Finance Exam 1
Ross purchased a new commercial vehicle today for $25,000. The entire amount was financed using a five-year loan with a 4 percent interest rate (compounded monthly). How much will Ross owe on his vehicle loan after making payments for three years?
$10,602.44
Andrea's opportunity cost rate is 12 percent compounded annually. How much must he deposit in an account today if he wants to receive $2,100 at the beginning of each of the next seven years? Use the equation method to determine the amount.
$10,734
Shekhar invests $1,820 in a mutual fund at the end of each of the next six years. If his opportunity cost rate is 8 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use the equation method to calculate the worth of the investment. (Round your answer to two decimal places.)
$13,351.39
Joey is planning to invest his savings in a fixed income fund. He manages to deposit $700 at the end of the first year, $500 at the end of the second year, $300 at the end of the third year, and $600 at the end of the fourth year. If the fund earns 6 percent interest each year, the terminal value of this uneven cash flow stream at the end of Year 4 is _____.
$2,314
Lisa's opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? Use the equation method to determine the amount to be deposited today.
$21,804
Greenwood Builders Ltd. has a debt ratio of 35 percent and it has total assets of $750,000. What is the value of their total liabilities?
$262,500
If the opportunity cost rate is 8% and is compounded annually, what is the present value of $8,200 due to be received in 12 years? Use the equation method to determine the present value.
$3,256
Amber Devices Ltd. has total assets worth $900 million and total liabilities worth $475 million at the end of December 31, 2016. What is the amount of money received by the stockholders, if Amber liquidates all of its assets for $850 and pays off all of its outstanding debt?
$375 million
The book value per share of Topaz General Ltd. is $10 per share and the company has a total of 4 million shares. Calculate the total book value of common equity of the company.
$40 million
Ruby Enterprises Ltd. has long-term bonds worth $20 million, retained earnings of $45 million, accounts payable of $10 million, notes payable of $12 million, and inventory worth $18 million. What is the value of total liabilities of Ruby Enterprises?
$42 million
Robert invests $650 in a savings account at the beginning of each of the next seven years. If his opportunity cost rate is 5 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calculator to determine the amount.
$5,557
Shaun is planning to invest $570 in a mutual fund at the end of each of the next eight years. If his opportunity cost rate is 6 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calculator to determine the amount.
$5,642
The Charleston Company is a relatively small, privately owned firm. Last year the company had an after-tax income of $15,000 and 10,000 shares were outstanding. The owners were trying to determine the market value for the stock prior to taking the company public. A similar firm, which is publicly traded, had a price/earnings ratio of 5.0. Using only the information given, the market value of one share of Charleston's stock is estimated as:
$7.50
Kim has just graduated from law school. She had taken an education loan of $45,000, which now needs to be repaid in equal monthly installments over the next 6 years. What is the amount of the monthly loan payment, if the loan carries a simple annual interest of 5%? Use a calculator to make the calculation and round your answer to two decimal places.
$724.72
Frank purchased his house 16 years ago by taking out a 25-year mortgage for $150,000. The mortgage has a fixed interest rate of 5 percent compounded monthly. If he wants to pay off his mortgage today, how much money does he need? He made his most recent mortgage payment earlier today.
$76,136.95
The book value of 4 million shares of Zircon Global Ltd. is $34 million. What is the book value per share of Zircon Global Ltd?
$8.50 per share
Sapphire Industries Ltd. has a net income of $60 million and the total depreciation on its assets is $20 million. The net cash flow of Sapphire Industries is:
$80 million
Dwayne invests $4,700 in a savings account at the beginning of each of the next twelve years. If his opportunity cost rate is 7 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use the equation method to calculate the worth of the investment. (Round your answer to two decimal places.)
