Financial Management Midterm

Which of the statements below is TRUE? -Accounting Identity is: Assets ≡ Liabilities - Owners' Equity. -Accounting Identity is: Assets ≡ Liabilities + Owners' Equity. -Accounting Identity is: Assets ≡ Owners' Equity - Liabilities. -Accounting Identity is: Liabilities ≡ Assets + Owners' Equity.

Accounting Identity is: Assets ≡ Liabilities + Owners' Equity.

________ is NOT a main category of financial management. -Capital budgeting -Capital structure -Accounts payable management -Working capital management

Accounts payable management

When there are conflicts among managerial goals in U.S. markets, the most important priority is to ________. -increase the current market value of equity -keep all of the company's customers happy -foster good relationships with the community -maintain a safe and happy work place

increase the current market value of equity

The one-time payment of money at a future date is often called a ________. -lump-sum payment -present value -principal amount -perpetuity payment

lump-sum payment

A never-ending stream of equal periodic, end-of-the-period cash flows is called a/an ________. -annuity -annuity due -perpetuity -amortization

perpetuity

________ are the forums where buyers and sellers of financial assets and commodities meet. -Housing markets -Federal Reserve banks -Financial markets -Automotive shows

Financial markets

Which of the following best identifies the four main areas of finance? - Exchange rate management, investments, financial institutions and markets, international finance - Corporate finance, investments, capital structure, international finance - Corporate finance, investments, financial institutions and markets, international finance - Corporate finance, capital budgeting, financial institutions and markets, regulation

Corporate finance, investments, financial institutions and markets, international finance

When solving for the future value of a stream of unequal cash flows, it is important to add together the values BEFORE applying the future value formula to determine their future value. -True -False

False

Even with an interest rate of 0.0%, the future value of a 5-year $800 annual annuity will be greater than the present value of the same annuity. -True -False

False

In the agency model, the owners of corporations are the agents and the stockholders are the principals. -True -False

False

RadicaL CREATIONS Inc. just issued zero-coupon bonds with a par value of $1,000. If the bond has a maturity of 15 years and a yield to maturity of 10%, what is the current price of the bond if it is priced in the conventional manner? A) $1,000 B) $239.39 C) $231.38 D) This question cannot be answered because the coupon payment information is missing.

$231.38

The present value of a $100 three-year annuity due (first cash flow occurs today) discounted at a rate of 10% is equal to ________. -$248.69 -$273.55 -$135.17 -$300.00

$273.55

The basic accounting identity that assets equal liabilities plus owners' equity usually, but not always, holds. -True -False

False

The coupon payment for an annual-coupon corporate bond is equal to the yield to maturity multiplied by the par value of the bond. -True -False

False

Suppose you postpone consumption so that by investing at 5% you will have an extra $500 to spend in one year. Suppose that inflation is 2% during this time. What is the approximate real increase in your purchasing power? A) $800 B) $500 C) $300 D) $200

C) $300 Feedback: We can see that an inflation rate of 2% is 2/5 of our 5% rate of investment. Thus, 3/5 of the $500, or $300, is the real increase in your purchasing power.

The future value of a combination of positive and negative cash flows cannot be determined. -True -False

False

When solving for a present value, the interest rate is commonly referred to as the compound rate, but when solving for the future value, the interest rate is called the discount rate. -True -False

False

The income statement begins with revenue and subtracts various operating expenses until arriving at the intermediate point of ________. -earnings after taxes -net income -taxable income -EBIT

EBIT

Which of the following is NOT an ADVANTAGE of a sole proprietorship? -The owner receiving all the after-tax profit -Limited liability -Quick decision making -It is the simplest and least complicated form of business organization.

