Finance Midterm

Which of the following forms of business organizations provide limited liability to all its owners?

corporation

Changes in the general economy, like changes in interest rates or tax laws, represent what type of risk?

market risk

Rock Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's operating income is equal to

$1,100,000

How much can you borrow today if you can make payments of $3,600 a year for the next five years and the interest rate is 10%?

$13,646.83

What is the maximum that you would be willing to loan your brother for a $100 IOU if he promises to pay you back at the end of the year? You want to earn an annual rate of return of 12%.

$89.29

What is the annual interest rate earned on a deposit that grew from $250 to $502.84 over the last 5 years?

15%

Determining the best way to raise money to fund a firm's long-term investments is called

capital structure decision

What is the present value of a $100,000 cash flow to be received at the end of each of the next 15 years from an account that earns an annual rate of 10%?

$760,608

Select the following account that does NOT belong on the asset side of a balance sheet:

common stock

Suppose that you want to create a "retirement party fund" for yourself and place $50 in a bank account for each of the next 20 years. If that account earns an annual rate of return of 7%, how much will be in your retirement party fund at the end of the twentieth year?

$2,049.77

A corporation has annual sales of $18 million, total assets of $4 million, a debt ratio of 40%, depreciation expense of $200,000, and a tax rate of 40%. The corporation's total stockholders' equity is equal to

$2,400,000

Mark borrows $15,000 to buy a new car. His loan has an annual interest rate of 6.5%, compounded monthly, and his monthly payment is $293.49. How much will he have paid in interest when he has finished repaying his loan in 60 months?

$2,609.40

California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. The firm paid dividends to preferred stockholders of $40,000, and the firm distributed $60,000 in dividend payments to common stockholders. What is California Retailing's "Addition to Retained Earnings"?

$290,000

Rasheed can afford a monthly car payment of $550 for 72 months at an annual interest rate of 7.5 percent. Which of the following is closest to the amount he will be able to borrow for a new car?

$31,810

Siskiyou Corp. has cash of $75,000; short-term notes payable of $100,000; accounts receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and accrued expenses of $75,000. What is the firm's net working capital?

$390,000

Mark borrows $15,000 to buy a new car. His loan has an interest rate of 6.5%, compounded monthly, and his monthly payment is $293.49. If instead his loan had an interest rate of 8%, how much more would he have paid in interest by the time he finished repaying his loan in 60 months?

$639.60

What is the present value of a $150,000 cash flow to be received at the end of each of the next 20 years from an account that earns an annual rate of 9%?

$7,674,018

Universal Financial, Inc. has total current assets of $1,200,000; long-term debt of $600,000; total current liabilities of $500,000; and long-term assets of $800,000. How much is the firm's net working capital?

$700,000

California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. What is California Retailing's EBIT?

$900,000

Benkart Corporation has sales of $5,000,000, net income of $800,000, total assets of $2,000,000, and 100,000 shares of common stock outstanding. If Benkart's P/E ratio is 12, what is the company's current stock price?

$96 per share

Assume that you have $165,000 invested in a stock whose beta is 1.25, $85,000 invested in a stock whose beta is 2.35, and $235,000 invested in a stock whose beta is 1.11. What is the beta of your portfolio?

1.37

What annual rate must be earned to turn $50,000 into $250,000 in 15 years?

11.33%

Denver Systems has total assets of $1,000,000; common equity of $400,000; a gross profit of $800,000; total operating expenses of $620,000; interest expense of $20,000; income taxes of $74,000; and preferred dividends of $30,000. What is Denver Systems' return on equity?

14%

Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12. Wendy sold the shares on 12/31/12 for $3.45. Genetics stock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk premium is 9%. Wendy's holding period return is

15%

Assume that you have $100,000 invested in a stock that is returning 14%, $150,000 invested in a stock that is returning 18%, and $200,000 invested in a stock that is returning 15%. What is the expected return of your portfolio?