$89,961.02
Determine the increase or decrease in cash for Rinky Supply Company for last year, given the following information. (Assume no other changes occurred during the past year.) Decrease in marketable securities $25 Increase in accounts receivables $50 Increase in notes payable $30 Decrease in accounts payable $20 Increase in accrued wages and taxes $15 Increase in inventories $35 Retained earnings $5
-$30
The balance sheet of Crimpson Solutions Ltd. has cash of $125 million, accounts receivable of $245 million, inventory of $160 million, and equipment worth $450 million. The company also has accounts payable of $120 million, notes payable of $280 million, and corporate bonds of $365 million. Crimpson's current ratio is:
1.325 times
The net fixed assets of Auburn Media Ltd. is $850 million. The sales of the firm is $1,420 million. The firm's fixed assets turnover ratio is:
1.67 times.
A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. The firm's times interest earned ratio is:
11 times
Suppose a firm has a growth rate equal to 8 percent, return on assets (ROA) of 10 percent, a debt ratio of 20 percent, and a current stock price of $36. The firm's return on equity (ROE) is:
12.5%
A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has a debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on a total debt of 5 percent, what is the firm's return on total assets (ROA)?
13.3%
Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday? Use a financial calculator to make the calculation.
15.19 years
If Rachel invests $1700 today in an account that pays 6 percent interest compounded annually, how long will it take for her to accumulate $6,500 in her account? Use a financial calculator to determine the amount.
23.02 years
Rebecca is currently working, but is planning to start a college in few years. For this purpose, she would need $20,000. Today she can start investing $750 monthly in an investment account that pays 6 percent compounded monthly. How long would it take her to have enough money to start college?
24.98 months
Selzer Inc. sells all of its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64. The firm's return on equity (ROE) is:
3.3%
Paul wants to accumulate $14,500 in order to make the down payment for a new condo. Today he can start investing $2,500 annually in an investment account that pays 10 percent interest compounded annually. How long would it take him to have enough money to make the down payment?
4.44 years
Assume that Meyer Corporation is 100 percent equity financed, and has the following information: (1) Earnings before taxes = $1,500; (2) Sales = $5,000; (3) Dividend payout ratio = 60%; (4) Total assets turnover = 2.0; (5) Applicable tax rate = 30% The firm's return on equity is:
42%
If a firm earns a net profit of $100,000 on sales of $2,000,000, its net profit margin is:
5%
Alumbat Corporation has $800,000 in debt outstanding, and pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000, its average tax rate is 40 percent, and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. Alumbat's current times interest earned ratio is:
5.0
A firm has total assets of $500 million, including its accounts receivable, which is worth $120 million. The annual sales of the firm is $650 million. The days sales outstanding (DSO) ratio of the firm is:
66 days.
Mike is considering investing $18,500 in an investment that will have a maturity value of $32,500 in 8 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?
7.30%
A leading bank is coming up with an investment that pays 8 percent interest compounded semiannually. What is the investment's effective annual rate (rEAR)? Use a financial calculator to determine the amount.
8.16%
Five years ago, Brian had invested $14,850 in a growth fund. The investment is worth $22,000 today. If the interest was compounded annually, what is the annual rate of return earned on the investment?
8.18%
Which of the following statements about the corporate form of business organization is correct?
A corporation has the legal authority to act like a person when conducting business.
Identify a true statement about a limited liability partnership (LLP).
A general partner of a limited liability partnership is personally liable for all business debts.
Identify a true statement about a limited liability company (LLC).
A limited liability company (LLC) offers the limited personal liability associated with a corporation.
A firm's net income as reported on its income statement is known as _____.
Accounting Profit
Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0
Accounts receivable are collected
Which of the following transactions will not affect the quick ratio of a company?
Accounts receivable collected
Which of the following types of annuity best describes the mortgage or rent that you have to pay at the beginning of each month?
Annuity due
Which of the following example involves transferring income to the future as well as transferring income from the future?
Buying a security with borrowed funds
Identify the internal factor that influences the stock prices of a firm.
Capital Structure
What is the appropriate measure used to examine whether a management is maximizing the firm's stock price?
