FIN 780 Chapters 1-4

A positive operating cash flow indicates that the firm is generating enough cash to A) pay a dividend B) pay operating costs C) repurchase stock D) create valuable objects

B) pay operating costs

CFA=

CFB + CFS cfb = cash flows from creditors cfs= cash flows from stockholders

_____ refers to a firm's interest payments minus any net new borrowing

Cash flow to creditors CFC = interest paid - net new borrowing

Financial analysis relies on ______, not on accounting or book numbers.

Cash flows

In finance, the vale of a firm depends on its ability to generate _______.

Cash flows

How is the EBITDA margin computed?

EBITDA/Sales

The future value formula is

FV = C(1+r)^t

If you invest $100 at 10% simple interest, how much will you have in 10 years?

FV=PV +10(100x.10)=$200

Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth? Current stock price Financial policy Dividend policy Profit margin

Financial policy, dividend policy, profit margin

Why would negative operating cash flow indicate trouble for a firm?

If operating cash flow is negative, it means that the firm is not generating enough cash to pay operating costs

Why type(s) of loan repays the interest as an annuity and the principal as a lump sum

Interest only loans

Cash flow paid to creditors =

Interest paid - net new borrowing

A dollar today is worth _____ than a dollar tomorrow.

More

On which side of the balance sheet do liabilities appear?

The right side

True or false: The formula for finding the net present value of a cash outflow now, a positive cash flow in 1 year, and a positive cash flow in 2 years is -C0+ C1/(1 + r)1 + C2/(1 + r)2.

True

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

True. This can actually be one of the largest cash outflows for a corporation.

Current assets are defined as assets that can be turned into cash within _____ months.

Twelve

When is the appreciation on property recognized as a gain?

When the property is sold.

Which one of the following statemetns is correct concerning ratio analysis?

a single ratio is often computed differently by different individuals

When a customer purchases an item on credit, the purchase amount is recorded in the books of the seller as an

accounts receivable

Net earnings refers to income earned ____.

after interest and taxes

The relationship between stockholders and management can best be described as a(n) _____ relationship.

agency

The short run is defined as

an imprecise period of time

______ is a noncash expense that reduces the pretax income.

depreciation

Non-cash items are _____ that ______ cash flow.

expenses; do not directly affect

On a common-size income statement, depreciation will be

expressed as a percentage of sales.

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

future; present

The future value of $100 at 10 percent compounded semiannually is ______ the future value of $100 at 10 percent compounded annually.

greater than Reason: interest is earned on the first six month's interest during the entire time period

If Bowen Co. has a return on assets of 11% and also a return on equity of 11%, then the firm

has no debt of any kind.

The information needed to compute the profit margin can be found on the

income statement Reason: profit margin = net income/sales

If a firm increases its debt-equity ratio it will _____ its sustainable rate of growth.

increase

cash flows from the acquisition and sale of fixed assets are located in the _____ activities section of the accounting statement of cash flows:

investing

Cash flow to stockholders is the amount of cash that a company pays to its stockholders less any cash received from ______

issuing new shares of stock

The cash flow from operating activities results from

normal business activities such as producing and selling goods and services

Earnings before interest and depreciation minus taxes, which measures the cash generated from operations not counting capital spending or working capital requirements.

operating cash flow

Which section of the income statement reports a firm's operating revenues and expenses?

operations section

An annuity stream where the payment occur forever is called a(n)

perpetuity

Most investors have an aversion to

risk

Capital spending, additions to net working capital, and interest payments are all _______ from operating cash flow to compute cash flow to investors in the firm.

subtracted

Cash flow from operations is calculated by adding depreciation to EBIT and _____ current taxes.

subtracting

Who owns treasury stock?

the issuer of the stock/the issuing firm

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

today;tomorrow

Which ratio calculates the amount of sales generated by each $1 of debt and equity invested in the firm?

total asset turnover

In the percentage of sales approach to financial planning described in the text book, it is assumed that any surplus funds ____.

were used to pay off debt.

If ending net fixed assets are $100, beginning net fixed assets are $40, and depreciation is $10, then the change in capital spending is:

$70 Ending-beginning +depreciation = change in capital spending

Last year Benton Inc. had net income of $3.5M and paid out $700,000 in cash dividends. If income this year is $4.1 million and the dividend payout ratio is held constant, how much will be paid in dividends?

$820,000 Dividend payout ratio = Cash dividends/net income

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

If you earn 8% a year compounded annually for 7 years on a $1,000 present value, your future value will be

1,713.82

Weston's financial planning model shows assets are projected to increase by $2.7 million while liabilities and equity increase by $1.5M. What is the external financing needed?

1.2M Reason: 2.7M-1.5M=1.2M

Alpha Co. has an interest expense of 1.2 million, total assets of 84 million, sales of 76 million, long-term debt of 16.4 million, and net income of 12.1 million. How will interest expense be recorded in the common-size income statement?

1.58% Reason: common-size income statements express each item as a percentage of sales. Therefore: interest expense/total sales=1.2/75=1.578 or 1.58%

Vera's has earnings per share of $3 and dividends per share of $1.20. The stock sells for $30 per share. What is the PE ratio?

10 times. Price Earnings ratio = market price per share / earnings per share

If your tax bill is $200 and your taxable income is $2,000, then your average tax rate is ______ percent.

10%

What is the future value of $100 compounded for 50 years at 10% annual interest?

11,739.09

BC corporation has 1,800 shares outstanding and earned $2,700 last year on assets of $2M and equity of $1.5M. What is the PE ratio if the stock is currently selling at $18 per share?

12 times. Earnings Per Share= net income/shares outstanding Price Earnings=Market price per share/earnings per share

BC Corporation's ROA is 22 percent and its plowback ratio is .5. What is its internal growth rate?

12.36%

If you invest $1,000 and your NPV is $200, then the present value of your future cash flows is ______.

1200

If $100 earns compound interest for 2 years at 10% per year, the future value will be ______.

121.00 Reason: FV = $100 x 1.10^2

AB Delta had sales of $312,000, net income of $28,400, and paid out $7,500 in cash dividends to stockholders. The dividend payout ratio is ____ percent and the plowback ratio is _____ percent.

26.41; 73.59 Dividend payout ratio=cash dividends/net income Plowback ratio = 1-dividend payout ratio

BC Toys has total equity of $584,000. There are 35,000 shares outstanding at a market price of $54 per share. What is the market-to-book ratio?

3.24 times Market-to-book ratio = market value per share/book value per share Book value per share = total equity/number of shares outstanding

AD Co. has net income of $4,250 on total sales of $128,400. Total assets are $145,000. What is the profit margin?

3.31% PM=Net Income/Sales

Suppose an investment of $100 will return $148 after 10 years, what is the interest rate implied in this scenario?

4.0%

Dot's financial planning model shows assets are projected to increase by $800,000 but liabilities and equity increase by $395,000. What is the external financing need (EFN)?

405,000

Swenson's return on assets is 14% and its plowback ratio is 40%. What is the internal rate of growth?

5.93%

Assume 12% annual interest is compounded semiannually on a $500 investment. What will the investment be worth after 1 year?

561.80

If the interest rate is 10% per year, then what is today's value of $100 received one year from today?

90.91

Which of the following show why a corproation is the most important form of business? A) A corporation is a separate legal entity with the ability to acquire and exchange property. B) Corporations can sue and be sued. C) Corporations can enter into contracts. D) Corporations can vote in general elections.

A) A corporation is a separate legal entity with the ability to acquire and exhcange property. B) Corporations can sue and be sued. C) Corporations can enter into contracts.

