Finance 311
Which of the following would help a company take action to improve its ratios?
-comparing to peer companies -comparing to its own historical ratios -comparing to aspirant companies -comparing to major competitors
Marginal tax rates are the most important tax rates because:
-incremental cash flows are taxed at marginal tax rates. -financial decisions are usually based on new cash flows.
Based on the DuPont Identity, an increase in sales, all else held equal, Blank______ ROE.
-may increase or decrease -may not change
Which of the following are components of cash flow from assets?
-operating cash flow -change in net working capital -capital spending
Which of these have been noted as unintended consequences of the Sarbanes-Oxley Act?
-public firms "going dark" and leaving the stock market -firms going public outside of the U.S. market -eliminating public disclosure for many firms
Corporations in other countries are often called:
-public limited companies -limited liability companies -joint stock companies
Which of the following could not be evaluated as annuities or annuities due?
-tips to a waiter -monthly electric bills
According to GAAP, when is revenue recognized on an income statement?
-when the value of an exchange of goods or services is known or reliably determined -when the earnings process is virtually completed
From the income statement, the corporation had a net income of $724 million for the year. Total dividends were $106 million. There were 400 million shares outstanding. How much is the dividends per share?
$0.265
Suppose a business takes out a $7,000, five-year loan at 6 percent that will be paid annually with a single, fixed payment each period. How much will be the annual payment?
$1,661.88 total amount= C*[(1-1/(1+r)t/r] 7,000= C*[(1-1/(1+0.6)5/0.6] 7,000=C*[.2527/0.6]
From the income statement, the corporation had a net income of $724 million for the year. Total dividends were $106 million. There were 400 million shares outstanding. How much is the earnings per share?
$1.81
You are analyzing the Statement of Cash flows for Coffey Corporation. You have the following information: Beginning Cash: Ending Cash: $285 Net cash increase: $102 Calculate the Beginning Cash.
$183
What is the future value of $1,000 invested for 15 years at a rate of 5%?
$2,079
What is the future value of $500 invested each year for 20 years at a rate of 10%?
$28,637
What is the present value of $500 invested each year for 10 years at a rate of 5%?
$3,861
What is the present value of $1,000 to be received in 12 years invested at a rate of 8%?
$397
Which of the following is the formula for the future value of an annuity factor?
((1+r)^t-1)/r)
Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?
(1 + quoted rate/m)m − 1
The formula for the present value of an annuity due is:
(1 + r) × (PV of an ordinary annuity).
If you invest for a single period at an interest rate of r, your money will grow to Blank______ per dollar invested.
(1+r)
Which of the following is the correct representation of the cash coverage ratio?
(EBIT + depreciation)/Interest expense
What is the formula for computing the internal growth rate (IGR)?
(ROA × b)/(1 − ROA × b)
What is the formula for computing a firm's sustainable growth rate?
(ROE × b)/(1 − ROE × b)
Which of the following is the correct representation of the total debt ratio?
(Total assets − Total equity)/(Total assets)
A general partnership has which of the following characteristics?
-All the partners share in gains or losses of the partnership. -Each owner has unlimited liability for all firm debts.
Which of the following are true of a sole proprietorship?
-It is one of the simplest types of businesses to form. -A proprietorship has a limited life.
Which of the following are defining features of the primary market?
-It is the market where initial public offerings are made. -Proceeds from the sale of securities go to the issuing firm.
Which of the following are ways to amortize a loan?
-Pay the principal and interest every period in a fixed payment. -Pay the interest each period plus some fixed amount of the principal.
Which of the following create problems with financial statement analysis?
-The firm and its competitors operate under different regulatory environments. -The firm or its competitors are global companies. -The firm or its competitors are conglomerates.
In the Excel setup of a loan amortization problem, which of the following occurs?
-The payment is found with = PMT(rate, nper, -pv, fv). -To find the principal payment each month, you subtract the dollar interest payment from the fixed payment.
Select all that apply Which of the following methods are used to calculate present value?
-an algebraic formula -a time value of money table -a financial calculator
If everything else is the same, when depreciation appears in the income statement, one can estimate that
the cash flow from operations exceeds the net income.
The market value of an item is:
the cash value you'd get if you sold it
Cash flow refers to Blank______.
the difference between the number of dollars that came in and the number that went out
Changes in capital spending can be negative if
the firm sold more assets than it purchased
In a for-profit business, owners' equity is equivalent to:
the total value of stock in a corporation.