Cash Flows
Which of the following accounts contains the actual money that can be spent by a firm?
Cash and equivalents
Which of the following is considered as a liability in the balance sheet of a firm?
Corporate bonds
Which of the following is an example of a firm's long-term debt?
Corporate bonds
Which of the following is an example of a noncash item reported in the income statement of a firm?
Depreciation
Which of the following information in an annual report describes the firm's performance during the past year and also provides information regarding new developments that will affect future performance of the firm?
Discussion of operations
Which of the following dissects a single ratio into two or more related ratios?
DuPont analysis
Which of the following is considered by analysts when comparing the operations of two firms that are financed differently?
Earnings before interest and taxes
Identify the various types of efficiencies that market efficiency refers to.
Economic efficiency and informational efficiency
The decision to limit salaries of executives whose companies received Troubled Asset Relief Program (TARP) funds was under which of the following acts?
Emergency Economic Stabilization Act of 2008
_____ is an example of a long-term investment of a firm.
Equipment
A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.
F
A firm's net income is the most appropriate measure to determine whether the management is maximizing the firm's stock price.
F
A firm's net income reported on its income statement must equal the operating cash flows on the statement of cash flows.
F
A money market is the market for trading in securities with maturities over one year and includes such financial assets as stocks and long-term corporate bonds.
F
A primary market is that segment of the financial markets where the instruments that are traded have original maturities equal to one year or less.
F
An individual investor is using the services of a broker to buy and sell stocks currently being traded in the stock market. This transaction is referred to as a primary market transaction.
F
An over-the-counter (OTC) market is a physical exchange, much like the New York Stock Exchange, where securities dealers provide trading in unlisted securities.
F
Different accounting practices will not have an impact on the comparative ratio analysis of the firms.
F
Dual listing of a stock is advantageous to a company. It is not of any benefit to the stock exchanges, but they allow dual listing because of regulatory requirements.
F
Dual listing of a stock leads to a decrease in the liquidity of the stock.
F
Ordinary annuity is an annuity with payments that occur at the beginning of each period.
F
Primary markets are exchanges with physical locations, whereas secondary markets are over-the-counter markets.
F
Retained earnings is the amount of cash that has been generated by the firm through its operations but has not been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and thus, these cash accounts, when added together, will always be equal to the total retained earnings of the firm.
F
Risk-adjusted required rate of return is the rate of return on the best available alternative investment of equal risk.
F
The New York Stock Exchange (NYSE) is an example of an over-the-counter exchange.
F
The Securities Exchange Commission is a major U.S. stock exchange that facilitates trading in listed securities.
F
The Securities and Exchange Commission (SEC) cannot exercise control over stock trades by corporate insiders.
F
The Securities and Exchange Commission (SEC) regulations are intended to ensure that investors receive fair disclosure of financial and nonfinancial information from privately held companies.
F
The Securities and Exchange Commission (SEC) was created to develop and approve a set of common international accounting rules.
F
The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.
F
The book value of shares are often equal to their market value.
F
The international market for bonds has grown at a slower rate as compared to the international stock markets.
F
The mandatory trade-through rule followed for trading in securities leads does not work to the benefit of the shareholders.
F
The present value of an investment increases as the opportunity cost rate increases.
F
The provision of dual listing of stocks has defeated the efforts made to increase competition in the stock markets.
F
The values or accounting numbers that are reported on the balance sheet are market values.
F
Under a best efforts arrangement, the investment bank purchases all of the shares from the issuing firm and then resells the shares to the public. Under this arrangement, the investment banks assume significant risk.
F
A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited liability for business, which limits his losses to what he has invested in the company.
False
Cultural differences do not impact the multinational corporations as they expand into different geographic regions.
False
Having the manager's compensation tied to the company's performance increases the agency problem that corporations face.
False
In a competitive marketplace "good ethics" is a wonderful idea but an impractical standard. There are simply too few benefits to be gained from maintaining high business ethics
False
Nations do not have the sovereignty to expropriate the assets of a firm without compensation.
