FIN FINAL

The book value of an asset is equal to the A) purchase price minus accumulated depreciation. B) purchase price minus recaptured depreciation. C) purchase price minus depreciation expense. D) fair market value. E) The book value of an asset is equal to the

A

A firm has current assets of $350,000, current liabilities of $200,000, cost of goods sold of $250,000, and inventory of $75,000. The firm's inventory turnover is A) 5.0 times. B) 3.3 times. C) 2.7 times. D) 2.0 times. E) 4.7 times.

B

A firm raises capital to finance new equipment by selling bonds in the A) secondary market. B) primary market. C) futures market. D) options market. E) federal funds market. F) money market.

B

According to the internal rate of return method, a firm should accept a project if the A) internal rate of return is less than the cost of capital. B) internal rate of return exceeds the cost of capital. C) cost of capital exceeds the internal rate of return. D) internal rate of return exceeds the firm's cost of debt. E) internal rate of return exceeds the firm's cost of equity.

B

According to the net present value technique, a project is considered acceptable if A) the sum of all cash inflows and outflows is positive. B) the difference between all discounted cash inflows and outflows exceeds zero. C) it lowers costs below an acceptable hurdle rate. D) its rate of return is greater than the firm's cost of capital. E) it returns the initial investment faster than competing projects.

B

An income statement contains all of the following EXCEPT A) revenues. B) assets. C) losses. D) gains. E) expenses.

B

What is the principal-agent problem? A) When the principal misrepresents the agent to the board B) When an agent does not maximize the utility of the principal C) The cost of training new agents D) When an agent misrepresents the principal to the board

B

A firm has accounts receivable of $150,000. During the year, total sales are $500,000, of which $300,000 are cash sales. What is the average collection period? A) 109.5 days B) 182.5 days C) 273.8 days D) 486.7 days E) None of the above

C

Bond prices rise when interest rates fall. These two variables (bond prices and interest rates) are: A) not correlated. B) positively correlated. C) negatively correlated. D) positively skewed

C

Which of the following statements is TRUE? A) The presence of asymmetric information in financial markets increases the likelihood that these markets are efficient. B) Accounting profits are always more important to shareholders than cash flows. C) Managers should choose investment projects that maximize shareholder wealth. D) The study of finance only benefits students who aspire to careers in business. E) Investors should not be compensated with a higher return for owning risky securities since they should know better than to buy stock in a firm that has uncertain prospects.

C

Which type of ratio measures how effectively the firm uses its resources to generate income? A) Activity B) Liquidity C) Profitability D) Leverage E) Market

C

________ risk ________ be eliminated through greater diversification and is due to firm-specific or industry-wide factors such as strikes or resource price changes. A) Systematic; can B) Systematic; cannot C) Unsystematic; can D) Unsystematic; cannot E) None of the above

C

An outlay for installation costs is not considered part of the depreciable basis of the asset to be purchased -TRUE -FALSE

FALSE

Assume a corporation, "A," owns 5% of the preferred stock in another corporation, "B." Assume B pays a dividend of $2.00 per share in 2017. Assume A owns 100,000 shares of corporation's B preferred stock. Assume A is in a combined 26.0% marginal federal and state income tax rate. How much income tax will A pay on the dividends it receives from B after taking into account the dividends received deduction

SEE EXAM

The higher the probability that the return on an investment will not pay off its averaged promised value, the higher the expected return must be to induce an investor to invest in it. TRUE FALSE

TRUE

What is a firm's times interest earned if it posts revenues of $200,000, taxes of $35,000, expenses of $100,000, and interest of $30,000? A) 3.3 times B) 2.0 times C) 2.2 times D) 0.5 times E) 1.3 times

A

What is the purpose of the capital market? A) To match people with money to entrepreneurs with great business ideas or concepts B) To more easily regulate the flow of money between parties C) To make money without trying D) To allow people to buy stocks for retirement

A

When using the bond yield plus risk premium approach to estimating the cost of equity, the equity risk premium is usually about A) 3-5%. B) 8-10%. C) 20-25%. D) 10-15%. E) 30-33%.

A

21) Liquidity ratios measure A) The ability of the company to generate cash and pay bills. B) The profitability of the company. C) The solvency of the company. D) The fluidity of the company.

A

Common stockholders expect to receive a return through capital gains and A) interest payments. B) dividends. C) fixed periodic dividends. D) coupon payments. E) receiving shares of preferred stock.