Which of the following are examples of short-run fixed costs? A) Bond interest B) Sales commissions C) Rent D) Material Costs

A) Bond Interest C) Rent

A general partnership has which of the following characteristics? A) Each owner has unlimited liability for all firm debts. B) It is difficult to transfer ownership C) It is expensive to form D) Large amounts of cash can be raised easily

A) Each owner has unlimited liability for all firm debts. B) it is difficult to transfer ownership.

All of the following are financial leverage ratios except: A) current ratio B) cash coverage ratio C) total debt ratio D) times interest earned ratio E) equity multiplier

A) current ratio

firms with high enterprise value multiples are most apt to have A) high growth opportunities B) low market-to-book ratios C) low profit margins D) low inventory turnover rates E) a low price-earnings ratio

A) high growth opportunities

in a financial plan using the percentage of sales approach, why is it assumed that some assets increase with sales?

Additional working capital and fixed assets are needed to support growth

A firm's balance sheet shows a snapshot of the firm's finances

At a single point in time.

Which one of the following statements concerning liquidity is correct? A) fixed assets are more liquid than current assets B) balance sheet accounts are listed in order of decreasing liquidity C) liquid assets tend to be highly profitable D) the less liquidity a firm has, the lower the probability the firm will encounter financial difficulties E) trademarks and patents are highly liquid

B) balance sheet accounts are listed in order of decreasing liquidity

Which of the following increases a firm's cash flow that can be used for capital spending? A) increase in investments B) sale of fixed assets C) payment of income taxes D) buyback of outstanding shares of common stock

B) sale of fixed assets

The assets section is on the ________, not on the income statement.

Balance Sheet

Why is the most important tax rate the marginal tax rate?

Because financial decisions are based on new cash flows.

Which of the following do not directly affect cash flow? A) Interest payments B) Cash sales C) Depreciation D) Wages

C) Depreciation

The effective annual rate (EAR) of a loan will increase if A) the frequency of the interest rate compounding is decreased B) the interest is changed from compound to simple interest at the same annual percentage rate (APR) C) the annual percentage rate (APR) is decreased D) either the annual percentage rate (APR) or the compounding frequency is increased

D)

The only difference between Anita's and Zita's is that Anita's has old, fully depreciated equipment, while Zita's has purchased all new equipment that will be depreciated over eight years. Assuming all else equal A) anita's will have a lower profit margin B) anita's will have a lower return on equtiy C) zitas will have a higher net income D) zitas will have a lower profit margin E) zitas will have a hihger return on assets

D) Zita's will have a lower profit margin.

Which of these statements related to the time value of money is correct? (Assume a positive rate of interest.) A) a dollar increases in value the further in to the future it is received. B) The future value of an invested dollar is inversely related to the rate of interest. C) The present value of a dollar to be received in one year is directly related to the interest rate. D) A dollar received today is more valuable than a dollar received next month. E) A dollar invested today will increase in a linear manner if interest earned is reinvested.

D) a dollar received today is more valuable than a dollar received next month

In a financial plan using the percentage of sales approach, why is it assumed that some assets increase with sales? A) additonal profits are generated B) increased profits increase retained earnings thereby increasing equity C) funds must be borrowed to support sales D) additional working captial and fixed assets are needed to support growth

D) additional working capital and fixed assets are needed to support growth

The interest rate charged per period multiplied by the number of periods per year is called the A) effective annual rate B) compound interest rate C) periodic interest rate D) annual percentage rate E) daily interest rate

D) annual percentage rate

A current asset is best defined as: A) the market value of all assets currently owned by the firm B) an asset the firm expects to purchase within the next year C) the amount of cash on hand the firm currently shows on its balance sheet D) cash and other assets owned by the firm that should convert to cash within the next year E) the value of fixed assets the firm expects to sell within the next year

D) cash and other assets owned by the firm that should convert to cash within the next year

The formula 365/Cost of goods sold/inventory calculates

Days's sales in inventory

True or False: Operating cash flow includes capital spending and working capital requirements.

False.

True or False: operating cash flow includes capital spending and working capital requirements

False. Operating cash flow is the cash flow generated by business activities, excluding financing, capital spending, or changes in net working capital.

True or False: in the short run, all costs are fixed.

False. Only some costs are fixed in the short run.

Which form of business structure is least likely to experience agency problems?

Sole proprietorship

An official accounting statement that helps to explain the change in cash and cash equivalents is called the _______.

Statement of Cash Flows

True or False: Revenue includes both cash and credit sales of goods and services.

True

The short run is a period when there are ________ costs.

both fixed and variable.

Given an internal growth rate of 3%, a firm can

can grow by 3% or less without any additional external financing needed. Reason: growing at a rate greater than 10% would require external financing.

Assets are listed on a US firm's balance sheet at

cost.

The sustainable growth rate is the maximum growth that a company can sustain without having to increase its _____________.

financial leverage

The Price-earnings (PE) ratio is a ______ ratio.

market value

The division of profits and losses among the members of a partnership is formalized in the

partnership agreement

Accountants usually distinguish between ________ costs and _______ costs.

product costs; period costs

Which ratio computes the amount of net income generated by each $1 in sales?

profit margin

Return on Assets (ROA) is a measure of _____

profitability

Which position is generally responsible for financial planning and capital expenditures?

treasurer

Semiannual compounding means that interest is paid ______ per year.

two times

The life of a corporation is _______

unlimited.

The purpose of the firm is to create

value for the owner

which formula represents the present value factor?

1/(1+r)^t

Assume $100 earns a stated 10 percent rate compounded quarterly. What will the value of the $100 be after one year?

110.38

BC Corporation has net income of $176,000, sales of $1,982,000 and total assets of $2.24 million. What is the return on assets.

7.86% ROA = Net Income / Total Assets

Cash flow from investing activities includes which of the following? A) sales of fixed assets B) sales of current assets C) acquisition of current assets D) changes in capital assets E) acquisition of fixed assets

A) sales of fixed assets D) changes in capital assets E) acquisition of fixed assets

___________ refers to the costs of any conflicts of interest between stockholders and management

Agency costs

Refers to a conflict of interest between the stockholders and managers of a corporation.

Agency problem

What is the correct balance sheet equation?

Assets = Liabilities + Stockholders' Equity

Net Income expressed per share of common stock is known as

Earnings per share

Which assets last a long time and include items such as equipment, land, machinery, or buildings.

Fixed

Net cash flow is ______ when current assets are greater than current liabilities.

Positive

Non-cash items are reflected on the income statement and included in the calculation of net income, and therefore affect retained earnings.

True

True or False: Fixed assets have a longer life than current assets.

True

True or False: In a general partnership, the cash raised is limited to that provided by the partners.

True

True or false: a good working knowledge of financial statements is desirable because such statements are the primary means of communicating financial information both within the firm and outside the firm.

True.

The corporation comprises shareholders, directors, and

corporation officers.

Accounts payable is an example of a

current liability

_____ refers to the difference between a firm's current assets and its current liabilities.

net working capital NWC = CA - CL

Financing activities involve cash flows:

to and from creditors

A partnership must have at least ____ owners.

two

Which of the following is not a component of operating cash flow? A) tax payments B) capital spending C) sales of goods and services

B) capital spending

Alpha Co has Cost of goods sold of 77 million, net income of 9.6 million, sales of 120 million, and total assets of 150 million. A common-size income statement would show cost of goods sold of _______ percent and a net profit of ______ percent.

Common-size income statement: expresses each item as a percentage of total sales. COGS = 64.17% Net Profit = 8%

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

Compounding

What does a financial plan with an internal growth rate of 6% mean?

A firm can achieve a maximum of 6% growth without obtaining external financing

What are the two questions to be asked in ascertaining how effective managers will be in for stockholders' best interests? A) How closesly are management goals aligned with stockholder goals? B) How large is the firm? C) How many stockholders will be represented? D) How well compensated are managers? E) Can managers be replaced if they do not pursue stockholder goals?

