Principles of Finance - Exam 1
If a firm's net working capital is $120 in 2021 and $100 in 2020, then the change in net working capital is:
+$20=$120-$100
Which one of the following is true?
CASH FLOWS CAN BE DERIVED FROM FINANCIAL STATEMENTS
Noncash items do not affect _______.
cash flow
Financial ratios are ways of comparing and investigating _____.
the relationships between pieces of financial information
When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year.
the same
The financial manager acts in the shareholders' best interests by making decisions that increase the value of _____.
the stock
A partnership must have at least ___ owners.
two
If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ____.
$121.00 FV = $100 × 1.10 2 = $121
Which one of the following is a correct formula for computing the return on equity?
ROA x Equity multiplier
The aim of the act known as ______ is to protect investors form corporate abuse.
SOX
True or false: The formula for a present value factor is 1/(1+r)t.
True
The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called
compounding
A ______ has all the respective rights and privileges of a legal person.
corporation
Cash flow to stockholders equals ________.
dividends paid minus net new equity raised
The price-sales ratio is especially useful when analyzing firms that have:
negative earnings
Most importantly, assets provide ____ to the firm.
value
The idea behind ______ is that interest is earned on interest.
compounding
A business that is a legal entity separate from the owners, yet treated as a legal person, is called a(n):
corporation.
The formula for total _______ is the total equity plus long-term debt.
equity
The basic present value equation underlies many of the _____.
most important ideas in corporate finance
The sources and uses of cash over a stated period of time are reflected on the:
statement of cash flows
Which of the following companies were involved in corporate scandals that led to sarbanes-oxley?
ENRON, WORLDCOM, TYCO
What does GAAP stand for?
Generally Accepted Accounting Principles
A ____ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm.
Stakeholder
The statement of cash flows summarizes the sources and uses of cash, though which of the following is true of the statement?
There are different methods of preparing it.
What is the main goal of financial management?
To maximize current value per share of existing stock
True or false: In one way or another, the basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to use in establishing benchmarks.
True
Which of the following are sources of cash? (Check all that apply.)
a decrease in accounts receivable, an increase in notes payable
The _____ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.
annual
Which one of the following is a source of cash?
decrease in inventory
When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum.
lump
A single cash flow is also known as a:
lump sum
Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ______ effectively controls the firm.
management
The price-earnings (PE) ratio is a ______ ratio.
market value
The original loan amount is called the _____.
principal
Which one of the following accounts is the most liquid?
Accounts Receivable
Which one of the following determines the standards and procedures with which audited financial statements are prepared?
Generally Accepted Accounting Principles
A firm's mixture of debt and equity financing is the result of its ______ decisions.
capital structure
The goal of the for-profit business is to maximize ____ equity.
owners
The (smaller/greater) the interest rate changes, the greater the impact to the future value of an amount invested.
greater
Decisions made by financial managers should primarily focus on increasing the:
market value per share of outstanding stock.
A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:
total equity
Semiannual compounding means that interest is paid ______ per year.
two times
Match the type of rate with its definition. 1. APR 2.EAR
1. The interest rate per period multiplied by the number of periods in the year. 2. The interest rate stated as though it were compounded once per year.
Your credit card company charges you 1.15 percent interest per month. What is the APR?
13.8% APR = 1.15% * 12
Based on the tax table below, what is the average tax rate for a sole proprietor with taxable income of $155,000? Ignore any standard or itemized deductions. Taxable Income Tax Rate $ 0 − 9,875 10% 9,875 − 40,125 12 40,125 − 85,525 22 85,525 − 163,300 24
20.18%
Which of the following show why a corporation is the most important form of business?
A CORPORATION IS A SEPARATE LEGAL ENTITY WITH THE ABILITY TO ACQUIRE AND EXCHANGE PROPERTY, CORPORATIONS CAN ENTER INTO CONTRACTS, CORPORATIONS CAN SUE AND BE SUED
Which of the following is the simplest form of loan?
A pure discount loan
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
_____ value is the cash value of an investment at some time in the _____.
Future, Future
Which one of the following questions involves a capital budgeting decision?
