McGraw

Which one of the following statements related to the cash flow to creditors must be correct?

A positive cash flow to creditors represents a net cash outflow from the firm.

The relationship between the return on assets and the return on equity is identified by the:

DuPont identity

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

When comparing loans you should compare the effective annual rates.

Which one of the following variables is the exponent in the present value formula?

number of time periods

The cash flow that results from a company's ongoing, normal business activities is called:

operating cash flow

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

Hayley won a lottery and will receive $1,000 each year for the next 30 years. The current value of these winnings is called the:

present value

For a corporation that earned positive taxable income, which one of the following statements is correct?

An increase in depreciation expense will increase the operating cash flow.

Which one of the following is a current liability?

An invoice payable to a supplier in 45 days

The interest rate that is most commonly quoted by a lender is referred to as the:

Annual Percentage Rate

You are comparing two annuities that offer regular payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while Annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?

Annuity B has a smaller present value than annuity A.

Plow back ratio

the percentage of net income available to the firm to fund future growth.

A perpetuity is defined as:

unending equal payments paid at equal time intervals

Activities of a firm that require the spending of cash are known as: sources of cash. uses of cash. Correct cash collections. cash receipts. cash on hand.

uses of cash

When constructing a pro forma statement, net working capital generally:

varies proportionally with sales

The need for external financing

will limit growth if left unfunded.

All other things beings equal, and assuming all ratios have positive values, an increase in current liabilities will:

Decrease the quick ratio

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

0.5

The retention ratio can be computed as:

1 − (Cash dividends/Net income).

Lee Sun's has sales of $4,000, total assets of $3,700, and a profit margin of 7 percent. The firm has a total debt ratio of 30 percent. What is the return on equity?

10.81

A firm has a return on equity of 15 percent. The total asset turnover is 1.4 and the profit margin is 8 percent. The total equity is $7,000. What is the net income?

1050

A firm has sales of $1,180, net income of $222, net fixed assets of $536, and current assets of $292. The firm has $97 in inventory. What is the common-size balance sheet value of inventory?

11.71

You want to buy a house that costs $255,000. You will make a down payment equal to 20 percent of the price of the house and finance the remainder with a loan that has an APR of 5.37 percent compounded monthly. If the loan is for 30 years, what are your monthly mortgage payments?

1141.71

Bob has been investing $6,000 in stock at the end of every year for the past 11 years. If the account is currently worth $125,000, what was his annual return on this investment?

12.16

Tip Top Hats has $1,320 of cash, inventory of $10,200, net fixed assets of $33,600, accounts payable of $3,650, accounts receivable of $3,780, and long-term debt of $18,100. All costs, net working capital, and fixed assets vary directly with sales. Sales are projected to increase by 4.8 percent annually. What is the pro forma net working capital for next year?

12209

Fancy Cat Products has a project that will cost $265,700 today and will generate monthly cash flows of $5,505 for the next 74 months. What is the rate of return of this project when expressed as an APR?

14.87

Thomas invests $114 in an account that pays 4 percent simple interest. How much money will Thomas have at the end of 6 years?

141.36

You have just won the lottery and will receive a lump sum payment of $23.49 million after taxes. Instead of immediately spending your money, you plan to deposit all of the money into an account that will earn 5.53 percent. If you make equal annual withdrawals for the next 35 years, how much can you withdraw each year starting exactly one year from now?

1531835.19

You can invest in an account that pays simple interest or an account that pays compound interest. In either case, you plan to invest $3,800 today and both accounts have an annual interest rate of 6 percent. How much more interest will you receive in the 10th year in the account that pays compound interest?

157.20

You are in talks to settle a potential lawsuit. The defendant has offered to make annual payments of $21,000, $28,000, $52,000, and $78,000 to you each year over the next four years, respectively. All payments will be made at the end of the year. If the appropriate interest rate is 4.3 percent, what is the value of the settlement offer today?

157614.07

What is the effective annual rate for an APR of 15.30 percent compounded monthly?

16.42

Your credit card company charges you 1.28 percent per month. What is the EAR on your credit card?

16.49

To fund your dream around-the-world vacation, you plan to save $1,225 per year for the next 11 years starting one year from now. If you can earn an interest rate of 5.65 percent, how much will you have saved for your vacation?

18005.94

A company has a pension liability of $360,000,000 that it must pay in 21 years. If it can earn an annual interest rate of 3.2 percent, how much must it deposit today to fund this liability?

185,792,790.51

One year ago, you invested $3,400. Today, it is worth $4,150. What rate of interest did you earn?

