Business Finance Midterm 1

Because shareholders get paid last after all other obligations are satisfied, they are often called _____. Multiple choice question. creditors stakeholders preferred shareholders residual owners

residual owners

Indirect agency costs are often due to lost ______. Multiple choice question. objectives causes goals opportunities

opportunities

The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1 + r). Multiple choice question. ordinary actuarial deferred middle

ordinary

Financial managers use a common-size income statement to determine ___. Multiple choice question. which costs are rising or falling as a percentage of sales the firm's sources and uses of cash the firm's current capital structure the percentage of income invested in each type of asset

which costs are rising or falling as a percentage of sales

The times interest earned ratio equals EBIT divided by blank .

interest

Cash flow to creditors is equal to _____. Multiple choice question. net new borrowing less interest paid interest paid less net new borrowing liabilities plus assets assets minus liabilities

interest paid less net new borrowing

If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested. Multiple choice question. (1×r)1×� (1/r)1/� (1+r)1+� (1-r)1-�

(1+r)

Which of the following is the correct representation of the cash coverage ratio? Multiple choice question. Total interest expense/Total cash Total cash/Total interest expense (EBIT+ Non-cash expenses)/Interest expense EBIT/Interest expense

(EBIT+ Non-cash expenses)/Interest expense

A firm with a profit margin of 6.8 percent generates ______ cents in net income for every one dollar in sales. Multiple choice question. 0.68 6.8 3.2 0.32

6.8 Reason: A firm with a profit margin of 6.8 percent generates 6.8 cents in net income for every one dollar in sales.

What does stockholders' equity represent? Multiple choice question. A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities.) A residual claim against the firm's liabilities (The book value of the firm's assets less the book value of its current assets.) A claim against all of the firm's assets A fixed claim against the firm's liabilities

A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities.)

Which of the following processes can be used to calculate future value for multiple cash flows? Multiple select question. Find the future value of a single lump sum amount Calculate the future value of each cash flow first and then add them up Discount all of the cash flows back to Year 0 Compound the accumulated balance forward one year at a time

Calculate the future value of each cash flow first and then add them up Compound the accumulated balance forward one year at a time

Which of the following are sources of cash? (Check all that apply.) Multiple select question. An increase in notes payable A decrease in accounts receivable Purchasing an asset A decrease in notes payable

An increase in notes payable A decrease in accounts receivable

Which of the following are examples of short-run fixed costs? Multiple select question. Wages to labors Bond interest Rent Material costs

Bond interest Rent

Blank______ buy and sell for themselves, at their own risk. Multiple choice question. Dealers Representatives Auctioneers Agents

Dealers

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? Multiple choice question. FV = $100 × (1.10)3 FV = $100 × 1.10 × 3 FV = $100÷(1.10)3 FV = $100 × 0.10 × 3

FV = $100 × (1.10)^3

In addition to the importance of finance for marketing, accounting, and management careers, finance is also now considered a Blank______ discipline, especially at the graduate level. Multiple choice question. MeGa GRET STEM PLANT

STEM

Blank is the term that indicates preference in position over other lenders.

Seniority, senior, junior

Who is entitled to the residual value of a firm's cash flows? Multiple choice question. Bondholders Shareholders Its suppliers The Internal Revenue Service

Shareholders

Interest earned on the original principal amount invested is called _____. Multiple choice question. simple interest compound interest interest yield

Simple

The officer responsible for corporate tax reporting is the ______. Multiple choice question. ombudsman controller treasurer chief operating officer

controller

It is argued that, left to themselves, managers would tend to maximize the amount of resources over which they have control or, more generally, power or wealth.

corporate

True or false: If you invest in junk bonds, there is a high likelihood that you will earn a very high return. True false

false

The interest from a municipal bond is exempt from ____ income taxes. Multiple choice question. federal state

federal

The five main areas of finance are corporate finance, investments, financial institutions, international finance, and .

fintech

Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts. Multiple choice question. personal unlimited no limited

limited

The payments in a Blank______ amortization loan are NOT based on the life of the loan. Multiple choice question. federal full partial remunerative

partial

A common-size income statement helps compare financial results over time by controlling for changes in ______. Multiple choice question. market share tax rates sales capital structure

sales

Agency Costs

the costs of the conflict of interest between stockholders and management

The primary responsibility of financial managers is to increase the value of: Multiple choice question. current earnings. the existing shares of stock. their total compensation package. future profits.

the existing shares of stock.

