finance 310 multiple choice exam 1

Which of the following statements is true? Bank loans, private placements to funds and insurance companies, and investment bank transactions are all activities in the secondary markets Like general partners, the owners of a corporation have unlimited liability for business debts While maximizing stockholder wealth is the relevant goal of the corporation, sometimes management goals are pursued at the expense of the stockholders. The sarbanes-oxley act of 2002 dramatically streamlined american corporate regulations resulting in billions of dollars in overall savings.

*While maximizing stockholder wealth is the relevant goal of the corporation, sometimes management goals are pursued at the expense of the stockholders.* Bank loans, private placements to funds and insurance companies, and investment bank transactions are all activities in the secondary markets FALSE BECAUSE IN PRIMARY MARKETS Like general partners, the owners of a corporation have unlimited liability for business debts FALSE BECAUSE LIMITED LIABILITY The sarbanes-oxley act of 2002 dramatically streamlined american corporate regulations resulting in billions of dollars in overall savings. FALSE BECAUSE EXPANDED CORPORtATE REGULATIONS AND RESULTED IN BILLIONS OF DOLLARS IN OVERALL COSTS

The Du Pont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm. II. operating efficiency of a firm. III. utilization rate of a firm's assets. IV. rate of return on a firm's assets.

1, 2 3 and 4

Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity

2 and 3 only

Which of the following will increase the sustainable rate of growth for a firm? I. Decreasing the profit margin II. Increasing the dividend payout ratio III. Decreasing the capital intensity ratio IV. Increasing the target debt-equity ratio

3 and 4 only

Which one of the following has the highest effective annual rate? 6 percent compounded annually 6 percent compounded semi-annually 6 percent compounded quarterly 6 percent compounded monthly All the above answers have the same effective annual rate.

6 percent compounded monthly

Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money? 6 percent interest for 3 years 12 percent interest for 5 years 7 percent interest for 9 years 8 percent interest for 9 years 6 percent interest for 10 years

8 percent for 9 years

Lisa has $1,000 in cash today. Which one of the following investment options will come closest to doubling her money? A. 12 percent interest for 5 years B. 7 percent interest for 9 years C. 8 percent interest for 9 years D. 6 percent interest for 10 years

8 percent interest for 9 years

Which one of the following statements is true concerning the price-earnings (PE) ratio? A high PE ratio may indicate that a firm is expected to grow significantly. A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings. PE ratios are unaffected by the accounting methods employed by a firm. The PE ratio is classified as a profitability ratio. The PE ratio is a constant value for each firm.

A high PE ratio may indicate that a firm is expected to grow significantly.

Which of the following statements is FALSE? A. While the book value of equity can be negative, the market value of equity cannot be negative. B. Market values are the prices at which assets, liabilities, and equities can be bought or sold for now. C. EBIT is the 'bottom line.' D. Average Tax Rates are less useful for making financial decisions than Marginal Tax Rates.

C. EBIT is the 'bottom line.'

Which one of the following statements is true concerning the price-earnings (PE) ratio? A. A high PE ratio typically indicates that a firm is expected to grow significantly. B. A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings. C. PE ratios are unaffected by the accounting methods employed by a firm. D. The PE ratio is classified as a profitability ratio.

A. A high PE ratio typically indicates that a firm is expected to grow significantly.

Suppose Miller Inc. is able somehow to reduce its fixed assets without affecting the company's operations, sales, net income, or equity. This reduction will decrease which of the following ratios? A. Capital intensity ratio B. Return on assets C. Total asset turnover D. Return on equity

A. Capital intensity ratio

Which one of the following is most apt to align management's priorities with shareholders' interests? A. Compensating managers with shares of stock that must be held for 3 years before the shares can be sold B. Allowing a manager to decorate his or her own office once he or she has been in that office for a period of 3 years or more C. Increasing the number of paid holidays that long-term employees are entitled to receive D. Allowing employees to retire early with full retirement benefits

A. Compensating managers with shares of stock that must be held for 3 years before the shares can be sold

Which of the following is an advantage of the corporate form of organization? A. Corporations can easily raise capital and its ownership can be transferred easily. B. Corporations can be started easily and face little regulation. C. Owners of corporations have unlimited liability and full control. D. Corporations pay taxes on income before dividends to their owners. B. Corporations can be started easily and face little regulation. C. Owners of corporations have unlimited liability and full control. D. Corporations pay taxes on income before dividends to their owners.