B

If net income was $10,000, interest expense was $4,000, and taxes were $1,000, what is the operating profit margin if sales were $50,000? A) 28% B) 30% C) 22% D) 10% E) 20%

B

Sales for a firm are $500,000, cost of goods sold are $400,000, and interest expenses are $20,000. What is the gross profit margin? A) 16.0% B) 20.0% C) 4.0% D) 25.0% E) 30.0%

B

The constant dividend growth model A) can be used to estimate the cost of equity for any corporation. B) is applicable only to firms that pay a constant dividend. C) is highly dependent upon the estimated rate of growth. D) is considered quite complex. E) considers the risk of the firm.

B

The nominal interest rate minus the rate of inflation equals: A) a negative number, always B) real interest rate C) net value rate D) discount interest E) present value F) secondary interest

B

The primary difference between simple and compound interest is that A) simple interest is only paid at the end of the investment period. B) compound interest entails receiving interest payments on previously earned interest. C) compound interest is paid up front and not when the investment matures. D) simple interest is not taxed by the federal government. E) simple interest earns a higher interest rate on reinvested interest than compound interest.

B

The return that shareholders for common stock require on their investment in the firm is called the A) dividend yield. B) cost of equity. C) capital gains yield. D) weighted average cost of capital. E) income return

B

To earn a ________ return, you must incur ________ risk. A) lower; higher B) higher; higher C) decent; very high D) higher; lower E) None of the above.

B

What is the current ratio if cash is $10,000, accounts receivable are $25,000, inventories are $30,000, accounts payable are $40,000, and accrued payroll is $15,000? A) 2.00 B) 1.18 C) 1.13 D) 0.64 E) 0.73

B

When the amount earned on a deposit has become part of the principal at the end of a specified time period the concept is called A) discount interest. B) compound interest. C) primary interest. D) future value.

B

Which of the following are agency costs? I. Forgoing an investment opportunity which would add to the market value of the owner's equity II. Paying a dividend to each of the existing shareholders III. Purchasing new equipment which increases the value of each share of stock IV. Hiring outside auditors to verify the accuracy of the company financial statements A) I and III only B) I and IV only C) II and III only D) II and IV only E) I, II, and IV only

B

When the net present value is negative, the internal rate of return is ________ the cost of capital. A) greater than B) greater or equal to C) less than D) equal to

C

Which of the following most closely defines the term risk in finance? A) Knowing that you will lose money on an investment B) A decision in which the potential outcomes are known with certainty C) A measure of the variability of cash flows D) A situation in which the required return on an asset equals its expected return E) A measure of the magnitude of cash flows

C

A firm has sales of $1 million, net income of $250,000, total current assets of $300,000, and accounts receivable of $200,000. The firm's accounts receivable turnover is A) 0.33 times. B) 0.20 times. C) 1.50 times. D) 5.00 times. E) 1.25 times.

D

A year ago, you purchased IBM stock for $94 a share. Today, IBM stock is selling for $93 a share. Additionally, you just received a check for $1.20 per share. Your holding period return is A) 0.21%. B) 2.34%. C) -2.34%. D) 2.13%. E) 1.06%.

A

An annuity with an infinite life is called A) a perpetuity. B) a prima. C) an indefinite. D) a deep discount.

A

Balance sheets: A) show how the firm raised funds to purchase assets. B) report a firm's activities over a period of time. C) describe a firm's cash flows. D) provide information about a firm's labor costs. E) may not balance if the firm suffered a net loss.

A

If a firm applies its overall cost of capital to all its proposed projects, then the divisions within the firm will tend to A) receive more funding if they represent the riskiest operations of the firm. B) avoid risky projects so that they will receive more funding. C) become less risky over time based on the projects that are accepted. D) have equal probabilities of receiving funding for their projects. E) propose less risky projects than if separate discount rates were applied to each project.

A

If the yield on a 1-year bond is 6% and the yield on a 2-year bond is 7%, then what is the shape of the yield curve? A) Upward-sloping B) Down-ward sloping C) Flat

A

In cross-sectional analysis, a firm's financial ratios are: A) judged against the performance of firms in the same industry. B) compared with the firm's ratios from the most recent period. C) compared with ratios from all firms. D) compared with a general standard. E) plotted over time to isolate trends.

A

In this over-the-counter market, dealers are linked with the purchasers and sellers of securities through the ________ system. A) NASDAQ B) NYSE C) AMEX D) SEC E) NYMEX

A

The ________ method to analyze cash flows associated with a project does not consider the time value of money. A) payback period B) net present value (NPV) C) profitability index (PI) D) internal rate of return (IRR) E) modified internal rate of return

A

The least desirable capital budgeting technique from a theoretical standpoint is A) the payback method. B) net present value. C) the profitability index. D) the internal rate of return. E) the modified internal rate of return.

