Unit Summary Test V4 C708 Principles of accounting

Examining ratios across time to identify trends and comparing the firm's ratios with those of other firms. Ratios are meaningful only when compared against a standard.

Financial Ratios help to identify some of the financial strengths and weaknesses of a company. What are two ways that the ratios provide for making meaningful comparisons of a firm's financial data?

6.667 Return on Equity = Net Income/Equity = $10,000,000/$1,500,000 = 6.667.

A company has assets of $2,000,000, net sales of $3,000,000, and $1,500,000 in equity. Its net income is $10,000,000. What is its return on equity?

The bond will trade above par and its current yield will decrease. Current yield is the annual interest payment divided by current market price. When market interest rates decrease, the market price of existing bonds rises above par. The bond's annual interest payment is now divided by a larger market price for the bond, which makes the current yield decrease.

A company issues a bond with a coupon rate of 5%. Since the bond was issued, market interest rates have decreased. What effect will this decrease have on the bond's market price and its current yield?

$55 million Formula provided DFN=TA-TL-TE TA=205+605=810 TL=188+461=649 DFN=810-649-106=55

A firm has projected current assets to be $205 million, fixed assets to be $605 million, current liabilities to be $188 million, long-term debt to be $461 million, and owner's equity to be $106 million. Given this information, what is the discretionary financing need?

Equivalent annuity The equivalent annuity method expresses the NPV as an annualized cash flow by dividing it by the present value of the annuity factor. It is often used when comparing investment projects of unequal lifespans.

A firm is evaluating the merits of investing in one of two non-repeatable projects with different lifespans. Start-up costs for each project are equal. If project A has an expected lifetime of five years, and project B has an expected lifetime of eight years, which capital budgeting method provides the best way to compare future cash flows from these projects?

The statement is false. If a person buys Barnes and Noble stock from an investor who owns shares in Barnes and Noble then he/she is participating in a secondary market, not a primary market.

A person buying Barnes and Noble stock from an investor who owns shares in Barnes and Noble is participating in a primary market.

$33,505 The present value of an annuity is the value of a stream of payments, discounted by the interest rate to account for the payments are being made at various moments in the future. The formula is: PV = [1-(1+i)^-n] / i, where n is the number of payments and i is the per period interest rate. Using the TI-BA II Plus calculator: N=5x4=20, I/Y=7/4=1.75, PMT=2000, FV=0 and [CPT] [PV] = 33,505.76.

An annuity has an interest rate of 7% and makes a quarterly payment of $2,000. The annuity is to last for 5 years. What is the present value of the annuity?

0.15 Operating margin = EBIT/Revenue. We calculate EBIT = Revenue - Operating expenses = $20,000,000 - $17,000,000 = $3,000,000. Hence, Operating Margin = $3,000,000/$20,000,000 = 0.15.

During a fiscal year, a company has $20,000,000 in revenue. Its operating expenses are $17,000,000. What is the company's operating margin?

commercial paper

External sources of financing include

To compare two projects that have an equal initial investment Assuming all projects require the same amount of up-front investment, the project with the highest IRR would be considered the best and undertaken first.

In which situation would it be appropriate to use the IRR method to make an investment decision?

Sale of stock Sale of stock is an internal source of financing.

Internal sources of financing include which of the following?

29.17% SGR = ROE (1-b) = (50/120) x [1- (15/50)] = 29.17%

Last year T&J Inc. reported total assets of $250 million, equity of $120 million, net income of $50 million, dividends of $15 million, and retained earnings of $35 million. What is T&J Inc.'s sustainable growth rate?

A lump-sum payment of $20,000 in two years from today. PV = $20,000/(1.102) = $16,529 gives the smallest payment in today's value. Using Calculator: N = 2, I/Y = 10, FV = 20,000. [CPT] PV = $16,529.

Of the following car financing options, which one would you prefer while assuming that you prefer paying the least amount of dollars and that you face a 10% annual compound interest rate on all your financial decisions?

An increase in discretionary financing needed increase the dividend received by investors

Suppose a company is planning to increase its dividend payout ratio next year. Given this information, which of the following cases do you expect to occur in the upcoming year?

True A financial institution is a company involved in the business of dealing with monetary transactions, such as loans, investments, and deposits.

T or F A financial institution is a company involved in the business of dealing with monetary transactions, such as loans, investments and deposits.

The statement is true. One of the main functions of financial markets is matching those who need capital with those who have capital.

T or F One of the main functions of financial markets is matching those who need capital with those who have capital

applies to a single point in time of a business's calendar year is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.

The balance sheet is the only financial statement which

Cash needed to finance future sales growth

The percentage of sales forecasting method is used by management to forecast which of the following?