False
No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to compete, even if those cost-increasing actions yield significant benefits to the firm.
False
The proper goal of the financial manager should be to maximize the firm's expected profit, because this will add the most wealth to each of the individual shareholders (owners) of the firm.
False
The finance function is relatively independent of most other corporate functions. Marketing decisions, for example, might affect the firm's need for funds but are not affected by conditions in financial markets or other financing issues.
False
Which of the following functions deals with the management of money?
Financial Services
Which of the following statements is correct?
Financial institutions in other countries generally are less regulated than in the United States.
Identify a true statement about the financial services provided by an organizations.
Financial services organizations help individuals and companies determine how to invest money to achieve their financial goals
Which of the following statements is true regarding debt ratios?
Firms with relatively high debt ratios have higher expected returns when business is good.
Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)
Future value = Present value × (1 + r)n
Which of the following accounting principles does the Securities and Exchange Commission (SEC) require U.S. firms to use when filing their financial statements?
Generally Accepted Accounting Principles (GAAP)
In which order will assets be listed in a balance sheet?
In order of liquidity
Which of the following is considered a part of cash flow from a financing activity in a statement of cash flow?
Increase in corporate bonds
Which of the following is considered a use of cash in a cash flow statement?
Increase in fixed assets
Which of the following actions can be considered a source of cash when constructing a statement of cash flows?
Increase in long-term bonds
Which of the following statements is true of the firms that operate in several different countries?
Institutional differences among countries can cause significant problems in coordination of subsidiaries.
Which of the following is an example of a current asset?
Inventory
Which of the following ratios measures how effectively a firm is managing its assets?
Inventory turnover ratio
Which of the following ratios shows the relationship between a firm's cash and other current assets, and its current liabilities?
Liquidity ratios
Which of the following actions should be taken by managers to avoid takeover threats?
Managers should take action to maximize stock prices.
The primary goal of a financial manager should be to _____.
Maximize the value of a firm's stock
Which of the following should be the primary goal pursued by the financial manager of a firm?
Maximizing the market value of the firm's stock
How is net cash flow calculated if depreciation is the only non-cash item in a firm's income statement
Net cash flow = net income + depreciation and amortization
Which of the following statements is true of agency problems?
One of the best means to control agency problems is to require the managers and other important decision makers of the firm to also be owners of the firm.
Identify the correct expression for calculating the present value of an investment.
Present value = Future value / (1 + r)n
Which of the following ratios indicate how much investors are willing to pay for the firm's stock for each dollar of reported profits?
Price/earnings ratio
Which of the following statements is correct?
Procedures for electing corporate directors are contained in bylaws
_____ is an example of cash flow from an investing activity in a cash flow statement.
Purchase of equipment
Which of the following ratios is calculated to determine the liquidity of a firm?
Quick ratio
Which of the following financial statements is prepared to show the changes in the common equity accounts between balance sheet dates?
Statement of retained earnings
An investment carries an interest rate of 8% compounded annually. When using the time value of money functions of a financial calculator, the interest rate is entered as 8, whereas it is entered as 0.08 when using a spreadsheet to make the time value of money calculations.
T
An investment has the option of daily compounding, monthly compounding, or annual compounding. The present value of this investment will be lowest when the investment is compounded daily.
T
An over-the-counter market is a network of brokers and dealers, connected electronically by telephones and computers that provides for trading in securities not listed on the physical stock exchanges.
T
As compared to U.S banks, foreign banks are less regulated and have fewer restrictions concerning the types of business activities they can pursue. Therefore, foreign banks often engage in numerous aspects of multilayer financial deals.
T
Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements. Trend analysis is one method of measuring a firm's performance over time.
T
Dual listing of stocks and the mandatory use of the trade-through rule when trading in securities have made the stock markets fiercely competitive.
T
Effective annual rate considers the effect of compounding, whereas annual percentage rate does not consider the effect of compounding.