The DuPont identity breaks ROE into ___ parts.
three or 3
The real world has moved away from using Blank______ for calculating future and present values.
time value of money tables
What is the primary objective of an auction market?
to bring buyers and sellers together
What is the main goal of financial management?
to maximize the current share value
What is the purpose of the income statement?
to measure performance over a set period of time
According to Figure 1.2, where does cash generated by a corporation typically go?
to pay corporate taxes paid to shareholders and creditors reinvested in the firm
Which one of the following best explains why financial managers use a common-size balance sheet?
to track changes in a firm's capital structure
A common-size balance sheet expresses accounts as a percentage of Blank______.
total assets
Shareholders' equity equals Blank______.
total assets minus total liabilities
Common stockholders are entitled to the difference between Blank______ and Blank______.
total assets; total liabilities
Free cash flow is better described as Blank______.
total distributable cash flow
Because of Blank______ and Blank______, interest rates are often quoted in many different ways.
tradition; legislation
The officer responsible for managing the firm's cash flows is the Blank______.
treasurer
Which corporate officer is responsible for managing the firm's cash?
treasurer
Which of the following positions generally report to the chief financial officer (CFO)?
treasurer and controller
The formula for the future value of an annuity factor is [(1 + r)t − 1]/r.
true
True or false: A corporation borrows money in its own name.
true
U.S. corporations pay tax at a rate of ______percent. (Enter number only.)
21
According to the current U.S. corporate tax code, the corporate tax rate in effect for 2019 is:
21%
Ferry Boat Corporation has the following financial information: Net fixed assets: Book value: $2,500, Market value: $3,000 Net working capital: $700 Current accounts liquidated: $1,500 ABC Corporation has $900 in long-term debt. What is the book value of equity?
2300
A firm with a 26 percent return on equity earned Blank______ cents in profit for every one dollar in shareholders' equity.
26
What is the present value of $400 invested each year for 12 years at a rate of 6%?
3,354
True or false: A simple way to amortize a loan is to have the borrower pay the interest each period plus a fixed amount.
true
True or false: A way to establish a benchmark for ratio analysis is to identify a peer group.
true
True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.
true
True or false: In a common-size income statement, each item is expressed as a percentage of total sales.
true
True or false: In a large corporation, stockholders and managers are usually separate groups.
true
True or false: Interest rates can be quoted in various ways.
true
True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.
true
True or false: Profit margin equals net income divided by sales.
true
True or false: The DuPont identity is a popular expression breaking ROE into three parts.
true
True or false: The annuity present value of an amount C is calculated as c*{1-[1/(1+r)^t]/r}
true
True or false: The payment for an annuity can be calculated using the annuity present value, the present value factor, and the interest or the discount rate.
true
True or false: The perpetuity present value can be found using the perpetual cash flow and the discount rate.
true
True or false: The total debt ratio equals the total assets minus total equity divided total assets.
true
True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.
true
True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.
true
A partnership must have at least Blank______ owners.
two
If you invest at a rate of r for ______periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.
two
A sole proprietor has Blank______ personal liability for all business debts and obligations.
unlimited
Financial leverage refers to a firm's ______.
use of debt in its capital structure
______ changes as the output of the firm changes.
variable cost
The variables in a future value of an annuity problem include all of the following, except:
volatility or usage
If the cash flow from operations exceeds the total investing and financing cash flows, the cash balance in the statement of cash flows
will increase
Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of Blank______ management.
working capital
Common-size statements are best used for comparing:
year-to-year for your firm. firms of different sizes. competitors.
The cash flows of an annuity due are the same as those of an ordinary annuity except that there is an extra cash flow at Time_____
zero or 0
Ferry Boat Corporation has the following financial information: Net fixed assets: Book value: $2,500, Market value: $3,000 Net working capital: $700 Current accounts liquidated: $1,500 ABC Corporation has $900 in long-term debt. What is the market value of equity?
3600
Days' sales in receivables is given by the following ratio:
365/receivables turnover
What is the future value of $1,200 invested for 20 years at a rate of 6%?
3849
The ABC Corporation has the following information. How much is the Cash Flow to Creditors?
40
What is the present value of $1,200 to be received in 18 years invested at a rate of 5%?
499
For the most recent fiscal year, the Hammock Company's total assets were $850 and net income was equal to $97. Of the $97 net income, $44 was retained. What is the internal growth rate for the Hammock Company?
5.46%
The balance sheet of XYZ Company is shown below. What is the Net Working Capital for the company?
60
What is the future value of $400 invested each year for 15 years at a rate of 6%?
9310
Which of the following spreadsheet functions will result in the correct answer for the below annuity problem: You plan to deposit $100 per year for the next 10 years in an account paying 8 percent. How much will you have in this annuity?
= FV(.08,10,-100,0)
Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year?
= PV(0.10,10,-100,0,0)
Which of the following is the correct Excel function to calculate the present value of $300 due in five years at a discount rate of 10 percent?
= PV(0.10,5,0,-300)
Which of the following is a perpetuity?
A constant stream of cash flows forever
What does shareholders' equity represent?
A residual claim against the firm's total assets
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
An income statement prepared using GAAP will show revenue when it is:
Accrued.
The Balance Sheet Identity is:
Assets = Liabilities + Owners Equity
Which of the following is the balance sheet equation?
Assets equal liabilities plus shareholders' equity.
The interest rate charged per period multiplied by the number of periods per year is equal to____ ________ on a loan.