A) How closely are management goals aligned with stockholder goals? E) Can managers be replaced if they do not pursue stockholder goals?

Which of the following are possible financial goals for a company? A) Maximize profits B) Survival C) Minimize Costs D) Incur Bankruptcy

A) Maximize profits B) Survival C) Minimize Costs

Which of these are generally considered to be short-run fixed costs? A) overhead expenses B) income taxes C) Management salaries D) Property taxes

A) Overhead expenses C) Management salaries D) Property taxes

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?

Accounts receivable

______ expenses are expenses that the company has incurred but has not yet paid.

Accrued expenses

Liabilities usually involve which of these? A) New equity issue B) require a cash payout within a stated period of time C) Obligations of the firm

B) require a cash payout within a stated period of time C) obligations of the firm

The _________ is a snapshot of what the firm owes and what it owns.

Balance Sheet

Which of the following is NOT a component of operating cash flow? A) tax payments B) sales of goods and services C) capital spending

Capital spending

The accountant's estimate of the cost of equipment used up on the production process.

Depreciation

True or False: all financial statements for all firms worldwide are prepared in conformance with GAAP?

False

What does GAAP stand for?

Generally Accepted Accounting Principles

How is the inventory turnover ratio computed?

Inventory turnover = COGS/Inventory

AD corporation has sales of 750,000 and cost of goods sold of 350,000. Inventory at year end was 87,500. What is the inventory turnover?

Inventory turnover = COGS/Inventory =4

A dollar tomorrow is worth ______ a dollar today.

Less than

Since _____ and ownership are separated, a corporation's life is unlimited.

Management

Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ______ effectively controls the firm.

Management

When a large group owns stock in a company, stockholders individually have very little power to control the direction of the firm. This means that _______ effectively controls the firm.

Management

In a shareholder-manager relationship, who is the agent?

Managers

What is the formula for computing operating cash flow?

OCF = EBIT + Depreciation - Current Taxes

A sole proprietorship is a business owned by ____ person(s).

One

In which type of loan does the borrower initially receive the present value of the future lump sum loan repayment amount?

Pure discount loan

What is the correct equation for computing Return on Assets (ROA)?

ROA=Net Income/Total assets

How is sustainable growth calculated when equity used in the calculation of ROE is the beginning value?

ROExb

A times interest earned (TIE) ratio of 3.5 times means that a firm has _____ that are 3.5 times greater tahn the firm's interest expense.

TIE = EBIT / Interest Earnings before interest and taxes

includes adjustments for capital spending and additions to net working capital. It will frequently be negative.

Total distributable cash flow of the firm

In the long run, all costs are variable.

True

True or false: Ownership is transferred in a corporation by gifting or selling shares of stock.

True

True or false: Regulation is meant to improve corporate governance and reduce conflicts of interest.

True

True or false: The formula for the present value factor is 1/(1 + r)t.

True

The cash flow identity states that cash flows from _____ should equal cash flows to creditors and equity investors.

assets

EBIT stands for earnings ______ and taxes.

before interest

On the balance sheet, assets are listed at their ____ value.

book

On the balance sheet, assets are listed at thier _____ value.

book

The process of planning and managing a firm's long-term investments is referred to as

capital budgeting

Which of the following is not a component of operating cash flow? A) capital spending B) tax payments C) sales of goods and services

capital spending

The mixture of debt and equity used by a firm to finance its operations is called:

capital structure

A supplier who requires payment this week should be most concerned about which one of its customer's ratios? A) current ratio B) debt-equity ratio C) cash ratio D) quick ratio E) total debt ratio

cash ratio

What would allow analysts to compare the financial leverage of different size firms?

common-size balance sheet Reason: financial leverage is the use of debt to acquire assets. The common-size balance sheet expresses a firm's total debt as a percentage of total assets.

An important accounting goal is to report financial information to users in a way that is useful for _____.

decision making

Net capital spending is equal to the change in net fixed assets plus

depreciation. Capital spending = ending net fixed assets - beginning net fixed assets + depreciation.

Cash flow to stockholders equals

dividends paid minus net new equity raised

To smooth its earnings, a firm is more apt to sell appreciated property and realize the income on that sale when its other earnings are

down.

the activity of making net payments to creditors and owners (excluding interest) is called a(n) _____ activity in the accounting statement of cash flows.

financing

Equipment and machines are _______ assets, which are generally the least liquid asset on the balance sheet.

fixed

A changed in _______ will appear as an investing activity in an accounting statement of cash flows.

fixed assets

Banks prefer lending to firms whose times interest earned ratio indicates that earnings are ____ interest payments.

greater than Reason: the TIE ratio measures how well a company has its interest obligations covered.

Accounting ______ refers to the speed and ease with which assets can be converted to cash.

liquidity

When making a financial decision, the most relevant tax rarte is the ____ tax rate

marginal

Which ratios use information that is not contained in financial statements?

market value ratios

Enterprise value is the sum of a firm's market capitalization and the ____ value of its interest-bearing debt ______ any cash on hand.

market; less

Annuities with payments occuring at the end of each time period are called ______, whereas annuities with payments occuring at the beginning of each time period are called _____.

oridinary annuities; annuities due

An income statement reflects activity that occurs ______ while a balance sheet reflects values _______.

over a period of time; as of a specific date

Dividends are paid to _____, not ______.

owners of the firm, not creditors.

A positive operating cash flow indicates that the firm is generating enough cash to

pay operating costs

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

present value

EBITDA is a measure of _____ cash flow

pretax

Assume Castillo Corp. increases its operating efficiency such that costs decrease while sales remain constant. As a result, given all else constant, the

return on equity will increase

Financial planning models typically do NOT rely on which of the following? risk cash flow size accounting relationships timing

risk, cash flow size, timing

Operating cash flow reflects which of these? A) Capital spending B) tax payments C) changes in net working capital D) interest payments

tax payments

The issuance of new equity shares is a cash flow from ______ to _______.

the financial markets; the firm.

Which cash coverage ratio would a lender prefer its borrower to have?

the highest possible

free cash flow is better described as

total distributable cash flow

The life of a corporation is

unlimited

GAAP requires that income is reported:

when it is accrued, regardless of payment status.

The management of a firm's short-term assets and liabilities is called:

working capital management

A firm with .25 in debt for every $1 in assets has an equity multiplier of _____

1.33 Reason: $1/(1-.25) = 1.33

If the future value is $500 in 1 year and the interest rate is 12% per year, what is the present value?

446.43

A pro forma balance sheet indicates that total assets will increase by $300,000. If a debt-equity ratio of .5 is maintained, then debt must increase by

$100,000 Reason: if D/E = .5, an increase in 300k in assets will be financed with $100,000 of debt and $200,000 of equity $100,000/$200,000=.5

A firm with $600,000 in sales, cash on hand of $750,000, liabilities odf $200,000 and total assets of $1M has a total asset turnover of _____ times.

.60 Total asset turnover=sales/total assets

A firm has a total debt ratio of .38. This means that the firm has .38 in debt for every

.62 in equity

If you invest 1,000 and your NPV is $200, then the present value of your future vash flows is

1,200. Reason: NPV = -Cost+PV PV=NPV + Cost PV=$200+1,000=$1,200

Better Life Inc. had net income of $375,000 on sales of $3.5 million and assets of $4.1 million this year. What is the profit margin?

10.71% Profit Margin = Net Income/Sales

Toy Town has a return on equity of 14 percent and its dividend payout ratio is 20 percent. What is the sustainable growth rate?

12.61%

A firm with 29,261 in sales, liabilities of 100,000, and total assets of 13,500 produces ____ in sales for each dollar invested in assets.

2.17. Reason: sales/total assets

BK Trucking has total equity of $25,380 and 1500 shares outstanding. Its stock is currently selling at $38 per share. What is the market-to-book ratio?