The coupon rate on an original issue discount bond will be Blank______. Multiple choice question. zero very low equal to a conventional bond very high

very low

Financial managers use a common-size income statement to determine ___. Multiple choice question. the firm's sources and uses of cash the percentage of income invested in each type of asset which costs are rising or falling as a percentage of sales the firm's current capital structure

which costs are rising or falling as a percentage of sales

What is the future value of $1,000 invested for 8 years at 6%? Multiple choice question. $1,586.87 $1,480.00 $1,593.85

$1,593.85 Reason: In the financial calculator, enter 1000 for PV, 8 for n, and 6 for I/Y. Solve for FV.

What is formula to calculate the present value of an annuity that makes payments of $100 per year for 10 years if the first payment is made immediately and the discount rate is 10 percent per year? Multiple choice question. $100[(1 − 1/1.10^10)/0.10][.10] $100[(1 − 1/1.10^10)/0.10][1.10] $100[(1 − 1/1.10^10)/1.10][1.10] $1,000[(1 − 1/1.10^10)/0.10][1.10]

$100[(1 − 1/1.10^10)/0.10][1.10]

What is the future value of $100 compounded for 50 years at 10 percent annual interest? Multiple choice question. $868.85 $500.00 $11,739.09 $14,987.45 Reason: FV = $100 × 1.10^50 = $11,739.09

$11,739.09

If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years? Multiple choice question. $121.00 $133.10 $131.00 $130.00

$133.10 Reason: FV = $100 × 1.103 = $133.10

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 Reason: 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.

Financial statements report: Multiple choice question. market values book values

Book Values

Which one of these provides a manager an incentive to perform well? Multiple choice question. Low pay Lack of takeover threats Promotions Agency problems

Promotions

Which of these are generally considered to be short-run fixed costs? Multiple select question. Rent payments for a warehouse Management salaries Property taxes Management bonuses Income taxes

Rent payments for a warehouse Management salaries Property taxes

When looking at the income statement, the financial manager should keep in mind GAAP, cash versus noncash items, and _ and costs

Time

Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds? Multiple select question. Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer. Treasury bonds are issued by the US government while corporate bonds are issued by corporations. Treasury bonds do not offer any tax benefits to investors but corporate bonds do. Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk.

Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer. Treasury bonds are issued by the US government while corporate bonds are issued by corporations. Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk.

The formula for a present value factor is 1/(1+r)^t True False

True

How significant is the inflation premium on the shape of the term structure of interest rates? (Select all that apply.) Multiple select question. Not significant Very significant More significant than the real rate of return Less significant than the real rate of return

Very significant More significant than the real rate of return

The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called blank .

compound

The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year. Multiple choice question. discounting adding subtracting compounding

compounding

One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time. Multiple choice question. one year three years half a year two years

one year

The relative ease of transferring ownership, the limited liability for business debts, and the unlimited life of the business are why the corporate form is superior to sole proprietorships or partnerships for _____. Multiple choice question. raising cash selling goods personal relations

Raising Cash

Which of the following are true about a partial amortization loan? Multiple select question. The amortization period is shorter than the loan period. The monthly payments do not fully pay off the loan by the end of the loan period. The amortization period is longer than the loan period. The monthly payment is based on a longer amortization period than the maturity of the loan. The borrower makes a large balloon payment at the end of the loan period.

The monthly payments do not fully pay off the loan by the end of the loan period. The amortization period is longer than the loan period. The monthly payment is based on a longer amortization period than the maturity of the loan. The borrower makes a large balloon payment at the end of the loan period.

