Finance Exam Review
Profitability Ratios
Profit Margin Return on Assets Return on Equity
Securities and Exchange Commission
Public offerings of debt and equity must be registered with the:
Profitability Ratio
Return on Assets (ROA) is an example of a ________.
How much inventory should be on hand for immediate sale?
What is a following question that is a working capital management decision?
Capital Budgeting
What long-term investments should a firm take on and how do we decide what is a good project or which one to choose?
Capital Structure
Where will we get the long-term financing to pay for the investment (Debt or Equity) and how much will that cost us?•
Goal of Financial Management
- Profitability - Risk Management
Agency Problems/Costs
- Separation of ownership and management - Agency relationship - Principal hires agent to represent her interests - conflict of interest between agent and principal
ordinary annuity
- all payments are in the same amount - all payments are made at the same intervals of time - all payments are made at the end of each period
Characteristics of an Annuity
-Identical payments each period•All periods are evenly spaced -Same interest rate between each period -Ordinary annuity: first payment occurs at the end of the period -Annuity due: first payment occurs at the beginning of the period
corporation
A business created as a distinct legal entity and treated as a legal "person" is called a(n):
sole proprietorship
A business owned by a solitary individual who has unlimited liability for the firm's debt is called a:
working capital
A firm's short-term assets and its short-term liabilities are referred to as the firm's:
Value
A goal of corporations is to create _____ over time for the owners of the firm.
Significant Loss in Value
A highly liquid asset can be converted to cash quickly without a ___________.
b. false
A perpetuity is a finite series of equal cash flows. a. true b. false
corporations
Agency problems are most associated with:
$2,086,722.88
An alumnus of your university gifted money to the school to provide annual scholarships to students starting in 5 years. The school expects to earn an annual rate of return of 9.5 percent and distribute $285,000 in scholarships a year forever based on thegift. What was the amount of the gift today?
Higher Present Value ; Higher Future Value
An annuity due will always have a ________ and _________ than an ordinary annuity.
whether or not to purchase a new machine for the production line.
An example of a capital budgeting decision is deciding:
how much debt should be assumed to fund a project.
Capital structure decisions include determining:
Annual Percentage Rate (APR)
Cost of borrowing money on an annual basis; takes into account the interest rate and other related fees on a loan.
Quick Ratio
Current Assents - Inventory / Current Liabilities
Net Working Capital (NWC)
Current Assets - Current Liabilities
Current Ratio
Current Assets / Current Liabilities
Cash Coverage Ratio
EBIT + Depreciation / Interest Expense
Times Interest Earned
EBIT / Interest Expense
26.67%
Elusive Credit Cards, Inc. charges a daily rate of 0.06479 percent on its credit cards. What is the effective annual rate (EAR) for its cards?
Auction Market
Exchange (ex. NYSE)
$10,700
Fallway, Inc. had current assets of $121,800 and current liabilities of $114,300 last year. This year, current assets are $118,600 and current liabilities are $100,400. What is the change in net working capital?
shareholders
Financial managers should primarily focus on the interests of:
16.36% ; 18.46%
Firm A and Firm B have total debt ratios of 45% and 35% and return on assets (ROA) of9% and 12%, respectively. What is the return on equity (ROE) for Firm A and Firm B?
b. False
For a given time period, the higher the interest rate, the smaller the future value. a. True b. False
Working Capital Management
How will we manage the everyday financial activities of the firm?
Earnings Per Share
Net Income / Shares Outstanding
Return on Assets (ROA)
Net Income/Total Assets
Return on Equity (ROE)
Net Income/Total Equity
double taxation of distributed profits
One disadvantage of the corporate form of business ownership is the:
Double Taxation
One of the disadvantages of a corporation as a business entity is ______.
Primary market
Original sale of security
Dealer market
Over the Counter (ex. NASDAQ)
Secondary Market
Securities bought and sold after original sale
was facilitated in the secondary market
Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:
Average Tax Rate (ATR)
Tax liability divided by taxable income. It is the percentage of income paid in taxes.
2.27
Taylor has just received an insurance settlement of $58,400. She wants to have $80,000 for her oldest daughter to attend college in 14 years. What is the rate of return that she must earn on her savings to achieve her goal?
Annual Percentage Rate (APR)
The effective annual rate (EAR) equals the ______ when interest is compounded annually.
inability to raise cash.