A. Corporations can easily raise capital and its ownership can be transferred easily.

New Century Products is a company that was founded last year. While the outlook for the company is positive, it currently has negative earnings. If you wanted to measure the progress of this firm, which one of the following ratios would probably be best to monitor given the firm's current situation? A. Price-sales ratio B. Market-to-book ratio C. Profit margin D. ROE

A. Price-sales ratio

Given an interest rate of zero percent, the future value of a lump sum invested today will always: A. Remain constant, regardless of the investment time period. B. Decrease if the investment time period is shortened. C. Decrease if the investment time period is lengthened. D. Be infinite in value.

A. Remain constant, regardless of the investment time period.

Which of the following statements is CORRECT? A. Shareholder's equity is the residual value of a firm B. Net working capital must be a positive value C. An increase in cash reduces the liquidity of a firm D. Equipment is generally considered a highly liquid asset

A. Shareholder's equity is the residual value of a firm

Which of the following statements is FALSE? A. The effect of compounding is great over short time periods, but then it begins to decline as the horizon grows. B. Moving cash flows to the left on a time line is called discounting, and values are additive at any one point in time. C. Future value refers to the amount of money an investment will grow to over some period of time at some given interest rate. D. To estimate the present value of future cash flows, the discount rate should be adjusted for both the timing or maturity of that cash flow and the inherent risk of that cash flow

A. The effect of compounding is great over short time periods, but then it begins to decline as the horizon grows.

Which of the following statements is TRUE? A. The marginal tax rate for most U.S. corporations is 35% while the average tax rate actually paid across U.S. corporations has actually been closer to 25% B. A Limited Liability Company (LLC) is legally defined as a person, while a corporation with limited liability is considered a partnership of several persons C. The ability of a corporation to grow can be seriously limited by an inability to raise cash via the primary capital markets for investment. D. According to the theory of the firm, among all stakeholders, the stockholders take the least risk.

A. The marginal tax rate for most U.S. corporations is 35% while the average tax rate actually paid across U.S. corporations has actually been closer to 25%

Which of the following statements about the corporate form of ownership is FALSE? A. The shareholders are the owners of the firm and hold the top priority claim among all stakeholders. B. The shareholders elect the directors of the corporation, usually in uncontested elections. C. The directors appoint the firm's management, and yet managers usually participate in nominating new candidates for directors. D. Separation of ownership from control can cause agency problems where managers act in their own interests, rather than shareholders' interests.

A. The shareholders are the owners of the firm and hold the top priority claim among all stakeholders.

Which one of the following statements is true concerning annuities? All else equal, an ordinary annuity is more valuable than an annuity due. All else equal, a decrease in the number of payments increases the future value of an annuity due. An annuity with payments at the beginning of each period is called an ordinary annuity. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity. All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

Which one of the following statements is correct? All secondary markets are dealer markets. All secondary markets are broker markets. All stock trades between existing shareholders are secondary market transactions. All stock transactions are secondary market transactions. All Dutch auction sales are secondary market transactions.

All stock trades between existing shareholders are secondary market transactions.

Bill just financed a used car through his credit union. His loan requires payments of $275 a month for 5 years. Assuming that all payments are paid timely, his last payment will pay off the loan in full. What type of loan does Bill have? Amortized Complex Pure discount Lump sum Interest-only

Amortized

Which one of the following statements concerning annuities is correct? The present value of an annuity is equal to the cash flow amount divided by the discount rate. An annuity due has payments that occur at the beginning of each time period. The future value of an annuity decreases as the interest rate increases. If unspecified, you should assume an annuity is an annuity due. An annuity is an unending stream of equal payments occurring at equal intervals of time.

An annuity due has payments that occur at the beginning of each time period.

Which one of the following statements concerning the balance sheet is correct? Total assets equal total liabilities minus total equity. Net working capital is equal total assets minus total liabilities. Assets are listed in descending order of liquidity. Current assets are equal to total assets minus net working capital. Shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt.