Should the firm purchase a new machine for the production line?
True or false: Taxes can be a large cash outflow for a corporation.
True
Net income refers to money earned ________.
after interest and taxes
On a balance sheet, assets are listed at their ______ value.
book
When calculating the present value of multiple cash flows using a spreadsheet, you must:
calculate the present value of each cash flow then add the discounted values together
Which of the following will be found in the liabilities section of a firm's balance sheet?
long-term bond issued by the firm, notes payable
What is the future value in 60 years of $7,440 invested today at 9 percent interest, compounded annually?
$1,309,673
The income statement of Lashari Design shows depreciation of $1,611, sales of $21,415, interest paid of $1,282, net income of $1,374, and costs of goods sold of $16,408. What is the amount of the noncash expenses?
$1,611
What is the future value of $100 compounded for 50 years at 10 percent annual interest?
$11,739.09 FV = $100 × 1.1050 = $11,739.09
You just invested $49,000 that you received as an insurance settlement. How much more will this account be worth in 40 years if you earn an average return of 7.6 percent rather than 7.1 percent? (Assume annual compounding.)
$1155,986.70
What is the future value of $3,300 in 20 years at an APR of 8.6 percent compounded semiannually?
$17778.14
An equity owner of McKissick and Khan Consulting, LLC earned $145,000 in taxable income from the firm. Based on the tax table below, how much will the owner owe in income taxes? Ignore any standard or itemized deductions. Taxable Income Tax Rate $ 0 − 9,875 10% 9,875 − 40,125 12 40,125 − 85,525 22 85,525 − 163,300 24
$28,879.50
What is the future value of $8,500 invested at the end of each year for 40 years, at 10.8 percent interest compounded annually?
$4,681,062.12 =FV(0.108,40,-8500)
If you put up $40,000 today in exchange for a 6.25 percent, 15-year annuity, what will the annual cash flow be?
$4186
If a firm's net working capital goes form $150 in 2020 to $130 in 2021, then the change in net working capital is:
-$20=$130-$150=-$20
Which of the following is equal to an effective annual rate of 12.36 percent?
12%, compounded semiannually
What does stockholders equity represent?
A residual claim against the book value of the firm's assets.
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
Which of the following methods can be used to calculate present value?
A time value of money table, A financial calculator, An algebraic formula
A supplier may look at the size of ______ to see how promptly the firm pays its bills.
Accounts Payable
Which of the following can be used to encourage managers to act in the best interacts of shareholders?
Better prospects of promotion, managerial compensation tied to performance
Which of the following actions could cause a company's change in net working capital to be negative for a given year?
Borrow money from the bank using a note payable in nine months
The ______ is the most important form, in terms of size, of business organization in the United States.
Corporation
Which one of the following financial statements summarizes a firm's revenue and expenses during a period of time?
Income statement
Capital budgeting is concerned with planning and managing a firm's ___.
Long-term investments
The goal of a for-profit business is to ____ existing owners' equity.
Maximize
Which of the following, according to the textbook, are possible financial goals for a company?
Minimize costs, maximize profits, survival
Cash flow to stockholders is dividends paid ________ (minus/plus) net new equity raised.
Minus
Organized auction markets include:
New York Stock Exchange
Which one of the following variables is the exponent in the present value formula?
Number of Time periods
A company's ________ cash flows reflect whether its cash flows from business operations can cover its everyday cash outflows.
Operating
Most equity shares of large firms in the U.S. trade on:
Organized auction markets
A positive operating cash flow indicates that the firm is generating enough cash to ________.
PAY OPERATING COSTS
Which of the following actions would be most likely to decrease agency costs for the firm?
