Financial Analysis Test #1 Practice Q's, Fina 470 - Ch: 3 - Analyzing Activities, finance 3, FINA 470 - Exam 1, FINA 470 Test 1 Discussion Questions, Financial Statement Analysis Exam 1, Chapter 3: Analyzing Financing Activities, Ch. 3 & 4, Finance 4...

In calculating the weighted average cost of capital (WACC), which of the following statements is *least* accurate? A. The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt B. Different methods for estimating the cost of common equity might produce different results C. The cost of preferred equity capital is the preferred dividend divided by the price of preferred shares

*A*

Which of the following statements concerning the principles underlying the capital budgeting process is *most* accurate? A. Cash flows should be based on opportunity costs B. Financing costs should be reflected in a project's incremental cash flows C. The net income for a project is essential for making a correct capital budgeting decision

*A*

*Capital structure* decisions refer to the: A. dividend yield of the firm's stock B. blend of equity and debt used by the firm C. capital gains available on the firm's stock D. maturity date for the firm's securities

*B*

The CFO of Axis Manufacturing is evaluating the introduction of a new product. The costs of a recently completed marketing study for the new product and the possible increase in the sales of a related product made by Axis are best described (respectively) as: A. opportunity cost; externality B. sunk cost; externality C. externality; cannibalization

*B*

Which of the following statements about NPV and IRR is *least* accurate? A. The IRR is the discount rate that equates the present value of the cash inflows with the present value of outflows B. For mutually exclusive projects, if the NPV method and the IRR method give conflicting rankings, the analyst should use the IRRs to select the project C. The NPV method assumes that cash flows will be reinvested at the cost of capital, while IRR rankings implicitly assume that cash flows are reinvested at the IRR

*B*

Which of the following statements about the payback period method is *least* accurate? The payback period: A. Provides a rough measure of a project's liquidity B. Considers all cash flows throughout the entire life of a project C. Is the number of years it takes to recover the original cost of the investment

*B*

Which of the following statements is *least* accurate? The discount payback period: A. Frequently ignores terminal values B. Is generally shorter than the regular payback C. Is the time it takes for the present value of the project's cash inflows to equal the initial cost of the investment

*B*

Which of the following statements about NPV and IRR is *least* accurate? A. The IRR can be positive even if the NPV is negative B. When the IRR is equal to the cost of capital, the NPV will be 0 C. The NPV will be positive if the IRR is less than the cost of capital

*C*

A change in the company's capital structure will change the amount of taxes paid but will *not* change the WACC?

*FALSE*

A firm's cost of capital can be used in valuation of every new project they encounter, regardless of its risk?

*FALSE*

Apple's weighted-average cost of capital is *lower* than that of Wal-Mart?

*FALSE*

If the firm *decreases* its debt ratio (D/E), both the debt and the equity will become more *risky*. The debtholders and equityholders require a higher return to compensate for the increased risk?

*FALSE*

One way to check the correctness of the expected return on bonds is through the *bond discount* method?

*FALSE*

As a firm changes to a *higher* debt ratio, debtholders are likely to demand higher rates of return?

*TRUE*

Assuming a project has the same risk and financing as the firm, it will have a positive NPV if its rate of return is *greater* than the firm's WACC?

*TRUE*

Calculation of company costs of capital should be conducted with *market values* whenever possible?

*TRUE*

Capital structure in essence is a firm's mix of *long-term financing*?

*TRUE*

The WACC is the rate of return that the firm must expect to earn on its average-risk investments in order to provide an acceptable return to its security holders?

*TRUE*

The company cost of capital is the expected rate of return that investors demand from the company's assets and operations?

*TRUE*

The riskiness of equity securities typically *exceeds* that of debt securities for firms?

*TRUE*

The weighted-average cost of capital is the return the company needs to earn after tax in order to satisfy all its security holders?

*TRUE*

There are two costs of debt finance. The *explicit* cost of debt is the rate of interest that bondholders demand. But there is also an *implicit* cost, because over-borrowing increases the required rate of return to equity?

*TRUE*

Weighted-average cost of capital is the expected rate of return on a portfolio of all the firm's securities, adjusted for tax savings due to interest payments?

