FIN 5352 Exam #1

If you are promised $100 in one year, $200 in two years, and $300 in 3 years, then if you can earn a positive interest rate on your investments those promises combined equal ______ $600 today.

"Less than": The sum of those cash flows is $600, so if you deposited $600 today at a positive interest rate and withdrew the series of payments described, there would be money left in the account at the end because of accumulated interest. So you would need to deposit less than $600, which means the present value is less than $600.

You invest $100 today. With positive interest rates, the concept of future value implies that the future value of your $100 will be ____ $100.

"greater than": If interest rates are positive, $100 given to you today will be worth more than $100 in the future (for example, if the interest rate is 5%, your $100 will be worth $100 x (1 + .05)1 = $105 in one year.

If you increase the risk level of a project, the discount rate should ______ which will _____ the project's present value.

"increase; decrease": If you increase the risk level of a project, the discount rate should increase, which will decrease the project's present value.

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": Reason: The cash flows for an annuity must happen at regular intervals. These do not (week, month, year).

What is the difference in the future value of $100 at 7 percent interest for 5 years if the interest is compounded semiannually rather than annually? -$1.03 -$0.67 -$0.91 -$0.80

$0.80 *($100 × 1.03510) − ($100 × 1.075) = $0.80.

Suppose you expect to receive $600 at the end of 1 year and $700 at the end of 2 years. What is the present value of these cash flows if the interest rate is 10 percent compounded annually? -$123.97 -$1,300.00 -$300.00 -$1,123.97

$1,123.97 *PV = $600/1.101 + $700/1.102 = $1,123.97.

A firm has cash flows of $100 at the end of years 1 - 4. What is the net present value of an investment in this firm if we pay $300 to purchase the firm and the discount rate is 10 percent?

$100 × [(1 - (1/1.10)4))/.10] - $300 = $16.99

What is the future value of $100 compounded continuously at a stated annual rate of 10 percent for 10 years?

$100 × e.^(10 × 10) = $271.83

What is the present value of a perpetuity of $100 per year if the annual interest rate is 10% and the growth rate is 6% per year?

$100/(.10 - .06) = $2,500

If an annuity pays $50 every 3 years over a 30-year period at 8% per year, then the present value equals ____.

$173.39

Suppose you have a car loan that lasts 6 years, a discount rate of 7%, and a loan balance of $15,000 requiring annual payments. What is the annual payment?

$3,146.94

Suppose you expect to receive $80 at the end of Year 1, $90 at the end of Year 2, $100 at the end of Year 3, and $110 at the end of Year 4. What is the present value of these cash flows if the interest rate is 7 percent compounded annually? $345.01 $341.25 $380.00 $318.92

$318.92 * PVF = 1/(1+ Interest Rate) ^ Year The present value of these cash flows if the interest rate is 7% compounded annually = 318.92

Suppose you paid off a $1,200 loan by paying $400 in principal each year plus 10 percent annual interest over a 3-year period. What is the total payment (interest plus principal) in Year 3?

$400 + ($1,200 - 800) × .10 = $440

At an annual interest rate of 10 percent, what is the present value of a perpetuity growing at 4 percent per year if next year's cash flow is $6?

$6/(.10 - .04)= $100

You invest $500 at 10 percent interest per annum. At the end of 2 years with simple interest, you will have Blank______ and with compound interest, you will have Blank______. -$550; $600 -$550; $605 -$600; $605 -$605; $600

$600; $605 Simple interest = 500(0.10)=$50 per year. Times two years = $100 total. Adding the original principal yields $600. With compound interest, the total is $500(1.10)2 = $605. The FV will always be higher with compound interest.

What is the present value of $100 each year for 20 years at 10 percent per year?

$851.36 $100{[1 - (1/(1.10)^20)]/0.10}= $851.36

Which of the following are true of a sole proprietorship? - A proprietorship has a limited life. - It is not difficult to transfer ownership. - It is one of the simplest types of businesses to form. - A sole proprietor can issue stock to raise capital.

- A proprietorship has a limited life. - It is one of the simplest types of businesses to form.

______ budgeting is the process of making and managing expenditures on long-term assets. - Capital - Performance-based - Optional - Conventional

- Capital

A general partnership has which of the following characteristics? -Each owner has unlimited liability for all firm debts. -Each partner shares profits and losses. -It is expensive to form. -Large amounts of cash can be raised easily.

- Each owner has unlimited liability for all firm debts. - Each partner shares profits and losses.

What happens when a firm creates value? - Total expenses decrease. - Shareholder wealth increases. - Shareholder wealth decreases. - Shareholder wealth remains unchanged.

- Shareholder wealth increases.

Which of the following statements is true about shareholders' equity? - Shareholders' equity is the difference between the value of a firm's debt and its current assets. - Shareholders' equity is a residual claim on a firm's assets. - Shareholders' equity represents the claim on a firm's assets by the firm's creditors. - Shareholders' equity is the difference between the value of a firm's assets and its debt.

- Shareholders' equity is a residual claim on a firm's assets. - Shareholders' equity is the difference between the value of a firm's assets and its debt.

A firm's balance sheet shows a snapshot of its finances Blank______. - for all times past and present - over the given period - at a point in time - for the year

- at a point in time

Which of the following shows a snapshot of a firm's finances at a given point in time? - balance sheet - stock price - analyst forecast

- balance sheet

Which term applies to the mixture of debt and equity maintained by a firm? - capital budget - cash management - capital structure - net working capital

- capital structure

The primary purpose of issuing debt or equity shares is to raise Blank______ for the firm. - dividends - taxes - cash - awareness

- cash

In large firms, financial activity is usually associated with which top officer? - vice president for marketing - chief management consultant - vice president of production - chief financial officer

- chief financial officer

The officer responsible for corporate tax reporting is the Blank______. - chief operating officer - ombudsman - treasurer - controller

- controller

The purpose of a firm is to Blank______. - create value for the creditors - create value for the owner - maximize its expenses in current assets - decrease its shareholders' value

- create value for the owner

A sole proprietorship is a business that Blank______. - is similar to a limited partnership - is owned by one person - is organized with bylaws - provides limited personal liability to its owner

- is owned by one person

In a limited partnership, a limited partner's liability for business debts is Blank______. - limited to their cash contribution to the partnership - unlimited - $0 - limited by their average annual income over the life of the partnership

- limited to their cash contribution to the partnership

Capital budgeting is concerned with making and managing expenditures on Blank______. - current assets - long-term liabilities - long-term assets - current liabilities

- long-term assets

A sole proprietorship is a business owned by Blank______ person(s). - two - three - one - four or more

- one

Forms of financing are represented on the Blank______ side of the balance sheet. - left - right

- right

Shareholders' equity is the difference between which of the following? - fixed assets and long-term debt - total assets and long-term debt - current assets and current liabilities - total assets and total debt

- total assets and total debt

Which of the following positions generally report to the chief financial officer (CFO)? - treasurer - controller - director of marketing - chief executive officer (CEO)

- treasurer - controller

A partnership must have at least Blank______ owners. - two - four - ten - three

- two

If $100 earns compound interest for 2 years at 10 percent per year, the future value will be Blank______. -$100.00 -$121.00 -$110.00 -$120.00

-$121.00 *FV = $100 × 1.10 2 = $121.