Reward high performing employees with shares of stock
Liquidity refers to the ease of changing ____.
assets to cash
A lump sum payment to pay off the balance of a partially amortized loan is called a _____, or bullet, payment.
balloon
When calculating the future value of multiple cash flows using a spreadsheet, you must:
calculate the future value of each cash flow then add the compounded values together
Deciding which long-term investment a firm should make is a ______ decision.
capital budgeting
Assume a supplier requires payment within 15 days. When granting credit, the supplier should be most concerned with which one of the following ratios?
cash
Which of the following items are among the items used to compute the current ratio?
cash accounts payable
The current ratio shows the relationship between ____.
current assets and current liabilities
In the standard present and future value tables, and in all the default settings on a financial calculator, the assumption is that cash flows occur at the (beginning/end) of each period.
end
Which of the following are current assets?
inventory and accounts receivable
A sole proprietorship is a business that _____
is owned by one person
The life of a corporation _____.
is unlimited
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.
one year
The loan balance on partial amortization loans declines so slowly because the ___.
payments are mostly interest
The formula for the ______ value interest factor of an annuity is {1-[1/(1+r)t]r}1-[1/(1+r)t]/r.
present
If we know the interest rate is 10 percent per year and the money is invested for 10 years, then we can use the _____ to find the present value.
present value factor
Amortization is the process of paying off loans by regularly reducing the _________.
principal
With an interest-only loan the principal is:
repaid in one lump sum at the end of the loan period.
The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.
uneven
If you tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.
10=$200/$2,000=0.1
How is the price-earnings (PE) ratio computed?
market price per share/earnings per share
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
The times interest earned ratio equals EBIT divided by
interest
The cash flow that results from a company's ongoing, normal business activities is called:
operating cash flow.
A typical investment has a large cash (inflow/outflow) at the beginning and then a cash (inflows/outflows) for many years.
outflow, inflows
Which of the following is a variable cost in the short run?
raw materials used in production
Assume your mother invested a lump sum 28 years ago at 4.05 percent interest, compounded annually. Today, she gave you the proceeds of that investment, totaling $48,613.24. How much did your mother originally invest?
$15,994.70 PV=FV/(1+r/100)^n PV=48,613.24/(1.0405)^28
Nataro, Incorporated, has sales of $742,000, costs of $316,000, depreciation expense of $39,000, interest expense of $34,000, a tax rate of 21 percent, and paid out $125,000 in cash dividends. What is the addition to retained earnings?
$153,870 =($742,000-$316,000-$39,000-$34,000)=$353,000-($353,000*0.21)-$125,000=$153,870
The appropriate discount rate for the following cash flows is 10 percent compounded quarterly. Year Cash Flow 1$ 850 2 930 3 0 4 1,520 What is the present value of the cash flows?
2557.28
How is income defined?
revenue minus expenses
The profit margin is equal to net income divided by ______.
sales
Financial managers should primarily focus on the interests of:
shareholders.
If ending net fixed assets are $100, beginning fixed assets are $40, and depreciation is $10, then the change in capital spending is ________.
$70=($100-$40)+10
Barre Dance has sales of $30,600, costs of $15,350, addition to retained earnings of $4,221, dividends paid of $469, interest expense of $1,300, and a tax rate of 21 percent. What is the amount of the depreciation expense?
$8,013.29
The costs incurred due to a conflict of interest between stockholders and management are called ____ costs.
Agency
The term _____ costs refers to the costs of the conflict of interest between stockholders and management.
Agency
_____ is the process of paying off loans by regularly reducing the principal.
Amortization
What is a primary concern for a bank lending funds to a business for the short term?
Liquidity
Noncash items are expenses that directly affect ________ but do not directly affect _______.
Net income Cash Flow
A firm's ______ is the firm's mix of short-term assets and short-term liabilities.
Net working capital
Which formula below represents a present value factor?
PV = 1/(1 + r)^t
A growing annuity has a(n) ____.
finite number of growing cash flows
When using the spreadsheet (Excel) function for finding the PV of an annuity, it's a good idea to enter the ______ as a negative value.
payment
The _____ value is the current value of future cash flows discounted at the appropriate discount rate.
present
Shareholders' equity:
represents the residual value of a firm.
Activities of a firm that require the spending of cash are known as:
uses of cash
If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the net capital spending is ______.