Blank 1: annual or A Blank 2: percentage or P Blank 3: rate or R
The DuPont identity shows that _______ ________times total asset turnover times equity multiplier equals ROE. (Enter only one word per blank.)
Blank 1: profit Blank 2: margin or margins
True or false: Current assets plus current liabilities equals net working capital.
False
True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.
False
True or false: Given the PV, FV, and payment amount, you can determine the number of periods.
False
True or false: If you invest for two periods at an interest rate of r, then your money will grow to (1 + r) per dollar invested.
False
True or false: Market-to-book ratio equals book value per share divided by market value per share.
False
True or false: The retention ratio equals one minus the ROA.
False
True or false: The times interest earned ratio is EBIT minus interest.
False
True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.
False
True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.
False
One of the important questions in the area of investments includes the potential risks and reward associated with investing ___ in assets.
Financial
______ are the prime source of information about a firm's financial health.
Financial statements
Growth can summarize various aspects of a firm's __________ and ___________ policies.
Financial, investment
The three most important items to keep in mind when reviewing an income statement are:
GAAP, cash versus noncash items, and time and costs
What does GAAP stand for?
Generally Accepted Accounting Principles
According to the textbook, which of the following is not one of the three main questions to be addressed if you wanted to start your own business?
How many employees will I need?
Which of these questions can be answered by reviewing a firm's balance sheet?
How much debt is used to finance the firm? What is the total amount of assets the firm owns?
Business finance is broadly concerned with which of the following?
How to manage day-to-day finances of the firm? How to finance long-term investments? Which long-term investment to make?
How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)?
Increase the present value.
You are analyzing the Statement of Cash flows for Coffey Corporation. You have the following information: Beginning Cash: $220 Operating Activity: $497 Investment Activity $598 Financing Activity: −$212 Calculate the Net cash increase/decrease:
Increase: $883
When are corporate profits taxed?
Individuals pay taxes on corporate dividends. Corporations pay taxes on corporate profits.
Why don't large businesses organize as sole proprietorships or partnerships?
It can be difficult to raise cash for investment in these forms, and that limits the ability of the business to grow.
Which of the following is true about the sustainable growth rate?
It is the maximum rate of growth a firm can maintain without increasing its financial leverage.
How does the Sarbanes-Oxley Act primarily work to make sure that companies tell the truth in financial statements?
It makes management personally responsible for the accuracy of a company's financial statements.
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
It will increase.
In an over-the-counter market, which of the following is true?
Many dealers are also connected electronically. Most of the buying and selling is done by the dealer.
_________ tax rate is the amount of tax payable on the next dollar earned.
Marginal
What is the primary goal of financial management?
Maximization of the current value per share of existing stock
A common error made when solving a future value of an annuity problem is:
Multiplying the annual deposit and the number of years before calculating the problem.
You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the Blank______ value on the financial calculator.
N
Which of the following is the correct equation for return on equity?
Net income/Total equity
NYSE
New York Stock Exchange
Is profit maximization the primary objective of a business?
No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.
Return on equity can be calculated as ROA × Equity multiplier. What is another way to express this equation?
ROE = ROA × (1 + Debt − Equity Ratio)
The first thing reported on an income statement would usually be:
Revenues.
Why would the threat of a takeover motivate a manager to act in stockholders' interest?
Running the firm well and acting in the stockholders' interest makes the firm a less attractive takeover target to begin with.
Which of the following represents the receivables turnover ratio?
Sales/Accounts receivable
Sarbox
Sarbanes-Oxley Act of 2002
SEC
Securities and Exchange Commission
three major of forms of business organization in the United States
Sole proprietorship, partnership and corporation
The Statement of Cash Flows has all of the following categories, except:
Standard
______ financial statements enable one to compare firms that differ in size.
Standardized
______ can be used to encourage managers to maximize the value of the stock.
Stock options
Dividend Tax Credit
Tax formula that reduces the effective tax rate on dividends
What does it mean when a company reports ROA of 12 percent?
The company generates $12 in net income for every $100 invested in assets.
What does it mean when a firm has a days' sales in receivables of 45?
The firm collects its credit sales in 45 days on average.
Which one of the following activities would increase the firm's cash balance?
The firm increases its accounts payable.
Which one of the following activities would decrease the firm's cash balance?
The firm sells more on credit, increasing its accounts receivable.
What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?
The interest rate in your calculator is entered as a whole number, while in the spreadsheet function it is entered as a decimal.
When evaluating financial planning steps, we must consider all of the following, except:
The project horizon for the next 30 to 90 days.
What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?
The total asset turnover ratio will increase.
Which of the following are true of financial ratios?
They are used for comparison purposes. They are developed from a firm's financial information.
How is the average income tax rate computed?
Total tax bill/Total taxable income
Earnings per share can be calculated as Net Income/Total shares outstanding.
True
The Income Statement measures performance over some period of time.
True
To generate a coherent plan, goals and objectives will have to be modified, and priorities will have to be established.
True
True or false: Dividends paid minus net new equity raised equals cash flow to stockholders.