A firm has cash flows of $100 at the end of years 1 - 4. How much will the present value of the firm change if the discount rate rises to 12 percent from 10 percent?

-$13.25

If you invest $1,000 and the present value of the incoming cash flows over the following year is $800, then the NPV is ____.

-$200

What is the present value of an ordinary annuity that pays $100 per year for 3 years if the interest rate is 10 percent per year? -$288.88 -$248.69 -$300.00 -$269.73

-$248.69

If the future value is $500 in 1 year and the interest rate is 12 percent per year, what is the present value? -$446.43 -$488 -$512 -$462.18

-$462.18 *$500/1.12 = $446.43.

If a shareholder purchases $5,000 of Coca-Cola stock, what is the maximum amount they could lose? -$1,000 -$0 -unlimited amount -$5,000

-$5,000

If the future value is $750 in 1 year and the interest rate is 15 percent, what is the present value? -$862.50 -$670.39 -$652.17 -$845.27

-$652.17 *$750/1.15 = $652.17.

What are the implications of the time value of money concept?

-A dollar today is worth more than a dollar tomorrow - a dollar tomorrow is worth less than a dollar today * because you can invest it and have more than a dollar tomorrow.

The formula for finding the net present value of a cash outflow now, a positive cash flow in 1 year, a positive cash flow in 2 years, and a positive cash flow in 3 years is:

-C0+ C1/(1 + r)1 + C2/(1 + r)2+ C3/(1 + r)3

What is the order of payments received of the following parties, from first to last. Assume all parties have a legitimate claim on the firm's assets. -Employees -Bondholders -Shareholders

-Employees -Bondholders -Shareholders

Which of the following are included in a firm's capital structure? - current assets - equity - long-term debt - net sales

-Equity -Long-term debt

What determines when a sale is recorded for accounting purposes? -The international monetary fund doctrine -Generally accepted accounting principles -Robert's rules of order -The last-in-first-out principle

-Generally accepted accounting principles

How is ownership transferred in a corporation? -Ownership is transferred only with prior approval from the board of directors. -Ownership in a corporation cannot be transferred. -Ownership is transferred by gifting or selling shares of stock. -Ownership can be transferred only if the firm is sold.

-Ownership is transferred by gifting or selling shares of stock.

When a corporation is formed, it is granted which of the following rights? (Check all that apply.) -legal powers to sue -the ability to issue stock -corporate life of up to 100 years -provincial citizenship for jurisdictional purposes

-Provincial citizenship for jurisdictional purposes -Legal powers to sue -The ability to issue stock

Which of the following is true concerning government regulation? -Regulation can be costly to a firm. -Regulation generally imposes costs without any benefits. -Regulation can help ensure firms disclose relevant information to investors. -Regulation can help reduce conflicts of interest between managers and shareholders.

-Regulation can be costly to a firm. -Regulation can help ensure firms disclose relevant information to investors. -Regulation can help reduce conflicts of interest between managers and shareholders.

______ are frequently used to encourage key managers to maximize the value of the firm's stock. -Stock splits -Stock dividends -Cash dividends -Stock options

-Stock options

Which of the following are true about the amortization of a fixed payment loan? -The amount of interest and principal paid increases each period. -The principal amount paid increases each period. -The payment amount decreases each period. -The amount of interest paid decreases each period.

-The principal amount paid increases each period. -The amount of interest paid decreases each period.

In the Excel setup of a loan amortization problem, which of the following occurs? -To find the principal payment each month, you subtract the interest payment from the total payment. -To find the dollar interest each month, you multiply the balance times the yearly interest rate. -The payment is found using PMT(rate, nper,-pv, fv). -To find the new balance, you subtract the interest payment from the old balance.

-To find the principal payment each month, you subtract the interest payment from the total payment. -The payment is found using PMT(rate, nper,-pv, fv).

Which of the following is a perpetuity? -a growing stream of cash flows for a fixed period -a constant stream of cash flows forever -a constant stream of cash flows for a fixed period -an undulating stream of cash flows forever

-a constant stream of cash flows forever

What will result in a lower present value for a given future cash flow? -more time -less time -less risk -more risk -a lower interest rate

-a higher interest rate -more time - more risk

The costs incurred due to a conflict of interest between stockholders and management are called Blank______ costs. -sunk -agency -hidden -opportunity

-agency

The costs incurred due to a conflict of interest between stockholders and management are called Blank______ costs. -sunk -opportunity -agency -hidden

-agency

The relationship between stockholders and management can best be described as a(n) Blank______ relationship. -agency -mentoring -contradictory -irrelevant

-agency

A misclassification of a $100 investment expense as an operating expense will cause ______. an understatement of investing cash flow no change in total cash flow a change in total cash flow an overstatement of operating cash flow a major change in total cash flow

-an understatement of investing cash flow -no change in total cash flow -an overstatement of operating cash flow

An annuity due is a series of payments that are made Blank______. -1 year hence -at the beginning of each period -1 year in the past -any time in the future

-at the beginning of each period

A lump sum payment to pay off the balance of a partially amortized loan is called a Blank______ payment. -balloon or bucket -balloon or bullet -bullet or shell -pistol and bullet

-balloon or bullet

The effective annual rate (EAR) takes into account the Blank______ of interest that occurs within a year. -discounting -compounding

-compounding

Which of the following business forms is easiest to transfer ownership stakes in? -corporation -sole proprietorship -partnership

-corporation

The main job of a financial manager is to Blank______. -make bondholders happy -create value for shareholders -appease government agencies

-create value for shareholders

A bad financial decision is defined as a decision that ______ owners' equity. -decreases -maximizes -does not affect -increases

-decreases

Some of the cash flow generated by a firm goes back to the financial markets in the form of Blank______. -products and services -reinvested cash flows -taxes and other payments to the government -dividends and debt payments

-dividends and debt payments

One of the most basic principles of finance is that rational individuals prefer to receive a dollar ____ than a dollar ______.