2.25 Market-to-book ratio = market value per share/book value per share book value per share = total equity / number of shares outstanding

BC corporation has sales of $1,000,000 and cost of goods sold of 450,000 for the year. Inventory at year end was 180,000. What is the inventory turnover?

2.5 times Inventory turnover = Cost of Goods sold/Inventory

Alpha Omega's percentage of sales model forecasts sales growth of 20% next year. If cost of goods sold are proportionate at 80% of sales, then cost of goods will increase by

20%. In a percentage of sales approach model, expenses that are proportionate will grow at the same rate as sales

Alder Inc. has net income of $403,000, operating earnings of $640,000, sales of $1.23M, and total assets of $1.48M. What is the Return on Assets?

27.23% ROA=Net Income/Total Assets

What is the formula for days' sales in receivables?

365 days/receivables turnover

Alpha Star's net income ws $300 on $2000 of sales. The company has $5,000 in assets and equity of $3,000. The firm paid out $125 in cash dividends. What is the dividend payout ratio?

41.67% Dividend payout ratio= cash dividends/net income

If the future value is $750 in 1 year and the interest rate is 15%, what is the present value?

652.17

Which of these is the most illiquid? A) fixed assets B) inventory C) cash D) marketable securities

A) Fixed assets

Which of the following are examples of short-run fixed costs? A) rent B) sales commissions C) material costs D) bond interest

A) rent D) Bond interest

Which of the following are most apt to create problems when comparing financial statements for multiple firms? A) differing fiscal years B) differing accounting methods C) differing levels of cash D) seasonality

A, B, D

An interest rate expressed as if it were compounded once per year is called the A) periodic interest rate B) compound interest rate C) stated annual rate D) daily interest rate E) effective annual rate

E)

EPS stands for

Earnings Per Share

What does it mean when the firm has positive net working capital?

It means that the firm should have sufficient cash to meet its current obligations.

A corporation is a distinct _____ entity and as such can have a name and take advantage of the legal powers of natural persons.

Legal

_______ income is earnings after interest and taxes.

Net income

What is the formula for the one-period present value?

PV=FV/(1+r)

The length of time, on average, it takes a firm's customers to ____ is referred to as the days' sales in receiables ratio.

Pay their bills

Net capital spending is equal to ending net fixed assets minus beginning net fixed assets

Plus depreciation

Debt service means repaying

Principal and interest

Name an incentive for a manager to perform well.

Promotions

What is the formula for Total Asset Turnover?

Sales/Total Assets

What happens when a firm creates value?

Shareholder wealth increases.

The owners of a corporation are called _______.

Shareholders

A current asset has a(n) _______ life.

Short

The ________ is the period during which some equipment, resources, and commitments are fixed.

Short run

The amount of taxes paid on a firm's earnings is determined by a set of rules known as the _______ ______.

Tax Code

Operating cash flow reflects which one of these? A) capital spending B) changes in net working capital C) tax payments D) interest payments

Tax payments Reason: operating cash flow is EBIT + Depreciation - tax payments. Interest payments are subtracted from cash flow to investors in the firm to compute financial cash flow.

True or false: a firm can smooth earnings by timing the sale of appreciated property.

True

True or false: a one-period formula for present value is PV=C1/(1+r)

True

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

True

A balance sheet reflects a firm's _____ value on a particular date.

accounting

A business created as a distinct legal entity composed of one or more individuals or entities is called a(n):

corporation

When a firm pays out fewer dividends, it _____ the accounting value of its retained earnings

increases

Retained earnings are a portion of stockholders' equity, therefore when they _______, stockholders' equity _____________.

increases; increases

A _____ liability does not have to be paid within one year.

long-term

The price at which willing buyers and sellers would trade is called

market value

The percentage of sales approach separates accounts on the pro forma income statement and balance sheet into those that change directly with

sales

Interest paid twice a year is known as ______ compounding.

semiannual

The long-term debts of a firm are liabilities

that do not come due for at least 12 months

What is the future value of $100 at 10% simple interest for 2 years.

$120 Reason: 100+2(.10x100)=$120

If you invest $10,000 and your NPV is $4,000, then the present value of your future cash flows is ______.

$14,000 Reason: NPV=-Cost +PV PV=NPV+Cost PV=4,000+10,000=14,000

If a firm's current assets are $100 and its current liabilities are $80, then its net working capital is:

$20 NWC = CA - CL

Given an interest rate of 8%, how much should you invest now in order to produce $3,000 at the end of the year?

$2777.78

If you make an extra $1,0000 in income and your marginal tax rate is 30% while your average tax rate is 20%, then you will pay an extra ______ in taxes.

$300

If you invest $1,000 and the present value of the expected cash inflows is $1,300, then the NPV is ______.

$300. Reason: NPV = $1300-1000=300

An amount invested at compounded interest earns interest on interest, wheras with simple interest, interest is not earned on interest. How much interest is earned on interest for a $10,000 investment at 7% for two years?

$49. Reason: .07^2 = .0049x10000=$49

If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ______.

$50

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

$50. NWC = CA - CL

Cheese Co. had net income of $300 and paid out $125 in cash dividends to stockholders. What is the plowback ratio?

58.33% Plowback ratio (retention ratio)=1-dividend payout ratio Dividend payout ratio = Cash dividends/Net Income

You invest $500 at 10% interest per annum. At the end of 2 years with simple interest, you will have ____ and with compound interest you will have ______.

600; 605 Reason: Simple interest = 500(.10)=50x2=100+500=600 Compound interest=500(1.10^2)=605. The FV will always be higher with compound interest.

Turner's return on equity is 12 percent and its retention ratio is 60 percent. What is its sustainable growth rate?

7.76%

What is the difference in the future value of $100 at 7% for 5 years if the interested is compounded semiannually rather than annually?

80 cents

Assume 7 percent annual interest is compounded semiannually on a $800 investment. What will that investment be worth after 1 year?

856.98

Braxton Industries has sales of $485,000, cost of goods sold of 290,000, and accounts receivables of 52,500. How many times does Braxton collect its outstanding credit accounts and lent the money during the year?

9.23 times Receivables turnover = sales/accounts receivable

The simple interest rate of 9.99% on $1 is _____ per year and ______ total interest over 93 years. Conversely, 9.99% compounded annually for 93 years is approximately 7,030.31.

9.99 cents; 9.29 over 93 years

Company L has $80 million in market capitalization, $20 million in debt and $10 million in cash. What is the company's enterprise value?

90M

What does stockholders equity represent?

A residual claim against the firm's assets.

Why would it not make sense for a firm to set financial goals like "maximize profits" or "minimize costs"

A sole focus on items like this may lead to ignoring what is in the stockholders long-term best interests.

