Finance Study
A loss incurred by a corporation
a. can be carried forward indefinitely.
You want to buy a new sports car 3 years from now, and you plan to save $6,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?
b. $19,583.96
Which of the following statements is CORRECT?
b. In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section.
A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
b. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
Which of the following statements is CORRECT?
b. The balance sheet gives us a picture of the firm's financial position at a point in time.
Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.
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The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and the statement of stockholders' equity.
true
All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.
true
How much is each $1 due in 14 years at a discount rate of 5% worth today?
$0.51
1. What is the present value of $1 due in 3 years when the discount interest rate is 10%?
$0.75
What is the future value of $1 in Period 4 when the interest rate is 5%?
$1.22
Pace Co. borrowed $10,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pace have to pay in a 30-day month?
$60.42
Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $40 million of common equity on its balance sheet, what is the company's Market Value Added (MVA)? Answer options are provided in whole dollar.
-$6,000,000
The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Refer to Exhibit 4.1. What is the firm's current ratio? Do not round your intermediate calculations.
0.94
The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.Refer to Exhibit 4.1. What is the firm's total assets turnover? Do not round your intermediate calculations.
1.60
Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. Merchants Bank offers to lend you the $50,000, but it will charge 6.8%, simple interest, with interest paid at the end of the year. What's the difference in the effective annual rates charged by the two banks?
1.71%
Suppose you inherited $175,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?
18,157.02
You are offered a chance to buy an asset for $4,500 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?
22.64%
Suppose your credit card issuer states that it charges a 24.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?
26.82%
What is the PV of an annuity due with 5 payments of $7,900 at an interest rate of 5.5%?
35,590.69
Suppose you just won the state lottery, and you have a choice between receiving $3,025,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.
5.35%
What is the PV of an ordinary annuity with 10 payments of $7,700 if the appropriate interest rate is 5.5%?
58,039.72
You have a chance to buy an annuity that pays $2,450 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?
6,973.48
Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 6.50%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?
6.66%
If the interest rate were 10%, how many periods would it take for the future value to be worth $1.95?
7 periods
What's the present value of a perpetuity that pays $3,800 per year if the appropriate interest rate is 5%?
76,000.00
Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 20.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?
83.37%
Which of the following statements is CORRECT?
a. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.
Suppose you have $850 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?
a. $1,009.53
How much would $100, growing at 5% per year, be worth after 10 years?
a. $162.89
HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. Both firms finance using only debt and common equity, and total assets equal total invested capital. However, HD uses more debt than LD. Which of the following statements is CORRECT?
a. HD would have the lower net income as shown on the income statement.
You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?
a. The discount rate increases.
Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
c. If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.
Which of the following statements is CORRECT?
c. Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.
Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?
c. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm's performance over time.
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If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.
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In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital.
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Which of the following statements is NOT CORRECT?
d. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.
Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.
d. Investment D pays $2,500 at the end of 10 years (just one payment).
Money markets are markets for
d. Short-term debt securities such as Treasury bills and commercial paper.
Below is the common equity section (in millions) of Timeless Technology's last two year-end balance sheets: 20192018Common stock2,0001,000Retained earnings2,0002,340Total common equity$4,000$3,340 The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?
d. The firm issued common stock in 2019.
Which of the following statements is CORRECT?
e. If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.
In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."
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Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects. These ratios include the Price/Earnings, the Market/Book, and Enterprise Value/EBITDA ratios.
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Which of the following statements is CORRECT?
e. The assets section of a typical company's balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest-lived assets listed last.
Which of the following statements is CORRECT?
e. Time lines are useful for visualizing complex problems prior to doing actual calculations.
All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.
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An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.
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If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.
false
In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.
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Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.
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One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.
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Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the NASDAQ, where anyone can make transactions.
false
Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)
false
The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.
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The next-to-last line on the income statement shows the firm's earnings, while the last line shows the dividends the company paid. Therefore, the dividends are frequently called "the bottom line."
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The operating margin measures operating income per dollar of assets.
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Consider the future value of $1 in 10 periods when the interest rate is 5%. When the interest rate doubles to 10%, the future value:
increases but by less than double
Bond Long will pay $1 in 20 years with a discount interest rate of 5% and Bond Short will pay $1 in 5 years with a discount interest rate of 10%. Which bond has the higher present value?
short greater than long
A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock's market price would equal its intrinsic value.
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A time line is meaningful even if all cash flows do not occur annually.
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The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
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The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.
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The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.
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The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.
true
The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.
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The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders' claim against the firm's existing assets. Put another way, retained earnings are stockholders' reinvested earnings.
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The return on invested capital measures the total return that a company has provided for its investors.
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The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects specific changes in accounts over that period of time.
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Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
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To estimate the cash flow from operations, depreciation must be added back to net income because depreciation is a non-cash charge that has been deducted from revenue in the net income calculation.
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Two metrics that are used to measure a company's financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income.
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Typically, the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year, adds net income, subtracts dividends paid, and ends with total stockholders' equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, resulting in a substantial amount of retained earnings shown on the balance sheet.
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