-dollar today to a dollar tomorrow, *because they can invest that dollar and have more than a dollar tomorrow.

What are the two basic classifications under which most potential financial goals fall? -earning or increasing profits -controlling risk -enhancing dividends -cutting costs

-earning or increasing profits -controlling risk

Shareholders are the ONLY stakeholder in a firm as they are the owners. -True -false

-false

Which of the following are features of a partnership? -difficult to raise large amounts of cash -inexpensive and easy to form -general partners have unlimited liability for all debts -cumulative dividend payment policy

-general partners have unlimited liability for all debts -inexpensive and easy to form -difficult to raise large amounts of cash

Value is created if the cash paid to shareholders and bondholders is Blank______ the cash raised in financial markets. -greater than -equal to -less than

-greater than

Value is created if the cash paid to shareholders and bondholders is Blank______ the cash raised in financial markets. -less than -equal to -greater than

-greater than

You invest $100 today. With positive interest rates, the concept of future value implies that the future value of your $100 will be Blank______ $100. -less than -exactly -greater than

-greater than * Because $110(1+r)=1+.10=$100x1.10=$110

PV = C/(r − g) is the formula for the present value of a Blank______. -fixed perpetuity -growing annuity -British consol -growing perpetuity

-growing perpetuity

How are assets on a balance sheet listed? -in order of time taken by an ongoing firm to convert them to cash -in random order -in order of capital invested in them starting with the maximum -in order by date of acquisition

-in order of time taken by an ongoing firm to convert them to cash

A good financial decision will do which of the following? -increase current dividends per share -increase the cost of capital -increase the value of the firm's existing stock -increase the market value of shareholders' equity

-increase the value of the firm's existing stock -increase the market value of shareholders' equity

Cutting costs falls under which of the two basic classifications under which most potential financial goals fall? -controlling risk -increasing profits

-increasing profits

A perpetuity is a constant stream of cash flows for a(n) Blank______ period of time. -random -finite -undetermined -infinite

-infinite

The 1934 Securities Exchange Act deals with the important issue of Blank______ trading. -insider -outsider -day -government

-insider

The life of a corporation Blank______. -is unlimited -ends when all of the original shareholders are deceased -ends when a founding shareholder wants to sell his shares -is limited to 65 years

-is unlimited

For a positive annual percentage rate (APR) and multiple (more than one) compounding periods per year, the EAR is always Blank______ the APR. -equal to -larger than -smaller than

-larger than *For a positive annual percentage rate (APR) and multiple (more than one) compounding periods per year, the EAR is always larger than the APR.

A corporation is a distinct Blank______ entity and as such can have a name and take advantage of the legal powers of natural persons. -illegal -patriotic -retributive -legal

-legal

The cash flows paid into a corporation by its bondholders and stockholders should be Blank______ the cash flows paid out to bondholders and stockholders. -greater than -unrelated to -equal to -less than

-less than

Businesses are motivated to organize as corporations because stockholders in a corporation have Blank______ liability for corporate debts. -no -limited -personal -unlimited

-limited

Businesses are motivated to organize as corporations because stockholders in a corporation have Blank______ liability for corporate debts. -personal -no -unlimited -limited

-limited

Which of the following are reasons why businesses organize as corporations? -federal tax treatment -limited liability -ease of ownership transfer -perpetual succession

-limited liability -ease of ownership transfer -perpetual succession

The threat of a hostile takeover motivates managers to Blank______. -do nothing -make poor decisions -make good decisions

-make good decisions

Since Blank______ and ownership are separated, a corporation's life is unlimited. -profitability -taxation -debt -management

-management

In a shareholder-manager relationship, who is the agent? -shareholders -neither shareholders nor managers -managers -both shareholders and managers

-managers

Assuming interest rates are positive and are greater than the inflation rate, one dollar received today is worth Blank______ one dollar received next year. -the same as -either more than or less than (but which is uncertain) -less than -more than

-more than

Which of the following are real-world examples of annuities? -common stock dividends -mortgages -preferred stock dividends -pensions

-mortgages -pensions

Fixed payment loans are typically used for which of the following? -credit card loans -mortgages -student loans -car loans

-mortgages -student loans -car loans

The 1934 Securities Exchange Act restricts anyone who has access to Blank______ information from trading on that information. -trading -public -redundant -non-public

-non-public

Indirect agency costs are often due to lost Blank______. -causes -goals -opportunities -objectives

-opportunities

A business without separate legal authority formed by two or more people is known as a Blank______. -partnership -corporation -conglomerate -sole proprietorship

-partnership

Which of the following cash flows appear in the financing activities section of the accounting statement of cash flows? payment of interest repurchase of stock retirement of long-term debt payment of dividends

-repurchase of stock -retirement of long-term debt -payment of dividends

The owners of a corporation are called Blank______. -partners -government agents -bondholders -shareholders

-shareholders

Which of the following are owners of a corporation? -partners -directors -shareholders -bondholders

-shareholders

Which one of the following parties would be the last party to receive payment if a firm were to close? Assume all parties have a legitimate claim on the firm's assets. -chief executive officer -shareholders -government -bondholders

-shareholders

When would individuals prefer to receive cash flows? -later rather than sooner -in equal payments over a long period of time -the timing of cash flows does not matter to individuals -sooner rather than later

-sooner rather than later

Which of the following groups are considered as owners of a company? -government -customers -stockholder -suppliers

-stockholder

The controller is responsible for which of the following tasks? -tax reporting and payments - financial accounting - capital expenditures - raising capital

-tax reporting and payments -financial accounting

Income from a partnership is Blank______. -not taxed at all -taxed as dividend income to the partners -taxed as corporate income -taxed as personal income to the partners

-taxed as personal income to the partners

Income from a partnership is Blank______. -taxed as personal income to the partners -not taxed at all -taxed as corporate income -taxed as dividend income to the partners

-taxed as personal income to the partners

Which of these are used to calculate the present value of multiple cash flows in Excel? -use the FV(year, rate, type, PMT) function -the PV function -the NPV function