Potential conflicts of interest between shareholders and managers of a company

The problem of motivating one party (the agent) to act on behalf of another (the principal) is known as the principal-agent problem

systematic risk systematic risk is a portion of risk in a portfolio that cannot be diversified away

The risk that remains after an investor has extensively diversified his portfolio is primarily

The statement is false. Bond markets and stock markets are not two types of money markets. Bond markets and stock markets are two types of capital markets

True or False: Bond markets and stock markets are two types of money markets.

The statement is true. Insiders are legally permitted to buy and sell shares of the companies they work for. However, these transactions must be properly registered with the Securities and Exchange Commission (SEC).

True or False: Company directors and high-level executives, ("insiders"), are legally permitted to buy and sell shares of the company that they work for.

The internal rate of return can vary throughout the life of a project. IRR assumes reinvestment of interim cash flows in projects with equal rates of return (the reinvestment can be the same project or a different project)

Under the internal rate of return rule in capital budgeting, which statement does not apply?

Personal, professional, and corporate Personal ethics are moral principles that guide a person's behavior. Professional ethics are values, practices, and policies that shape the choices made by decision-makers on behalf of their organizations. Corporate/business ethics describe the application of ethical values to business activities.

What are the three central components of business ethics

Personal assets of owners are not protected The liability of the partners for the debts of the business is unlimited.

What is a disadvantage of a partnership?

$62,092 PV = $100,000/(1.105) = $62,092 Using Calculator: N = 5, I/Y = 10, FV = 100,000. [CPT] PV = $62,092.

What is the present value of $100,000 that will be received 5 years from today if you face a 10% compound interest rate every year (rounded up to the nearest dollar)?

Unsystematic risk Correct! Unsystematic risk can be reduced through diversification.

What type of risk can an investor reduce through the process of diversification?

To determine which discount rate results in a net present value (NPV) of zero The internal rate of return (IRR) is defined as the discount rate that gives a net present value (NPV) of zero. It is a commonly used measure of investment efficiency.

Which answer correctly describes a way the internal rate of return (IRR) is used in capital budgeting?

Internal rate of return is an indicator of the efficiency, quality or yield of an investment. The internal rate of return (IRR) is defined as the discount rate that gives a net present value (NPV) of zero. It is a commonly used measure of investment efficiency. IRR calculations are commonly used to evaluate the desirability of investments or projects. The higher a project's IRR, the more desirable it is to undertake the project. Assuming all projects require the same amount of up-front investment, the project with the highest IRR would be considered the best and undertaken first.

Which answer correctly describes an advantage the internal rate of return has over net present value for capital budgeting purposes?

Taxes are filed as personal income.

Which answer describes a characteristic of a sole proprietorship?

Inflation Opportunity Cost Risk of a bad investment note:Brokerage commissions are an actual cost to investor but are not priced by the seller.

Which answer is a cost to the investor that is included in the calculation of an investment's interest rate?

Inflationary expectations Deferred consumption Alternative investments

Which answer is a factor that influences market interest rates?

To better understand the economic environment To improve management of personal finances To apply financial concepts to business situations A person would study finance to improve management of personal finances, apply financial concepts to business situations, and to better understand the economic environment.

Which answer is a reason why a person would study finance?

A firm grasp of the business's accounting system The ability to calculate the cost of investing in a product or business opportunity An understanding of the business's long-term strategy deal with uncertainty as a routine part of their responsibilities.

Which answer is a requirement for a financial manager to carry out his or her responsibilities?

company's employees The company's shareholders The company's suppliers The company's employees, the company's suppliers, and the company's shareholders are all stakeholders in the company.

Which answer is an example of a stakeholder in a company?

Managing the budget Figuring out financial projections and whether a project is worth financing Ensuring the business has enough cash to pay its financial obligations

Which answer is not a responsibility of a financial manager?

Write down of inventory Depreciation and Amortization Unrealized losses from investments

Which answer is the best example of a noncash item that would be included on the income statement?

Assets = Liabilities + Owner's Equity The accounting equation is: Assets = Liabilities + Shareholder Equity. The balance sheet is a complex display of this equation, showing that the total assets of a company are equal to the total of liabilities and shareholder equity

Which answer is the correct definition of the accounting equation?

Valuing the profitability of multiple projects and choosing one in which to invest. Preparing the corporation's budget for the next fiscal quarter. Determining whether to pay a dividend to the corporation's shareholders. Financial statement preparation is a function of accounting department

Which answer option is a job function associated with a corporate finance department?

A primary market refers to the market where securities are created. Securities start trading in primary market venues including the New York Stock Exchange and Nasdaq.

Which description accurately describes a primary market?

