Financial Management Exam 2

The retention ratio can be computed as:

1-(cash dividends/net income)

The process of discounting is associated with finding the future value

False

Which one of the following statements related to annuities and perpetuities is correct?

A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

• An example of a perpetuity is ____.

British console

Whether a firm reaches its production capacity affects the forecast of which account?

Fixed assets

Caroline is going to receive a award of $20,000 six years from now. Jiexin is going to receive an award of $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?

In today's dollars, Caroline's award is worth more than Jiexin's.

What is the driving factor we use for financial planning?

Sales Growth

Which one of these statements related to growing annuities and perpetuities is correct?

The present value of a growing perpetuity will decrease if the discount rate is increased.

• If interest rate is 10% p.a., $100 today is equivalent to $110 next year.

True

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate.

annual percentage

• An example of an annuity is ____.

auto loan and mortgage

• Which of the following is/are an amortized loan?

auto loan and mortgage

• The interest earned on the reinvested interest is called ______.

interest on interest

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

compounding

Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav:

could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

If a firm do not plan to raise debt or equity, what is the maximum growth rate that the firm should stay below? (constant dividend payout ratio)

internal growth rate

A firm's external financing need is met by:

debt and/or equity

Which one of the following actions will increase the present value of an amount to be received sometime in the future?

decrease in interest rate

Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:

discounting

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

• Our deposits in the bank are compounded to compute the _______.

future value

The maximum rate of growth a corporation can achieve can be increased by:

increasing the retention ratio

• The effect of compounding (interest on interest) is equal to the _______.

interest on interest

A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume the firm:

is currently operating at full capacity.

Which of the following do NOT vary directly with sales?

long term debt, interests, depreciation

The sustainable growth rate of a firm is best described as the ______ growth rate achievable ______.

maximum; excluding any external equity financing, while maintaining a constant debt-equity ratio

An amortized loan:

may have equal or increasing amounts applied to the principal from each loan payment.

The financial planning method that uses the projected sales level as the basis for determining changes in balance sheet and income statement account values is referred to as the ______ method.

percentage of sales

When preparing pro forma statements, which one of the following is an analyst most likely to estimate first?

projected sales

The entire repayment of a(n) _____ loan is calculated by computing one single future value.

pure discount

• If a financial product can be purchased for $93, and it will deliver a onetime payment of $100 in two years, this loan is considered as ____.

pure-discount loan

Which one of the following has the least effect on a firm's sustainable rate of growth?

quick ratio

The portion of net income that a firm reinvests in itself is measured with the:

rentention ratio

With an interest-only loan the principal is:

repaid in one lump sum at the end of the loan period.

External Financing is needed (EFN) when

retained earnings cannot meet asset investment requirement

If a firm can raise debt to maintain a constant capital structure, what is the maximum growth rate that the firm should stay below? (constant dividend payout ratio)

sustainable growth rate

A perpetuity is defined as:

unending equal payments paid at equal time intervals.