Limited Liability

A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________. -ordinary annuity -annuity due -perpetuity -amortization

annuity due

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________. A) the credit rating increases, the default risk increases, and the required rate of return decreases B) the credit rating increases, the default risk decreases, and the required rate of return increases C) the credit rating increases, the default risk decreases, and the required rate of return decreases D) the credit rating decreases, the default risk decreases, and the required rate of return decreases

the credit rating increases, the default risk decreases, and the required rate of return decreases

The purpose of studying financial statements is ________. -to mechanically build portfolio analysis -to understand those portions of the statements that have relevance for financial decision making -to primarily investigate all portions of the statements that have relevance for dividend policy -to mechanically learn how to read and understand footnotes

to understand those portions of the statements that have relevance for financial decision making

One of the key components to making financial decisions is to ________. -understand the timing and amount of dividends -understand the timing and amount of cash flow -understand the timing of EBIT -understand the amount of net income

understand the timing and amount of cash flow

Ten years ago Salmon Acqua Farming Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have fallen and the yield to maturity on the Bacon bonds is now 7%. Given this information, what is the price today for such a bond? A) $1,000 B) $1,116.54 C) $1,091.08 D) $914.41

$1,091.08

Assume that Ray is 38 years old and has 27 years for saving until he retires. He expects an APR of 7.5% on his investments. How much does he need to save if he puts money away annually in equal end-of-the-year amounts to achieve a future value of $1,200,000 dollars in 27 years' time? A) $44,444.44 B) $20,670.97 C) $14,882.44 D) $13,844.13 Option 2

$14,882.44

Creative Solutions Inc. has issued 10-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________. A) $80 B) $40 C) $90 D) $45

$80

A U.S. Treasury bill is currently selling at a discount basis of 0.50%. The par value of the bill is $100,000 and will mature in thirty days. What is the price of this Treasury bill? A) $98,850.25 B) $99,830.17 C) $99,907.00 D) $99,956.33

$99,956.33

Which of the following statements is TRUE? -The finance manager uses the framework of the income statement to find the operating income of the company (an accounting measure), which is also the true cash flow from operations. -In accrual-based accounting, revenue is recorded at the time of sale if the revenue has been received in cash. -Three fundamental issues separate net income and cash flow: accrual-based accounting, noncash expense items, and interest expense. -Generally accepted accounting principles (GAAP) in the United States do not allow the use of accrual-based accounting to record revenue.

-Three fundamental issues separate net income and cash flow: accrual-based accounting, noncash expense items, and interest expense.

Southern Transit Corporation has $1,000 par value, twenty-year, 6% annual coupon bonds, outstanding currently selling for $696.25. What is the yield to maturity on these bonds? Use a calculator for your answer. -9.43% -7.43%. -11.43%. -None of the above

9.43%

Nancy is seeking to expand her rare stamp collection. Each year, rare stamps increase in price at a three percent rate. She believes that if she invests her money for one year, she should be able to buy 16 stamps for what 15 stamps would cost today. What is the approximate nominal rate necessary to compensate for waiting and to cover inflation? A) 3.00% B) 3.67% C) 6.67% D) 9.67%

9.67%

In the equation r = (FV/PV)1/n - 1, the r is sometimes referred to as the ________. -interest rate -discount rate -growth rate -All of the above

All of the above

Which of the following actions will INCREASE the present value of an investment? -Decrease the interest rate. -Decrease the future value. -Increase the amount of time. -All of the above will increase the present value.

Decrease the interest rate.

Given positive equal annual cash flows and a positive interest rate, the present value of an annuity will be greater than the sum of the cash flows. -True -False

False

The Fisher Effect involves which of the items below? A) Nominal rate, the real rate, and inflation B) Nominal rate and the real rate only C) Nominal rate and inflation only D) Nominal rate, the bond rate, and inflation

Nominal rate, the real rate, and inflation

Of the following, which is the most recent example of legislation passed by the federal government to deal with a major economic or highly visible corporate event? -The Federal Deposit Insurance Corporation Improvement Act -The Securities and Exchange Act -The Sarbanes-Oxley Act -The Securities Act of 1933

The Sarbanes-Oxley Act

Which of the following is NOT an example of annuity cash flows? -The university tuition bill you pay every month that is always the same -The grocery bill that changes every week -The $3.50 you pay every morning for a bagel and coffee as you run to your first morning class -All of the examples above are annuity cash flows.