15.78%

The risk-free rate of interest is 4% and the market risk premium is 9%. Howard Corporation has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of 27%. The required return on Howard Corporation stock is

22%

Assume that you expect to hold a $40,000 investment for one year. It is forecasted to have a year end value of $42,000 with a 30% probability; a year end value of $48,000 with a 45% probability; and a year end value of $60,000 with a 25% probability. What is the expected holding period return for this investment?

23%

Rock Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's net profit margin is equal to

25.67%

A well-diversified portfolio includes investments in 50 securities. The portfolio's systematic risk is likely to be about

40% of the total risk

TransSystems Inc. has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000. What is TransSystems Inc.'s debt ratio?

43.7%

You currently have $11,167 in your savings account. What interest rate do you need to earn in order to have $20,000 in the account in 10 years?

6%

What is the annual interest rate earned on a deposit that grew from $60 to $111.06 over the last 8 years?

8%

What would be the interest rate on a loan of $39,927.10 that you paid off with annual payments of $10,000 for each of the next five years?

8%

When comparing inventory turnover ratios, other things being equal,

A higher inventory turnover is preferred to improve liquidity

What information does a firm's statement of cash flows provide to the viewing public?

A report documenting a firms cash inflows and cash outflows from operating, financing, and investing activities for a defined period of time

What information does a firm's income statement provide to the viewing public?

A report of revenues and expenses for a defined period of time

Assume that an investor is offered a choice of a risk-free government bond that is expected to return 3.5% or a high-risk corporate stock. According to one of the principles of finance, what would induce the investor to purchase the corporate stock?

A return that is substantially higher than 3.5%

Which of the following accounts does NOT belong in the liability section of a balance sheet?

Additional paid-in capital

Why should you care about the power of compounding and the time value of money?

All of the above It is critical to obtaining your future financial goals The sooner you start saving for retirement, the less you have to save each year You may outlive your social security and employer's retirement plan It is possible to build a large estate for yourself, spouse, and children

Which of the following is true if a firm wishes to collect its accounts faster by imposing stricter credit terms on its customers?

All of the above The firms average collection period is likely to fall. The firms accounts receivable turnover might rise. The firms sales might decrease.

All of the following statements about balance sheets are true EXCEPT

Balance sheets show average asset balances over a one-year period

Examples of uses of cash include

Borrowing an additional amount using a secured loan

Company A and Company B have the same gross profit margin and the same total asset turnover, but company A has a higher return on equity. This may result from

Company A has lower selling and administrative expenses, resulting in a higher net profit margin

A company borrows $2,000,000 and uses the money to purchase high technology machinery for its operations. These are examples of

Cash flow from financing and cash flow from investing

Which of the following statements is MOST correct concerning risk and diversification?

Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category

A corporation's operating profit margin is equal to

EBIT divided by sales

Advantages of the corporate form of business organization include

Easier transfer of ownership

Uses historical financial statements to measure a company's performance and in making financial projections of future performance

Financial analysis

The current ratio of a firm would be decreased by which of the following?

Inventories are sold on a long-term credit basis

Investment A has an expected return of 15% per year, while Investment B has an expected return of 12% per year. A rational investor will choose

Investment A if A and B are of equal risk

The current ratio of a firm would be increased by which of the following?

Land held for investment is sold for cash

For a retailer with inventory to sell, the acid-test ratio will be

Less than the current ratio, thus providing a more stringent measure of liquidity

In an ideal world, which of the following would be used to evaluate firm performance?

Market value of assets

The primary goal of a publicly owned corporation is to

Maximize shareholder wealth

Which of the following is/are true?

Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks

Which of the following transactions will increase a corporation's operating return on assets?

Negotiate a new contract that lowers raw material costs by 10%

Nelson Industries has a higher debt ratio than Butler, Inc., and Nelson also has a higher times interest earned ratio than Butler. If Nelson and Butler both have the same amount of total assets, then

Nelson may have more non-interest bearing liabilities, such as accounts payable, than butler has

Company A has a higher days sales outstanding ratio than Company B. Therefore,

Other things being equal, company B has a cash flow advantage over company A

The capital asset pricing model

Provides a risk-return trade-off in which risk is measured in terms of beta

What financial statement explains the changes that took place in the firm's cash balance over a period?