Assets are listed in descending order of liquidity.

Which of the following statements is FALSE? A. Market capitalization is the number of shares outstanding times the market price. B. A company with a .05x interest coverage ratio would be at less risk of missing payments on interest than a company with a 4.9x interest coverage ratio. C. The DuPont Identity is an expression that breaks the return on equity into three parts that measure operating efficiency, asset use efficiency, and financial leverage. D. Sometimes book equity can become negative, and when that happens, positive ROE is not a good sign.

B. A company with a .05x interest coverage ratio would be at less risk of missing payments on interest than a company with a 4.9x interest coverage ratio.

Which of the following statements is FALSE? A. Financial Managers make three basic types of decisions: Capital Budgeting, Capital Structure, and Working Capital Management. B. Capital budgeting is the process of planning and managing a firm's short-term investments. C. The primary goal for corporate managers should be to make good decisions to maximize the market value of the owner's equity. D. Agency conflicts, which sometimes arise when CEOs are overly motivated to seek job security, can be reduced by adjusting managerial compensation.

B. Capital budgeting is the process of planning and managing a firm's short-term investments.

Which of the following statements is FALSE? A. The APR should not be used to compare two investments with different compounding periods. B. Lenders prefer less frequent compounding. C. Treasury Bills are pure discount loans with no coupon payments. D. Typical bullet bonds are interest-only loans where the principal is not amortized.

B. Lenders prefer less frequent compounding.

Which of the following statements is FALSE? A. While the book value of equity can be negative, the market value of equity cannot be negative. B. On the income statement, financial analysts often focus on a company's EBIT, and items above this line depend on the company's long-term financing choices among debt and equity. C. The average tax rate is always less than or equal to, and often considerably less than, the marginal tax rate. D. Managers should use the marginal tax rate when making decisions regarding new investments and financing choices.

B. On the income statement, financial analysts often focus on a company's EBIT, and items above this line depend on the company's long-term financing choices among debt and equity.

Which of the following statements is FALSE? A. A bond's yield represents the annualized return that an investor would earn by holding it to maturity, if it does not default. B. Over time as a bond's maturity grows closer, if it does not default and if market yields do not change, then the price on a discount bond will decrease. C. When interest rates increase, then bond prices fall, and moreso the longer their maturity and the smaller their coupons. D. If a bond is held to maturity and it does not default, then the reinvestment rate risk will offset the price risk.

B. Over time as a bond's maturity grows closer, if it does not default and if market yields do not change, then the price on a discount bond will decrease.

Which of the following statements is TRUE? A. When yields increase, bonds with shorter maturities tend to decrease in value more than bonds with longer maturities. B. Over time, if yields do not change, the values of premium bonds decrease toward par smoothly. C. A "call provision" allows the bond holder the option to determine when they want the company to buy back the bond. D. Treasury Bonds are pure discount loans sold by the US government as a means to borrow money for less than one year.

B. Over time, if yields do not change, the values of premium bonds decrease toward par smoothly.

Which of the following statements is FALSE? A. The current ratio provides a measure of the short-term solvency of the firm. B. Price-earnings ratio reflects the book value per share per dollar of accounting earnings for a firm. C. Total asset turnover measures how much in sales is generated by each dollar of firm assets. D. Times interest earned, also known as the interest coverage ratio, provides a relative measure of how well the firm's operating earnings can cover current interest obligations.

B. Price-earnings ratio reflects the book value per share per dollar of accounting earnings for a firm.

Hon just bought 800 shares of TYUJ stock, which has been trading for some time on the NYSE. In which market did Hon's purchase occur? A. Dealer market B. Secondary market C. Derivative market D. Primary market

B. Secondary market

Which one of the following will decrease the present value of an annuity? Increase in the annuity's future value Increase in the payment amount Increase in the time period Decrease in the discount rate Decrease in the annuity payment

Decrease in the annuity payment

Which of the following statements is TRUE? A. Companies are required by law to have their bonds rated by agencies such as Moody's or S&P. B. The Fisher effect is the relationship between nominal returns, real returns, and inflation. C. Investors require higher yields on secured bonds than on unsecured bonds. D. A callable bond can be swapped for a fixed number of shares of stock before maturity at the holder's option.