A

The pre-tax cost of debt for a firm A) is equal to the yield to maturity on the outstanding bonds of the firm. B) is equal to the coupon rate of the outstanding bonds of the firm. C) is equivalent to the current yield on the outstanding bonds of the firm. D) is based on the yield to maturity that existed when the currently outstanding bonds were originally issued. E) has to be estimated as it cannot be directly observed in the market.

A

The primary problem with the NPV technique of capital budgeting is A) that many people without a background in financial theory may not understand it. B) that there is no adjustments for risk. C) an unclear decision rule. D) the fact that it ignores the time value of money. E) that it uses unorthodox time value of money techniques.

A

The relevant cash flows for capital budgeting analysis are A) incremental cash flows. B) ordinary cash flows. C) necessary cash flows. D) consistent cash flows.

A

The sale of an ordinary asset for its book value results in A) no tax benefit. B) recaptured depreciation. C) a capital gain. D) an ordinary tax benefit.

A

The ultimate goal of capital budgeting analysis is to select projects that A) maximize shareholder wealth. B) cost the most funds. C) lower operating expenses. D) increase sales and market share. E) enable managers to keep their jobs.

A

This form of the Efficient Markets Hypothesis (EMH) refutes technical analysis (also known as charting). This form suggests that past price performance does not give predictive power on an underlying's future price. a. Weak form b. Semi-weak form c. Semi-strong form d. Strong form

A

Using market ratios in the chart above, which stock looks overpriced (relative to the other two)? A) Kroger B) Safeway C) Walmart

A

________ are long-term debt instruments business and government use to raise sums of money. A) U.S. Treasury bills B) Bonds C) Common stocks D) Preferred stocks E) Commercial papers

B

________ is the process of deciding which long-term investments or projects a firm will acquire using the long-term funds a firm has available. A) Investment analysis B) Capital budgeting C) Capital marketing D) Liability management E) Corporate governance

B

________ ratios measure the efficiency with which assets are converted to sales or cash. A) Liquidity B) Activity C) Profitability D) Market E) Financing

B

________ risk affects all stocks to a greater or lesser extent and is due to large macroeconomic shocks. This type of risk ________ be eliminated through diversification. A) Systematic; can B) Systematic; cannot C) Unsystematic; can D) Unsystematic; cannot E) None of the above

B

$100 today is worth A) the same as $100 to be received in one year, since the inflation rate has been low recently and funds received in the near future should have the same purchasing power that they have today. B) less than $100 to be received in one year, since many people will spend money foolishly today and will become more careful in their spending habits as they mature. C) more than $100 to be received in one year, since you can invest the money received today for this period, leaving you with more than $100 in the future. D) the same as a future receipt of $100, since the physical characteristics of U.S. currency are unchanged for long periods of time. E) less than $100 received by someone ten years ago, since many products have been improved over this time period.

C

A $1,000 face value bond has a coupon rate of 5%. Bonds of similar risk currently yield 7%. This bond should be selling A) at a premium. B) for its face value. C) at a discount. D) at the price for which Treasury bonds of the same maturity are currently selling. E) Cannot be determined without further information.

C

Current assets values may be estimated by calculating A) the future value of all cash flows expected from the asset. B) a sum of all cash flows forecasted from the use and/or sale of the asset. C) the present value of all future cash flows expected from the asset. D) the cash flows expected from the asset without adjusting for the time value of money. E) only the present value of the cash flows to be received in the first two years since later cash flows are too uncertain to be considered.

C

If the marginal income tax rate for federal corporate income tax purposes is 21.0%, and if the marginal income tax rate for state corporate income tax purposes is 4.0%, what is the combined marginal income tax rate? A) 21% B) 17% C) 25% D) 22.64% E) 23.14%

C

If the probability of a 20% return is 70% and the probability of a 4% loss is 30%, what is the expected return to the nearest whole percentage? A) 17% B) 3% C) 13% D) 15% E) 11%

C

Indicate which of the following is TRUE about annuities. A) An ordinary annuity is an equal payment paid or received at the beginning of each period. B) An annuity due is a payment paid or received at the beginning of each period, that increases by an equal amount each period. C) An annuity due is an equal payment paid or received at the beginning of each period. D) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period.

C

Information Asymmetry is A) false information spread by competitors. B) when two pieces of information counteract each other. C) when some know more than others. D) when information is not reflected properly in the market. E) incomplete information.