Operating cash flow differs from total cash flow in that the latter makes adjustments for A) Additions to net working capital B) Retained earnings C) Capital spending D) net income

A) Additions to net working capital C) Capital spending

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

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

What does ROA equal? A) ROE/Equity Multiplier B) Profit Margin X Total Asset Turnover C) Total Asset Turnover X Equity Multiplier D) Net Income/Sales

A) ROEXEquity Multiplier B) Profit Margin X Total Asset Turnover

Which of the following a means of calculating an interest rate? A) a calculator B) linear regression C) algebra D) a time value of money table

A) a calculator C) algebra D) a time value of money

A decrease in which one of the following accounts increase a firm's current ratio and its quick ratio? A) accounts payable B) cash C) accounts receivable D) Inventory E) fixed assets

A) accounts payable

Which of the following items are used to compute the current ratio? A) accounts payable B) equipment C) cash D) earnings

A) accounts payable C) cash Reason: current ratio=current assets - current liabilities

Which of the following will increase earnings per share? A) decreasing the unit cost of inventory sold B) increasing depreciation expense C) decreasing the sales price of each unit sold D) increasing the corporate tax rate E) decreasing dividend payments

A) decreasing the unit cost of inventory sold

Which of the following is true for a firm whose stock has a PE ratio of 8? A) for each share purchased, the investor is investing $8 for every dollar of earnings B) the stock is expected to provide an 8% return C) The stock is selling for $8 per share D) for each share purchased, the investor will receive a dividend of $8 per share

A) for each share purchased, the investor is investing $8 for every dollar of earnings. Reason: a PE ratio of 8 indicates that the stock is selling for 8 times earnings

Given a firm with positive annual cash flows, which one of the following will increase the current value of that firm? A) increasing the annual growth rate of the cash flows B) increasing the discount rate C) decreasing the amount of each cash flow D) decreasing the life of the firm E) increasing either the growth rate of the cash flows or the discount rate

A) increasing the annual growth rate of the cash flows

current assets include: A) inventory and accounts receivable B) accounts payable and cash C) cash and intangible assets D) inventory and accounts payable E) buildings and equipment

A) inventory and accounts receivable

The total cash flow of the firm includes A) operating, capital spending, and net working capital cash flows B) only capital and net working capital cash flows C) only operating and net working capital cash flows D) only operating and capital cash flows

A) operating, capital spending, and net working capital cash flows

When a corporation is formed, it is granted which of the following rights? A) the ability to issue stock B) provincial citizenship for jurisdictional purposes C) legal powers to sue D) Corporate life up to 100 years

A) the ability to issue stock B) provincial citizenship for jurisdictional purposes C) legal powers to sue

Which of the following are commonly used methods of computing an interest rate for a one-period time value of money problem in an introductory finance class? A) time value of money table B) calculator C) counting on your fingers D) algebraic formula

A,B,D

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?

Accounts receivable

Non-cash items are ______ to net income to start the process of explaining changes in cash and cash equivalents.

Added back

In the long run, ____ costs are variable.

All costs

The short run is ________.

An imprecise period of time.

In March, Al purchased 10 video games for his store's inventory. In April, he sold five games on credit and received the payment in May. The income should be reported in

April.

An organization must prepare ____ and bylaws when forming a corporation

Articles of incorporation

_____ are shown on the left-hand side of the balance sheet.

Assets

What is the formula for Equity Multiplier?

Assets/Total Equity

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.

Average; Marginal

You are comparing two investments, A and B, with unequal annual cash flows and varying number of years. Which one of these statements is correct regarding this comparison? A) If A has the higher net present value at one discount rate, then A will have the higher net present value at all other discount rates. B) If B has a higher net present value, then B will have the higher net future value at any point in time, given a stated discount rate. C) If B has a higher net future value at one discount rate, then B will have the higher net present value given any discount rate. D)The two projects cannot be compared since their time periods differ in length. E) The project with the greater number of years will have the higher present value.

B

Assume two annuities will each provide $500 annual cash flows for five years. One is an ordinary annuity and the other is an annuity due. Which of these statements is correct? A) the ordinary annuity will pay on the first day of each time period B) the annuity due is more valuable than the ordinary annuity C) the annuity due will pay one more payment than the ordinary annuity D) the ordinary annuity will have the highest value at the end of year 4.

B)

Which of these is considered to be the most liquid? A) Equipment and machines B) Accounts Receivable C) Land D) Inventory

B) Accounts receivable

Which of the following are included in a firm's inventory according to GAAP? A) Fixed assets B) Finished goods C) Work in Progress D) Raw materials

B) Finished goods C) Work in Progress D) Raw Materials

Which of these are reported in the operations section of an income statement? A) interest paid to bondholders B) revenues from principal operations C) after-tax cash flows D) expenses from principal operations

B) Revenues from principal operations D) expenses from principal operations

Which of the following will increase wealth? A) a zero NPV B) a positive NPV C) a negative NPV

B) a positive NPV Reason: a positive NPV 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.

Operating cash flow differs from total cash flow in that the latter makes adjustments for A) retained earnings B) additions to net working capital C) net income D) capital spending

B) additions to net working capital D) capital spending

In a financial plan, how is the amount of borrowing determined? A) by the needed increase in fixed assets B) by managment's D/E decision C) by the increase in total assets minus the increase in cash D) in direct proportion to sales growth

B) by management's D/E decision

The percentage of sales approach groups accounts from which financial statements? A) cash flow statements B) income statement C) balance sheet D) statement of retained earnings

B) income statement C) balance sheet

Cash flow to stockholders in the amount of cash that a company pays to its stockholders less any cash received from _____. A) payments to creditors B) issuing new shares of stock C) Investing in inventory D) cash repayments of outstanding loans

B) issuing new shares of stock

Which of the following are traditional financial ratio categories? A) real options ratios B) Market value ratios C) profitability ratios D) asset management ratios

B) market value ratios C) profitability ratios D) asset management ratios

Ratio analysis works best when evaluating the financial statements of two firms A) in the same industry but located in different countries B) of differing sizes in the same industry C) with one being in a single line of business and the other is a conglomerate D) of the same size in differing industries

B) of differing sizes in the same industry

The total cash flow of the firm includes A) Only operating and net working capital cash flows B) operating, capital spending, and net working capital cash flows C) only capital and net working capital cash flows D) Only operating and capital cash flows

B) operating, capital spending, and net working capital cash flows

What are the two questions to be asked in ascertaining how effective managers will be in advocating for stockholder's best interests? A) How many stockholders will be represented? B) Can managers be replaced if they do no pursue stockholder goals? C) How well compensated are managers? D) How closely are management goals aligned with stockholder goals? E) How large is the firm?

B, D

Assume a stated rate of 8%. Which form of compounding will produce the highest effective rate of return? A) daily B) Annual C) continuous D) monthly E) semiannual

C)

The net present value of an investment is best defined as the A) current cost if the investment is made today. B) net value received at the end of the investment period C) present value of the investment's future cash flows minus the investment's cost D) net decrease in value casued by waiting to receive the cash benefit from the investment. E) value received at the end of the investment period minus the investment's cost.

C)

Which of the following will increase the present value of a finite stream of even cash flows? Assume a positive rate of return. A) moving every cash flow one time period into the future B) decreasing the amount of each cash flow C) increasing the TIme 2 cash flow by $100 and lowering the Time 3 Cash flow by $100 D) Moving the Time 1 cash inflow to Time 2 E) increasing the discount rate

C)

Which one of the following is true? A) Earnings, net income, and cash flows are identical B) The Income Statement explicitly shows cash flows. C) Cash flows can be derived from financial statements. D) Cash flows always exceed earnings.

C) Cash flows can be derived from financial statements.

Which of the following are found on an income statement? A) the liabilities section B) The assets section C) the non-operating section D) the operations section

C) The non-operating section D) the operations section

What are the implications of the time value of money concept? A) a dollar today is worth less than a dollar tomorrow B) a dollar has the same value no matter which day it is C) A dollar today is worth more than a dollar tomorrow D) a dollar tomorrow is worth less than a dollar today

C) a dollar today is worth more than a dollar tomorrow D) a dollar tomorrow is worth less than a dollar today

which one of the following accounts is generally the most liquid? A) patent B) building C) accounts receivable D) equipment E) inventory

C) accounts receivable

Operating cash flow differs from total cash flow in that the latter makes adjustments for A) retained earnings B) net income C) additions to net working capital D) capital spending

C) additions to net working capital D) capital spending

You invest $100 today. With positive interest rates, the concept of future value implies that the future value of your $100 will be _____ $100. A) exactly B) less than C) greater than

C) greater than

Which one of the following statements is correct if a firm has an accounts receivable turnover measure of 10? A) it takes the firm 36.5 days to pay its creditors B) it takes the firm 36.5 days to sell its inventory and collect payment from the sale C) it takes the firm 36.5 days to collect payment for a sale D) The firm has 10 times more in accounts receivable than it does in cash E) it takes an average of 10 days to collect payment from the firm's customers

C) it takes the firm 36.5 days to collect payment for a sale

Assume a firm is operating at full capacity. Which one of these accounts is least apt ot vary directly with sales? A) inventory B) cash C) long-term debt D) accounts payable E) fixed assets

C) long-term debt

Which one of these statements is correct? A) long-term debt is the residual difference between assets and liabilities B) net income that is not paid out in dividens decreases retained earnings C) long-term debt requires a payout of cash within a stated time period D) stockholders' equity is stated at market value on the balance sheet E) stockholders' equity increases as the liquidity of a firm increases

C) long-term debt requires a payout of cash within a stated time period

Which of the following are found on an income statement? A) The assets section B) The liabilities section C) The operations section D) the non-operating section

C, D

Deciding whether to open an office in a foreign location is an example of what type of decision?