-the PV function -the NPV function

A shareholder's liability is limited to which of these? -the amount the shareholder invested in the corporation -The percentage of corporate debt that equals the shareholder's ownership percentage -the corporation's current liabilities -the corporation's outstanding long-term debt

-the amount the shareholder invested in the corporation

Which one of these motivates managers to make good decisions? -complacent board of directors -complacent shareholders -threat of a hostile takeover -lack of stock options

-threat of a hostile takeover

What is the primary purpose of awarding stock options to managers? -to give managers the incentive to pursue shareholders' goals, such as increasing shareholder value -to satisfy the requirements of the SEC. -to increase bondholders' wealth -to decrease managers' wealth so they will no longer have the incentive to increase shareholders' wealth

-to give managers the incentive to pursue shareholders' goals, such as increasing shareholder value

What is the main goal of financial management? -to maximize current share value -to maximize current profits -to maximize market share -to minimize expenses

-to maximize current share value

Present value represents what an amount of money promised or expected in the future is worth Blank______. -next month -last year -next year -today

-today

A sole proprietor has Blank______ personal liability for all business debts and obligations. -unlimited -limited -little -no

-unlimited

If the interest rate is 10% per year and there are 10 years, what is the present value discount factor?

0.3855 by taking 1/(1+0.10)^10

From highest to lowest, rank the following compounding periods effective annual rates:

1. continuous 2. weekly 3. semiannual 4. annual

A company plans to pay a $2.50 dividend with annual dividend increases of 4%. If the discount rate is 7%, what is present value of this growing perpetuity?

2.50 / (.07-.04) = 83.33

In the formula for continuous compounding, a constant equal to _____ is included.

2.72

If the cash flows of an annuity start at the end of year 6 (date 6), the present value of an annuity formula will discount all of the annuity cash flows back to the end of year ___.

5 Reason:If the cash flows of an annuity start at the end of year 6 (date 6), the present value of an annuity formula will discount all of the annuity cash flows back to the end of year 5. The annuity value is as of the period before the payments begin.

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, −100, 0.1, 0, 0) = PV(0.10, 10, −100, 0, 0) = PV(100, 0.1, 0, 10, 0)

= PV(0.10, 10, −100, 0, 0) *Present value = (interest rate, no of years, payment per year, Future value, Timing of payment Present value = (rate, nper, pmt, [fv], [type])

Which Excel functions can be used to compute the present value of multiple cash flows? =rate =FV =NPV =nper

=NPV

In Excel, which of the following formulas is used to compute the payment of an amortized loan? Multiple choice question. =PV =PMT =rate =FV

=PMT

What will increase wealth?

A positive NPV because it is the same as having that amount of money in your pocket today, so it will increase wealth. A negative NPV is the same as having money taken out of your pocket today.

When a customer purchases an item on credit, the purchase amount is recorded in the books of the seller in which one of these accounts? Cash Accrued Expense Accounts Payable Accounts Receivable

Accounts Receivable

o The ________ ______ is a snapshot of the firm

Balance sheet

o A current liability is listed ______ long-term liabilities

Before

Agency costs refer to the costs of the conflict of interest between ___________ and ____________.

Blank 1: stockholders, shareholders, or principal Blank 2: Management, managers, or agent

________ refers to the quickness and ease with which assets can be converted to ________.

Blank 1: Liquidity Blank 2: cash

Earnings per share is equal to __________ income divided by the number of outstanding _________ of a firm's common stock.

Blank 1: after-tax or net Blank 2: shares

What is the formula for the present value of a growing perpetuity?

C/(r - g)

What is the formula for computing future value with continuous compounding?

C0 × e^(rT)

What is the general compounding formula for calculating the annual return on an investment when there is more than one compounding period in a year?

C0(1 + r/m)?^m

Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his favorite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year?

Calculate the payment using the PV of an annuity at 10% for 3 years. $1,000/[(1 - 1/1.103)/.10] = $402.11

o The net spending on fixed assets is referred to as

Capital spending

o The difference between the number of dollars that came in and the number that went out is known as:

Cash flow

Which of these will result from a firm using cash to buy inventory? Net working capital would increase Inventory would increase Net working capital would decreased. Cash would decrease

Cash would decrease. Inventory would increase.

o Equity holders are only entitled to the residual value, the portion left after __________ are paid

Creditors

o Liabilities are classified as:

Current Long-term

o Assets are classified as ________ or ______

Current or fixed

______ is the process of converting future dollars into a current value. -Compounding -Discounting -Shuffling

Discounting *is the process of converting future dollars into a present value.

o Total dividends/ Total shares outstanding=

Dividends per share

Which one of the following calculates cash flow from operations? Multiple choice question. EBIT + Depreciation − Taxes Net income + Depreciation + Taxes EBIT − Depreciation + Taxes EBIT − Depreciation − Taxes

EBIT + Depreciation − Taxes

f an annuity pays $100 every 2 years over a 20-year period at 10 percent per year, then the present value equals ____.

Effective 2-year rate = 1.102 - 1 = .21 $100 × [1 - (1/1.2110)]/.21 = $405.41

How frequently does continuous compounding occur?

Every infinitesimal instant

The Securities Act of 1933 and the Securities __________ Act of 1934 provide the basic regulatory framework in the United States for the public trading of securities.

Exchange

o _________ associated with the firms financing of its assets are not included because they are not operating expenses

Expenses

True or false: Receiving $10 today has the same value as receiving $1 today and $9 one year from now.

F: You could invest nine extra dollars now and have more than nine dollars a year from now.

True or false: For financial analysis, financial statements and accounting numbers are more important than cash flows.

False

True or false: Net income equals cash flow.

False: Noncash expenses are one reason why net income varies from cash flow.

o The use of debt in a firm's capital structure is called

Financial leverage

o Cash flow from assets sometimes goes by a different name

Free cash flow

o Under Generally Accepted Accounting Principles (GAAP) audited financial statements in the United States generally show assets at

Historical cost

o Fixed assets are relatively _______

Illiquid

o Intangible assets are _______

Illiquid

o Revenues-Expenses=

Income

o The ______ _________ measures performance over some period of time, usually a quarter of a year

Income statement

Which of the following payment methods amortizes a loan?