*TRUE*

When using the WACC as a discount rate, it is often adjusted upward for riskier projects and downward for safer projects?

*TRUE*

When calculating the WACC an adjustment is made for *taxes* because:

*The interest on debt is tax deductible*

Which of the following is the most appropriate decision rule for *mutually exclusive* projects?

Accept the project with the *highest NPV* (subject to the condition that its NPV is greater than 0)

Pension Plan

Agreement by employer to provide pension benefits to the employee, and involves 3 entities: the employer, who contributes to the plan; the employee, who derives benefits; and the pension fund.

Net Deferral

Amount deferred minus the amount amortized.

*Project Sequencing* is best described as:

An investment in a project today that creates the opportunity to *invest in other projects in the future*

Projected benefit obligation (PBO)

Based on estimated employee compensation at retirement date.

Post Retirement Benefits

Benefits after retirement-primarily health care and life insurance. Two types: Pension benefits & Other post retirement employee benefits (OPEB).

calculate the EBIT for a firms $4 million total revenues, $3.5 million cost of goods sold, $500000 depreciation expense, and $120000 interest expense. a. $500,000 b. $380,000 c. $0 d ($120000)

C. 0

Other Post Retirement Benefits (OPRB)

Certain other benefits provided by employers to retirees and their designated dependents.

Actuarial Gain or Loss

Changes in nonrecurring components such as; life expectancy, discount rate, compensation growth, and employee turnover.

Off-Balance Sheet Financing

Non-recording of certain financial obligations.

Service Cost

Obligation to pay into pension more when a employee stays.

Benefit Payment

Outflow to employee.

Net Periodic Pension Cost

Pension included on the income statement.

Commitment

Potential claims against a company's resources due to future performance under contract. Examples; Purchase commitments, Debt covenant restrictions, capital expenditures, etc... Not recognized on financial statements.

Contingencies

Potential gains and losses whose resolution depends on one or more future event. Examples; Litigation (45%), Environment (24%), Insurance (10%), Governmental (8%), Other.

Assume a firm uses a *constant* WACC to select investment projects rather than adjusting the projects for risk. If so, the firm will tend to:

Reject *profitable, low-risk* projects and accept *unprofitable, high-risk* projects

Prior Service Cost

Retroactive benefits that is negotiated and is nonrecurring.

Return on Plant Assets

Return, or growth, on invested money in pension plan.

Interest Cost

The increase in pension expense overtime.

Operating Lease

The lessee (lessor) accounts for minimum lease payment as a rental expense (revenue), and no asset or liability is recognized on the balance sheet.

Capital Lease

Transfers substantially all the benefits and risks of ownership is accounted for as an asset acquisition and a liability incurrence by the lessee. Lessor treats as a sale and financing transaction.

Funding

When it becomes managements decision for defined benefit plans that is influenced by legal and tax considerations.

when subtracting an asset's accumulated depreciatin from its historic cost, the resulting value is termed the: a. book value of the asset b. market value of the asset c. depreciation expense d. current asset vaue

a. book value of the asset

if a payment of principal is due in 7 months on a long term liability, that payment will appear on the current balance sheeet now as a(n): a. current liability b. long term debt c. cash d. interest expense

a. current liability

which of the following changes in working capital will result in an increase in cash flow? a. increase in AP b. increase in inventory c. increase in AR d. decrease in other CL

a. increase in AP

which of the following assets is liekly to be considered the most liquiid? a. marketable securities b. net fixed assets c. accounts payable d. inventory

a. marketable securities

in a statement of cash flows, which category includes deprecation expense? a. operations b. investments c. financing d. none of the above; depreciation is a non-cash expense

a. operations

if a firm generates $2000 in sales and has a $500 increases in AR during an accounting period, then, based on these two categories, cash flow will increase by: a. $2500 b. $2000 c. $1500 d. $500

b. $2000

which of the following items should not be included in a listing of current assets? a. marketable securities b. accounts payable c. accounts receivable d. inventories

b. accounts payable

accumulated depreciation is used to reduce what tpe of account on the balance sheet a. current asset b. capital assets or fixed assets c. liability d. owners equity