Capital budgeting decision

________ decisions involve the choices related to long-term debt and equity financing.

Capital structure

In finance, the value of a firm depends on its ability to generate _______.

Cash flows.

What would be the result from a firm using cash to buy inventory?

Cash would decrease, inventory would increase.

In large firms, financial acitivity is usually associated with which top officer?

Chief Financial Officer (CFO)

The treasurer and the controller of a corporation generally report to the

Chief Financial Officer (CFO)

Rock construction has current assets of 45 million, total liabilities and equity of 67 million, and sales of 59 million. How would current assets be expressed on a common-size balance sheet?

Common-sized balance sheets express each item as a percentage of total assets. =67% (45/67) Remember the balance sheet equation total liabilities and equity MUST equal the amount of total assets. Therefore, the total assets of Rock must be 67M.

A _______ is best suited to raising large amounts of capital.

Corporation

The _______ is the most important form of business, as it is a distinct legal entity

Corporation

Which form(s) of business is treated as a distinct legal entity separate from its owners.

Corporation

Which type of business organization has all the respective rights and privileges of a legal person?

Corporation

Cash and Inventory are examples of

Current Assets

Kate starts saving for retirement today and plans to make annual contributions into this retirement account. Which one of these is most appropriate to increase the total amount she has saved on the day she retires? Assume she earns a positive rate of return each year. A) Retiring at age 62 rather than age 66 B) Decreasing the investment's average rate of return C) Decreasing the amount she saves each year D) Delaying her retirement by one year E) Delaying any additions to her savings by one year

D

Present value represents what an amount of money promised or expected in the future is worth _____. A) last year B) next year C) next month D) today

D) today

A bad financial decision is defined as a decision that _____ owner's equity .

Decreases

If contractual obligations are not met, the firm will be in ______.

Default

A systematic expensing of an asset based on the asset's estimated life.

Depreciation

Which one of these measures a firm's operating and asset use efficiency as well as its financial leverage?

DuPont Identity

Discounting cash flows involves A) taking the cash discount offered on trade merchandise B) estimating only the cash flows that occur in the first four years of a project C) adjusting only those cash flows that occur at least 10 years in the future D) multiplying expected future cash flows by the cost of the capital E) adjusting all expected future cash flows to their current value

E)

Al's new business has a positive net income and a marginal tax rate of 21%. Given this, an increase in which one of the following will cause the operating cash flow to increase? A) fixed assets B) taxes C) net working capital D) cost of goods sold E) depreciation

E) depreciation

What is the formula for Operating Cash flow?

EBIT + Depreciation - Tax Payments (Taxes)

What is the formula for cash flow from operations?

EBIT + Depreciation - Taxes

What does EBIT stand for?

Earnings Before Interest and Taxes

True or False: operating cash flow includes capital spending and working capital requirements

False

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

False

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

False Reason: you could invest 9 extra dollars now and have more than 9 dollars a year from now.

True or False: net income equals cash flow

False Reason: non-cash expenses are one reason why net income varies from cash flow

True or False: small changes in the interest rate do not really matter when dealing with millions or billions of dollars over 30 or 40 years.

False- Reason: small rate differences can be worth thousands of dollars, especially when either the amount or the time period is large.

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

False.

True or False: operating cash flow includes capital spending and working capital requirements

False: operating cash flow is the cash flow generated by business activities, excluding financing, capital spending, or changes in net working capital

True or false: Cash flow occurs at the time of sale.

False: Cash flow does NOT necessarily occur at the time of sale.

True or False: Lower PEs are often interpreted as favorable and indicate significant growth prospects for the firm.

False: higher PEs are often taken to mean that investors are confident in the firms future growth potential.

Equipment and warehouses are examples of which type of assets?

Fixed

Financial accountants do not distinguish between _____ and ______ costs.

Fixed; variable

What determines when a sale is recorded for accounting purposes?

Generally Accepted Accounting Principles

_______ income is revenues minus cost of goods sold.

Gross income.

Which term applies to a set of cash flows that are finite in number and increase ind amount at a steadying rate

Growing annuity

Which one of the following would have the greatest value assuming each has a Year 0 cash flow of zero and a Year 1 annual cash flow of $100? Assume a discount rate of 8 percent, compounded annually. Also, assume any growth rate is positive. Perpetuity Annuity Growing perpetuity Growing annuity Growing perpetuity or growing annuity, as they would have equal values

Growing perpetuity

The ________ reports the firm's accrual-based accounting revenues and expenses.

Income Statement

Which of the following shows performance during the year?

Income Statement

If sales increase while there is no change in accounts receivable, the receivables turnover will

Increase Receivables turnover = sales/accounts receivable

The _____ tax rate is the tax paid on each extra dollar of income while the _____ tax rate is the percentage of income paid in taxes.

Marginal, Average

For financial decision-making purposes, the most important tax rate is the ______ tax rate.

Marginal.

How is the price-earnings (PE) ratio computed?

Market price per share/earnings per share

_________ _________ is the price at which willing buyers and sellers would trade the assets.

Market value

Assuming interest rates are positive, one dollar received today is worth _____ one dollar received next year.

More than

_______ income includes only expenses and revenues from operations.

Net income

What is the formula for Profit Margin?

Net income/sales

What impact will the collection of cash from a firm's credit customers have on its net working capital?

No effect. Cash would increase and accounts receivable would decrease. (Accounts receivable is a cash equivalent account.)

A current liability is defined as debt that must be repaid within which period of time?

One year

is the cash flow generated by business activities, excluding financing, capital spending, or changes in net working capital.

Operating Cash Flow

__________ cash flow is the cash flow generated by business activities, such as sales of goods and services, and also reflects tax payments.

Operating cash flow

If equity is taken from an ending balance sheet, the formula for computing the sustainable growth rate is:

ROExb/1-ROExb

Which ratio measures the number of times a firm lends money to customers, collects that money, and relends it within a year?

Receivables turnover

What is the formula for the receivables turnover ratio?

Receivables turnover = sales/accounts receivable

Omega Co. has annual sales of 250,000, cost of goos sold of 168,000, and assets of 322,000. Accounts receivable are 86,200. What is the receivables turnover?

Receivables turnover = sales/accounts receivable 2.900 times

What is a measure of profitability?

Return on equity (ROE) focuses on the return on the stockholders' equity

How is income defined?

Revenue minus expenses (this is the accounting definition)

What does the operations section of an income statement report?

Revenues and expenses from principal operations

As the amount and timing of cash flows are not known with certainty, this means that investors carry a certain amount of ______, which firms should be aware of.

Risk

_______ is concerned with managing net working capital.

Short-term finance

Interest earned only on your original investment is called ______ while interest earned on interest is called ______.

Simple interest; compound interest

Which type of buiness is easiest and cheapest to form?

Sole Proprietorship

A _______ is a business that is owned by one person.