C

Most people prefer to receive money today rather than ten years from now because A) U.S. prices have been falling recently and a dollar received today will buy more than one received in the future. B) future investment returns are expected to be less variable than current ones. C) receiving cash today enables one to take advantage of current investment opportunities. D) people are unsure about their future employment prospects and wish to provide themselves with a source of future income. E) most people are afraid they will spend future cash payments foolishly.

C

Preferred stock is valued as if it were A) a fixed-income obligation. B) a bond. C) a perpetuity. D) a common stock.

C

The act of finding a present value is also called A) compounding. B) amortizing. C) discounting. D) depreciating.

C

The coupon rate of a bond is A) the annual coupon divided by the price of the bond. B) equal to the yield to maturity. C) the annual coupon divided by the face value of the bond. D) the annual coupon divided by the issue price of the bond.

C

The market yield on BBQ Grills' bonds is 8%, and the firm's marginal tax rate is 33.33%. What is their shareholders' required return if the equity risk premium is 3%? A) 6.67% B) 7.33% C) 8.33% D) 8.67% E) 9.67%

C

This form of the Efficient Markets Hypothesis (EMH) implies all public information is calculated into a stock's current share price, meaning neither fundamental nor technical analysis can be used to achieve superior gains. a. Weak form b. Semi-weak form c. Semi-strong form d. Strong form

C

Using financial information to aid in decision-making is called A) "what-if" analysis. B) factor analysis. C) financial analysis. D) quantitative analysis. E) managerial economics.

C

What is a firm's total asset turnover if its fixed assets are $120,000, current assets are $30,000, current liabilities are $44,000, sales were $200,000, and net income was $75,000? A) 0.5 times B) 2.2 times C) 1.3 times D) 2.0 times E) 1.7 times

C

When financial ratios are compared to financial ratios from previous years, a ________ is conducted. A) cross-time B) SIC code C) time series D) cross-sectional E) None of the above

C

A firm's cost of debt often differs from the yield reported on its bonds because A) the firm's cost of debt is unknown when the bonds are first sold. B) the underwriting costs for new bond issues are not tax deductible, raising the cost of debt relative to bond yields. C) the cost of debt changes infrequently since bond rating agencies do not change their recommendations often. D) the interest paid on corporate bonds is tax deductible. E) speculators can drive the cost of debt down so that bond yields exceed it.

D

Compute the simple interest earned on a 1-year $200 deposit that earns 6% per year. A) $6 B) $60 C) $120 D) $12 E) $200

D

Find the return on assets if net income was $55,000, total assets are $115,000, EBIT was $100,000, and equity is $75,000. A) 73.3% B) 63.1% C) 87.0% D) 47.8% E) 55.0%

D

Money markets are markets for: A) foreign currency exchange. B) corporate stocks. C) long-term bonds. D) short-term debt securities. E) preferred securities.

D

Peter's Audio Shop has a cost of debt of 7 percent, a cost of equity of 11 percent, and a cost of preferred stock of 8 percent. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face value of $500,000 and sells at 102 percent of face value. The company's tax rate is 34 percent. What is the weighted average cost of capital for Peter's Audio Shop? A) 6.14 percent B) 6.54 percent C) 8.60 percent D) 9.14 percent E) 9.45 percent

D

The cost of preferred stock is computed the same as A) the pre-tax cost of debt. B) an annuity. C) the after-tax cost of debt. D) a perpetuity. E) an irregular growth common stock.

D

The feature of a bond whereby the issuer may redeem the bond from the holder in exchange for the face amount plus, in most cases, a premium. A) Sinking Fund B) Purchase Fund C) Repurchase (Repo) D) Call

D

The internal rate of return may be defined as the A) percentage increase in the value of an investment over its useful life. B) the minimum return required by investors to hold a firm's securities. C) the discount rate at which a project's NPV is negative. D) the discount rate at which a project's NPV equals zero. E) the maximum rate of return expected from a project.

D

The pre-tax cost of debt is 11%, preferred stock costs 14%, and equity costs 15%. What is the weighted average cost of capital assuming a tax rate of 40% and a target capital structure of 40% debt, 20% preferred stock, and 40% equity? A) 10.6% B) 11.2% C) 14.0% D) 11.4% E) 12.8%

D

The primary role of a financial system is to A) make savvy investors rich. B) regulate the banking system. C) enable financial managers to evaluate investment projects with a system that always selects the correct opportunity for their firm. D) channel funds from savers to borrowers who need funds for investment projects. E) provide employees in financial institutions with a code of ethics.

D

The proportions of the market value of the firm's assets financed via debt, common stock, and preferred stock are called the firm's A) financing costs. B) portfolio weights. C) beta coefficients. D) capital structure weights. E) costs of capital.