b. capital assets or fixed assets

what happens when moving from net income to cash flows as the result of an increase in inventory balances? a. cash flows increase b. cash flows decrease c. cash flows are unchanged d. the change in cash flows cannot be determined

b. cash flows decrease

if a firms net income is positive and its non-cash expenses are positive, which of the following could account for a negative amount of cash provided by operations a. current assets decrease more than current liabilities decrease b. current assets increase more than current liabilities increase c. current assets decrease more than current liabilities increase d. a large addition is made to plant and equipment

b. current assets increase more than current liabilities increase

an increase in depreciation expense will (other things equal): a. increase net income b. decrease net income c. increase cash flow d. decrease the market value of assets

b. decrease net income

net earnings result from: a. the sale of additional shares of stock to investors b. income not paid to shareholders in the form of cash dividends c. an excess of assets over liabilities d. market values the exceed book values

b. income not paid to shareholders in the form of cash dividends

which of the following is NOT a typica reason for differences between profit and cash flow? a. depreciation expense b. income taxes c. changing levels of accounts receivable d. accrual accounting practices

b. income taxes

which of the following is more likely to be correct if market value of equity is less than book value of equity? a. investors anticipate excellent earning potential b. investors anticipate low earning potential c. assets have been fully depreciated d. the company is bankrupt

b. investors anticipate low earning potential

if market interest rates have increased since a company last borrowed long-term funds, the market value of these longterm funds will likely be: a. greater than their book value b. less than their book value c. equal to their book value d. unknown without knowing the maturity of the debt

b. less than their book value

if the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders equity then the firm has: a. no retainded earnings b. long term debt c. no accumulated depreciation d. current assets

b. long term debt

which of the following values would most likely interest a shareholder? a. book value of equity b. market value of equity c. historical cost of equity d. retained earnings component of equity

b. market value of equity

which of the following statements is true for a corporation with $1 million market value of equity, $2 million market value of assets, and 1000 shares of outstanding stock? a. market value of liabilities exceeds book value of liabilities b. market value of liabilities equals $1 million c. market value per share equals $1000 d. market value per share equals $2000

b. market value of liabilities equals $1 million

ABC Corp's balance sheet showers their long term debt of $10 million. The debt was issued with a 10% interest rate, and the current interest rate is 7%. Based on this information, the market value of this debt would be: a. less than $20 million b. more than $20 million c. equal to $20 million d. unknown without knowing the maturity of the debt

b. more than $20 million

according to the statement of cash flows, cash flows from financing could be positive if: a. the firm repaid more debt than it added b. the firm added more debt than it repaid c. interest rates were low on outstanding debt d. the firm sold portions of its plant and equipment

b. the firm added more debt than it repaid

according to accrual accounting, when goods are not sold until the period after they were produced, then the cost of goods sold: a. will be recognized in the first period b. will be recognized in the second period c. will be recognized when payment is received d. will be split between both periods

b. will be recognized in the second period

which of the following best explains the combination of a high level of sales combined with a low cash flow during an accounting period? a. high depreciation expense b. reduction of inventory levels c. acquisition of equipment d. increase in accounts payable

c. acquisition of equipment

depreciation expense is used to: a. allocate costs to all departments of the firm b. determine when an asset is fully paid off c. allocate historical cost over the life of an asset d. equate the historical cost and market values of an asset

c. allocated historical cost over the life of an asset

a balance sheet portrays the value of a firm's assets and liabilities : a. over an annual period b. over any stated period of time c. at any stated point in time d. at the end of the calendar year

c. at any stated point in time

the net income figure on an income statement is calculated before deducting: a. interest expense b. depreciation expense c. cash dividends d. tax liability

c. cash dividends

which of the following will occur in a statement of cash flows as a result of paying cash dividends? a. cash flows from operations will increase b. cash flows from investments will decrease c. cash flows from financing will decrease d. cash balances will not be affected

c. cash flows from financing will decrease

net working capital is calculated by taking the difference between: a. total assets and total liabilities b. inventory and accounts payable c. current assets and current liabilities d. cash and long term debt