The growth of both sole proprietorships and partnerships is frequently limited by the firm's:
Marginal Tax Rate (MTR)
The percentage of the next dollar you earn that must be paid in taxes is referred to as the __________.
vice president of finance
The treasurer of a corporation generally reports directly to the:
b. False
To find the per-period interest rate, you divide the effective annual rate (EAR) by the number of periods per year. a. True b. False
$3386.94
Today, Jonathan is investing $34,000 at an APR of 5 percent compounded semi-annually, for 7 years. How much additional income could Jonathan earn if he had invested this amount at an APR of 6 percent compounded semi-annually?
Total Debt Ratio
Total Assets - Total Equity / Total Assets
Debt to Equity Ratio
Total Debt / Total Equity
c. corporation
Which business form is best suited to raising large amounts of capital? a. limited partnership b. general partnership c. corporation d. sole proprietorship
Both general partners and sole proprietors
Which of the following individuals have unlimited liability for a firm's debts based on their ownership interest?
b.) Increasing current profits when doing so lowers the value of the company's equity
Which one of the following actions by a financial manager is most apt to create an agency problem? a.) Refusing to lower selling prices if doing so will reduce the net profits b.) Increasing current profits when doing so lowers the value of the company's equity c.) Refusing to borrow money when doing so will create losses for the firm d.) Refusing to expand the company if doing so will lower the value of the equity
Payment of loan interest
Which one of the following is a cash flow from a corporation into the financial markets?
d. Sale of a new share of stock to an individual investor
Which one of the following is a primary market transaction? a.) Gift of stock by a shareholder to a family member b.) Stock ownership transfer from one shareholder to another shareholder c.) Sale of currently outstanding stock by a dealer to an individual investor d.) Sale of a new share of stock to an individual investor
a.) How should a product be marketed?
Which one of the following questions is least likely to be addressed by financial managers? a. ) How should a product be marketed? b.) Should customers be given 30 or 45 days to pay for their credit purchases? c.) Should the firm acquire new equipment? d.) Should the firm borrow more money?
b.) Income from both sole proprietorships and partnerships that is taxable is treated as individual income
Which one of the following statements is correct? a.) Only firms organized as sole proprietorships have limited lives. b.) Income from both sole proprietorships and partnerships that is taxable is treated as individual income c.) Partnerships are the most complicated type of business to form. d.) A general partnership is legally the same as a corporation.
$22,438.78
You are considering a project that will provide annual cash inflows of $4,500, $5,700, and $8,000 at the end of years 1, 2, and 4, respectively. What is the future value of these cash flows at year 5, given a 9 percent discount rate?
30.41
You can deposit $850 today into a savings account. How long must you wait for the investment to grow to $5,000 if you can earn 6 percent per year on this investment?
$14597.62
You need $20,000 in cash to buy a car 5 years from today. You expect to earn 6.5 percent, compounded annually, on your savings. How much do you need to deposit today if this is the only money you will save for this purpose?
$21,606.46
You will receive annual payments of $4,000 at the end of each year for ten years. The first payment will be received in 3 years from today. What is the present value of these payments as of today if the annual discount rate is 9 percent?
$320
Your grandfather started his own business 65 years ago. He opened a savings account at the end of his sixth month of business and contributed $X. Every six months since then he saved another $X. His savings account has paid an effective annual rate (EAR) of 5.0625 percent. Today, his account is valued at $304,384.88. How much did your grandfather save every six months?
annuity due
an annuity for which the cash flows occur at the beginning of the period. all payments are the same amount (rent for example)
Liquidity
ease at which asset is converted into cash
Annuity
finite series of equal payments that occur at regular intervals
Perpetuity
infinite series of equal payments
Price Earnings Ratio
market price per share/earnings per share
Market to Book Ratio
market value per share/book value per share
capital structure
mix of debt and equity
profit margin
net income/net sales
Effective Annual Rate (EAR)
the interest rate expressed as if it were compounded once per year
Advantages and Disadvantages of Liquidity Ratios
•Advantages: Book value and market value of current assets and liabilities are likely to be similar •Disadvantages: Poor predictor of future, these ratios change very frequently and can be easily misinterpreted due to seasonality and other temporary factors. However, trends over time are meaningful.