T
Electronic communications networks (ECNs) provide an alternative trading medium, which has increased competition with the stock exchanges.
T
Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment.
T
Gale Corporation acquires a printing equipment through lease. The terms of the lease require the monthly lease payments to be made at the beginning of every month. This is an example of an annuity due.
T
If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually), it is said to be an amortized loan.
T
In an underwritten arrangement, the investment banker assures the company coming up with a new issue of securities that the entire issue will be sold, so the investment banker bears significant risks in such an offering.
T
In the United States, sales of new stocks and bonds are regulated by the Securities and Exchange Commission (SEC).
T
Most foreign financial institutions are allowed to engage in nonbanking (nonfinancial) business activities, whereas the nonbanking activities of U.S. intermediaries have been severely restricted until recently.
T
Noncash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.
T
Ratio analysis involves a comparison of the relationships between financial statement accounts to analyze the financial position and strength of a firm.
T
The Securities and Exchange Commission (SEC) allowed publicly traded foreign companies to use the International Financial Reporting Standards (IFRS) rather than the Generally Accepted Accounting Principles (GAAP).
T
The balance sheet will have historical values and that will have an impact on the ratios of the firm.
T
The debt markets are segmented based on the maturity of the debt instruments, the type of debt instruments, and the participants in the market.
T
The existence of financial intermediaries greatly increases the efficiency of financial markets because, without them, savers would have to provide funds directly to borrowers, which would be a costlier process.
T
The information contained in the annual report is used by investors to form expectations about future earnings and dividends.
T
The trade-through rule states that a stock trade should be executed at the best price that is available in all of the stock markets. In other words, a trade order continues to pass through the markets until the best price is reached.
T
Unlike physical asset markets, which deal with products such as wheat, autos, real estate, and machinery, financial asset markets deal with stocks, bonds, mortgages, and other claims on real assets with respect to the distribution of future cash flows generated by such assets.
T
Whole-life polices offer both insurance coverage and a savings feature, whereas term life policies do not.
T
Which of the following is true about a common size balance sheet?
The assets, liabilities, and equities are reported as a percentage of total assets.
Which of the following statements is true of the concentrated organizational structures of non-U.S. firms?
The concentrated organizational structures of non-U.S. firms result from the universal banking relationships that exist outside the United States.
Bicksler Corporation has a current ratio of 2.0 on 21st July. On 22nd July, Bicksler purchased (and received) raw materials on credit from its supplier. Assuming all other things are equal, how will this transaction affect the current ratio of Bicksler?
The current ratio will decrease
A firm's current ratio has steadily increased over the past 5 years, from 1.9 to 3.8. What would a financial analyst probably conclude from this information?
The firm's liquidity position has improved.
Which of the following statements is true about the annual report of a company?
The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends.
Which of the following statements is correct?
The potential for agency problems is greatest when individual stockholders own extremely small proportions of the companies and managers have little, if any, of their own wealth tied up in these companies.
Which of the following statements is true of the terms under which companies compete?
The terms under which companies compete is determined by direct negotiation between the host government and the multinational corporation.
Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash flows denominated in the parent company's home currency.
True
If a firm raises its product prices beyond reasonable levels, it will simply lose its market share.
True
If a firm's managers want to maximize stock price, it is in their best interests to operate efficient, low-cost plants, develop new and safe products that consumers want, and maintain good relationships with customers, suppliers, creditors, and the communities in which they operate.
True
In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken over by groups who are more aligned with stockholder interests.
True
In general, the role of the financial manager is to plan for the acquisition and use of funds so as to maximize the value of the firm.
True
Incentive compensation plans are used to attract and retain top managerial talent as well as to align the interests of management with shareholders.
True
Industrial groups are organizations comprised of companies in different industries with common ownership interests, which include firms necessary to sell and manufacture products.
True
The corporate charter is a document filed with the secretary of the state in which the firm is incorporated that provides information about the company, including its name, address, directors, and amount of capital stock.