Statement of cash flow

Which of the following ratios would be the most useful to assess the risk associated with a firm being able to pay off its short-term line of credit?

The acid test ratio

The Colorado Jet Boat Company had a cash balance of $3 million at the beginning of 2010. During 2010, Sales were $8 million and expenses were $7 million. Therefore,

The cash balance at the end of 2010 cannot be determined from the information given

Two companies have identical assets and operating activities. Which of the follow statements is true?

The company with more debt will have lower net income due to interest expense

Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions will increase the company's current ratio?

The company writes a $30,000 check to pay off some existing accounts payable

The current ratio of a firm would equal its quick ratio whenever

The firm has no inventory

Beta is a statistical measure of

The relationship between an investments returns and the market return

A method by which one can compare cash flows across time, either as what a future cash flow is worth today (present value) or what an investment made today will be worth in the future (future value), is called

Time value of money

The __ Principle states that a dollar today is worth more than a dollar in the future.

Time value of money

Wheeler Corporation had retained earnings as of 12/31/10 of $15 million. During 2011, Wheeler's net income was $7 million. The retained earnings balance at the end of 2011 was equal to $20 million. Therefore,

Wheeler paid a dividend in 2010 of $2 million

Investors generally don't like risk. Therefore, a typical investor

Will only take on additional risk if he expects to be compensated in the form of additional return

The appropriate measure for risk according to the capital asset pricing model is

beta

Which of the following accounts does NOT belong on the asset side of a balance sheet?

accruals

Common-sized income statements

assist in the comparison of different sizes

Net working capital is equal to

current assets minus current liabilities

Common-size balance sheets are balance sheets of companies with almost identical total assets (within 2% of each other).

false

If the stock market is efficient, then investors do not need to read the Wall Street Journal or research companies before they select which stocks to buy because market prices already reflect all publicly available information.

false

Your money will grow or compound _ as the number of compounding periods per year becomes _.

faster; larger

All of the following business organizations provide limited liability to their owners EXCEPT

general partnership

Which of the following accounts belongs on the asset side of a balance sheet?

inventory

Which of the following accounts does NOT belong in the equity section of a balance sheet?

long-term debt

Which of the following is an advantage of the general partnership form of business organization?

low cost of formation

The increase in owners' equity for a given period is equal to

net income minus dividends

A perpetuity is an annuity where the payments

never stop

Cash flows between investors and the firm, what we call financing cash flows, occur in one of four ways EXCEPT:

pay stock dividend

Which of the following accounts belongs in the equity section of a balance sheet?

retained earnings

An income statement may be represented as follows:

sales-expenses= profits

A financial manager is evaluating a project which is expected to generate profits of $100,000 per year for the next 10 years. The project should be accepted if...

the present value of the projects cash inflows exceeds the present value of the projects cash outflow

Common-sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm's financial performance across time and with competitors.

true

Determining how a firm should raise money to fund its long-term investments is referred to as capital structure decisions.

true

Diversifying among different kinds of assets is called asset allocation.

true

Financial ratios are used by managers inside the company and by lenders, credit-rating agencies, and investors outside of the company.

true

In a limited partnership at least one general partner must exist; that general partner has unlimited liability.

true

Its ability to raise capital by selling stock makes the corporation the best form of organization in terms of raising capital.

true

Operating profits or EBIT is used to measure a firm's profits on assets because it does not include the firm's cost of debt financing.

true

Ratios are used to standardize financial information, thereby making it easier to interpret.

true

Seasonality causes comparability problems in ratio analysis. A common solution is to use an average account balance as opposed to an ending account balance.

true

Shareholder wealth maximization means maximizing the price of the existing common stock.

true

The goal of the firm's financial managers should be the maximization of the total value of the firm's stock.

true

Variation in the rate of return of an investment is a measure of the riskiness of that investment.

true

When making financial decisions, managers should always look at marginal, or incremental cash flows.

true