B. The Fisher effect is the relationship between nominal returns, real returns, and inflation.

Which of the following statements is FALSE? A. An easy way to compute the value of an annuity due (such as a lease) is to compute the value of a regular annuity, and then compound the result forward one period. B. The annual percentage rate (APR) is the best way to compare two investments with different compounding periods. C. Lenders and investors prefer daily compounding to annual compounding. D. The process of paying off a loan by making regular principal reductions is called amortizing.

B. The annual percentage rate (APR) is the best way to compare two investments with different compounding periods.

Operating cash flow is defined as: A. a firm's net profit over a specified period of time. B. the cash that a firm generates from its normal business activities using its existing assets. C. the change in the net working capital over a stated period of time. D. the cash that is generated and added to retained earnings.

B. the cash that a firm generates from its normal business activities using its existing assets.

Which of the following statements is FALSE? A. The yield to maturity is a bond's rate of return that is required by the market place. B. When a bond's yield to maturity is less than a bond's coupon rate, the bond is selling at a premium. C. A convertible bond initially sells at a deep discount and pays no interest payments. D. The invoice amount that an investor actually pays to purchase an outstanding bond is not its 'clean' quoted price.

C. A convertible bond initially sells at a deep discount and pays no interest payments.

Which of the following statements is TRUE? A. All secondary markets are dealer markets. B. All secondary markets are broker markets. C. All stock trades between existing shareholders are secondary market transactions. D. All stock transactions are secondary market transactions.

C. All stock trades between existing shareholders are secondary market transactions.

Which of the following statements is FALSE? A. With simple interest, the interest is not reinvested, so interest is earned each period only on the original principal. B. Both lenders and investors prefer more compounding. C. Amortizing a loan allows for a portion of principal to be paid with the interest each period principal so that the actual payments to interest will increase with each payment. D. Treasury Bills are pure discount loans sold by the US government that repay a fixed amount as one lump sum at some time in the future.

C. Amortizing a loan allows for a portion of principal to be paid with the interest each period principal so that the actual payments to interest will increase with each payment.

Managers should act in shareholders' interests because shareholders have ___________ priority in receiving their claims. A. Top B. Somewhere in the middle C. Bottom D. Equal (to those of all other stakeholders)

C. Bottom

Which of the following statements is TRUE? A. In a sole proprietorship, the owner has limited liability and full control. B. In a partnership, ownership can be transferred quickly, and capital can be raised easily. C. Corporations face double taxation, meaning the corporation pays taxes on income before dividends, while the owners pay personal taxes on dividends and capital gains. D. Intended to improve public disclosures, the Sarbanes-Oxley Act has likely increased the number of small companies going public in the USA.

C. Corporations face double taxation, meaning the corporation pays taxes on income before dividends, while the owners pay personal taxes on dividends and capital gains.

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? A. Interest rate risk premium B. Taxability premium C. Default risk premium D. Liquidity premium

C. Default risk premium

Which one of the following situations is most apt to create an agency conflict? A. Giving all employees a bonus if a certain level of efficiency is maintained B. Hiring an independent consultant to study the operating efficiency of the firm C. Rejecting a profitable project to protect employee jobs D. Selling an under producing segment of the firm

C. Rejecting a profitable project to protect employee jobs

Which of the following statements is FALSE? A. The book value of equity rarely equals the market value of equity except when the market-to-book ratio is 1.0. B. The book value of equity is the residual difference between assets and liabilities. C. The book value of equity increases when a company pays dividends. D. The ultimate goal of financial managers is to maximize the current market value of the company's existing equity.

C. The book value of equity increases when a company pays dividends.

Which of the following statements is TRUE? A. Bank loans, private placements to funds and insurance companies, and investment bank transactions are all activities in the secondary markets. B. Like general partners, the owners of a corporation have unlimited liability for business debts. C. While maximizing stockholder wealth is the relevant goal of the corporation, sometimes management goals are pursued at the expense of the stockholders. D. The Sarbanes-Oxley Act of 2002 dramatically streamlined American corporate regulations resulting in billions of dollars in overall savings.

C. While maximizing stockholder wealth is the relevant goal of the corporation, sometimes management goals are pursued at the expense of the stockholders.

