Finance Modules 1-6

During a fiscal year, a company has $20,000,000 in revenue. Its operating expenses are $17,000,000. What is the company's operating margin?

0.15

At the end of a fiscal year, a company had $8,000,000 in revenues, $6,000,000 in operating expenses and $500,000 in non-operating revenue. Its total assets at the end of the year was $15,000,000. What is its Basic Earning Power ratio?

0.1667

You plan to invest $100,000 in a 3 year Certificate of Deposit that has a 5% compound interest rate. What is its future value?

115,763

What is the future value in 30 years of $100,000 invested today in a savings account earning a 1% simple interest rate every year (rounded up to the nearest dollar)?

130,000

What is the future value in 30 years of $100,000 invested today in a savings account earning a 1% compound interest rate every year (rounded up to the nearest dollar)?

134785

During a fiscal year, a company had $25,000,000 in total sales. It had a cost of goods sold (COGS) of $18,000,000 and $4,000,000 in additional expenses. What is the company's gross profit margin?

28%

A business begins its fiscal year with an inventory balance of $1,000,000. During that year its cost of goods sold is $3,500,000. Its inventory balance at the end of the year is $500,000. What is its inventory turnover for the year?

4.67

A business begins its fiscal year with $10,000,000 in total assets. During the year it has net sales revenue of $45,000,000. At the end of the year it has $8,000,000 in total assets. What is its total assets turnover ratio?

5

At the beginning of a fiscal year, a company has $1,000,000 in fixed assets. During that year, it makes $8,000,000 in net sales. At the end of the fiscal year it has $1,500,000 in fixed assets. What is its fixed-asset turnover ratio?:

6.4

A company has assets of $2,000,000, net sales of $3,000,000, and $1,500,000 in equity. Its net income is $10,000,000. What is its return on equity?

6.667

Which of the following represents a company in a developed economy operating at peak effective capacity?

80% design capacity.

An annuity pays $1500 at the beginning of every month for five years. The interest rate of the annuity is 4%. What is this annuity's future value?

99,780

A US Treasury security matures in 4 years. What type of treasury is it?

A bill.

Which of the following predictions based on a description of the yield curve is correct?

A flat yield curve suggest that interest rates will be cut. An inverted yield curve suggests that interest rates will be dramatically cut. A normal yield curve suggests that interest rates will be raised in the future.

A bond pays a coupon rate equal to the LIBOR rate plus 0.30%. The coupon rate is recalculated every three months. What type of bond is this?

A floating rate note.

Which of the following is an explanation for why the concept of the time value of money is important to a business?

A project's future unadjusted revenues can be misleading when trying to determine its profitability. By figuring out the present value of future income, a company can better compare possible projects. The present value of a dollar you get in a year is less than the value of a dollar you get today.

Which of the following best defines finance?

A study of fund management and asset allocation over time.

Which of the following could be an appropriate period used in a present value calculation?

A year. Three months. A month.

Which answer best summarizes how the fields of accounting, finance, and economics relate to each other?

Accounting is backwards looking, finance projects forward, and economics studies cause and effect.

Which of the following is NOT a correct definition of a basic type of financial ratios?

Activity ratios are concerned with shareholder audiences.

Which of the following is NOT a step in constructing a multi-step income statement?

Add all revenues, then subtract all expenses.

Which of the following are debt instruments that companies use as investments? Choose one answer.

Bonds

Which of the following is the correct order of how assets should be presented on a balance sheet?

Cash; accounts receivable; inventory; property, plant and equipment (PPE).

Which of the following is NOT a type of bond?

Certificate of deposits (CDs)

Which of the following is NOT a current asset?

Copyrights

There has been a recent push to standardize accounting standards worldwide. Which limitation of financial statements does this step address?

Cross-time or cross-company comparison of financial statements can be difficult.

Which of the following is NOT a way to calculate the debt to equity ratio?

Debt / (Debt + Equity)

Which of the following is a job function associated with a corporate finance department?

Determining whether to pay a dividend to the corporation's shareholders.Valuing the profitability of multiple projects and choosing one in which to invest. Preparing the corporation's budget for the next fiscal quarter.

A company wants to forecast its cash flows for the next 30 days. Which method should it use?

Direct Method.

Which of the following is a responsibility of a financial manager?

Ensuring the business has enough cash to pay its financial obligations. Managing the budget. Figuring out financial projections and whether a project is worth financing.