Which of the following positions generally report to the chief financial officer (CFO)? Treasurer CEO Controller Director of Marketing

Treasurer Controller

The formula for the present value interest factor for annuities is: Annuity present value factor = {1-[1/(1+r)^t]}/r True false

True

What should you keep in mind when examining an income statement? Multiple select question. cash versus noncash items time and costs GAAP asset composition

cash versus noncash items time and costs GAAP

With a fixed payment loan, the amount of interest paid (decreases/increases) each period.

decreases

The cash coverage ratio adds Blank______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations. Multiple choice question. depreciation interest expenses administrative expenses payroll expenses

depreciation

The cash coverage ratio adds Blank______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations. Multiple choice question. interest expenses administrative expenses depreciation payroll expenses

depreciation

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. Multiple choice question. additions to retained earnings sales net income earnings before interest and taxes

earnings before interest and taxes

Depreciation is the accountant's estimate of the cost of ______ used up in the production process. Multiple choice question. equipment cash labor inventory

equipment

As the time to maturity increases, the interest rate risk premium ____. Multiple choice question. increases at an increasing rate increases at a decreasing rate decreases at a decreasing rate decreases at an increasing rate

increases at a decreasing rate

Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ______ effectively controls the firm. Multiple choice question. management the largest shareholder the federal government no one

management

Cash generated from a firm's normal business activities is called _____. Multiple choice question. operating cash flow cash flow from assets cash flow to creditors

operating cash flow

The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1 + r). Multiple choice question. deferred actuarial middle ordinary

ordinary

In general, if you invest for one period at an interest rate of r, your investment will grow to 1 (minus/plus) r.

plus

In case of default: Multiple choice question. subordinated debt holders are paid after all other security holders subordinated debt holders must give preference to other specified creditors subordinated debt holders receive preference over other specified creditors subordinated debt holders must give preference to equity holders

subordinated debt holders must give preference to other specified creditors

The formula for the present value of an annuity due is _____. Multiple choice question. (PV of an ordinary annuity) - (1 + r) (PV of an ordinary annuity)/(1 + r) (1 + r) + (PV of an ordinary annuity) (1 + r) × (PV of an ordinary annuity)

(1 + r) × (PV of an ordinary annuity)

If you are holding a municipal bond that is trading at par to yield 6 percent, by how much will your aftertax yield change if your income tax bracket increases from 15 percent to 20 percent. Assume there are no state or local taxes Multiple choice question. 0.3% 0% 5% 3%

0% Reason: Interest income from munis is exempt from federal income tax.

Which formula below represents a present value factor? Multiple choice question. 1/(1 + N)r 1/N + 1/r (1 + r)/t 1/(1 + r)^t

1/(1 + r)^t

Days' sales in receivables are calculated as blank days divided by the receivables turnover. (Enter your answer as a numerical value.)

365

Which of these computes days' sales in receivables? Multiple choice question. Accounts receivable/365 365/Receivables turnover 365/Sales Receivables turnover/365

365/Receivables turnover

you are in the 20 percent tax bracket, what is your aftertax yield on a par value municipal bond yielding 5 percent? Ignore state and local taxes. Multiple choice question. 6% 5% 4.8% 4%

5% Reason: Interest income from a muni is exempt from federal income tax so the after-tax yield equals the before-tax yield.

How is an original issue discount bond (OID) different from a zero coupon bond? Multiple choice question. An OID has a very low coupon rate, while a zero coupon bond pays no coupon. An OID has a very high coupon rate, while a zero coupon bond pays no coupon. There is no difference. The coupon rate of an OID changes annually.

An OID has a very low coupon rate, while a zero coupon bond pays no coupon.

The two types of secondary markets include , markets and dealer markets.

Auction

What are original issue discount bonds? Multiple choice question. Bonds that are issued with a very low coupon rate. Bonds that have a very high coupon rate. Bonds that were originally issued with a coupon rate of zero. Bonds that are sold at a discount.