True
True or false: Free cash flow is also known as cash flow from assets.
True
True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.
True
True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.
True
True or false: Interest paid minus net new borrowing equals cash flow to creditors.
True
True or false: Long-term liabilities are not due in the current year (from the date of the balance sheet).
True
True or false: Operating cash flow does not include depreciation or interest.
True
True or false: The cash ratio is found by dividing cash by current liabilities.
True
True or false: The formula for a present value factor is 1/(1+r)^t
True
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
Tyco Enron WorldCom
The conflict of interest between an agent and a principal is called a(n):
agency problem.
The short run is ______.
an imprecise period of time
Which one of these will decrease a firm's sustainable rate of growth?
an increase in the dividend payout ratio
An annuity with payments beginning immediately rather than at the end of the period is called an Blank______.
annuity due
Net working capital will be negative when current assets Blank______ current liabilities.
are less than
An organization must prepare ______ and bylaws when forming a corporation.
articles of incorporation
The cash flow identity states that cash flows from Blank______ should equal cash flows to creditors and equity investors.
assets
Which of the following is shown on the left-hand side of the balance sheet?
assets
Liquidity refers to the ease of changing Blank______.
assets to cash
An annuity due is a series of payments that are made Blank______.
at the beginning of each period
The New York Stock Exchange is a(n) Blank______.
auction market
A company's Blank______ tax rate is its tax bill divided by its total taxable income, and its Blank______ tax rate is the tax rate it pays on the next dollar of income.
average; marginal
A useful way of standardizing financial statements is to choose a _______ year and then express each item relative to that amount.
base
To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?
because the $100 is an outflow from you which should be negative
On the balance sheet, assets are listed at their Blank______ value.
book
The short run is a period when there are Blank______ costs.
both fixed and variable
Which of the following are classified as fixed assets on the balance sheet?
buildings trademark equipment
______ budgeting is the process of planning and managing a firm's long-term assets.
capital
What three subjects is the financial manager concerned with?
capital budgeting working capital management capital structure
A partnership in which partners share in gains or losses and carry unlimited liability for all partnership debts is called a ______.
capital structure
A problem with the TIE ratio is that it is based on EBIT, which is not a measure of ____ available to pay interest.
cash
Future value is the ______ value of an investment at some time in the future.
cash
Working capital includes which of the following?
cash inventory short-term assets
Non-cash items do not affect:
cash flow
Cash flow from assets equals:
cash flow to creditors +cash flow to stockholders
In finance, the value of a firm depends on its ability to generate Blank______.
cash flows
What should you keep in mind when examining an income statement?
cash versus noncash items time and costs GAAP
Future value is the ____value of an investment at some time in the future. (Enter only one word per blank.)
cash, money, or monetary
American Corporation has the following financial information. Year 1 Year 2 Cash $202.95 $245.90 A/R 398.02 485.34 Inventory 785.12 648.54 If Year 1 is the base year, what is the percentage increase/decrease of each current asset amount?
cash= 21% increase A/R= 21% increase inventory= 17% decrease
Tax rates for proprietorships, partnerships, and LLCs Blank______ with the passage of the Tax Cuts and Jobs Act of 2017.
changed
In large firms, financial activity is usually associated with which top officer?
chief financial officer
The size of a company's tax bill is determined by the tax _______.
code
The effective annual rate (EAR) takes into account the Blank______ of interest that occurs within a year.
compounding
The idea behind ______ is that interest is earned on interest.
compounding
The Sarbanes-Oxley Act requires corporate officers to:
confirm the validity of the financial statements. be responsible for errors in the annual report.
Which corporate officer is responsible for accurate financial accounting of the firm's activities?
controller
The ______ office is responsible for corporate tax reporting.
controller's
The Sarbanes-Oxley Act is intended to strengthen protection against:
corporate accounting fraud and financial malpractice
The federal government taxes which of the following?
corporate earnings and shareholder dividends
Public limited companies and joint stock companies are other names for Blank______.
corporations
Product costs are usually shown on the income statement under the heading of Blank______.
cost of goods sold
A firm with a market-to-book value that is greater than 1 is said to have Blank______ value for shareholders.
created
The cash flow identity states that cash flow from assets equals cash flows to Blank______.
creditors and stockholders
Liabilities can be classified as Blank______ or long-term.
current
Assets can be categorized as:
current and fixed assets. tangible and intangible assets.