$50=$100-$60+$10
What is the future value of $1,575 deposited at the end of each year for 25 years? Assume an interest rate of 6.3 percent compounded annually.
$90,152.04 =FV(0.063,25,-1575)
An income statement prepared using GAAP will show revenue when it is:
Accrued
Which one of the following is least apt to help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes.
Increasing managers' base salaries
Which of the following are annuities?
Installment loan payments Monthly rent payments in a lease
Which of the following are real-world examples of annuities?
Pensions Mortgages
The controller, rather than the treasurer, is typically responsible for which one of the following functions?
Processing cost reports
Interest paid twice a year is known as ______ compounding.
semiannual
What are two ways to calculate a balloon payment?
Find the present value of the payments remaining after the loan term Amortize the loan over the loan life to find the ending balance
he five main areas of finance are corporate finance, investments, financial institutions, international finance, and _____.
Fintech
Which of the following payment methods amortizes a loan?
Fixed payments that result in a zero loan balance Interest plus fixed amount
Whenever ___________ information is available, it should be used instead of accounting data.
market
The loan balance on _____ amortization loans declines so slowly because the payments are mostly interest.
Partial
The inventory _____ is calculated as the COGS divided by the inventory.
turnover
You will receive a bonus of $5,000 in one year's time, and would like to take a loan against it now. What is the formula that shows how much you can borrow if you plan to use the entire amount to pay back the loan and your interest rate is 3%?
$5,000/1.03
Vuong Rentals has sales of $546,000, costs of $295,000, depreciation expense of $37,000, interest expense of $15,000, and a tax rate of 21 percent. The firm paid $59,000 in cash dividends. What is the addition to retained earnings?
$98,210
Griffin's Goat Farm, Incorporated, has sales of $684,000, costs of $275,000, depreciation expense of $40,000, interest expense of $23,000, and a tax rate of 22 percent. What is the net income for this firm?
$269,880 =684,000-275,000-40,000-23,000=346,000 346,000-(346,000*0.22)=248820
Long-term solvency ratios are also known as:
financial leverage ratios
Given the same APR, more frequent compounding results in _____.
higher EARs
How are assets on a balance sheet listed?
in order of decreasing liquidity
The most common way to repay a loan is to pay ____.
interest plus a fixed principal amount every period
The cash coverage ratio directly measures the ability of a company to meet its obligation to pay:
interest to a lender
A corporation is a distinct ________ entity and as such can have a name and take advantage of the legal powers of natural persons.
legal
A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time.
level
Long-term solvency ratios are also called financial _____ ratios.
leverage
_________ refers to the speed and ease with which an asset can be converted to cash.
liquidity
The ______ tax rate is the percentage of the last dollar you earned that must be paid in taxes.
marginal
Net working capital equals current assets ______ current liabilities.
minus
The concept of the time value of money is based on the principle that a dollar today is worth __________ a dollar promised at some time in the future.
more than
Most investments involve _____ cash flows.
multiple
The difference between the total assets and total liabilities is shareholders' or ________ equity.
owners
If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value.
present
Dominic's Custom Draperies has a fixed asset turnover rate of 1.13 and a total asset turnover rate of .94. Its competitor, Window Fashions, has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .91. Both companies have similar operations. Based on this information, Dominic's must be _____ than Window Fashions.
utilizing its total assets more efficiently
Financial managers use a common-size income statement to determine ___.
which costs are rising or falling as a percentage of sales
The possible goal of profit maximization ______.
-would probably be the most commonly sighted goal for a business -can be achieved by cost-cutting
Sai purchased a car today at a price of $8,500. He paid $600 down in cash and financed the balance for 48 months at 5.4 percent per year compounded monthly. What is the amount of each monthly loan payment?
=183.37 =PMT(0.054/12,48,-7900)
Which of the following spreadsheet (Excel) functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year?
=PV(.10,10,-100,0,)
Which of the following should be valued using a perpetuity formula?
A consol (bond that pays interest only and does not mature) Preferred stock Cash flows from a product whose sales are expected to remain constant forever
Which of the following positions generally report to the chief financial officer (CFO)?