Interest plus fixed amount Fixed payments that result in a zero loan balance

o ________ is probably the least liquid of the current assets

Inventory

o Assets are normally listed on the balance sheet in order of decreasing ___________

Liquidity

o __________ refers to the speed and ease with which an asset can be converted to cash

Liquidity

o A debt that is not due in the coming year is classified as a

Long term liability

In March, Al's paid cash for a video game for the store's inventory. In April, it sold the game on credit. In May, Al's received payment for the sale. The expense should be recorded in Blank______, and the income should be reported in Blank______. March; April March, May April; May March; March

March; April

o The extra tax you would pay if you earned one more dollar is your:

Marginal tax rate

o The true value of any assets is its

Market value

o Assets are recorded at what the firm paid for them _____ ____________ ____________, no matter how long ago they were purchased or how much they are worth today

Minus accumulated depreciation

What are examples of annuities?

Monthly rent payments in a lease Installment loan payments

How is net present value computed?

NPV = -Cost + PV

______ income is earnings after interest and taxes. Net Operating Gross Nonoperating

Net

o Earnings per share=

Net income/total shares outstanding

o The difference between a firm's current assets and current liabilities is called

Net working capital

o A current asset has a life less than

One year

o Current liabilities have a life for less than

One year

What is the present value of an annuity of $100 per year that begins at the end of year 4 and lasts for 5 years if the interest rate is 10 percent per year?

PV3 = $100[(1 - 1/1.105)/.1] = $379.08 PV0 = $379.08/1.103 = $284.81

What are two to amortize a loan?

Pay principal and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of the principal.

How much is $50 at 7% interest at the end of each year forever worth today?

Present Value of a Perpetuity = Annual Payment ÷ Discount Rate = 714.29

In a general partnership, each partner shares in the ___________ and ______________.

Profits & Losses

o The first thing reported on an income statement is usually _______ and ________ from the firm's principal operations

Revenues and expenses

o The difference between total assets and total liabilities is

Shareholders' equity

A _______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of a firm.

Stakeholder

True or false: Discounting is the opposite of compounding

T: Compounding increases money forward in time, discounting reduces money back in time.

True or false: The effect of compounding increases exponentially over time.

T: Present value is an exponential function. PV = FV/(1 + r)t

True or false: The spreadsheet (Excel) formula for calculating the present value of $100 at the end of each year for 2 years at 10 percent per year is: PV(.1,2,-100,0).

T: The input is correct. You can check out the fx function key in Excel to verify this.

True or false: More money can be earned with compound interest than with simple interest.

T: With compound interest, you earn interest on interest as well as interest on the principal.

o Fixed assets can be:

Tangible Intangible

Suppose you invest $1,000 and the PV of your future cash flows is $1,100. If the investment becomes riskier, what can happen?

The NPV will decrease and become negative as the discount rate rises with increasing levels of risk.

What is true about the growing perpetuity model assumptions?

The cash flow used is that for next year. The cash flows occur at regular intervals. The interest rate must exceed the growth rate.

Which of the following is true about a growing annuity? -The cash flows grow for a finite period. -The cash flows grow at an irregular rate. -The cash flows grow for an infinite period. -The cash flows grow at the rate of inflation.

The cash flows grow for a finite period.

o Any new cash flows are taxed at

The marginal rate

o The Recognition principle is to recognize revenue when:

The value of an exchange is known

Which one of these motivates managers to make good decisions?

Threat of hostile takeover.

If the cash flows of an annuity start at the end of year 4, the present value of an annuity formula will discount all of the annuity cash flows back to the end of year ___________.

Three or 3

Accounting profit does not adequately account for cash flow. -True -false

True

True or false: An increase in depreciation expense lowers net income.

True

True or false: Bondholders have a higher claim to a firm's cash flow than stockholders do.

True

True or false: Taxes can be a large cash outflow for a corporation.

True

True or false: There is a correlation between future cash flows and the economic value of an asset.

True

o T/F an Income statement contains noncash items

True

o True or false: Free cash flow is very similar to cash flow from assets

True

o True or false: Operating cash flow does not include depreciation or interest

True

True or false: Free cash flow is the total of cash flow to creditors and cash flow to stockholders.

True. Free cash flow is another name for cash flow from assets, which must equal cash flow to creditors plus cash flow to stockholders. It does not include cash flows necessary to operate the firm, such as increases in net working capital and fixed assets (capital expenditures).

True or False: Long-term liabilities are not due in the current year (from the date of the balance sheet).

True: Long-term liabilities are not due for more than 1 year from the date of the balance sheet.

The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____.

[1-(1/1.08^20)]/.08 = 9.8181

What is inventory an example of? Multiple choice question. a current liability a long-term liability a current asset a non-current asset

a current asset

Identify the current asset(s) in the list below. -property -accounts receivable -accounts payable -plant

accounts receivable

Which of the following are included in the fixed asset portion of a balance sheet? cash and equivalents capital surplus accumulated depreciation trademarks

accumulated depreciation & trademarks

Which of the following are included in the fixed asset portion of a balance sheet? cash and equivalents accumulated depreciation trademarks capital surplus

accumulated depreciation trademarks

Operating cash flow differs from total cash flow in that the latter makes adjustments for Blank______. Multiple select question. net income retained earnings additions to net working capital capital spending

additions to net working capital capital spending

Another term for an annuity due is Blank______. -a deferred annuity -an ordinary annuity -an annuity in advance -an annuity in arrears

an annuity in advance

Which compounding interval will result in the lowest future value assuming everything else is held constant?

annual

The EAR is meaningful by itself, but the ______ is only meaningful when the number of compounding periods per year is given.

annual percentage rate

The ______ is the annual interest rate without consideration of compounding.

annual percentage rate

Net working capital will be negative when current assets ______ current liabilities. are greater than are less than equal

are less than

Stockholders' equity is defined as Blank______. -liabilities − assets -assets + liabilities -assets − liabilities -assets

assets − liabilities

Discounting brings money Blank______ in time and compounding brings money Blank______ in time. -back; back -forward; forward -back; forward -forward; back

back; forward

EBIT stands for earnings Blank______ and taxes. between investing before investing before interest between interest

before interest

Order the following groups in order of highest claim to lowest claim on a firm's cash flow: bondholders stockholders

bondholders stockholders

Another term for a partial amortization loan is a(n) ____ loan.