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0. Cash purchase of inventory Cash payment of an account receivable Cash payment of an account payable Credit sale of inventory at cost Cash sale of inventory at a loss

Cash payment of an account payable

Which one of the following is most apt to align management's priorities with shareholders' interests? Increasing employee retirement benefits Compensating managers with shares of stock that must be held for 3 years before the shares can be sold Allowing a manager to decorate his or her own office once he or she has been in that office for a period of 3 years or more Increasing the number of paid holidays that long-term employees are entitled to receive Allowing employees to retire early with full retirement benefits

Compensating managers with shares of stock that must be held for 3 years before the shares can be sold

What goal should always motivate the actions of the firm's financial manager?

Current market value(share price) of the equity

Which of the following statements is FALSE? A. The average tax rate is the total tax expense divided by the total taxable income. B. The marginal tax rate is the tax rate that applies to the next dollar of taxable income that a firm earns. C. The average tax rate is always less than or equal to, and often considerably less than, the marginal tax rate. D. Managers should use the average tax rate when making decisions regarding new investments and financing choices.

D. Managers should use the average tax rate when making decisions regarding new investments and financing choices.

Which one of the following has the highest effective annual rate? A. 6 percent compounded annually B. 6 percent compounded semi-annually C. 6 percent compounded quarterly D. 6 percent compounded monthly

D. 6 percent compounded monthly

Other things equal, investors will require higher yields on, and be willing to pay lower prices for, bonds with the following characteristics, except those which: A. Are unsecured B. Have less protective covenants C. Have lower credit quality D. Are convertible into common shares

D. Are convertible into common shares

Which of the following is NOT an effective means of aligning management goals with shareholder interests? A. Employee stock options B. Threat of a takeover C. Management bonuses tied to performance goals D. Compensating managers with salaries significantly higher than their peers

D. Compensating managers with salaries significantly higher than their peers

Which of the following statements is FALSE? A. Across a longer time period, a single cash flow grows to a larger future value B. For a higher interest rate, a single cash flow has a smaller present value C. If its payments last longer, an annuity has a larger present value D. For a higher interest rate, an annuity has a smaller future value

D. For a higher interest rate, an annuity has a smaller future value

Which of the following statements is FALSE? A. Financial ratios help compare over time companies of different sizes and industries, and since not all sources calculate them the same way, managers should understand how they are derived. B. Asset utilization ratios describe how efficiently, or intensively, a firm uses its assets to generate sales. C. To a firm's creditors, particularly short-term creditors such as suppliers, the higher the current ratio is, the better. D. Higher margin, turnover, leverage, and dividends all generally allow a firm to grow faster over the long run.

D. Higher margin, turnover, leverage, and dividends all generally allow a firm to grow faster over the long run.

Which of the following will increase the sustainable rate of growth for a firm? A. Decreasing the profit margin B. Increasing the dividend payout ratio C. Decreasing the asset turnover D. Increasing the target debt-equity ratio

D. Increasing the target debt-equity ratio

Which of the following is NOT an advantage to the corporate form of organization? A. Ability to raise large sums of equity capital B. Ease of ownership transfer C. Profits taxed at the corporate level D. Limited liability for all owners

D. Limited liability for all owners

If any, which of the following statements is FALSE? A. Capital Budgeting is the process of planning and managing a firm's long-term investments where managers identify investments that are worth more than they cost to acquire. B. Capital Structure is the mix of debt and equity maintained by a firm to finance operations, where the firm decides how much to borrow and what the cheapest sources of funds are. C. Working Capital Management is the day-to-day management of finances that determines how much cash and inventory should be kept on hand, whether to sell on credit to customers, and how to obtain short-term financing. D. None of the above statements is false.