Bonds that are issued with a very low coupon rate.

Which one of the following is true? Multiple choice question. Financial statements explicitly show costing and pricing of individual products Cash flows can be derived from financial statements. Earnings, net income, and cash flows are identical. Cash flows always exceed earnings.

Cash flows can be derived from financial statements.

True or false: Enterprise value equals total market value of the stock plus the book value of the liabilities plus cash. True False

False

True or false: When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal. True false

False

Blank value is the cash value of an investment at some time in the blank

Future, future

Which of the following are uses of cash? Multiple select question. Increases in property, plant and equipment Increases in inventory Decreases in accounts receivable Decreases in property, plant and equipment Decreases in accounts payable

Increases in property, plant and equipment Increases in inventory Decreases in accounts payable

What does the dirty price represent? Multiple choice question. It represents the average price of bonds with similar ratings It includes the quoted price and interest accrued since the last coupon payment. It represents the historical issue price of a bond It represents the quoted price for a bond

It includes the quoted price and interest accrued since the last coupon payment.

What is the likely impact on all interest rates when the real rates are high? Multiple choice question. It will increase It will not be affected It will decrease by 1% if real rate increases by 1% It will decline

It will increase

What are some features of the OTC market for bonds? Multiple select question. There are fewer bond issues that trade OTC than there are stocks on the NYSE. OTC dealers are connected electronically. The OTC has no designated physical location. The OTC market is now as transparent as the stock market.

OTC dealers are connected electronically. The OTC has no designated physical location.

Which are true concerning product costs? Multiple select question. Product costs are reported as administrative expenses. Product costs contain both fixed and variable costs. Product costs are reported as costs of goods sold. Product costs contain selling expenses.

Product costs contain both fixed and variable costs. Product costs are reported as costs of goods sold.

Why is a dollar received today worth more than a dollar received in the future? Multiple choice question. A dollar will be worth as much in the future as it is today. Today's dollar can be reinvested, yielding a greater amount in the future. A dollar today is not worth more than a dollar in the future.

Today's dollar can be reinvested, yielding a greater amount in the future.

How is investing in U.S. Treasury bonds different from investing in corporate bonds? Multiple select question. U.S. Treasury bonds have longer maturities than corporate bonds. Treasury issues have no default risk. Interest from U.S. Treasuries is exempt from all taxation while corporate bond interest is taxable at all levels. Interest from U.S. Treasuries is exempt from taxes at the state level but corporate interest is not.

Treasury issues have no default risk. Interest from U.S. Treasuries is exempt from taxes at the state level but corporate interest is not.

When using a financial calculator to find the interest rate, you may use the inputs N, PMT, and PV to find I/blank.

Y

Although Blank______ are often poor reflections of reality, they are often the best information available. Multiple choice question. market valuations accounting numbers intrinsic values

accounting numbers

The costs incurred due to a conflict of interest between stockholders and management are called ______ costs. Multiple choice question. opportunity agency sunk hidden

agency

A lump sum payment to pay off the balance of a partially amortized loan is called a blank, or bullet, payment.

balloon

lump sum payment to pay off the balance of a partially amortized loan is called a ______, payment. Multiple choice question. balloon, or bucket balloon or bullet pistol and bullet bullet or shell

balloon or bullet

Future value is the Blank______ value of an investment at some time in the future. Multiple choice question. cash interest indirect relational

cash

Cash flow to blank is interest paid less net new borrowing.

creditors

Increasing its noncash liquid assets will enable a firm to do which of the following? Multiple select question. Increase its ability to meet short-term obligations Increase its rate of return Reduce its investment in receivables and inventory Increase its ability to avoid financial distress

Increase its ability to meet short-term obligations Increase its ability to avoid financial distress

What are two classifications of costs used by financial accountants? Multiple select question. Fixed costs Period costs Variable costs Product costs

Period costs Product costs

Accountants usually distinguish between _____ costs and _____ costs. Multiple choice question. product; variable variable; fixed product; period fixed; period

product; period