D

The rate of return earned by an investor who holds a bond to until the date that the face value becomes due and payable is called the A) coupon yield. B) coupon rate. C) capital gain yield. D) yield to maturity.

D

This form of the Efficient Markets Hypothesis argues that, in addition to the information in the weak and semi strong forms, even non-public insider knowledge is factored into the current price of the stock. Even if the information is not available to investors, and is only known to corporate directors, the current stock price still reflects it. This means that even knowing insider information cannot improve price prediction leading to "abnormal profit over time." This form is not generally accepted, as both legal insider trading (i.e., by corporate officers) and illegal insider trading (e.g., when information is shared to others who are not corporate officers) have led to gains in excess of market returns in many instances. A) Weak form B) Semi-weak form C) Semi-strong form D) Strong form

D

When evaluating a project, a firm's managers should select only those projects whose cash flows A) exceed some target cash flow level set by management. B) have the lowest NPVs after discounting cash flows by the project's capital cost. C) are subject to less risk than all other competing projects D) produce higher returns than the firm's average cost of capital.

D

Which of the following statements about risk is FALSE? A) Risk is one of the determinants of the required return. B) Risk requires the possibility of at least one outcome less favorable than the expected value. C) Risk requires the possibility of more than one outcome. D) High risk should require low return.

D

Which of the following statements best describes mutual funds? A) They are illegal in the United States, but popular in Europe. B) They enable investors to buy many shares of stock in a single firm at a lower cost than using a stockbroker. C) They provide good investment returns, but insufficient diversification. D) They enable many investors with limited funds to buy a diversified portfolio. E) They appeal only to wealthy investors.

D

Which of the following statements is TRUE regarding common and preferred shares? A) Preferred shareholders have more voting power than common shareholders. B) Common shareholders are guaranteed a fixed dividend. C) Common shareholders have a more senior claim against assets than preferred shareholders. D) Preferred shareholders are entitled to their dividends before common shareholders E) Common shareholders earn a better return than preferred shareholders.

D

Often a U.S. corporation with operations in one or more states will set up a subsidiary corporation in the state of Delaware. The U.S. corporation transfers its intellectual property (patents, trademarks, copyrights, and trade secrets) to this subsidiary. The U.S. corporation then pays royalty payments to the subsidiary for use of the intellectual property, thereby creating an expense item that lowers net profits - and state income taxes - in those states which impose state income taxes. Delaware does not impose state corporate income taxes on the receipt of royalty payments by Delaware-based corporations. This method of reducing state income taxes describes the __________________ _______________ _____________.

DELAWARE TAX LOOPHOLE

Correlation A) is a measure similar to the standard deviation, but more precise. B) may only be positive. C) is usually negative for a portfolio with two securities. D) measures the degree to which a change in the riskiness of one security causes the risk of another to change. E) ranges between −1 and +1.

E

If a firm has 100,000 shares of common stock outstanding and has just recorded a $45,000 profit, what is its price/earnings ratio if its current share price is $35? A) 0.78 B) 0.45 C) 14.00 D) 45.00 E) 78.00

E

The discount rate assigned to an individual project should be based on A) the firm's weighted average cost of capital. B) the actual sources of funding used for the project. C) an average of the firm's overall cost of capital for the past five years. D) the current risk level of the overall firm. E) the risk level of the project itself.

E

The quick ratio improves upon the current ratio by A) using more up-to-date information. B) simplifying the calculation. C) subtracting intangible assets like goodwill. D) recognizing that inventory is the current asset that is easiest to value. E) recognizing that inventory is the least liquid current asset.

E

The weighted average of the firm's costs of equity, preferred stock, and after-tax debt is the A) reward to risk ratio for the firm. B) expected capital gains yield for the stock. C) expected capital gains yield for the firm. D) portfolio beta for the firm. E) weighted average cost of capital (WACC).

E

What is a firm's debt ratio if its total assets are $135,000, equity is $75,000, current liabilities are $24,000, and total liabilities are $105,000? A) 140% B) 110% C) 50% D) 60% E) 78%

E

What is the quick ratio if cash is $10,000, accounts receivable are $25,000, inventories are $30,000, accounts payable are $40,000, and accrued payroll is $15,000? A) 2.00 B) 1.18 C) 0.73 D) 1.13 E) 0.09

E

Which of the following is a FALSE statement? A) Expected returns are not always predicted accurately. B) Expected returns may differ from actual returns because of an unforeseen recession. C) Historical returns can be calculated with more confidence than expected returns. D) Accurate predictions of expected returns depend on the analyst's ability to estimate probabilities. E) Although expected returns may differ from actual returns, they seldom do.

E