22.06

Beatrice invests $1,420 in an account that pays 4 percent simple interest. How much more could she have earned over a 5-year period if the interest had been compounded annually?

23.65

Marko, Incorporated, is considering the purchase of ABC Company. Marko believes that ABC Company can generate cash flows of $4,900, $9,900, and $16,100 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 10 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Company?

24732.53

Randall's Bakery has sales of $42,000 and a net profit margin of 5.8 percent. The firm estimates that sales will increase by 4.5 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income?

2545.62

You need to have $35,000 for a down payment on a house in 7 years. If you can earn an annual interest rate of 4.5 percent, how much will you have to deposit today?

25719.00

Bob bought some land costing $16,340. Today, that same land is valued at $46,717. How long has Bob owned this land if the price of land has been increasing at 4 percent per year?

26.78

Noma plans to save $2,500 per year for the next 30 years. If she can earn an annual interest rate of 8.3 percent, how much will she have in 30 years?

299273.47

You just paid $355,000 for a policy that will pay you and your heirs $12,500 per year forever with the first payment in one year. What rate of return are you earning on this policy?

3.52

Khadimally, Incorporated, expects sales of $763,500 next year. The net profit margin is 5.3 percent and the firm has a dividend payout ratio of 18 percent. What is the projected increase in retained earnings?

33181.71

Your grandparents would like to establish a trust fund that will pay you and your heirs $110,000 per year forever with the first payment 7 years from today. If the trust fund earns an annual return of 2.1 percent, how much must your grandparents deposit today?

4624011.84

What is the future value of $3,048 invested for 8 years at 5.7 percent compounded annually?

4749.14

We Pay Insurance Company will pay you $1,000 each quarter for 20 years. You want to earn a minimum interest rate of .81 percent per quarter. What is the most you are willing to pay today for these payments?

58708.87

Samuelson's has a debt-equity ratio of 34 percent, sales of $14,000, net income of $1,900, and total debt of $9,700. What is the return on equity?

6.66

Your parents are giving you $150 a month for 4 years while you are in college. At an interest rate of .37 percent per month, what are these payments worth to you when you first start college?

6585.74

Myca Corporation has a project with the following cash flows. What is the value of the cash flows today assuming an annual interest rate of 9.5 percent? Year Cash Flow 1 $ 1,720 2 2,150 3 2,465 4 2,475

6962.92

A firm has total debt of $1,400 and a debt-equity ratio of .25. What is the value of the total assets?

7,000

Today, your dream car costs $67,700. You feel that the price of the car will increase at an annual rate 2.6 percent. If you plan to wait 6 years to buy the car, how much will it cost at that time?

78971.94

Mario's Home Systems has sales of $2,840, costs of goods sold of $2,180, inventory of $508, and accounts receivable of $432. How many days, on average, does it take Mario's to sell its inventory?

85.06

Moxie, Incorporated, has annual sales of $564,000, current assets of $276,000, and net working capital of $192,000. Assume the firm is operating at full capacity and that all costs, net working capital, and fixed assets vary directly with sales. The debt-equity ratio and the dividend payout ratio will be held constant. If sales are projected to increase by 6 percent next year, what is next year's pro forma value for current liabilities?

89040

Five years from today, you plan to invest $4,600 for 10 additional years at 7.6 percent compounded annually. How much will you have in your account 15 years from today?

9569.31

Which of the following questions should be considered when developing a corporation's financial plan? I. How much net working capital will be needed? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?

All

A firm's mixture of debt and equity financing is the result of its ______ decisions.

Capital structure

firm's mixture of debt and equity financing is the result of its ______ decisions.

Capital structure

Agency problems are most likely to be associated with:

Corporations

Which one of the following statements regarding corporations is correct?

Corporations can have an unlimited life.

Which one of the following is a use of cash?Decrease in fixed assets Decrease in inventory Increase in long-term debt Decrease in accounts receivables Decrease in accounts payable

Decrease in accounts payable

Parsa's Organics currently has $56 in debt for every $100 in equity. If the company were to use some of its cash to decrease its debt, while maintaining its current equity and net income, which one of the following would decrease?

Equity multiplier

Which one of the following determines the standards and procedures with which audited financial statements are prepared?

Generally Accepted Accounting Principles

A sole proprietorship:

Had a limited life

A sole proprietorship:

Has a limited life

Hulsey Outdoor had a return on assets of 15 percent and a return on equity of 15 percent. Given this information, the firm:

Has an equity multiplier of 1.0

Which one of the following questions involves a capital structure decision?

How much debt should the firm incur to fund a project?

Which one of the following questions is a working capital management decision?

How much inventory should the company keep on hand?