Sole proprietorship

_______ are affected by non-cash items, because net income is affected.

Taxes

A shareholder's liability is limited to

The amount the shareholder invested in the corporation.

What is the most important item that can be extracted from financial statements?

The firm's actual cash flows.

What is the purpose of the inventory turnover ratio?

The inventory turnover ratio monitors the rate at which a company is turning over its inventories. Efficient firms turn over their inventory rapidly so as not to tie up more capital than necessary in raw materials or finished goods.

On which side of the balance sheet does shareholders' equity appear?

The right side

Cash flows are show on

The statement of cash flows

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

The total asset turnover ratio will increase. Reason: sales/total assets

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.

What is the purpose of the income statement?

To measure performance over a set period of time. It is an accrual based statement.

What is the fundamental goal of the Sarbanes-Oxley Act of 2002?

To protect investors from corporate abuse.

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

Today; tomorrow

Shareholders' equity is the difference between:

Total assets and total debt

Assume current assets = $48; fixed assets = $125, current liabilities = $42, and equity = $100. What is the total debt ratio?

Total debt ratio = total assets - total equity/ total assets =.4219 Debt ratio can also be debt/total assets-to compute debt, you subtract equity from assets

How is the average income tax rate computed?

Total tax bill / Total taxable income

_________ _________ is stock that the firm has issued in the past but has repurchased.

Treasury stock

A prospectus describes a potential investment to third parties.

True

Enron, Tyco, and WorldCom are companies that were involved in corporate scandals that led to Sarbanes-Oxley.

True

Liabilities usually involve obligations of the firm and require a cash payout within a stated period of time.

True

The formula for finding the present value of a cash outflow now, a positive cash flow in 1 year, and a positive cash flow in years 2 and 3 is -C0+ C1/(1 + r)1 + C2/(1 + r)2 + C3/(1 + r)3

True

True or False: Shareholder's equity = Total assets - Total Debt

True

True or False: A balance sheet shows what a firm owns and how it is financed.

True

True or False: A general partnership may be formed by oral agreement.

True

True or False: Accounting profit does not adequatelly account for cash flow.

True

True or False: Accounting profit records sales made and expenses incurred but not the timing of cash recepits and expenditures.

True

True or False: Contract Liabilities put the firm at risk of default.

True

True or False: Debt does not represent ownership in a corporation.

True

True or False: Fixed assets can be tangible or intangible.

True

True or False: Sole proprietorships and partnerships are taxed in a similar fashion.

True

True or False: Sole proprietorships create unlimited liability for their owners.

True

True or False: The chief operations officer reports to the chief executive officer.

True

True or False: The goal of financial management is to maximize the current value (per share) of the existing stock.

True

True or False: The realization (timing) of income can be useful to a firm.

True

True or False: The treasurer and the controller generally report to the Chief Financial Officer (CFO).

True

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

True

True or False: the owner of a sole proprietorship may be forced to sell personal assets to pay company debts.

True

True or false: A general partnership is easy and inexpensive to form-it can even be an oral agreement.

True

True or false: some agency costs are opportunity costs, but most opportunity costs are not a result of agency conflicts.

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: A general partnership may be formed by oral agreement.

True.

The costs incurred due to a conflict of interest between stockholders and management are called

agency costs

A conflict of interest between the stockholders and management of a firm is called:

an agency problem

a stream of equal payments that occur in equal periods of time for a finite period

an annuity

Some of the cash flow sent from the financial markets to the firm in the form of stock purchases is then used to invest in:

assets

The left side of the balance sheet shows a firm's current and fixed

assets

Stockholders' equity is the residual difference between ________.

assets and liabilities.

Liquidity refers to the ease of changing

assets to cash

The ______ tax rate measures the total taxes you paid divided by total taxable income

average

The market-to-book ratio evaluates a company's current market value relative to its ______

book value. Reason: the market-to-book ratio measures the difference between the book value and the company's stock price.

The sustainable growth rate answers the question: How much can the firm grow before it must _________.

borrow money

The percentage of sales approach described in the textbook assumes that any deficit of funds were

borrowed

The short run is a period when there are ____ costs.

both fixed and variable

If a firm decreases its operating costs, all else constant, then A) the profit margin increases while the cash coverage ratio decreases B) the return on assets increases while the return on equity decreases C) both the return on assets and the return on equity increase D) both the profit margin and the equity mulitplier increase E) the total asset turnover rate decreases while the profit margin increases

both the return on assets and the return on equity increase

The statement of cash flow explains changes in _____.

cash and cash equivalents

From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts? A) Times interest earned ratio B) cash coverage ratio C) cash ratio D) quick ratio E) debt-equity ratio

cash coverage ratio

Non-cash items do not affect

cash flow

In determining the economic and financial condition of a firm, ______ is more revealing than net income

cash flow Reason: it indicates whether or not the firm can pay its suppliers and creditors

Which of the following are often left out of most financial planning models? Profit margins, financial leverage, and turnover Equity growth, cash flow, and financial leverage Sales growth, asset growth, and equity growth Cash flow size, risk, and timing

cash flow size, risk, timing

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

compounding

The person directly responsible for overseeing the tax management, cost accounting, financial accounting, and information system functions is the:

controller

A firm with a market-to-book value that is greater than 1 is said to have _____ value for shareholders.

created

The cash flow identity states that cash flow from assets equals cash flows to ______

creditors and stockholders

The current ratio computes the relationship between:

current assets and current liabilities

the quick ratio is calculated as

current assets minus inventory divided by current liabilities

The actual economic value of an asset varies ____ the asset's future cash flows.

directly with

Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?

dividend policy, profit margin, financial policy

Which of the following must decrease in order to increase a firm's sustainable growth?

dividends paid Reason: a decrease in dividends paid will increase equity and thus increase sustainable growth

Cash flow to stockholders=

dividends paid - net new equity raised or dividends paid - (stock sold - stock repurchased)

Capital spending =

ending net fixed assets - beginning net fixed assets + depreciation

Shareholders' liability is _____ to the amount invested in ownership shares.

equal

Depreciation is the accountant's estimate of the cost of _____ used up in the production process.

equipment

The cash flow of a firm, also referred to as cash flow from assets, must be equal to the cash flow to

equity holders plus the cash flow to debt holders

True or false: small changes in the interest rate do not really matter when dealing with millions or billions of dollars over 30 or 40 years.

false

The sustainable growth rate is the maximum growth that a company can sustain without having to increase its _______

financial leverage

The sustainable growth rate is the maximum growth rate possible without having to increase

financial leverage (debt)

Pro forma statements are the goal of

financial planning

On a balance sheet, patents and trademarks are classified as

fixed assets

Selling a firm's plant and equipment results in a change in

fixed assets

cash that the firm is free to distribute to creditors and stockholders because it is not needed for working capital or fixed asset investments.

free cash flow

The total value of an investment earnining interest over one or more periods is known as the ____

future value

The total value of an investment earning interest over one or more periods is known as the ______

future value Reason: a future value is the amount to which an investment will grow after earning interest.

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

future; present

Given an internal growth rate of 3 percent, a firm can _____.

grow by 3% or less without any additional external financing

When a typical stock in the S&P 500 Index has a PE ratio 12, a company with a PE ratio of 15 may have ____ than average growth prospects, given similar earnings per share.

higher

A ____ PE ratio may indicate that investors believe a company has better prospects for future growth in earnings.

higher Reason: a negative PE ratio means that EPS are negative, because price can't be negative.

Revenue minus expenses measures a firm's

income

The purpose of a(n) _______ is to measure performance over a set period of time.

income statement

The information needed to compute the profit margin can be found on the

income statement Profit Margin=net income/sales

A positive NPV will _____ wealth.

increase Reason: a positive NPV is the same as having that amount of money in your pocket today, so it will increase wealth.

