Corporate Finance Test 1 Review

What is correct concerning the PE ratio?

A high PE may indicate that a firm is expected to grow significantly.

Which statement is correct?

Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

Could a company's CF to creditors be negative in a given year?

If a company borrows more money than it pays the interest the cash flow to creditors will be negative.

A charity wants to invest less than $3000 with the goal of receiving $3000 back sometime in the future. Which statement is correct?

The period of time she has to wait decreases as the amount she invests increases.

Pure discount loans

This is the simplest form of a loan. The borrower receives money today and repays a single lump sum at some time in the future.

Which of the following features distinguishes an ordinary annuity from an annuity due?

Timing of the annuity payments.

True or False: The primary purpose of the NYSE is to match buyers with sellers

True

which of the following can be classified as an annuity but not a perpetuity?

equal annual payments for life

Annuity Due

finite series of equal cash flows that occur at the BEGINNING of each period

Ordinary Annuity

finite series of equal cash flows that occur at the END of each period

An auction market

has a physical trading floor

Interest Only Loans

has a repayment play that calls the borrower to pay interest each period and to repay the entire principle (original loan amount) at some point in the future.

Annuity Due

has payments that occur at the beginning of each time period

When comparing savings accounts, you should select the account that has the

highest effective annual rate

Perpetuity

infinite series of equal payments

The future value of a lump-sum investment will decrease if the:

interest is changed to simple interest from compound interest

The relationship between the present value and the investment time period is best described as

inverse

the book value of owner's equity will decrease when

dividends exceed net income for a period

in a profitable firm depreciation does what?

lowers taxes

income statement according to GAAP

records expenses based on the matching principle

what is included in the market value of a firm but not in the book value?

reputation of the firm

balance sheet

snapshot of the firm and of what it owns (assets), what it owes (liabilities), and the difference between the two (equity)

Amortized Loan

the borrower repays parts of the loan amount over time. Simple way: have the borrower pay the interest each period plus some fixed amount. The last payment pays the loan off in full.

The sustainable growth rate is based on the premise that:

the debt-equity ratio will be held constant

shareholders equity is best defined as

the residual value of a firm

Ratio analysis CANNOT be taken at face value for all of the following except;

while GAAP is consistent across the globe, multiple currencies may be considered

Could a company's CF to stockholder's be negative in a given year?

yes, when cash flow from operating activities, cash flow from investing activities and cash flow from financing activities can be negative.

If a firm has a 100% dividend payout ratio, then the internal growth rate is:

zero %

DuPont Identify can be used to help a financial manager determine the

1. degree of financial leverage used by a firm 2. operating efficiency of a firm 3. utilization rate of a firms assets 4. rate of return on a firms assets

Based on the recognition principle, revenue is recorded on the financial statements when the: I. payment is collected for the sale of a good or service. II. earnings process is virtually complete. III. value of a sale can be reliably determined. IV. product is physically delivered to the buyer.

2 & 3

Which of the following statements is correct?

The EAR, rather than the APR, should be used to compare both investment and loan options.

When comparing a firms sales and cost to determine if any trends are present or determine if any changes are needed, what statement would work best?

Common-Size Income Statement (shows each element of income and expenditure as a % of total sales)

What will increase the profit margin of a firm?

Decrease in the tax rate

What will decrease if a firm increases its net income?

PE Ratio

Reducing SG&A cost will increase what ratios?

Profit Margin, ROA, ROE

Which statement is true?

all else equal, an increase in the discount rate decreases the PV and increases the future value of an annuity

the matching principle states that

costs of producing an item should be recorded when the sale of that item is recorded as revenue

net working capital

current assets minus current liabilities