FIN 355 Exam 2

Future values decrease with decreases in interest rates

True

If a firm increases its sales while holding its accounts receivable constant, their DSO will most likely decline

True

U.S. trade deficits, as a macroeconomic factor, can have an impact on U.S interest rates

True

All else equal, increasing the debt ratio will increase the ROA.

False

All streams of cash flows are called annuities

False

Federal government bonds have no risk premium because they carry no risk of any kind

False

Holding all other variables constant, an increase in the nominal annual interest rate would increase a present value.

False

If a bank compounds savings accounts quarterly, the effective annual rate will be lower than the nominal rate

False

If companies have fewer good investment opportunities, interest rates are likely to increase

False

Like car loans, mortgage loans on real estate generally require smaller payments of interest in the early years of the mortgage and lower payments of interest in the later years

False

Liquidity premiums are generally higher on Treasury than on corporate bonds.

False

One of the four most fundamental factors that affect the cost of money is the expected rate of inflation. If inflation is expected to be relatively high, then interest rates will tend to be relatively low, other things held constant.

False

Other things held constant, an increase in a firm's accounts payable will increase the firms current ratio

False

Reinvestment rate risk is higher, other things held constant, on a long term than on short term bonds

False

The Fed's recent actions in raising interest rates to curb inflation is not in line with the purpose of the Fed.

False

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loans life, the smaller the percentage of the payment will be a repayment of principal

False

The present value of an investment will always be larger than its expected future value when interest is compounded.

False

The real risk rate of interest is determined by the Federal Reserve

False

When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal payments percentage declines in the loans later years.

False

An annuity due will have a larger present value than a normal annuity

True

An increase in the debt ratio will usually lead to a decrease in the ROA for a firm.

True

Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."

True

Companies in the same industry may use different accounting practices which may indicate differing levels of performance; this can reduce the effectiveness of ratio analysis.

True

Other things held constant, the more debt a firm uses, the lower its profit margin will be

True

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its currents assets

True

The time value of money means that a dollar today is worth more than a dollar at some time in the future

True

Kramer was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today with all remaining payments occurring at the beginning of the year, or a lump sum. If a fair return is 7.5% how large must the lump sum be to provide the same financial benefit as the annuity?

a. $237,229 b. $274,622 c. $220,678 d. $261,545 e. $249,090 a.

Which of the following statements is most correct?

a. A banks loans nominal interest rate will always be equal to or greater than its effective annual rate. b. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. c. If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%. c.

Considered alone, which of the following would increase a company's current ratio?

a. An increase in net fixed assets b. An increase in accrued liabilities c. An increase in notes payable d. An increase in accounts payable e. An increase in accounts receivable e.

Which of the following actions is an example of "window dressing?"

a. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt. b. Using some of the firm's cash to reduce long-term debt. c. Borrowing on a long-term basis and using the proceeds to retire short-term debt. d. Any action that does not improve a firm's fundamental long-run position and this increases its intrinsic value. c.

Which of the following is most correct?

a. The future value of a present value decreases as the interest rate increases b. The time value of money means that a dollar today is worth more than a dollar at any time in the future c. The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant b.

The process of finding present values its typically called

a. annualizing b. compounding c. valuing d. discounting d.

When a loan is amortized over a five year term, the

a. balance is paid as a balloon payment in the fifth year b. amount of interest paid decreases each year c. amount of applied to principal decreases each year d. rate of interest decreases each year e. payment is decreases each year b.

Which of the following factors would be most likely to lead to an increase to nominal interest rates?

a. household reduce their consumption and increase their savings b. a new technology, like the solar powered vehicles, has just been introduced, and it increases investment opportunities c. there is a decrease in expected inflation d. the economy falls into a recession and the Federal Reserve decides to try to stimulate the economy b.

Which of the following statements is most correct?

a. if a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline b. if a firm has high current and quick ratios, this always indicates that the firm is managing its liquidity position well c. the inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets c.

Which of the following statements is most correct?

a. if two firms have identical sales, interest rate paid, operating costs, and assets, but they differ in the way they are financed, the firm with less debt will generally have the higher expected ROE b. the use of debt financing will tend to increase the TIE ratio, other things held constant c. a firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that had no debt in its capital structure d. bond financing is better than stock financing for investors because income from bonds is taxed on a more favorable basis than income from stock. c.

You observe that a firm's ROE is above the industry average, but both its profit margin and equity multiplier are below the industry average. Which of the following statements is most correct?

a. its total assets turnover must be below the industry average b. its return on assets must be equal the industry average c. its TIE ratio must be below the industry average d. its total assets turnover must be above the industry average d.

Suppose Newman Incorporated's total asset turnover falls from 1.1 to 1, but at the same time its profit margin rises from 9% to 10% and its total debt increases from 40% of total assets to 60% of total assets. What will happen to Newman's ROE given these circumstances?

a. newmans ROE will increase b. newmans ROE will remain the same c. newmans ROE will decrease d. theres not enough information to determine what will happen to newmans ROE a.

Which of the following would be most likely to lead to a higher level of interest rates in the economy?

a. the Federal Reserve decides to try to stimulate the economy b. Corporations step up their expansion plans and thus increase their demand for capital c. the level of inflation begins to decline d. the economy moves from a boom to a recession b.

Which of the following statements is most correct?

a. the cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. b. if a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. c. the cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year, or once a month d. the cash flows for an annuity due must all occur at the ends of the periods

The higher the rate of interest:

a. the larger the present value of a future sum of money b. the smaller the future value of an invested today c. the smaller the present value of a future sum of money c.

Your bank account pays 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is most correct?

a. the periodic rate of interest is 6% and the effective rate of interest is greater than 6% b. the periodic rate of interest is 1.5% and the effective rate of interest rate is greater than 6% c. the periodic rate of interest is 3% and the effective rate of interest is 6% d. the periodic rate of interest is 6% and the effective rate of interest is also 6% b.

The real risk-free rate is expected to remain constant at 3% in the future, a 2% rate of inflation is expected for the next 2 years, after which inflation is expected to increase to 4%, and there is a positive maturity risk premium that increases with years to maturity. Given these conditions which of the following statements is correct?

a. the treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope b. the conditions in the problem cannot all be true--they are internally inconsistent c. the yield on a 7-year treasury bond must exceed that of a 5-year corporate bond d. the yield on a 5-year treasury bond must exceed that on a 2-year treasury bond e. the yield on a 2-year T-bond must exceed that on a 5-year T-bond d.

Which of the following statements is most correct?

a. the yield on a 3-year treasury bond cannot exceed the yield on a 10-year treasury bond b. the yield on a 2-year corporate bond should always exceed the yield on a 2-year treasury bond c. the yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond. d. the following represent a "possibly reasonable" formula for the maturity risk premium on bonds: MRP = 0.1%(t), here t is the years to maturity b.

All else equal, increasing the debt ratio will increase ROA

false

If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease

false

Goal of the Fed

promote maximum employment, stable prices, and moderate long-term interest rates.