The grocery bill that changes every week

Consider the TVM equation: A decrease in the interest rate will decrease the future value, other things remaining equal. -True -False

True

Which of the statements below is FALSE? A) A part of the default premium has to do with the frequency of default by the borrower. B) For the home loan, the collateral (the house) is an asset that will increase in value over time (in general), compared with a car loan in which the collateral (the car) decreases in value over time. C) With a car, the potential loss due to default is less than a house because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan. D) A personal credit card essentially has no collateral, so the potential loss is even higher if the customer defaults on his or her credit card payments.

With a car, the potential loss due to default is less than a house because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan.

The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator. A) current yield B) yield to maturity C) bond discount rate D) coupon rate

current yield

A ________ is an unsecured bond, and most of the bonds sold today in the United States are of this type. A) mortgage bond B) debenture C) senior bond D) bond indenture

debenture

To determine the present value of a future amount, one should ________ the future cash flows. -annuitize -compound -discount -multiply

discount

Stocks are bought and sold in ________ markets. -equity -debt -derivatives -foreign exchange

equity

How Financial Institutions Quote Interest Rates: Annual and Periodic Interest Rates A) for principal but not interest B) for interest but not principal C) for both principal and interest D) for interest only

for both principal and interest

Net income is ________. -not cash flow -the cash flow from the operations of the company during the period -the increase or decrease in cash flow for the period -earnings before interest and taxes

not cash flow

The number of periods for a consumer loan (n) is equal to the ________. A) number of years times compounding periods per year B) number of years C) number of years in a period D) number of compounding periods

number of years times compounding periods per year

A/An ________ is a series of equal end-of-the-period cash flows. -ordinary annuity -annuity due -perpetuity due -None of the above

ordinary annuity

The ________ is the face value of the bond. A) coupon rate B) maturity date C) par value D) coupon

par value

In agency theory, the owners of the business are referred to as ________, and the managers are referred to as ________. -bondholders, principals -stockholders, bondholders -agents, principals -principals, agents

principals, agents

To find operating cash flow for the business for the year, add depreciation expense to EBIT and then ________. -subtract the interest expenses -add the taxes -subtract the taxes -add interest expenses

subtract the taxes

Monthly interest on a loan is equal to ________. A) the beginning balance times the APR B) the ending balance times the annual percentage rate C) the ending balance times the periodic interest rate D) the beginning balance times the periodic interest rate

the beginning balance times the periodic interest rate

The Cycle of Money at its most basic level, the function of financial intermediaries is to ________. -track and report interest rates -move money from lenders to borrowers and back again -effect a transfer of wealth in society

track and report interest rates

Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________. A) you will be able to consume fewer goods B) you will be able to buy the same amount of goods or services C) you will be able to buy fewer goods or services D) you will be able to buy more goods or services

you will be able to buy more goods or services

Perhaps the most important thing this course will help you develop is ________. -your skill set as a contract negotiator -your ability to manipulate a calculator -your set of analytical skills -your ability to distinguish among different types of financial statements

your set of analytical skills

Which of the statements below is FALSE? -The purpose of studying financial statements is to understand those portions of the statements that have relevance for financial decision making. -We need to understand how to interpret and use the information presented in financial statements to form a picture of the financial profile of the firm. -Accounting, it has been said, looks back to where a company has been—somewhat like looking through a rear view mirror. -Accounting and finance view the numbers in the same way.

Accounting and finance view the numbers in the same way.

Which of the following is NOT a DISADVANTAGE of a partnership? -Unlimited liability to at least some of the owners -The limited life of the business -The potential difficulty in transferring ownership -All are disadvantages of a partnership.