D. None of the above statements is false.

Which of the following statements is FALSE? A. Liquidity measures the speed and ease with which assets can be converted to cash without significant loss of value, and 'fortress' balance sheets are especially liquid. B. Even though depreciation is not a cash expense, it affects taxes, and corporations prefer to depreciate assets using accelerated over straight line methods for tax purposes. C. The marginal tax rate is the tax rate payable on the next dollar earned and is always higher than the average tax rate. D. Operating Cash Flow is generated from utilizing existing assets after deducting interest expense

D. Operating Cash Flow is generated from utilizing existing assets after deducting interest expense

Which of the following statements is FALSE? A. The market value of any asset is what an item is actually worth if sold and must always be a positive value. B. Even though depreciation is not a cash expense, it affects taxes, and corporations prefer to depreciate assets using accelerated over straight line methods for tax purposes. C. The marginal tax rate is the tax rate payable on the next dollar earned and, due to deductions and credits, the marginal tax rate is always higher than the average tax rate. D. Priority measures the speed and ease with which assets can be converted to cash without significant loss of value.

D. Priority measures the speed and ease with which assets can be converted to cash without significant loss of value.

Which of the following statements is TRUE? A. The APR is equal to the EAR for a loan that charges interest monthly. B. The EAR is always strictly greater than the APR. C. The APR on a monthly loan is equal to (1 + monthly interest rate)12 - 1. D. The EAR is the best measure of the actual rate you are paying on a loan.

D. The EAR is the best measure of the actual rate you are paying on a loan.

Which of the following statements is FALSE? A. The future value of a single cash flow grows across a longer time period B. The present value of a single cash flow falls with a higher interest rate C. The present value of an annuity grows if the annuity lasts longer D. The future value of an annuity falls with a higher interest rate

D. The future value of an annuity falls with a higher interest rate

Which of the following choices is NOT a CORRECT way to complete this sentence: Other things equal, a set of cash flows is more valuable ... A. The longer they last B. The more frequently they are paid C. The faster they grow D. The larger the time value that investors require compensation for trading a dollar today for dollars tomorrow

D. The larger the time value that investors require compensation for trading a dollar today for dollars tomorrow

Which of the following statements is TRUE? A. The coupon rate on a previously issued bond represents the rate of return required by today's participants in the market place. B. When a bond's yield to maturity is less than its coupon rate, the bond is selling at a discount. C. The market prices of bonds with higher coupons are more sensitive to changes in market interest rates. D. The market prices of bonds with longer maturities are more sensitive to changes in market interest rates.

D. The market prices of bonds with longer maturities are more sensitive to changes in market interest rates.

Today, Courtney wants to invest an amount less than $5,000 with the goal of receiving $5,000 back some time in the future. Which one of the following statements is correct? A. The period of time she has to wait until she reaches her goal is not affected by the compounding of interest. B. The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal. C. The length of time she has to wait to reach her goal is directly related to the interest rate she earns. D. The period of time she has to wait decreases as the amount she invests today increases.

D. The period of time she has to wait decreases as the amount she invests today increases.

Which of the following statements is FALSE? A. When market yields rise, the price of discount bonds fall further below par or face value. B. When market yields rise, the price of long-term bonds fall by a greater percent than short-term bonds. C. When market yields rise, the price of bonds with small coupons fall by a greater percent than those with large coupons. D. When market yields rise, investors redeem or 'call' the callable bonds they own, forcing the issuer of the bond to pay at least the face value.

D. When market yields rise, investors redeem or 'call' the callable bonds they own, forcing the issuer of the bond to pay at least the face value.

Firms that compile financial statements according to GAAP: A. record income and expenses at the time they affect the firm's cash flows B. have no discretion of recording either revenue or expense items C. must record all expenses when incurred D. can still manipulate their earnings to some degree

D. can still manipulate their earnings to some degree

Fill in the blanks: An annuity is worth _______ than a perpetuity, and a constant annuity is worth _______ than a growing annuity. (assuming the normal circumstance where the discount rate exceeds the growth rate and where the growth is positive) A. more, more B. more, less C. less, more D. less, less

D. less, less

Below are examples of business transactions. Choose the type of financial management decision that is relevant to each. Deciding whether to expand a manufacturing plant [x] Deciding whether to issue new equity and use the proceeds to retire outstanding debt [y] Modifying the firm's credit collection policy with its customers [z]

Deciding whether to expand a manufacturing plant Correct Capital budgeting Deciding whether to issue new equity and use the proceeds to retire outstanding debt Correct Capital structure Modifying the firm's credit collection policy with its customers Correct Working capital management

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past? Decrease in the total asset turnover Decrease in the capital intensity ratio Increase in days' sales in receivables Decrease in the profit margin Decrease in the inventory turnover rate

Decrease in the capital intensity ratio

Jamie is employed as a commercial loan officer for a regional bank centered in the Midwestern section of the U.S. Her job falls into which one of the following areas of finance? International finance Financial institutions Corporate finance Capital management Investments

Financial institutions

Which one of the following is a working capital decision? How should the firm raise additional capital to fund its expansion? What debt-equity ratio is best suited to our firm? What is the cost of debt financing? Which type of debt is best suited to finance our inventory? How much cash should the firm keep in reserve?