Which of the following statements regarding strategic planning and financial forecasting is correct?

Financial forecasts help strategic planners understand the possibilities of different investments.

Many countries require that a company's financial statements be audited by an unbiased third party. Which limitation of financial statements does this requirement address?

Financial statements can be intentionally manipulated to make the company look better.

A company is considering merging with another business. It is planning on preparing a pro forma income statement. Which of the following should be included in the pro forma statement?

How much the merged company's income tax expense will increase. If the merged company will have increased Research & Development (R&D) expenses. How much the company's revenues will increase due to the merger.

Which of the following is a reason why a person would study finance?

Improve management of personal finances Better understand the economic environment Apply financial concepts to business situations

Which of the following statements about net profit margins is NOT true?

Net profit margin shows the relationship between revenue and Cost of Goods Sold (COGS).

A company sells produce to small farmer markets and has receivables of $30,000. It believes that it may face a series of short-term cash deficiencies in the near future. Which of the following is an option the company can pursue?

Obtain a line of credit with its bank.

A security offers to pay the holder $1000 at the end of every month for five years. What type of annuity is this?

Ordinary annuity.

Which of the following the correct formula for calculating present value using compound interest?

PV = FV / (1+i)ⁿ

Which of the following statements correctly defines a component of Cost of Goods Sold?

Parts, Raw Materials, and supplies used are all physical objects that go into making a good.

Which of the following is the correct order of steps when performing a forecast related to a company's performance?

Perform sales forecast, multiply by unit price, assess market price, assess cost, determine profit.

What are the three central components of business ethics?

Personal, professional and corporate.

Which of the following best summarizes why there may be a difference between a company's pretax income and taxable income?

Pretax income is based on revenue recognition; taxable income is based on the company's cashflow.

Which of the following statements regarding pro forma financial statements is correct?

Pro form statements summarize the projected future status of a company based on current statements.

Balance analysis is primarily based on ratios. Which of the following statements regarding ratio analysis associated with balance sheets is correct?

Profitability analysis concerns return on capital: risk analysis concerns credit risk.

Which of the following is a true statement about using Return on Equity (ROE) to analyze a company?

ROE measures how efficient the company is at generating profits from the funds invested in it.

Which of the following is NOT one of the four basic GAAP principles?

Revenue should be recorded when realized or realizable and when cash is received.

Which is the following is a way a business can finance a new business opportunity.

Sell some of its equity Use money the business already has Borrow money from a bank or other third party

Which of the following statements correctly defines a type of other expenses input?

Selling, General, and Administrative expenses consist of the combined payroll costs. Depreciation is the decrease in the value of an asset due to its use over time. Amortization is the process of depreciating an intangible asset of the company.

Which of the following occurred during the financial crisis of 2007-2008?

Significant declines in consumer wealth and prolonged unemployment. Several major institutions failed or were subject to government takeover. A currency crisis, with investors transferring their wealth to countries with stronger currencies.

You decide to make an investment on a bond that pays 5% interest on the principal only. Which of the following describes how interest accrues on this investment?

Simple interest.

Each of the following is an argument for considering the interests of a broad group of stakeholders when making corporate decisions EXCEPT:

Since stakeholders are direct owners of the company, their interests should be protected.

Which of the following is a limitation associated with income statements?

Some values are based on judgments and estimates. Items that might be relevant to a company's value cannot be reliably measured and are not reported. Some figures are based on differing accounting methods.

Which of the following describes a difference between stocks and bonds?

Stockholders generally have an equity stake in the business while bondholders have a creditor stake.

You plan to invest $100,000 in a 3 year Certificate of Deposit that has a simple interest rate of 5%. What is its future value?

$115,000

A company wants to have $5 million in sales with $1 million in profit. It will have fixed costs of $3 million. Each unit of its product sells for $20. How much contribution per unit must the company have to meet its goals?

$16

Assume you invest money in a bond that will pay you $250,000 in four years. The bond has an annual interest rate of 5%. You do not receive interest payments while you own the bond; it is zero-coupon. What is the bond's present value?

$205,676

A five year annuity pays $1000 at the end of every month for four years. It has an interest rate of 3%. What is its present value?

$25,266

In a year, you expect to receive a payment of $1 million in a year. That annual interest rate is 5%. What is the present value of the future payment?

$952,381

Which of the following correctly pairs a ratio with its financial ratio grouping?

The acid-test, or quick, ratio is a type of liquidity ratio.