The current ratio computes the relationship between Blank______.
current assets and current liabilities
What is the Net Working Capital for Capella Corporation?
current assets- current liabilities 300-110= 190
"Increasing shareholder wealth" means increasing the Blank______.
current common stock value
The cash ratio is found by dividing cash by:
current liabilities
A _________ __________ is one that has a life of less than one year, meaning they must be paid within the year.
current liability
How would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same)?
decrease the present value
Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm has increased. The firm has (increased/decreased) its liquidity over the past year.
decreased, decrease, or Decreased
A bad financial decision is defined as a decision that Blank______ shareholders wealth.
decreases
A bad financial decision is defined as a decision that ______ shareholder wealth.
decreases
The more debt a firm has, the greater its:
degree of financial leverage
Net capital spending is equal to the change in net fixed assets plus Blank______.
depreciation
Net capital spending is equal to the change in net fixed assets plus ______.
depreciation
The cash coverage ratio adds Blank______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.
depreciation
Which of the following is a disadvantage of sole proprietorships and partnerships?
difficulty of transferring ownership
In a present value equation, the ____________rate (r) can be found using the PV, FV, and t. (Enter one word per blank.)
discount or discounted
Calculating the present value of a future cash flow to determine its worth today is commonly called Blank______ valuation.
discounted cash flow (DCF)
One step in calculating an EAR ___ is to the quoted rate by the number of times that the interest is compounded.
divide or dividing
Return on assets equals net income ____ by total assets.
divided
The _____ payout ratio equals cash dividends divided by net income.
dividend
Cash flow to stockholders equals Blank______.
dividends paid minus net new equity raised
When a firm smooths earnings to please investors, it is called Blank______.
earnings management
Assume interest is compounded monthly. The Blank______ annual rate will express this rate as though it were compounded annually.
effective
The ____annual rate is the interest rate expressed as if it were compounded once per year.
effective
Which of the following are considered non-owner stakeholders in a company?
employees government suppliers
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the Blank______ of each period.
end
Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the Blank______ of the period.
end
Which of the following are included in a firm's capital structure?
equity and long term debt
Financial statement analysis is primarily "management by Blank______ ."
exception
The GAAP matching principle requires revenues to be matched with Blank______.
expenses
Non-cash items are ______ that _____ cash flow.
expenses; do not directly affect
Common size income statements show balance sheet items as a percentage of current assets.
false
Net working capital represents current assets plus current liabilities.
false
The internal growth rate is where the external funds needed (EFN) is equal to 1, also where the required increase in assets is exactly equal to the addition to retained earnings.
false
True or false: "Profit maximization" is the goal for the management of a corporation in the short run only.
false
True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.
false
True or false: Ending net fixed assets plus beginning net fixed assets minus depreciation equals net investment in fixed assets.
false
True or false: Financial ratios are computed using only balance sheet information.
false
True or false: Future value refers to the amount of money an investment is worth today.
false
True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.
false
True or false: If the interest rate is greater than zero, the value of an annuity due is always less than an ordinary annuity.
false
True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.
false
True or false: Inventory turnover is sales divided by inventory.
false
True or false: Receivables turnover is cost of goods sold divided by accounts receivable.
false
True or false: The Sarbanes-Oxley Act provides incentives for companies to go public in U.S. markets.
false
True or false: The annual percentage rate (APR) is calculated as the interest rate charged per period on a loan divided by the number of periods per year.
false
True or false: The annuity due calculation assumes cash flows occur evenly throughout the period.
false
True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.
false
True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged.
false
True or false: The dividend payout ratio equals cash dividends divided by sales.
false
True or false: The effective annual rate is the interest rate expressed in terms of the interest payment made each period.
false
True or false: The present value is the sum of all expenses in a project.
false
True or false: The price-earnings ratio is price per share times earnings per share.
false
True or false: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.
false
True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.
false
True or false: To find the annuity future value factor, you only need the cash flows and the discount rate.
false
True or false: Using the spreadsheet formula to convert a quoted rate (or an APR) to an effective rate, use the formula NOMINAL(effect_rate, npery).
false
True or false: When using a financial calculator to find the number of payments, the PMT value should be entered as a positive.
false
True or false: With interest-only loans, the principal is never repaid.
false
Long-term solvency ratios are also known as:
financial leverage ratios
Which of the following is not a component of cash flow from assets?
financing expenses
Depreciation is the accountant's estimate of the cost of Blank______ used in the production process matched with the benefits produced from owning it.
fixed assets equipment
Costs that do not change in the short run arise because of Blank______.
fixed commitments
Which of the following is not a way to amortize a loan?
fixed interest payments only
The variables in a present value of a lump sum problem include all of the following, except:
free cash flow
The amount an investment is worth after one or more periods is called the Blank______ value.
future
The present value is the current value of the _____cash flows discounted at the appropriate discount rate.
future
The variable that you are solving for in a future value of an annuity problem is:
fv future value
A partnership in which partners share in gains or losses and carry unlimited liability for all partnership debts is called a Blank______.
general partnership
The common set of standards and procedures by which audited financial statements are prepared are called ______.
generally accepted accounting principles (GAAP)
If the interest rate is greater than zero, the value of an annuity due is always Blank______ an ordinary annuity.
greater than
Given an internal growth rate of 3 percent, a firm will Blank______.
grow by 3 percent or less without any additional external financing
More frequent compounding leads to Blank______.
higher EARs
Under GAAP, assets are generally carried on a firm's balance sheet at Blank______.
historical cost book value
The information needed to compute the profit margin can be found on the Blank______.
income statement
The purpose of a(n) Blank______ is to measure performance over a set period of time.