All are disadvantages of a partnership.

Which of the following can lead to increased expected cash flow over time to the firm? -Open and collaborative relations with the community -Qualified and motivated employees -Greater customer satisfaction -All of the above

All of the above

Which of the following is NOT an example of a financial transaction? - Your parents use their credit card to pay for your current term's college tuition. - You use the ATM at Heathrow airport in London to withdraw British pounds. - Your roommate lends you $20 and you repay it in one week. - All of the above are financial transactions.

All of the above are financial transactions.

Which of the following is NOT an example of annuity cash flows? -Regular equal monthly rent payments -Equal annual deposits into a retirement account -The $50 of gasoline you put into your car every two weeks on pay day -All of the examples above are annuity cash flows.

All of the examples above are annuity cash flows.

________ is the typical title of the corporate executive charged with determining the best repayment structure for borrowed funds to ensure timely repayment and sufficient cash for daily operations. -Chief Executive Officer (CEO) -Chief Financial Officer (CFO) -Chairman -Chief Operating Officer (COO)

Chief Financial Officer (CFO)

________ is simply the interest earned in subsequent periods on the interest earned in prior periods. -Quoted interest -Anticipated interest -Simple interest -Compound interest

Compound interest

________ is the area of business that deals with how a company conducts its business and implements controls to ensure proper procedures and ethical behavior. -Leadership -Agency Relationship -Corporate Governance -Capital Budgeting

Corporate Governance

The set of financial activities that support the OPERATIONS of a business is best described by which main area of finance? -Corporate finance -Investments -Financial institutions and markets -International finance

Corporate finance

Of the following activities, which is MOST likely to be an interaction between the financial manager and the information systems manager? -Developing a system to bill customers, pay suppliers, and track inventory -Costing of products -Setting credit policies -Determining the appropriate pricing of products

Developing a system to bill customers, pay suppliers, and track inventory

The dividends per share paid by Artisan Industries Inc. (AI) doubled from a starting value of $1.50 in 2010 to a value of $3.00 in 2016 (a six-year period). What was the approximate average annual rate of growth of AI's dividends per share? Use the Rule of 72 to determine your answer. -FFF's dividends grew at an annual rate of approximately 12% per year. -FFF's dividends grew at an annual rate of approximately 10% per year. -FFF's dividends grew at an annual rate of approximately 8% per year. -FFF's dividends grew at an annual rate of approximately 6% per year.

FFF's dividends grew at an annual rate of approximately 12% per year.

Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE? A) The bank is borrowing money from you without a promise to repay that money with interest. B) The bank is lending money to you with a promise to repay that money with interest. C) The bank is technically renting money from you with a promise to repay that money with interest. D) The bank is lending money to you, but not borrowing money from you.

The bank is technically renting money from you with a promise to repay that money with interest.

Your grandmother places $13,000 into an account earning an interest rate of 7% per year. After 5 years the account will be valued at $18,233.17. Which of the following statements is CORRECT? -The present value is $13,000, the time period is 7 years, the present value is $18,233.17, and the interest rate is 5%. -The future value is $13,000, the time period is 5 years, the principal is $18,233.17, and the interest rate is 7%. -The principal is $13,000, the time period is 5 years, the future value is $18,233.17, and the interest rate is 7%. -The principal is $13,000, the time period is 7 years, the future value is $18,233.17, and the interest rate is 5%.

The principal is $13,000, the time period is 5 years, the future value is $18,233.17, and the interest rate is 7%.

Consider a two-year investment: Given a constant and positive interest rate, the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding). -True -False

True

Equity on the balance sheet refers to what the owners receive after liabilities have been satisfied. -True -False

True

The Finance Manager works with the Marketing Manager to set credit policies for targeted customers. -True -False

True

The ability to raise capital is an advantage of the corporate form of business organization. -True -False

True