bullet, balloon

Which of the following will change fixed assets? issuing new bonds buying a new machine selling a plant amortizing goodwill

buying a new machine selling a plant

If a firm defaults on its bond contract, the bondholders Blank______. can sue the firm must take the loss quietly can force the firm into bankruptcy

can sue the firm can force the firm into bankruptcy

The statement of cash flow explains changes in _____. retained earnings net income non-cash items cash and equivalents

cash and equivalents

In determining the economic and financial condition of a firm, ______ is more revealing than net income. operating income cash flow retained earnings total assets

cash flow

Noncash items do not affect Blank______. earnings per share cash flow net income retained earnings

cash flow

Taxes represent which of the following Blank______. cash inflow cash outflow accrued interest

cash outflow

When investing in large US stocks, the reinvestment of dividends and capital gains generates:

compound interest

The annual percentage rate is the annual interest rate without consideration of _____.

compounding

The idea behind ______ is that interest is earned on interest.

compounding

The APR is meaningful for comparisons only when the number of ______ per year is given.

compounding periods

The limiting case of compounding periods is ____________ compounding.

continuous

If interest rates go up, the present value of a perpetuity will ______.

decrease

If the discount rate increases, the net present value will:

decrease

The principal balance ______ over time of a fixed payment loan.

decreases

Net capital spending is equal to the change in net fixed assets plus ______. dividends notes payable depreciation retained earnings

depreciation

Which of the following do not directly affect cash flow? cash sales interest payments wages depreciation

depreciation

Accounting profit Blank______ cash flow. is identical to differs from is always larger than

differs from

The purchase of unneeded artwork for an executives office is an example of what type of agency cost? indirect direct

direct

The actual economic value of an asset varies ______ the asset's future cash flows. indirectly with directly with independent of

directly with

According to the Rule of 72, to find the amount of time required for a sum of money to double in value, you:

divide 72 by the interest rate (%)

The acronym EBIT stands for Blank______. earnings before income taxes equity by investing talent earnings before interest and taxes earnings after interest and taxes

earnings before interest and taxes

A corporation's earnings divided by number of outstanding shares of a firm's common stock is called Blank______. g.e. ratio earnings per share benchmark ratio price-earnings ratio

earnings per share

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.

effective

If a company buys back $100 worth of stock, this increases the cash flow to the stockholders by ______. less than $100 more than $100 exactly $100

exactly $100

When using an annuity table to find the present value of an annuity, you multiply the annuity cash flow by the present value interest __________ , for annuities.

factor

True or false: Limited partners manage the day to day operations of a business. True false

false

The activity of making net payments to creditors and owners (excluding interest) is called a(n) ______ activity in the accounting statement of cash flows. borrowing operating financing investing

financing

Which of the following are included in a firm's inventory? fixed assets finished goods work in progress raw materials to be used in production

finished goods work in progress raw materials to be used in production

A geometric series has a(n) ______ sum.

finite

A growing annuity has a(n) ____.

finite number of growing cash flows

Selling a firm's plant and equipment results in a change in ______. goodwill current liabilities intangible assets fixed assets

fixed assets

Which type of amortization is most commonly used in the real world for mortgages and car loans?

fixed payment

Discounting is the process of converting ______ dollars into a ______ value.

future; present

The present value of a perpetuity can be found as the limit of a(n) ______ series.

geometric

The present value of a growing perpetuity requires the interest rate to be ______ the growth rate.

greater than

The present value of a growing perpetuity will be ______ the present value of a zero-growth perpetuity, all else equal.

greater than

A stream of cash flows that grows at a constant rate for a finite period is called a(n) _____.

growing annuity

PV = C/(r - g) is the formula for the present value of a:

growing perpetuity

More frequent compounding leads to ____.

higher EARS and EAYS

Which of the following would lower the present value of a future amount?

higher interest rate, longer period of time, higher level of risk. This is because If you have a longer period of time before you need the money, it can accumulate more interest, so you don't need to deposit as much today.

Assets are listed on a balance sheet in which order? -in order of time it would take an ongoing firm to convert them into cash -in no particular order -in decreasing order of time to convert them into cash -in order of account value from smallest to largest

in order of time it would take an ongoing firm to convert them into cash

Revenue minus expenses is the accounting definition of Blank______. Multiple choice question. working capital income net fixed assets shareholders' equity

income

Revenue minus expenses is the accounting definition of Blank______. shareholders' equity net fixed assets income working capital

income

The purpose of a(n) Blank______ is to measure performance over a set period of time. statement of cash flows income statement prospectus balance sheet

income statement

Which of the following reflects financial information over a period of time? income statement balance sheet

income statement

As the compounding frequency increases, the future value will:

increase

Increasing its liquid assets will enable a firm to do which of the following? increase its ability to avoid financial distress increase its rate of return increase its ability to meet short-term obligations reduce its investment in receivables and inventory

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

A decrease in depreciation expense Blank______ earnings per share. decreases does not affect increases

increases

A stock buyback Blank______ cash flow to stockholders. increases or decreases has no effect on

increases

Stockholders' equity Blank______ when retained earnings increase. decreases increases is unaffected

increases

When a firm pays out fewer dividends, it ___the accounting value of its retained earnings.

increases

When equating the present value of two annuities, one will typically equate the present value of _____________- with the present value of ___________________. An example of this type of problem would be determining how much to save for retirement.

inflows; outflows

For a subsidized Stafford loan:

interest does not accrue until repayment begins

Raw materials are classified as which of the following? accounts receivable cash and equivalents inventory fixed assets

inventory

Cash flows from the acquisition and sale of fixed assets are located in the ______ activities section of the accounting statement of cash flows. financing operating investing retained earnings

investing

The second step in compiling the accounting statement of cash flows is to calculate the ______. investing activities financing activities operating activities taxes and insurance expenses

investing activities

Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is ___.

less

Holding too many liquid assets can be harmful for a firm because such assets are generally Blank______. too profitable less profitable more profitable than less liquid assets

less profitable

Changes in capital spending can be negative when the acquisition of fixed assets is _________ the sale of fixed assets.

less than

A dollar tomorrow is worth ______ a dollar today. -less than -more than

less than - because if you invest the dollar you have today, you'll have more than a dollar tomorrow.