income statement
An increase in a firm's total asset turnover will Blank______ the sustainable growth rate.
increase
An increase in the profit margin will Blank______ a firm's sustainable growth rate.
increase
An increase in the profit margin will ______ a firm's sustainable growth rate.
increase
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will Blank______.
increase
A perpetuity is a constant stream of cash flows for a(n) Blank______ period of time.
infinite
When finding the present or future value of an annuity using a spreadsheet, the Blank______ should be entered as a decimal.
interest
Which loan type requires calls for the borrower to pay interest each period and to repay the entire principal at some point in the future?
interest only
Cash flow to creditors equals:
interest paid minus net new borrowing
When finding the present or future value of an annuity using a financial calculator, the Blank______ should be entered as a percentage.
interest rate
Period costs are the costs that are allocated to a specific ______.
interval of time
Which of the following is a current asset?
inventory
Operating cash flow _________.
is a sign of trouble if negative over a long period of time tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows
A sole proprietorship is a business that ______.
is owned by one person
Long-term solvency ratios measure what aspect of the firm's financial position?
its financial leverage
Which of the following are real-world examples of annuities?
leases pensions mortgages
When a corporation is formed, it is granted which of the following rights?
legal powers to sue the ability to issue stock
A dollar received one year from today has Blank______ value than a dollar received today.
less
If a company has inventory, the quick ratio will always be Blank______ the current ratio.
less than
If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be Blank______.
less than 1
An ordinary annuity consists of a(n) Blank______ stream of cash flows for a fixed period of time. Multiple choice question.
level
A limited liability company's owners have Blank______ liability.
limited
Businesses are motivated to organize as corporations because stockholders in a corporation have Blank______ liability for corporate debts.
limited
LLC
limited liability company
What type of partnership involves both general and limited partners to run the business?
limited partnership
In a limited partnership, a limited partner's liability for business debts is ______.
limited to their cash contribution to the partnership
Current assets are classified as relatively Blank______; these assets can be converted to cash within the next 12 months.
liquid
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its Blank______.
liquidity
Short-term solvency ratios are also called ____ratios.
liquidity
Capital budgeting is concerned with making and managing expenditures on Blank______.
long term assets
When dealing with compound interest, it is more financially advantageous to have a Blank______ time horizon for investment.
longer
Given an investment amount and a set rate of interest, the Blank______ the time horizon the Blank______ the future value. Multiple choice question. longer; greater
longer; greater
Agency costs occur when Blank______ and stockholder interests are not in line with each other.
management
Time-trend analysis is an example of
management by exception
In a shareholder-manager relationship, who is the agent?
managers
For financial decision-making purposes, the most important tax rate is the Blank______ tax rate.
marginal
The price at which willing buyers and sellers would trade is called Blank______ value.
market
Whenever Blank______ information is available, it should be used instead of accounting data.
market
How is the price-earnings (PE) ratio computed?
market price per share/earnings per share
The price-earnings (PE) ratio is a Blank______ ratio.
market value
How is the market-to-book ratio measured?
market value per share/book value per share
The Blank______ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service.
matching
The goal of a "for-profit" business is to ______ the value of shareholders' wealth.
maximize
A simple way to amortize a loan is to have the borrower pay the interest each period plus some fixed amount. This approach is common with _________-term business loans.
medium
Current assets (plus/minus) current liabilities equals NWC.
minus
Current assets ___ current liabilities equals NWC.
minus
Interest paid (plus/minus) net new borrowing equals cash flow to creditors.
minus
The balance sheet identity shows that stockholders' equity equals assets Blank______ liabilities.
minus
The annuity present value factor equals one ______the present value factor all divided by the discount rate. (Enter only one word per blank.)
minus -
The retention ratio equals one ___ the dividend payout ratio.
minus, less, or -
The concept of the time value of money is based on the principle that a dollar today is worth Blank______ a dollar promised at some time in the future.
more than
A firm may use a price-sales ratio when it has had ______(negative/positive) earnings over the past year.
negative
When using a financial calculator to find the number of payments, the PMT value should be entered as a _____
negative or -
The last item (or "bottom line") on the income statement is typically the Blank______.
net income
Which one of the following is the correct equation for computing return on assets (ROA)?
net income/total assets
Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?
noncash expenses
A primary reason that accounting income differs from cash flow is that an income statement contains Blank______.
noncash items
Using an Excel spreadsheet to solve for the payment in an amortized loan, enter the number of periods as the _____ value.
nper
The cash flow that results from the firm's day-to-day activities of producing and selling is called:
operating cash flow.
The present value of an annuity due is equal to the present value of a(n) Blank______ annuity multiplied by (1 + r).
ordinary
The entire principal of an interest-only loan is the:
original loan amount.