Wei Bridal is a profitable firm with a dividend payout ratio of 25 percent. The firm does not want to issue additional equity shares nor increase its long-term debt. Which one of the following defines the maximum rate at which this firm can currently grow?

Internal growth rate

The Top Corporation has ending inventory of $482,700, and cost of goods sold for the year just ended was $3,934,005. a. What is the inventory turnover? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the days' sales in inventory? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. How long on average did a unit of inventory sit on the shelf before it was sold? (Use 365 days a year. Do not round intermediate calculation

Inventory turnover = COGS/Inventory Inventory turnover = $3,934,005/$482,700 Inventory turnover = 8.15 times Days' sales in inventory = 365 days/Inventory turnover Days' sales in inventory = 365/8.15 Days' sales in inventory = 44.79 days On average, a unit of inventory sat on the shelf 44.79 days before it was sold.

Which one of the following best states the primary goal of financial management?

Maximize the current value per share

SDJ, Incorporated, has net working capital of $3,220, current liabilities of $4,470, and inventory of $4,400. a. What is the current ratio? b. What is the quick ratio?

NWC = CA − CL CA = CL + NWC CA = $4,470 + 3,220 CA = $7,690 So, the current ratio is: Current ratio = CA/CL Current ratio = $7,690/$4,470 Current ratio = 1.72 times And the quick ratio is: Quick ratio = (CA − Inventory)/CL Quick ratio = ($7,690 − 4,400)/$4,470 Quick ratio = .74 times

At the beginning of the year, Scoopers Ice Cream had cash of $183, accounts receivable of $392, accounts payable of $463, and inventory of $714. At year end, cash was $167, accounts payable was $447, inventory was $682, and accounts receivable was $409. What is the amount of the net source or use of cash by working capital accounts for the year?

Net source of 15 cash

Which one of the following statements concerning net working capital is correct?

Net working capital increases when inventory is sold for cash at a profit.

Which one of the following statements concerning net working capital is correct?

Net working capital may be a negative value.

You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate.

Option B has a higher present value at time zero.

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed.)

Project X has both a higher present and a higher future value than Project Y.

If Rogers, Incorporated, has an equity multiplier of 1.51, total asset turnover of 1.30, and a profit margin of 6.1 percent, what is its ROE? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places,

ROE = (PM)(TAT)(EM) ROE = (.061)(1.30)(1.51) ROE = .1197, or 11.97%

Dahlia Corporation has a current accounts receivable balance of $343,800. Credit sales for the year just ended were $5,105,430. a. What is the company's receivables turnover? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the company's days' sales in receivables? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. How long did it take on average for credit customers to pay off their accounts during the past year? (Use 365 days a year. Do not round

Receivables turnover = Sales/Receivables Receivables turnover = $5,105,430/$343,800 Receivables turnover = 14.85 times Days' sales in receivables = 365 days/Receivables turnover Days' sales in receivables = 365/14.85 Days' sales in receivables = 24.58 days On average, the company's customers paid off their accounts in 24.58 days.

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

Retention ratio

Which one of the following is a primary market transaction?

Sale of a new share of stock from a corporation to an individual investor

Which one of the following questions involves a capital budgeting decision?

Should the firm purchase a new machine for the production line?

Which one of the following statements related to an income statement is correct?

Taxes reduce both net income and operating cash flow.

Which one of the following is correct in relation to pro forma statements?

The addition to retained earnings is equal to net income less cash dividends.

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.

Assume you deposited $6,000 into a retirement savings account today. The account will earn 8 percent interest per year, compounded annually. You will not withdraw any principal or interest until you retire in 48 years. Which one of the following statements is correct?

The present value of this investment is equal to $6,000.

First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made a deposit of $71,000 in each bank, how much more money would you earn from your Second City Bank account at the end of 8 years?

The time line for the cash flows is: 0 8 $71,000 FV The simple interest per year is: $71,000 × .08 = $5,680 So after 8 years you will have: $5,680 × 8 = $45,440 in interest. The total balance will be $71,000 + 45,440 = $116,440. With compound interest we use the future value formula: FV = PV(1 + r)t FV = $71,000(1.08)8 FV = $131,416.04 The difference is: $131,416.04 - 116,440 = $14,976.04

Your coin collection contains 49 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2059, assuming they appreciate at an annual rate of 5.2 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

The time line is: 0 107 $49 FV To find the FV of a lump sum, we use: FV = PV(1 + r)t FV = $49(1.052)107 FV = $11,114.25

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant.