CONTROLLER, TREASURER
______ budgeting is the process of making and managing expenditures on long-term assets.
Capital
In large firms, financial activity is usually associated with which top officer?
Chief financial officer
The basic present value equation is:
PV = FVt/(1+r)t
______ Costs change as the output of the firm changes.
Variable
You estimate that you will owe $28,200 in student loans by the time you graduate. If you want to have this debt paid in full within 10 years, how much must you pay each month if the interest rate is 5.4 percent per year compounded monthly?
$304.65 =PMT(0.054/12,10*12,-28200)
Finn intends to save $2,000 per year, and expects to earn an annual rate of 6.9 percent. How much will he have in his account at the end of 37 years?
$313,274.38 =FV(0.069,37,-2000)
At 5 percent annually compounded interest, how long would it take to triple your money?
22.52 years
Sixty years ago, your grandmother invested $4,500. Today, that investment is worth $430,065.11. What is the average annually compounded rate of return she earned on this investment?
7.90%
True or false: There is only one way to quote interest rates.
False
Which one of the following is excluded from a firm's accounting value, but included in its market value?
Recognition of the firm's brand
________ financial statements provide for comparison of firms that differ in currency type.
Standardized
The more debt a firm has, the greater its:
degree of financial leverage
An annuity _____ is an annuity for which the cash flows occur at the beginning of each period.
due
Which one of the following complies with GAAP?
matching revenues with expenses
With interest-only loans that are not perpetuities, the entire principal is _____.
repaid at some point in the future
An effective annual rate of 7.12 percent is equal to 7 percent compounded ______.
semiannually
Because ownership in a corporate is spread over a huge number of shareholders, it can be argued that ____ effectively controls the firm.
Management
Since ______ and ownership are separated, a corporation's life is unlimited.
Management
True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.
True
When a corporation is formed, it is granted which of the following rights?
legal powers to sue, the ability to issue stock, state citizenship for jurisdictional purposes
A dollar received one year from today has _____ value than a dollar received today.
less
________ financial statements provide for comparison of firms that differ in size.
standardized
Future value is the ________ value of an investment at some time in the future.
Cash
In a typical corporate organizational structure:
The controller reports to the chief financial officer.
What does a current ratio of 1.2 mean?
The firm has $1.20 in current assets for every $1 in current liabilities.
Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year?
FV = $100 × (1.10)^3
________ ________ are the prime source of information about a firm's financial health.
Financial statements
What are the two factors that impact whether managers will act in the best interest of stockholders?
How Closely management goals align with stockholder goals and the way managers are compensated
Which one of the following questions is a working capital management decision?
How much inventory should the company keep on hand?
The use of financial leverage can:
- Increase the chance of financial distress and business failure - Greatly magnify both gains and losses - Increase the potential reward for investors
Aidan deposited $8,500 in an account today. If the account earns 8.5 percent per year, compounded annually, how many years will it take for the account to reach a balance of $138,720?
34.23 years
True or false: The multi-period formula for future value using compounding is FV = (1 + r)t.
False FV = PV × (1 + r)^t
All of the following issues represent problems encountered when comparing the financial statements of two separate entities except the issue of the companies:
having the same fiscal year
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ______ ratios.
profitability
The net income as shown on the common-size income statement of Omega Industries for the past three years increased from 3 percent to 6 percent. This indicates that the firm is increasing its ______.
profitability
Tobin's Q relates the market value of a firm's assets to which one of the following?
today's cost to duplicate those assets
True or false: The formula for the present value interest factor for annuities is Annuity present value factor = {1-[1/(1+r)t]}r1-[1/(1+r)t]/r.
True
Which of the following are among the most important questions to be asked when a business is started?
WHERE WILL LONG-TERM FINANCING BE OBTAINED TO PAY FOR INVESTMENTS? HOW WILL EVERYDAY FINANCIAL ACTIVITIES BE HANDLED? WHAT LONG-TERM INVESTMENTS SHOULD BE MADE?
Which of the following is not an important question that must be asked when starting a firm?