c. current assets and current liabilities

which of the following statements is more likely if cash and marketable securities increase by $5000 during a period in which cash provided by operations increase by $1000 and cash used by investments decreases by $500? a. cash provided by financing increases by $3500 b. cash used by financing decreases by $1000 c. debt increased by more than cash dividends paid d. debt was reduced by more than cash dividends paid

c. debt increased by more than cash dividends paid

net working captal is a measure of the companys: a. goodwill b. short term liabilities c. estimated liquidity d. shareholders equity

c. estimated liquidity

what balancing entry is most likely to be called for if previously excluded intangible assets were added to a firms balance sheet? a. increase accumulated depreciation b. decrease long term debt c. increase shareholders equity d. decrease current assets

c. increase shareholders equity

what happens to firms net worth as it uses cash to repay accounts payable? a. net worth increases b. net worth decreases c. net worth remains the same d. net worth decreases temporarily, until cash is replenished

c. net worth remains constant

if the value of a firms net fixed assets equals the value of the accumulated depreciation, then, from an accounting context, the fixed assets are: a. new b. fully depreciated c. one-half depreciated d. equal in value to the firms current assets

c. one half depreciated

what is the most likely conclusion for a firm whose statement of cash flows shows an increase in cash balances and has negative cash flows from both operations and financing? a. the firm has low deprecation expense b. the firm did not pay any dividends c. the firm sold more equipment than it purchased d. the firm has a low interest rate on its debt

c. the firm sold more equipment than it purchased

current period depreciation expense is listed on: a. the balance sheet b. the investment section of the cash flow statement c. the income statement d. neither the balance sehet nor the income statement, it is a noncash expense

c. the income statement

the gathering of related revenues and expenses into the same period, regardless of when they were incurred, is: a. cash basis accounting b. market value accounting c. book value accounting d. accrual accounting

d. accrual accounting

market value balance sheets differ from book-value balance sheets in that market values: a. are higher than book values b.. are lower than book values c. conform more to GAAP accounting d. confrom to investors expectations

d. conform to investors expectations

which of the following statements about depreciation is correct? a. depreciation is subtracted from cost of goods sold to calculate net income b. when depreciation expense is incurred, cash balances are reduced c. depreciation expense does not affect net income d. depreciation reduces the book value of assets

d. deprecation reduces the book value of assets

according to GAAP, assets and liabilities are typically recorded on the balance sheet at: a. historical cost b. market value c. salvage value d. historical cost less depreciation

d. historical cost less depreciation

in general, what is changing as you read down the left hand side of a balance sheet? a. the assets are more fully depreciated b. the assets are growing in value c. the assets are increasing in maturity d. the assets are becoming less liquid

d. the assets are becoming less liquid

which of the following is correct for a fully depreciated asset? a. market value is zero b. market value is greater than book value c. book value is greater than market value d. the relationship between market and book values is indeterminable

d. the relationship between market and book values is indeterminable

what happens to the market value of a firms equity as the book value of the firm's equity increases? a. it increases by the same amount b. it decreases by the same amount c. it remains constant d. there is no set relationship to determine this outcome

d. there is no set relationship to determine this outcome

Net Pension Cost

Interest Cost - return on plant assets

Pension Fund

Is independent from the employer and administered by trustees.

Funded Status

Net asset of the pension plan (Plan assets-Pension obligation)

Lease

A contractual agreement between a lessor (owner) and a lessee (user). Granting right to use asset in return for minimum lease payments (MLP).

Vesting

Employee's right to pension benefits regardless of weather the employee remains with the company or not. Usually a minimum specified period with employer.

Pension benefits

Employer promises monetary benefits to the employee after retirement.

Other Post Retirement Employee Benefits

Employer provides other (usually nonmonetary) benefits after retirement-primarily health care and life insurance.

Pension obligation

Employer's liability at the start of the (15-year) accumulation period.

Contributions

Employers payment into the plan.

Variable Interest Entities (VIEs)

Equity that isn't stock. 1) Inability to make decisions. 2) The obligation to absorb losses. 3) The right to receive returns.

Defined Benefits

Specify the amount of pension benefits that the employer promises to provide to the retirees. Employer bears the risk of pension fund performance.

Defined Contribution

Specify the amount of pension contributions that the employer makes to the pension plan. Actual end amount depends on investment performance.