OTC
over the counter
Treasurer
oversees cash management, credit management, capital expenditures, and financial planning
Controller
oversees taxes, cost accounting, financial accounting and data processing
Earnings management is a controversial practice in which corporations Blank______ or Blank______ their earnings to "smooth out" dips and surges and keep investors calm.
overstate; understate
A business without separate legal authority formed by two or more people is known as a ______.
partnership
A limited liability company is taxed like a Blank______, but retains Blank______ for owners.
partnership; limited liability
A limited liability company is taxed like a ______, but retains ______ for owners.
partnership; limited liability
A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows.
When entering variables in a spreadsheet function (or in a financial calculator), the "sign convention" can be critical to achieving a correct answer. The sign convention says that outflows are negative values; inflows are positive values. For which variables is this a consideration?
payment future value present value
The _____ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.
payment (PMT)
The variables in a present value of a lump sum problem include all of the following, except:
payments
One of the most important uses of financial statement information within the firm is:
performance evaluation.
Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as Blank______.
period costs
C/r is the formula for the present value of a(n) Blank______.
perpetuity
The _______present value can be found using the perpetual cash flow and the discount rate. (Enter only one word per blank.)
perpetuity
The present value formula for a(n) Blank______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
perpetuity
Which of the following is not one of the basic areas of finance?
personal finance
Ending net fixed assets minus beginning net fixed assets ______depreciation equals net investment in fixed assets.
plus
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets Blank______.
plus depreciation
The current value of a future cash flow discounted at the appropriate rate is called the Blank______ value.
present
The formula for the Blank______ value interest factor of an annuity is [1 − 1/(1 + r)t]/r.
present
With discounting, the resulting value is called the Blank______ value, while with compounding the result is called the Blank______ value.
present; future
If a company has had negative earnings for several periods, they might choose to use a Blank______.
price-sales ratio
Amortization is the process of paying off loans by regularly reducing the Blank______
principal
Amortization is the process of paying off loans by regularly reducing the Blank______.
principal
The original amount of a loan is termed the loan Blank______.
principal
Which of these topics is not of especial interest to a financial manager?
product development
In practice, accountants tend to classify costs as either Blank______ costs or Blank______ costs.
product; period
In practice, accountants tend to classify costs as either ______ costs or ______ costs.
product; period
Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?
profit margin financial policy dividend policy
Davis Company has provided the following financial data: Total Asset Turnover = .245 Net Income = $400,000 Equity Multiplier = 1.20 Net Sales = $1,300,000 What is the Return on Equity?
profit margin = net income/net sales =3.1 ROE= Profit margin * equity multiplier =9.1%
Return on assets (ROA) is a measure of Blank______.
profitability
Return on equity (ROE) is a measure of Blank______.
profitability
Which of the following are traditional financial ratio categories?
profitability ratios financial leverage ratios turnover ratios
Which one of these is an important mechanism used by unhappy stockholders to replace current management?
proxy fight
If you borrow $15,000 today at 5 percent annual interest to be repaid in one year as a lump sum, this is termed a Blank______.
pure discount loan
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value.
EAR = (1 +____ rate/m)m − 1
quoted or stated
With typical interest-only loans, the entire principal is:
repaid at some point in the future.
Stockholders' equity is always shown on the Blank______ of the balance sheet.
right-hand side
The market value of an asset depends on:
riskiness and cash flows.
Which one of the following items is a source of cash from financing activities in the statement of cash flows?
sale of common stock
In a common-size income statement, each item is expressed as a percentage of total
sales
Receivables turnover is ___ divided by accounts receivable
sales
The profit margin is equal to net income divided by Blank______.
sales
Which one of the following equations defines the total asset turnover ratio?
sales/total assets
When one owner or creditor sells to another, the transaction takes place in the ______ market.
secondary
The owners of a corporation are called Blank______.
shareholders
Who is entitled to the residual value of a firm's cash flows?
shareholders
How is ownership of a corporation represented?
shares of stock
With ____ interest, the interest is not reinvested. (Enter only one word per blank.)
simple
The times interest earned ratio is a measure of long-term _____
solvency
The variables in a present value of an annuity problem include all of the following, except:
source of fund, or risk profile
Which of the following are the primary as well as easy ways used to perform financial calculations today?
spreadsheet functions financial calculator
A(n) Blank______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm.
stakeholder
A(n) ______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm.
stakeholder
Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:
stock options.
Who elects the board of directors and ultimately maintains control of the firm?
stockholders
A corporation receives cash from financial markets by selling Blank______ and Blank______.
stocks bonds
Physical assets are termed Blank______ assets.
tangible
capital gains tax
tax is paid on the investments increase in value over its price
The general formula for Blank______ is (1 + quoted rate/m)m − 1.
the EAR
A shareholder's liability is limited to which of these?
the amount the shareholder invested in the corporation
For a given time period (t) and interest rate (r), the present value factor is Blank______ the future value factor.
1 divided by the reciprocal of
Long-term liabilities represent obligations of the firm lasting more than Blank______.
1 year
The ABC Corporation has the following information. How much is the Operating Cash Flow?
1,294
Rank the ease (from easiest to hardest) of turning the following assets into cash.