WHICH TYPE OF OPERATING SYSTEM SHOULD YOU USE FOR YOUR COMPUTERS
According to GAAP, when is income reported?
When it is earned or accrued
Another name for short-term financial management is _____ management.
Working Capital
Assume you borrow $30,000 at an interest rate of 5.35 percent. The terms stipulate that the principal is due in full in 5 years and interest is to be paid annually at the end of each year. How much total interest will you pay on this loan assuming you pay as agreed?
$8,025 Annual interest = Amount borrowed * interest = $30,000*5.35% = $1,605 Total interest paid on loan = annual interest amount * term = $1,605 * 5 years = $8,025
Assets can be described as items that _____.
- A firm owns - Provide market value to the firm - Generate revenue
One of your customers is delinquent on his accounts payable balance. You've mutually agreed to a repayment schedule of $750 per month. You will charge 1.9 percent per month interest on the overdue balance. If the current balance is $18,000, how long will it take for the account to be paid off?
32.5 months
Assume the total cost of a college education will be $245,000 when your child enters college in 15 years. You presently have $108,000 to invest for this purpose. What annually compounded rate of interest must you earn to cover the cost of your child's college education?
5.61%
Which of the following are classified as liabilities on a firm's balance sheet?
Accounts payable, Notes payable
The five main areas of finance are corporate finance, _____, financial institutions, international finance, and fintech.
Investments
In a large corporation, the financial manager is primarily responsible for:
LONG-TERM INVESTMENT DECISIONS, FINANCING DECISIONS, FINANCIAL ASPECTS OF OPERATIONS: SUCH AS COLLECTIONS OF ACCOUNTS RECEIVABLES
How is the average income tax rate computed?
Total tax bill/Total taxable income
When the typical stock in the S&P 500 Index has a PE ratio 12, a company with a PE ratio of 15 may have ______ than average growth prospects, given similar earnings per share.
higher
The information needed to compute the profit margin can be found on the ____.
income statement
Total capitalization equals total equity plus total:
long-term debt
Ultimately, the ______ control(s) the corporation.
shareholders
Common-size statements are used for comparing firms with differing ____.
sizes
A firm owned by a single person who has unlimited liability for the firm's debt is called a:
sole proprietorship.
Because of __________ and _________, interest rates are often quoted in many different ways.
tradition; legislation
Prepare a 2018 balance sheet for Rogers Corporation based on the following information: Cash = $310,000; Patents and copyrights = $700,000; Accounts payable = $480,000; Accounts receivable = $179,000; Tangible net fixed assets = $4,700,000; Inventory = $205,000; Notes payable = $170,000; Accumulated retained earnings = $1,235,000; Long-term debt = $1,530,000. What is the common stock account balance for the company?
$2,679,000 Total Assets = 310,000+179,000+205,000+4,700,000+700,000 = 6,094,000 Current Liabilities = 480,000 + 170,000 = 650,000 Long-term Debt = 1,530,000 Accumulated Retained Earnings = 1,235,000 Common Stock = 6,094,000 - 650,000 - 1,530,000 - 1,235,000 = 2,679,000
Logano Driving School's 2017 balance sheet showed net fixed assets of $4.2 million, and the 2018 balance sheet showed net fixed assets of $5.6 million. The company's 2018 income statement showed a depreciation expense of $875,000. What was net capital spending for 2018?
$2275000 =(5600000+875000-4200000)
Nataro, Incorporated, has sales of $742,000, costs of $316,000, depreciation expense of $39,000, interest expense of $34,000, and a tax rate of 21 percent. What is the net income for this firm?
$278,870 =(742,000 - 316,000 - 39,000 - 34,000) x (1-0.21)
You invest $500 at 10 percent interest. At the end of 2 years with simple interest you will have ____ and with compound interest you will have ____.
$600, $605 With simple interest you will earn $500 X 0.10 = $50 each year. Your total will be $500+100=$600. With compound interest, you will have $500(1.10)2 = $605 at the end of the two years. Given the same rate of interest, the FV will always be higher with compound interest.