A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time.

level

o A fixed asset is one that has a relatively ____ life

long

The cash flows from financing activities include changes in ______. long-term debt accounts payable taxes common stock

long-term debt common stock

If reinvestment of interest or dividends does not occur, then the future value of an investment will be _____ and the realized yield will be ____ than if reinvestment had occurred.

lower; lower

A delayed annuity (or perpetuity) is one that begins ___.

many periods in the future

Since new cash flows are taxed at Blank______ tax rates, those tax rates are the most important. marginal equal reduced average

marginal

The price at which willing buyers and sellers would trade is called Blank______ value. market carrying accounting book

market

The goal of financial management is to ______________ (maximize/minimize) shareholder wealth.

maximize

When comparing rates without a compounding interval, the EAR is Blank______. -not meaningful -meaningful

meaningful

The concept of future value implies that a dollar today is worth ______ a dollar in the future, assuming positive interest rates.

more than

______ frequent compounding leads to a ______ EAR's & EAY's, all else equal.

more; higher less ; lower

A firm is in trouble if its operating cash flow is ________ for a long period of time.

negative

If the acquisition of fixed assets is $10,000,000 and the sale of fixed assets is $15,000,000, capital spending will be Blank______. negative positive zero

negative

Noncash items are expenses that directly affect Blank______ but do not directly affect Blank______. cash flow; revenue cash flow; net income net income; cash flow cash flow; taxes

net income; cash flow

Which of the following are examples of financing activities? federal tax payments net payments to owners interest expense payments net payments to creditors

net payments to owners net payments to creditors

The first step in calculating cash flow from operating activities is to adjust net income for ______. any changes in retained earnings noncash items and net working capital changes changes in taxes and interest financing and investment activities

noncash items and net working capital changes

Cash flow and net working capital are ______. not the same the same

not the same

The total cash flow of the firm includes ______. -only capital and net working capital cash flows -operating, capital spending, and net working capital cash flows -only operating and net working capital cash flows -only operating and capital cash flows

operating, capital spending, and new working capital cash flows

An income statement reflects activity that occurs Blank______, while a balance sheet reflects values Blank______. on a specific date; as of the same date over a period of time; over the same period of time on a specific date; that occur over a period of time over a period of time; as of a specific date

over a period of time; as of a specific date

Payments in a partial amortization loan are based on the amortization period, not the loan period. The remaining balance is then ____.

paid off in a lump sum bullet payment

The loan balance on partial amortization loans declines so slowly because the ___.

payments are mostly interest

A British consol is an example of a(n):

perpetuity

C/r is the formula for the present value of a(n) ____.

perpetuity

The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.

perpetuity

Which of the following represents an infinite and constant stream of cash flows?

perpetuity

Which of the following are tangible fixed assets? patents plant land accounts receivable

plant land

When more cash becomes available than will be paid out over the next 12 months, net working capital is ______. zero positive negative

positive

Interest rates and the _____________ value of a perpetuity have an inverse relationship.

present

Interest rates and the ___________________ value of a perpetuity have an inverse relationship.

present

The value of a future cash flow stated in today's dollars is referred to as the _____.

present value

The value of a firm can be found by taking the _____ value of all _____ cash flows.

present, future

Amortization is the process of paying off loans by regularly reducing the _________.

principal

Which of these are generally considered to be short-run fixed costs? property taxes overhead expenses income taxes management salaries

property taxes overhead expenses management salaries

The interest rate (r) used in the general compounding formula is the ______ interest rate.

quoted

In reality, perfect certainty of future cash flows occurs ____.

rarely

Which of the following is a variable cost in the short run? raw materials used in production monthly rent on the plant property taxes bond interest

raw materials used in production

Which of the following are examples of short-run fixed costs? Multiple select question. sales commissions material costs rent bond interest

rent bond interest

How is income defined? retained earnings minus dividends revenue plus expenses change in cash and equivalents revenue minus expenses

revenue minus expenses

Which of the following are included in cash flow from investing activities? retirement of long-term debt sales of fixed assets acquisition of fixed assets depreciation

sales of fixed assets acquisition of fixed assets

Interest paid twice a year is known as ______ compounding.

semiannual

The difference between _______ interest and compound interest is that compound interest (increases or decreases) ___________ with time.

simple; increases

An official accounting statement that helps to explain the change in cash and cash equivalents is called the ______. statement of cash flows income statement cash and equivalents report balance sheet

statement of cash flows

Fixed payment loans are typically used for ?

student loans mortgages car loans

Cash flow from operations is calculated by adding depreciation to EBIT and ______ current taxes. subtracting adding multiplying by dividing by

subtracting

If a firm default on its bond contracts, bondholders can do which of the following to get their money back? automatically assume ownership of the firm recover their losses from the federal government appeal to their state or provincial government for reimbursement sue the firm in court

sue the firm in court

Balloon payments on partial amortization loans are typically quite large because ____.

the loan balance declines slowly

Semiannual compounding means that interest is paid Blank______ per year. -one time -12 times -three times -two times

two times

When evaluating NPV, the future is typically ______.

uncertain

In a growing perpetuity model, if the growth rate is larger than the interest rate, then the present value will be ____.

undefined

The EAR is meaningful for comparisons ____.

without a compounding interval

If the cash flows of an annuity start at the end of year 6 (date 6), the present value of an annuity formula will discount all of the annuity cash flows back to the end of year Blank______. -0 -5 -6 -4

year 5. *The annuity value is as of the period before the payments begin.

Assuming all other things held constant, less frequent compounding ___ the future value of receiving $1,000,000 five years from today. · Increase · Decrease · Has no Impact

· Decrease

Assuming all other things are held constant, does more frequent compounding ____ the future value of an annuity due (for example, $100 payments compounded annually versus $25 payments compounded quarterly)? · Increases · Decreases · Has no Impact

· Increases

o If dividends are $100, stock sold is $10, and stock repurchased is $25, what is the cash flow to stockholders? $85 $115 $65 $135

• $115

o If a firm's current assets equal $200 and its current liabilities equal $150, then its net working capital equals ________. $200 $150 $350 $50

• $50

o Long-term liabilities represent obligations of the firm lasting over _______. 1 month 6 months 1 year 90 days

• 1 year

o According to the originators of the current U.S. corporate tax code, the only rates are: (4) 34% 25% 40% 35% 15%

• 34% • 25% • 35% • 15%

o What does stockholders' equity represent? A fixed claim against the firm's assets A residual claim against the firm's liabilities A residual claim against the firm's assets A fixed claim against the firm's liabilities

• A residual claim against the firm's assets

o A balance sheet reflects a firms: Income over a specific time period Economic value at a specific time Accounting value on a specific date Earnings per share over an unspecified time

• Accounting value on a specific date

o Which of the following are classified as liabilities on a firm's balance sheet? (2) Marketable securities Accounts receivable Accounts payable Long-term debt

• Accounts payable • Long-term debt

o A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts? Stockholders' equity Retained earnings Accounts receivable Accounts payable