How much cash should the firm keep in reserve?

Which of the following are advantages of the corporate form of organization? I. Ability to raise large sums of equity capital II. Ease of ownership transfer III. Profits taxed at the corporate level IV. Limited liability for all owners

I, II, and IV only

Which one of the following relates to a negative change in net working capital? Increase in the inventory level Sale of net fixed assets Purchase of net fixed assets Increase in current assets and decrease in current liabilities for the period Increase in current liabilities with no change in current assets for the period

Increase in current liabilities with no change in current assets for the period

Sara is investing $1,000 today. Which one of the following will increase the future value of that amount? Shortening the investment time period Paying interest only on the principal amount Paying simple interest rather than compound interest Paying interest only at the end of the investment period rather than throughout the investment period Increasing the interest rate

Increasing the interest rate

Which one of the following best matches the primary goal of financial management? Increasing the dollar amount of each sale Increasing traffic flow within the firm's stores Transforming fixed costs into variable costs Increasing the firm's liquidity Increasing the market value of firm

Increasing the market value of the firm

You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of 3 years. What type of loan did you obtain? Interest-only Amortized Perpetual Pure discount Lump sum

Interest-only

Which one of the following is an advantage of being a limited partner? Non-taxable share of any profits Control over the daily operations of the firm Losses limited to capital invested Unlimited profits without risk of incurring a loss Active market for ownership interest

Losses limited to capital invested

Which of the following statements is FALSE? The average tax rate is the total tax expense, divided by the total taxable income. The marginal tax rate is the tax rate that applies to the next dollar of taxable income that a firm earns The average tax rate is always less than or equal to, and often considerably less than, the marginal tax rate. Managers should use the average tax rate when making decisions regarding new investments and financing choices.

Managers should use the average tax rate when making decisions regarding new investments and financing choices. THEY SHOULD USE MARGINAL TAX RATES

New Century Products is a company that was founded last year. While the outlook for the company is positive, it currently has negative earnings. If you wanted to measure the progress of this firm, which one of the following ratios would probably be best to monitor given the firm's current situation? Price-sales ratio Market-to-book ratio Profit margin ROE ROA

Price-sales ratio

Which of the following statements is FALSE? The market value of any asset is what an item is actually worth if sold and must always be a positive value Even though depreciation is not a cash expense, it affects taxes, and corporations prefer to depreciate assets using accelerated over straight line methods for tax purposes. The marginal tax rate is the tax rate payable on the next dollar earned and, due to deductions and credits, the marginal tax rate is always higher than the average tax rate. Priority measures the speed and ease with which assets can be converted to cash without significant loss of value.

Priority measures the speed and ease with which assets can be converted to cash without significant loss of value. FALSE BECAUSE SHOULD BE LIQUIDITY

Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment which she will be required to pay 2 years from today. Which type of loan is this? Principal-only Amortized Interest-only Compound Pure discount

Pure discount

Which one of the following statements is correct? Shareholders' equity is the residual value of a firm. Net working capital must be a positive value. An increase in cash reduces the liquidity of a firm. Equipment is generally considered a highly liquid asset. Depreciation increases total assets.

Shareholders' equity is the residual value of a firm.

Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested? Terry will earn the same amount of interest each year. Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest. Terry will earn an increasing amount of interest each and every year even if he should decide to withdraw the interest annually rather than reinvesting the interest. Terry's interest for year two will be equal to $2,000 × 0.065 × 2. Terry will be earning simple interest.

Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest.

Today, Courtney wants to invest less than $5,000 with the goal of receiving $5,000 back some time in the future. Which one of the following statements is correct? The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest. The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal. She will have to wait longer if she earns 6 percent compound interest instead of 6 percent simple interest. The length of time she has to wait to reach her goal is directly related to the interest rate she earns. The period of time she has to wait decreases as the amount she invests today increases.