Which of the following statements regarding balance sheets is true?

The balance sheet's sections are assets, liabilities, and ownership equity.

A company issues a bond with a coupon rate of 5%. Since the bond was issued, market interest rates have decreased. What effect will this decrease have on the bond's market price and its current yield?

The bond will trade above par and its current yield will decrease.

What does it mean when a business has a working capital deficit?

The business lacks the current assets to pay its short-term expenses and liabilities.

Which of the following is a stakeholder in a company?

The company's shareholders The company's employees The company's suppliers

Which of the following is NOT information used to calculate an asset's book value?

The current market price of the asset.

A company has<em> $100,000</em> in cash, $300,000 in accounts receivable, $50,000 in inventory and a $300,000 office building.Its current liabilities are $250,000.What is the company's current ratio, and does that ratio good short-term financial strength?

The current ratio is 1.8, and the ratio indicates good short-term financial strength.

A sinking fund is used by firms to retire some of its outstanding debt every year. Which of the following is a way that a sinking fund may operate?

The firm may buy the bonds at a special call price stipulated in the bond's sinking fund provision. The firm may repurchase the bonds in the open market. The firm may repurchase the bonds at the current market price or the call price, whichever is lower.

Which of the following statements regarding shareholder and market value is correct?

The idea of maximizing market value is related to the idea of maximizing shareholder value.

Which of these is a variable used to calculate the time value of money?

The interest rate. The amount of time that has passed. The present value of the sum you have.

Which of the following is a correct statement regarding a method of drafting a company's income statement?

The non-operating section of the multi-step method covers all non-primary revenues and losses. The single-step method requires totaling a company's revenue, then subtracting all of its costs. The multi-step method requires calculating the gross profit then subtracting operating expenses.

Which yield curve theory is based on the premises that financial instruments of different terms are not substitutable and therefore the supply and demand in the markets for short-term and long-term instruments is determined largely independently?

The segmented market hypothesis.

When crowding out occurs, investment spending decreases. What causes this phenomenon?

The total money supply is increased, increasing interest rates.

Which of the following is a limitation associated with using a balance sheet?

The value of some assets listed on the balance sheets are estimates, not the true financial value. Some assets, such as the loyalty of the business's workers, are not included on the balance sheet. Assets are recorded at their historical cost, not their current market value.

Which of the following is the definition of the Macaulay duration?

The weighted average time, measured in years, until cash flows are received.

Which of the following concepts is the underlying driver behind all finance?

Time

How is finance used in organizations?

To maximize shareholder value. To choose between different potential investments.To ensure that money is at the right place at the right time.

A company wants to increase the amount of time in its disbursement cycle. Which of the following is a valid way to do that?

Use credit cards as often as possible. Mail payment to suppliers for contractual obligations. Pay for purchases using checks.

Which of the following is NOT a liability that a business must include on its balance sheet?

Wages paid to its employees.

When does a bond usually sell at its par value?

When the bond's coupon rate is the same as the bond's yield to maturity. When the bond is first issued. When the bond matures.

Which of the following is NOT something a corporation must consider when making an investment decision?

Whether you can accurately calculate the guaranteed return on the investment.

Which of the following appropriately defines a type of production schedule input?

Work in process are materials and components that have begun transformation to finished goods. Goods for resale are returned products that can still be sold. Raw materials are basic materials that are used to make a company's products.

Which of the following is a noncash item that would be included on the income statement?

Write down of inventory. Depreciation and Amortization Unrealized losses from investments

The terms of a bond allows its issuer to redeem the security at anytime. This type of bond is _____.

an American callable.

Which of the following is usually listed first on a balance sheet?

assets

According to the accounting equation, net worth must equal ________.

assets minus liabilities

Moral ________ is best defined as an individual's ability to achieve 'proportionality' relative to understanding the perspective or viewpoints of others.

imagination

A period of three consecutive months (1/4 of a year).

quarter

Which of the following is the correct definition of the accounting equation?

Assets = Liabilities + Owner's Equity

Which of the following risks refers to the possibility that the company will fail to earn the appropriate return on the money and effort it puts into the new product? Choose one answer.

Investment risk

A bond makes only one payment - the payment of the face value on the maturity date. The bond is sold at a discount. What type of bond is this?

Zero-coupon bond

The terms of a bond allow its issuer to redeem the bond on December 31st, four years after the bond was issued. The issuer can only redeem the bond on that date. This type of bond is ____ .

a European callable.