of financial management?
maximize the current value per share
Net working capital:
can create either a cash inflow or a cash outflow at time zero of a project.
A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:
can provide less information to its shareholders than it did prior to "going dark".
High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of High Country Builders' has a higher ______ than the stock of Valley High Builders.
capital gains yield
Which one of following is the rate at which a stock's price is expected to appreciate?
capital gains yield
The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the:
cash flow from assets.
The cash flow related to interest payments less any net new borrowing is called the:
cash flow to creditors.
Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?
cash inflow in the final year of the project
Interest earned on both the initial principal and the interest reinvested from prior periods is called:
compound interest
Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?
compounding
Which one of the following terms is used to identify a British perpetuity?
consol
You recently purchased a grocery store. At the time of the purchase, the store's market value equaled its book value. The purchase included the building, the fixtures, and the inventory. Which one of the following is most apt to cause the market value of this store to be lower than the book value?
construction of a new restricted access highway located between the store and the surrounding residential areas
Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?
coupon
Net working capital is defined as:
current assets minus current liabilities.
Which one of the following is a project cash inflow? Ignore any tax effects.
decrease in accounts receivable
Which one of the following will increase the cash flow from assets, all else equal?
decrease in net capital spending
The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond?
decrease the market price
Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?
decreases
For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase.
depreciation
Which one of the following costs is most apt to be a fixed cost?
depreciation
Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?
discount rate
The process of determining the present value of future cash flows in order to know their worth today is called which one of the following?
discounted cash flow valuation
Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?
discounted cash flow valuation
Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?
dividend payments which increase by 10 percent per year for 5 years followed by dividends which increase by 3 percent annually thereafter
Which one of the following is computed by dividing next year's annual dividend by the current stock price?
dividend yield
According to the Rule of 72, you can do which one of the following?
double your money in 8 years at 9 percent interest Rule of 72 = 72/8 years = 9 percent interest
A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?
net present value
An ordinary annuity is best defined as
equal payments paid at regular intervals over a stated time period
Noncash items refer to:
expenses which do not directly affect cash flows.
. A bond's coupon rate is equal to the annual interest divided by which one of the following?
face value
Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?
face value
Cash flow from assets is also known as the firm's:
free cash flow.
You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now?
future value
Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value?
good reputation of the company
A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:
greater than 7 percent.
The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:
grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
The higher the degree of financial leverage employed by a firm, the:
higher the probability that the firm will encounter financial distress.
Which one of the following is an agency cost?
hiring outside accountants to audit the company's financial statements
Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?
income statement
Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?
increase in the market value per share
As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:
increases at a decreasing rate.
Which one of the following actions by a financial manager is most apt to create an agency problem?
increasing current profits when doing so lowers the value of the firm's equity
Which one of the following is least likely to be an agency problem?
increasing the market value of the firm's shares
Which one of the following will decrease the net present value of a project?
increasing the project's initial cost at time zero
Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10 interest on his $100 investment. He reinvested the $10. The second year, he earned $11 interest on his $110 investment. The extra $1 he earned in interest the second year is referred to as:
interest on interest
Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10 interest on his $100 investment. He reinvested the $10. The second year, he earned $11 interest on his $110 investment. The extra $1 he earned in interest the second year is referred to as
interest on interest.
Net capital spending:
is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.
Supernormal growth is a growth rate that:
is unsustainable over the long term.
You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?
long-term; zero coupon
The Sarbanes-Oxley Act of 2002 is a governmental response to:
management greed and abuses.
The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate.
marginal
The current yield is defined as the annual interest on a bond divided by which one of the following?
market price
Decisions made by financial managers should primarily focus on increasing which one of the following?
market value per share of outstanding stock
National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:
priced the same as a $1 perpetuity.
Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?
project A only
Which one of the following grants an individual the right to vote on behalf of a shareholder?
proxy
Which one of the following is a means by which shareholders can replace company management?
proxy fight
Depreciation:
reduces both taxes and net income.
Shareholders' equity:
represents the residual value of a firm.
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?
selling fewer hot dogs because hamburgers were added to the menu
Which one of the following will increase the value of a firm's net working capital?
selling inventory at a profit
Which one of the following parties has ultimate control of a corporation?
shareholders
Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. Which type of interest is Sara earning?
simple interest
G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?
sunk
Which one of the following costs was incurred in the past and cannot be recouped?
sunk