Preferred stock provides a simpler means of raising substantial capital than the sale of common stock does.

Which is the correct reason as to why businesses issue preferred stock?

When one increases, the other increases, assuming all variables are constant. A higher cash flow today would result in a higher amount in the future and vice versa.

Which of the following describes the relationship between present value and future value?

Cross-sectional Longitudinal data Time Series

Which of the following is a statistical forecasting method?

Compare the company's gross profit margin to the average gross profit margin of the top three firms in its industry. Calculate a company's debt ratio and compare it to its industry's average debt ratio. Contrast a company's current ratio with its nearest competitors.

Which of the following is an example of benchmarking using ratio analysis?

The company's current gross profit margin is compared with its gross profit margin from past years. We are comparing the firm's gross profit margin over time.

Which of the following is an example of trend analysis?

Cash Flow from Financing Cash Flow from Investing Cash Flow from Operations

Which of the following is not a component of the Cash Flow Statement?

Cash; accounts receivable; inventory; property, plant, and equipment (PPE). Cash is always presented first, followed by marketable securities, then accounts receivable, then inventory, and then fixed assets. Goodwill is listed last.

Which of the following is the correct order of how assets should be presented on a balance sheet?

Invest in a broad pool of US and international stocks and bonds. Risk can be diversified away by investing in a broad pool of assets

Which option is an adequate method to reduce an investor's risk through diversification?

A normal yield curve suggests that interest rates will be raised in the future. A flat yield curve suggest that interest rates will be cut. An inverted yield curve suggests that interest rates will be dramatically cut. Normal yield curves suggest that interest rates rise over time.

Which prediction based on a description of the yield curve is correct?

Systematic risk is what provides a stock's "risk premium." Systematic risk is priced in the market since it is undiversifiable.

Which statement accurately describes systematic risk?

Price risk is positively correlated to interest rates, reinvestment risk is inversely correlated. Price risk is the risk that the market price of a bond will fall due to a rise in the market interest rate; e.g., price risk rises as market interest rates rise. Reinvestment risk is the risk that a bond is repaid early, typically after market interest rates fall. Thus, Reinvestment risk rises when market interest rates fall.

Which statement correctly explains the difference between price risk and reinvestment risk?

Debt holders are the creditors whereas equity holders are the owners of the company. Debt can be kept for a limited period and should be repaid back after the expiry of that term. On the other hand, Equity can be kept for a long period. Debt can be secured or unsecured, whereas equity is always unsecured.

Which statement is TRUE regarding debt vs. equity?

Debt carries high risk to investors as compared to Equity. Debt carries low risk to investors as compared to Equity

Which statement is false regarding debt vs. equity?

Preferred stockholders typically have voting rights. Preferred stockholders typically do not have the voting rights that common stockholders do, but they may be granted special voting rights.

Which statement is not true regarding preferred stock owners?

Preferred stock owners are paid before common stock shareholders in the event of the company's liquidation. Preferred stockholders enjoy a fixed dividend. referred stockholders must be paid their due dividends before the company can distribute dividends to common stockholders.

Which statement is true regarding preferred stock owners?

A bond selling at par has a coupon rate so the bond is worth its redemption value at maturity. Yield-to-maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. If a bond's coupon rate is equal to its YTM, then the bond is selling at par

Which statement regarding bonds and par values is true?

The idea of maximizing market value is related to the idea of maximizing shareholder value. When business managers try to maximize the wealth of their firm, they are actually trying to increase their stock price. As the stock price increases, the individual who holds the stock wealth increases

Which statement regarding shareholder and market value is correct?

Inflation linked, Stepped-coupon, Floating rate

Which type of bond will be affected by reinvestment risk?

Zero-Coupon bond There are no coupon payments made to the investor over the life of the bond

Which type of bond will not be affected by reinvestment risk?

Risk resulting from a general decline in the US stock markets This illustrates a risk exposure that affects all companies in the market and is thus an example of systematic risk.

You are considering investing in the common stock of a major US Corporation. Which answer is an example of systematic risk?

$952,381 PV = $1 million/(1.05) = $952,381 Using Calculator: N = 1, I/Y = 5, FV = $1 million. [CPT] PV = $952,381

You expect to receive a payment of $1 million in a year. The annual interest rate is 5%. What is the present value of the future payment?

$33,333 PVGP = A1/(i - g) = $1000/(0.05 - 0.02) = $33,333.

You own a perpetuity that pays $1000 in the first year. It has a 5% annual interest rate and a 2% annual growth rate. What is the present value of the perpetuity?

sale of fixed assets, retained earnings, debt collection

are internal sources of financing

Maintaining the company's financial system

responsibility of a financial accounting manager