• Accounts receivable

o Net earnings refers to income earned _________. Net of operating and administrative costs Before interest and taxes After interest and taxes Prior to taxes

• After interest and taxes

o In the long-run, costs may be considered as _________ All variable All fixed Some fixed and some variable

• All variable

o Which of the following is the balance sheet equation? Assets equal liabilities plush stockholders equity Stockholders' equity equals assets plus liabilities Liabilities equal assets plus stockholders' equity Assets equal stockholders' equity minus liabilities

• Assets equal liabilities plus stockholders equity

o Shareholders equity equals_______ Assets minus liabilities Current assets minus current liabilities Total assets minus long-term debt Assets+liabilities

• Assets minus liabilities

o Liquidity refers to the ease of changing _________. Cash to liabilities Cash in to other assets Assets to cash Liabilities to assets

• Assets to cash

o A company's _____ tax rate is its tax bill divided by its total taxable income, and its ____ tax rate is the tax rate it pays on the next dollar of income Marginal; average Median; average Average; marginal Average; median

• Average; marginal

o On the balance sheet, assets are listed at their _____ value Book Market Economic Estimated

• Book

o Under GAAP, assets are generally carried on a firm's balance sheet at ______ (2) Book value Market value Historical cost Salvage value

• Book value • Historical cost

o The short run is a period when there are _____ costs Only fixed Both fixed and variable Only variable Only cash

• Both fixed and variable

o Rank from easiest to hardest of turning the following assets into cash Inventory Cash equivalents Accounts receivable Plant and equipment

• Cash equivalents • Accounts receivable • Inventory • Plant and equipment

o In finance, the value of a firm depends on its ability to generate ______. Cash flows Net working capital Earnings per share Net income

• Cash flows

o Which one of the following is true? Cash flows can be derived from financial statements The income statement explicitly shows cash flows Cash flows always exceed earnings Earnings, net income, and cash flows are identical

• Cash flows can be derived from financial statements

o Which of the following are components of cash flow from assets? (3) Change in net working capital Operating cash flow Net new borrowing Net new equity Capital spending

• Change in net working capital • Operating cash flow • Capital spending

o The cash flow identity states that cash flow from assets equals cash flows to _____ Equity investors and stockholders Creditors and stockholders Equity investors and the government Creditors and bondholders

• Creditors and stockholders

o Net working capital equals ___________. Total assets minus total liabilities Fixed assets minus long-term liabilities Current liabilities minus current assets Current assets minus current liabilities

• Current assets minus current liabilities

o Period costs are incurred during a particular time period and might be reported as Selling general Administrative expenses Earnings Management

• Earnings management

o Depreciation is the accountant's estimate of the cost of _(2)___ used in the production process matches with the benefits produced from owning it Equipment Fixed assets Inventory Cash

• Equipment • Fixed assets

o Which of the following is shown on the left-hand side of the balance sheet? Stockholders' equity Fixed Assets Current Liabilities Long-Term Debt

• Fixed Assets

o What should you keep in mind when examining an income statement? (3) GAAP Cash versus non-cash items Asset composition Time and costs

• GAAP • Cash versus non-cash items • Time and costs

o What does GAAP stand for? General accounting and auditing procedures Generally accepted auditing principles Generally accepted accounting principles Generally appreciated accounting procedures

• Generally accepted accounting principles

o Which of these questions can be answered by reviewing a firm's balance sheet? How much net income has the firm earned this period? How much of the firm's net income was paid out in dividends? How much debt is used to finance the firm? What is the total amount of assets the firm owns?

• How much debt is used to finance the firm? • What is the total amount of assets the firm owns?

o Marginal tax rates are the most important tax rates because: (2) Incremental cash flows are taxed at marginal tax rates Financial decisions are usually based on new cash flows Because the IRS says so Financial decisions are usually based on previous changes in cash flows

• Incremental cash flows are taxed at marginal tax rates • Financial decisions are usually based on new cash flows

o Cash flow to creditors equals: Stock repurchased plus interest paid Interest paid minus net new borrowing Interest paid plus net new borrowing Interest plus dividends paid

• Interest paid minus net new borrowing

o Which of the following is a current asset? Inventory Equipment Accounts payable Accrued expense

• Inventory

o For a mature firm, operating cash flow: (2) Is usually positive Is usually negative Is a sign of trouble over a long period of time Cannot be positive for long periods

• Is usually positive • Is a sign of trouble if negative over a long period of time

o The price at which willing buyers and sellers would trade is called __________ value Book Carrying Market Accounting

• Market

o The ____________ principle of GAAP states that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service Tax Historic Matching Revenue

• Matching

o The last item on the income statement is typically the __________. Net income Gross income Operating income Operating cash flow

• Net income

o A positive operating cash flow indicates that the firm is generating enough cash to: Create valuable projects Pay out a dividend Repurchase stock Pay operating costs

• Pay operating costs

o Net capital spending is equal to ending net fixed assets minus beginning net fixed assets ____ Plus the change in inventory Minus the change in inventory Plus depreciation Minus depreciation

• Plus depreciation

o Liquidity has two dimensions which are the ability to: Quickly convert assets into cash without significant loss in value Convert assets into cash so that value is maximized Quickly convert assets into cash regardless of loss in value

• Quickly convert assets into cash without significant loss in value

o Physical assets are termed ____________ assets Long-term Current Tangible Intangible

• Tangible

o What is the most important item that can be extracted from financial statements? Total dividends per year The firms total net income The firm's total sales The firm's actual cash flows

• The firm's actual cash flows

o What is the purpose of the income statement? To show the accumulation of assets and liabilities To identify the amount of cash spent on various expenses To measure performance over a set period of time To identify the cash inflows and outflows

• To measure performance over a set period of time

o Common stockholders are entitled to the difference between _____ and ______ Total assets; long-term debt Current assets; current liabilities Total assets; total liabilities

• Total assets; total liabilities

o Free cash flow is better described as ________. Fixed asset investment Total distributable cash flow Non-cash expenses Dividend and interest payments

• Total distributable cash flow

o Financial leverage refers to a firm's ____________. Net working capital Use of debt in its capital structure Organizational structure

• Use of debt in its capital structure

o Current assets ________ exceed current liabilities in a healthy firm Always Usually Never

• Usually

o ________ costs change as the output of the firm changes Overhead Fixed Variable Depreciation

• Variable

o According to GAAP, when is income reported? When cash payment is received When it is first anticipated Whenever the firm decided to report it When it is earned or accrued

• When it is earned or accrued