The period of time she has to wait decreases as the amount she invests today increases.

which of the following statements about the corporate form of ownership is false? The shareholders are the owners of the firm and hold the top priority claim among all stakeholders. The shareholders elect the directors of the corporation, usually in uncontested elections. The directors appoint the firms management, and yet managers usually participate in nominating new candidates for directors. Seperation of ownership from control can cause agency problems where managers act in their own interests, rather than shareholders interests.

The shareholders are the owners of the firm and hold the top priority claim among all stakeholders. should be bottom priority

Which one of the following is an example of a perpetuity? Trust income of $1,200 a year forever Retirement pay of $2,200 a month for 20 years Lottery winnings of $1,000 a month for life Car payment of $260 a month for 60 months Apartment rent payment of $800 a month for one year

Trust income of $1,200 a year forever

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: will be less than 12.9 percent. can either be less than or equal to 12.9 percent. is 12.9 percent. can either be greater than or equal to 12.9 percent. will be greater than 12.9 percent.

Will be greater than 12.9 percent

Which of the following are potential ways to align management goals with shareholder interests? Employee stock options Threat of a takeover Management bonuses tied to performance goals Threat of a proxy fight

all 4

Which one of the following terms is defined as the total tax paid divided by the total taxable income? Average tax rate Variable tax rate Marginal tax rate Absolute tax rate Contingent tax rate

average tax rate

Firms that compile financial statements according to GAAP: record income and expenses at the time they affect the firm's cash flows. have no discretion over the timing of recording either revenue or expense items. must record all expenses when incurred. can still manipulate their earnings to some degree. record both income and expenses as soon as the amount for each can be ascertained.

can still manipulate their earnings to some degree

Which one of the following will increase the profit margin of a firm, all else constant? Increase in interest paid Increase in fixed costs Increase in depreciation expense Decrease in the tax rate Decrease in sales

decrease in the tax rate

Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002? Increase the costs of going public Increase protection against corporate fraud Limit secondary issues of corporate securities Decrease the number of publicly traded firms Increase the number of firms that "go dark"

increase protection against corporate fraud

he present value of a lump sum future amount: increases as the interest rate decreases. decreases as the time period decreases. is inversely related to the future value. is directly related to the interest rate. is directly related to the time period.

increases as the interest rate decreases.

If a firm has a negative cash flow from assets every year for several years, the firm: may be continually increasing in size. must also have a negative cash flow from operations each year. is operating at a high level of efficiency. is repaying debt every year. has annual net losses.

may be continually increasing in size

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period? Positive operating cash flow Negative cash flow to creditors Positive cash flow to stockholders Negative net capital spending Positive cash flow from assets

positive cash flow from assets

You've probably noticed coverage in the financial press of an initial public offering (IPO) of a company's securities. Web search company Google is a relatively recent example. IPO is a [x].

primary market transaction

Limited liability companies are primarily designed to: allow a portion of its owners to enjoy limited liability while granting the other portion of its owners control over the entity. provide the benefits of the corporate structure to foreign-based entities. spin-off a wholly-owned subsidiary. allow companies to reorganize themselves through the bankruptcy process. provide limited liability while avoiding double taxation.

provide limited liability while avoiding double taxation

Financial statement analysis: is primarily used to identify account values that meet the normal standards. is limited to internal use by a firm's managers. provides useful information that can serve as a basis for forecasting future performance. provides useful information to shareholders but not to debt holders. is enhanced by comparing results to those of a firm's peers but not by comparing results to prior periods.

provides useful information that can serve as a basis for forecasting future performance.

Given an interest rate of zero percent, the future value of a lump sum invested today will always: remain constant, regardless of the investment time period. decrease if the investment time period is shortened. decrease if the investment time period is lengthened. be equal to $0. be infinite in value.

remain constant, regardless of the investment time period.

Which one of the following will increase cash flow from assets but not affect the operating cash flow? Increase in depreciation Increase in accounts receivable Sale of a fixed asset Decrease in cost of goods sold Increase in sales

sale of a fixed asset