Stockholders' equity _____ when retained earnings increase.

increases

The availability of additional debt financing _______ a firm's sustainable growth rate?

increases

The 1934 Securities Exchange Act deals with the important issue of

insider trading

Debt service implies paying

interest and principal

Which one of these is handled differently in calculating cash flows for accounting versus financial purposes?

interest expense

The cash flow to creditors increases when

interest is paid on outstanding debt

Raw materials, work in process, and finished goods are examples of

inventory

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

less than

If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be

less than 1. A market-to-book ratio greater than 1 means that management has created value for the company, because it's worth more on the market now than the initial equity investment.

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

less than; the formula is Capital spending = Acquisition of fixed assets - sales of fixed assets

Shareholder's liability is ______ to the amount invested in ownership shares.

limited

A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a

limited liability company

A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a

limited liability company (LLC)

In a limited partnership, a limited partners liability for business debts is

limtied to their cash contribution to the partnership.

A ______ asset is one that can be quickly converted into cash without significant loss in value

liquid

Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are often referred to as

liquidity measures

Corporate bonds are generally classified as

long-term debt

The lower a firm's inventory turnover, the

longer inventory sits on the firm's shelves

If the 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

your _____ tax rate is the percentage of the highest taxable dollar of income you earned that is payable as tax

marginal

Market value measures are based, in part, upon information from what non-financial-statement source?

market price per share of the stock

How is the market-to-book value measured?

market value per share/book value per share

Enterprise value is the sum of a firm's market capitalization and the _____ value of its interest-bearing debt ______ any cash on hand.

market; less

The primary goal of financial management is to

maximize the current value per share of the existing stock.

The sustainable growth rate is the _____ rate of growth a firm can maintain ____ increasing its financial leverage.

maximum; without

Non-cash items are expenses that directly affect _____ but do not directly affect _______.

net income; cash flow

The internal rate of growth is based on the assumption that

no external financing of any kind is obtained

the first step in calculating cash flow from operating activities is to adjust net income for______

non-cash items and net working capital changes

A business formed by two or more people and has no separate legal authority is known as a

partnership

EBITDA is a measure of ______ operating cash flow.

pretax Reason: EBITDA is a measure of pretax operating cash flow, because it is short for Earnings Before Interest, Taxes, Depreciation, and Amortization.

The amount shareholders are willing to pay for each $1 per share of annual earnings a firm generates is indicated by the

price-earnings ratio

Financial planning using the percentage of sales approach produces

pro forma financial statements

The sustainable growth rate can be increased by increasing the

profit margin

Return on Equity (ROE) is a measure of

profitability

List the five categories of financial ratios.

profitability market value asset management Long-term solvency short-term solvency

The primary purpose of the Sarbanes-Oxley Act of 2002 is to

protect investors from corporate abuses

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

quoted

Assume $10 invested today will be worth $64 in 25 years. What is the correct formula for computing the interest rate on this investment?

r=($64/$10)/^1/25-1

The total asset turnover ratio is defined as ______ divided by total assets.

sales

The profit margin is equal to net income divided by _____.

sales PM=Net Income/Sales

A firm's total asset turnover measure of .63 means that a firm has .63 in

sales for every $1 in total assets

On a balance sheet, total assets must always equal total liabilities plus

shareholders' equity

Bylaws are meant to regulate:

shareholders, directors, and officers

Negative capital spending would mean more fixed assets were _____ than _____.

sold; purchased

The short run for a firm is the period of time during which

some costs are fixed and output can vary

_____ financial statements provide for comparison of firms that differ in size.

standardized

the statement that helps explain changes in accounting cash and equivalents

statement of cash flows

______ are frequently used to encourage key managers to maximize the value of the firm's stock.

stock options

What is treasury stock?

stock the firm has repurchased

If a firm maintains a constant debt-equity ratio and dividend payout ratio, and does not use any new external equity financing, the firm can grow at a rate no greater than its _____.

sustainable growth rate Reason: the ROE shows the rate of return on the equity invested. Sustainable growth rate is ROE x the retention ratio, which adjusts ROE to remove the dividends paid.

Operating cash flow reflects which one of these? a) changes in net working capital b) interest payments c) capital spending d) tax payments

tax payments

The goal of financial management focuses on the fact that

the current stockholders are the owners of the corporation.

Cash flow to stockholders must be positive when

the dividends paid exceed the net new equity raised

The primary responsibility of financial managers is to increase the value of ______.

the existing shares of stock.

Financial planning models typically do NOT rely on which of the following? timing accounting relationships cash flow size risk

timing cash flow size risk

A common-size balance sheet expresses accounts as a percentage of

total assets

A common-size balance sheet will express accounts receivable as a percentage of

total assets

Operating cash flow, capital spending, and additions to net working capital are the components of

total cash flow

The value of a firm is best defined as the

total present value of all the firm's future cash flows

The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the:

treasurer

Which of the following can be used to encourage managers to act in the best interests of shareholders? A) Monitoring through reports B) A larger organization and more employees C) Stock options and bonuses D) Manageral compensation tied to performance E) Executive perks F) The Threat of termination

A) Monitoring through reports C) Stock options and bonuses D) Managerial compensation tied to performance F) Threat of Termination

Select all that apply: A good financial decision will do which of the following: A) Increase current dividends per share B) Increase market value of shareholder's equity C) Increase the value of the firm's existing stock D) Increase the cost of capital

B) Increase market value of shareholder's equity C) Increase the value of the firm's existing stock

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

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

Which of the following statements are true about shareholders' equity? A) Shareholder's equity represents the claim on a firms assets by the firm's creditors. B) Shareholders' equity is a residual claim on a firm's assets. C) Shareholders' equity is the difference between the value of a firm's assets and its debt. D) Shareholder's equity is the difference between the value of a firm's debt and its current assets.

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

Which of the following are considered non-owner stakeholders in a company? A) stockholder B) suppliers C) Employees D) government

B) Suppliers C) Employees D) Government

What must an organization prepare to start a corporation? A) prospectus for investors B) balance sheet C) Articles of incorporation D) set of bylaws E) human resources handbook

C) Articles of incorporation D) Set of bylaws

A good financial decision will do which of the following? A) Increase current dividends per share B) Increase the cost of capital C) Increase market value of shareholder's equity D) Increase the value of the firm's existing stock

C) Increase market value of shareholder's equity D) increase the value of the firm's existing stock.

A general partnership has which of the following characteristics: A) large amounts of cash can be raised easily B) It is expensive to form C) Each owner has unlimited liability for all firm debts D) It is difficult to transfer ownership

C) each owner has unlimted liability for all firm debts. D) It is difficult to transfer ownership.

A bad financial decision is defined as a decision that ______ owners' equity.

Decreases

Some of the cash flow generated by a firm goes back to the financial markets in the form of _________.

Dividends and debt payments.

True or false: Ownership of a corporation is difficult to transfer.

False.

When would individuals prefer to receive cash flows?

Sooner rather than later.

Shareholder's equity is the difference between

Total assets and total debt

True or False: In a limited partnership, the limited parters do not participate in managing the day-to-day business.

True

A manager who does a good job in pursuing stockholder goals will be able to get ______ in the job market than one who is ineffective.

a higher salary

The owners of a firm wish to make a risky investment with upside, as the value of the stock may go up. Management wants to avoid this investment, as there is significant risk, and jobs may be lost as a result. This is an example of

agency cost

The owners of a firm wish to make a risky investment with upside, as the value of the stock may go up. Management wants to avoid this investment, as there is significant risk, and jobs may be lost as a result. This is an example of an _______ ________.

agency cost

The rules used by a corporation to regulate its existence are known as

bylaws

The 1934 Securities Exchange Act restricts anyone who has access to _______ information on trading on that information.

non-public (inside)