1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment
Using a time value of money table, what is the future value interest factor for 10% for 2 years?
1.21
Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?
1.4400
Which formula below represents a present value factor?
1/(1+r)^t
A firm with a profit margin of 10 percent generates Blank______ in net income for every dollar in sales.
10 cents
For the most recent fiscal year, the Hammock Company's total equity was $450 and net income was equal to $97. Of the $97 net income, $44 was retained. What is the sustainable growth rate for the Ladder Company?
10.83%
To find the present value of an annuity of $100 per year for 10 years at 10 percent per year using the tables, find a present value factor of 6.1446 and multiply it by Blank______.
100
Current assets are defined as assets that can be turned into cash within Blank______ months.
12
Franklin Corporation just paid taxes of $152,000 on taxable income of $512,000. The marginal tax rate is 35% for the company. What is the average tax rate for the Franklin Corporation?
152,000/512,000= 30%
cash flow from assets (CFFA)
CFFA= cash flow to bondholders+ cash flow to shareholders CFFA= operating cash flow- net capital spending - changes in NWC
Cal's Market has a return on equity (ROE) of 15 percent. What does this mean?
Cal's generated $.15 in profit for every $1 of book value of equity.
What term applies to the specific combination of debt and equity a firm uses to finance its operations?
Capital Structure
Which one of the following is true?
Cash flows can be derived from financial statements.
Which of the following processes can be used to calculate the future value of multiple cash flows?
Compound the accumulated balance forward one year at a time. Calculate the future value of each cash flow first and then sum them.
When calculating annuity present values using a financial calculator, _____the amount is left blank. (Enter the abbreviation only.)
FV or future value
Which of the following are reasons that the corporation is the most important form of business?
Corporations can enter contracts. Corporations can sue and be sued. Corporations are separate legal entities.
How is the inventory turnover ratio computed?
Cost of Goods Sold / Inventory
How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)?
Decrease the future value.
Which of the following is an example of a non-cash item on an income statement?
Depreciation
____paid minus net new equity raised equals cash flow to stockholders.
Dividends or Dividend
The Blank______ identity can help to explain why two firms with the same return on equity may not be operating in the same way.
DuPont
Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12 percent compounded quarterly to an EAR?
EFFECT(0.12,4)
Which of the following is the multi-period formula for compounding a present value into a future value?
FV = PV × (1 + r)^t
The variable that you are solving for in a future value of a lump sum problem is:
FV future value
Using the PV, discount rate, and ________, you can determine the number of periods. (Enter abbreviation only.)
FV or future value
Future Value Equation
FV=1*(1+r)^t t=number of year r=the interest rate
When considering Net Working Capital, a project will generally need all of the following, except:
Only long-term assets to get the project started.
How is ownership transferred in a corporation?
Ownership is transferred by gifting or selling shares of stock.
If FV = PV × (1 + r) is the single-period formula for future value, which of the following is the single-period present value formula?
PV = FV/(1 + r)
Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r percent interest?
PV = FV/(1 + r)t
The basic present value equation is Blank______.
PV = FVt/(1 + r)t
The variable that you are solving for in a present value of a lump sum problem is:
PV present value
The variable that you are solving for in a present value of an annuity problem is:
PV, The Present Value
FV =_____ × (1 + r)t
PV, present value, $1, or 1
The variables in a future value of a lump sum problem include all of the following, except:
Payments "annuity payments"
______ group analysis is a way to establish a benchmark when using ratios
Peer
The price-earnings ratio is _____per share divided by ____ per share. (Enter only one word per blank.)
Price, earnings
The three parts of the Dupont equation are:
Profit Margin * Total Asset Turnover * Equity Multiplier
Which loan type requires the borrower to repay a single lump sum payment at some time in the future with interest?
Pure Discount
Which of the following are key questions for investments? What is the best mixture of financial
What is the best mixture of financial assets to hold? What determines the price of a financial asset? What are the risks and rewards associated with investing?
According to GAAP, when is income reported?
When it is earned or accrued
Net capital spending is negative when Blank______.
a firm sold off more assets than it purchased
The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes Blank______ to sell.
a long time
Which of the following is the simplest form of loan?
a pure discount loan
The most common way to repay a loan is to pay Blank______.
a single fixed payment every period
The threat of Blank______ motivates managers to make good decisions.
a takeover
The threat of ______ motivates managers to make good decisions.
a takeover
A balance sheet reflects a firm's:
accounting value on a specific date.
Which of the following items are used to compute the current ratio?
accounts payable cash
Which of the following are classified as liabilities on a firm's balance sheet?
accounts payable long-term debt
A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?
accounts receivable
Amounts not yet collected from customers on sales already made are called:
accounts receivable.
Net income refers to income earned Blank______.
after interest and taxes
The costs incurred due to a conflict of interest between stockholders and management are called Blank______ costs.
agency
The relationship between stockholders and management can best be described as a(n) ______ relationship.
agency
The relationship between stockholders and management can best be described as a(n) ______ relationship.
agency
If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?
agency problem