Assuming the interest rate offered for a 10-year investment plan is same as for a 4-year investment plan. For an investor to achieve the same future value, which of these two plans would require a smaller savings amount to be deposited today?
10-year investment
Suppose you want to save $10,000 to buy a car. You have $6,000 to deposit today and you can earn 6% on your investments. You want to know when you'll have enough to buy the car. Which of the following spreadsheet functions will solve the problem?
=NPER(0.06,0,−6000,10000)
The Balance Sheet Identity is:
Assets = Liabilities + Owner's Equity
How is the inventory turnover ratio computed?
Cost of Goods Sold / Inventory
On the statement of cash flows, which one of the following is considered an operating activity?
Decrease in accounts payable
Which one of the following is a use of cash?
Decrease in accounts payable
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
Dividend growth, Sales growth
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
It will increase
What is the equation for enterprise value?
Market value of stock + book value of liabilities − cash
Which of the following are traditional financial ratio categories?
Market value ratios Asset management ratios Profitability ratios
Which one of the following is one way in which financial managers use a common-size balance sheet?
To track changes in a firm's capital structure
Bing, Incorporated, has current assets of $5,400, net fixed assets of $28,100, current liabilities of $4,100, and long-term debt of $10,600. a. What is the value of the shareholders' equity account for this firm? (Do not round intermediate calculations.) b.How much is net working capital?
a. $18,800 =(Current Assets + Fixed Assets) - (Current Liabilities + LT Debt) =($5,400+$28,100) - ($4,100 + $10,600) b. $1,300 =Current Assets - Current Liabilities =$5,400 - $4,100
Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time?
common-base year statement
A firm's liquidity is measured with which one of the following ratios?
current ratio
A times interest earned (TIE) ratio of 3.5 times means a firm has _____ that is(are) 3.5 times greater than the firm's interest expense.
earnings before interest and taxes
Relationships determined from a company's financial information and used for comparison purposes are known as:
financial ratios
The inventory turnover ratios for Proctor and Gamble over the past three years are 5.09, 5.72, and 5.92 times, respectively. Explaining the upward trend in the inventory turnover ratio requires:
further investigation
When developing a common-size balance sheet to evaluate last year's performance, all accounts are expressed as a percentage of:
last year's total assets
All else equal, the longer time period you have before you will need the money, the _____ (less/more) you will need to deposit today to have the same amount in the future.
less
Some financial ratios measure a firm's ______, which shows the ability to meet short-term obligations without undue stress, while others measure a firm's financial ______, which demonstrates the proportion of assets financed by long-term obligations.
liquidity; leverage
Mortgage lenders probably have the most interest in the ______ ratios.
long-term debt and times interest earned
The five categories of financial ratios include short-term solvency, long-term solvency, asset management, profitability, and _____ value ratios.
market
Ratios that measure a firm's liquidity are known as ______ ratios.
short-term solvency
The statement of cash flow explains changes in ______.
cash and equivalent
Which one of the following is a current liability?
An invoice payable to a supplier in 45 days
Which one of the following describes a noncash item?
Expenses that do not consume cash
On which side of the balance sheet do liabilities appear?
Right side
You hope to buy your dream car five years from now. Today, that car costs $62,500. You expect the price to increase by an average of 2.9 percent per year. How much will your dream car cost by the time you are ready to buy it?
72,103.59 PV x (1+r)^n
Public offerings of debt and equity must be registered with the:
Securities and Exchange Commission.
Because we are almost always unable to obtain all of the market information we want, we rely on ____________ numbers for much of our financial information.
accounting
A ______ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.
higher
Depreciation is the accountant's estimate of the cost of _________ used up in the production process.
Equipment
In addition to the importance of finance for marketing, accounting, and management careers, finance is also now considered a _____ discipline, especially at the graduate level.
STEM
You are planning to make monthly deposits of $340 into a retirement account that pays 9 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 35 years?
1000206.72
Which one of the following represents what a firm owns at a given point in time?