Mobius, Incorporated, has a total debt ratio of .38. a. What is its debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is its equity multiplier? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Total debt ratio = .38 = TD/TA Substituting total debt plus total equity for total assets, we get: .38 = TD/(TD + TE) Solving this equation yields: .38(TE) = .62(TD) Debt-equity ratio = TD/TE Debt-equity ratio = .38/.62 Debt-equity ratio = .61 Equity multiplier = 1 + D/E Equity multiplier = 1.61

Denver, Incorporated, has sales of $20 million, total assets of $18.2 million, and total debt of $9.1 million. Assume the profit margin is 9 percent. a. What is the company's net income? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) b. What is the company's ROA? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the company's ROE? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

We need to find net income first. So: Profit margin = Net income/Sales Net income = Profit margin(Sales) Net income = .09($20,000,000) Net income = $1,800,000 ROA = Net income/TA ROA = $1,800,000/$18,200,000 ROA = .0989, or 9.89% To find ROE, we need to find total equity. Since TL & OE equals TA: TA = TD + TE TE = TA − TD TE = $18,200,000 − 9,100,000 TE = $9,100,000 ROE = Net income/TE ROE = $1,800,000/$9,100,000 ROE = .1978, or 19.78%

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

a decrease in the interest rate

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

compound interest

Which one of the following accounts is the most liquid?

accounts receivable

pro forma statements

are projections, not guarantees.

Total income taxes divided by total taxable income equals the ______ tax rate.

average

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?

balance sheet

The book value of a firm is:

based on historical transactions

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

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

maximum; excluding external financing of any kind

Deciding which long-term investment a firm should make is a ______ decision.

capital budgeting

Determining the number of shares of stock to issue is an example of a ______ decision.

capital structure

The cash flow that is available for distribution to a corporation's creditors and stockholders is called the:

cash flow from assets

The cash flow related to interest payments less any net new borrowing is called the:

cash flow to creditors

Which one of the following is classified as a tangible fixed asset?

computer equipment

A ______ has all the respective rights and privileges of a legal person.

corporation

A business that is a legal entity separate from the owners, yet treated as a legal person, is called a(n):

corporation

Which form of business would be the best choice if it were necessary to raise large amounts of capital?

corporation

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.

Net working capital is defined as:

current assets minus current liabilities

A firm's liquidity is measured with which one of the following ratios?

current ratio

A firm's external financing need is met by:

debt and/or equity

Which one of the following is a source of cash?Increase in accounts receivable Decrease in common stock Increase in fixed assets Decrease in accounts payable Decrease in inventory

decrease in inventory

All else constant, a(n) ______ will increase the internal rate of growth.

decrease in total assets

Assuming a firm earns taxable income, an increase in ______ will cause the cash flow from assets to increase.

depreciation expense

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

discounting

Cash flow to stockholders is defined as:

dividends paid minus net new equity raised

Which one of the following will decrease the value of a firm's net working capital?

donating inventory to charity

Jackson Corporation has a profit margin of 5.8 percent, total asset turnover of 1.7, and ROE of 20.34 percent. What is this firm's debt-equity ratio? (Do not round intermediate calculations an

entity except the equity multiplier, so, using the DuPont identity: ROE = (PM)(TAT)(EM) ROE = .2034 = (.058)(1.70)(EM) EM = .2034/(.058)(1.70) EM = 2.06 D/E = EM − 1 D/E = 2.06 − 1 D/E = 1.06

ordinary annuity is best defined as:

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

A firm owned by two or more people who each have unlimited liability for all of the firm's debts is called a:

general partnership

Assume the total cost of a college education will be $300,000 when your child enters college in 18 years. You presently have $71,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

he timeline is: 0 18 -$71,000 $300,000 We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for r, we get: r = (FV/PV)1/t - 1 r = ($300,000/$71,000)1/18 - 1 r = .0834, or 8.34%

Which one of the following financial statements summarizes a firm's revenue and expenses during a period of time?

income statement

Jared invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

interest on interest

Which one of the following is classified as a current asset?

inventory

Net capital spending:

is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.

A general partner:

is personally responsible for 100 percent of the debts of the partnership.

General Partner

is personally responsible for 100 percent of the debts of the partnership.

A partner in a firm knows that the maximum financial loss he or she will experience is the amount he or she invested in the firm. The partner is called a ______ partner.

limited

The Sarbanes-Oxley Act of 2002 holds a public company's ______ responsible for the accuracy of the company's financial statements.

managers

The ______ tax rate is the percentage of the last dollar you earned that must be paid in taxes.

marginal

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

profitability

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

projected sales

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

sales

Financial managers should primarily focus on the interests of:

shareholders

A firm owned by a single person who has unlimited liability for the firm's debt is called a:

sole proprietorship