Assets
Which of the following parties are not considered stakeholders of a firm?
Competitors
Which one of the following is classified as a tangible fixed asset?
Computer equipment
Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $100 per year for 10 years at 15%?
Enter 100 for PMT, 10 for N, and 15 for I/Y. Solve for FV.
A business without separate legal authority formed by two or more people is known as a ____.
Partnership
Sophia and Mallory are the same age. At age 25, Sophia invests $6,000 at 7 percent, compounded annually. At age 30, Mallory invests $6,000 at 7 percent, compounded annually. All else constant, when they both reach age 60:
Sophia will have more money than mallory.
Nataro, Incorporated, has sales of $742,000, costs of $316,000, depreciation expense of $39,000, interest expense of $34,000, a tax rate of 21 percent, and paid out $125,000 in cash dividends. The common stock outstanding is 75,000 shares. a. What is the earnings per share, or EPS, figure? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the dividends per share figure? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
a. 3.72 =(742,000-316,000-39,000-34,000)-(353,000*0.21) b. 1.67 =(125,000/75,000)
Corporate dividends represent:
aftertax income from the corporation which becomes taxable income for the recipient.
The ______ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.
annual
Which of the following are considered stakeholders in a company?
employees, government, suppliers
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.
end
You recently purchased a restaurant that had equal market and book values. The purchase included the building, fixtures, and inventory. Which one of the following would be most likely to cause the market value of the restaurant to fall below its book value?
A pandemic that required restaurants to limit the number customers allowed inside
Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent?
Annual Explanation: it will not have any compounding periods while continuous have the highest effective annual rate.
Which of the following processes can be used to calculate future value for multiple cash flows?
Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then add them up
Which one of the following will decrease the value of a firm's net working capital?
Donating inventory to charity
Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $400 per year for 10 years at 5%? Multiple choice question.
Enter 400 for PMT, 10 for N, and 5 for I/Y. Solve for FV.
True or false: A deteriorating time trend in a financial ratio is always a bad sign.
False
The common set of standards and procedures by which audited financial statements are prepared are called ______.
GAAP
Which one of the following questions involves a capital structure decision?
How much debt should the firm incur to fund a project?
An official accounting statement that helps to explain the change in cash and cash equivalents is called the _____.
Statement of cash flows
Which of the following is true about a growing annuity?
The cash flows grow at a constant rate. The cash flows grow for a finite period.
Which is true of taxes?
They can be one of the largest cash outflows a firm experiences.
Timmy Tappan is single and had $189,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate his income taxes. a. What is the average tax rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the marginal tax rate? (Do not round intermediate calculations and enter your answer as a percent rounded to the nearest whole number, e.g., 32.)
a. 21.96% =$41,495.50/$189,000 b. 32% =the additional tax paid on the additional income
Although _________ __________ are often poor reflections of reality, they are often the best information available.
accounting numbers
A customer has yet to pay the bills for products purchased on credit. The seller records this debt in which balance sheet account?
accounts receivable
An annuity due is a series of payments that are made ____.
at the beginning of each period
The book value of a firm is:
based on historical transactions.
Under GAAP, U.S. firms must carry assets at:
book value
Which one of the following statements regarding corporations is correct?
Corporations can have an unlimited life.
Which of the following are uses of cash? (Check all that apply.)
Decrease in accounts payable increases in property, plant and equipment Increase in investment
Which three of the following are most apt to create problems when comparing financial statements for multiple firms?
Differing fiscal years Seasonality Differing accounting methods
Which of the following are correct spreadsheet functions?
Discount rate = RATE(nper,pmt,pv,fv) Present value = PV(rate,nper,pmt,fv) Future value = FV(rate,nper,pmt,pv)
In a large corporation, the ______ would be responsible for answering the three main questions that must be asked when starting a firm.
FINANCIAL MANAGER
True or false: Enterprise value equals total market value of the stock plus the book value of the liabilities plus cash.
False
True or false: Finance is mainly important to study if you are planning a career in finance.
False
True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.
False
True or false: There is only one method for preparing the statement of cash flows.
False