True
The riskiness inherent in a firm's earnings per share (EPS) depends on both the types of projects the firm takes on and the manner in which the projects are financed.
True
Two key limitations of the proprietorship form of business involve potential difficulty in raising the necessary capital and the presence of unlimited personal liability for business debts.
True
Which of the following statements is correct?
Under partnership law, if any partner is unable to meet his or her pro rata claim in the event the partnership goes bankrupt, the remaining partners must make good on the unsatisfied claims.
Which of the following are the correct classifications of informational efficiency?
Weak-form, semistrong-form, and strong-form
Everything else equal, including firm size, dollar sales, type of product sold, and so forth, the primary difference between proprietorship and partnership business forms is that
a partnership has more owners than a proprietorship
Paying Payroll Service (PPS) recently declared bankruptcy. The price of PPS's stock has dropped from approximately $10 per share one year ago to $1 today. You can imagine that stockholders are not happy that the value of their stock has dropped so significantly. At the same time, the financial position of the firm was deteriorating, PPS executives increased their salaries and perquisites substantially. Nothing they did violated any laws or was considered an unethical act. We would most likely describe this situation as _____.
an agency problem
The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded _____.
annually
Pelican Corporation is planning to invest $12,000 for the next 8 years. It will have to pay the amount at the beginning of each year. This form of payment is known as a(n) _____.
annuity due
A comparison of a firm's ratios with those of other firms in the same industry at the same point in time is called:
bench-marking
The Sarbanes-Oxley Act of 2002 requires the chief executive officer of a publicly-traded corporation to _____.
certify financial reports that are submitted to the Securities and Exchange Commission.
Listing requirements of a security, which has no maturity date, refer to the _____.
characteristics a firm must possess to be listed on a stock exchange
The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____.
compounding
The accounting and tax departments are the responsibility of the
controller
The debt ratio is calculated as:
debt ratio = total liabilities ÷ total assets.
The investment function of finance helps in
determining the values, risks, and returns associated with such financial assets as stocks and bonds
When a business sells its stocks or bonds to investors without going through any type of intermediary or financial institution, this process is known as a(an) _____.
direct transfer
The prices at which the currency of one country can be converted into the currencies of other countries are known as _____.
exchange rates
The controller of a company is a key subordinate of the
financial vice president
The treasurer of a company is a key subordinate of the
financial vice president
As financial institutions in other countries are generally less regulated than in the United States,
foreign banks provide businesses with a greater variety of services than U.S. banks
Assuming that other things are constant, the price earnings (P/E) ratio:
is higher for firms with high growth prospects and lower for riskier firms
It is possible to limit the liability faced by some of the partners in a business by establishing a(n) _____.
limited liability partnership (LLP)
A firm obtains the funds needed to pay its current bills from its
liquid assets
Ibiza Corporation has been investing $20,000 for the last four years in an investment scheme that is maturing at the end of the current year. It will be receiving $120,000 at the time of maturity. The $120,000 received at maturity is referred to as _____.
lump-sum amount
William buys 20 shares of Zync Corporation at $18.5 per share. Zync pays dividend at the end of each year on the basis of profits made during the year. In its 25 years history, Zync has paid dividends every year without fail. The initial investment by William and the receipt of dividend at the end of every year is referred to as _____ and _____ respectively.
lump-sum payment; uneven cash flows
The funds provided by common stockholders that consist of common stock, paid-in capital and retained earnings are referred to as the firm's:
net worth.
A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of payment represents a(n) _____.
ordinary annuity
When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____.
ordinary annuity
A document describing a new security issue and the issuing company is called a(n) _____.
prospectus statement
The first step in a financial analysis of a company includes
ratio analysis
If a firm's existing quick ratio is 1.0, and all other variables remain unchanged, the quick ratio can be increased by:
receiving interest income.
The equity section of a firm's balance sheet contains _____.
retained earnings
If you wanted to purchase previously issued shares of stock from another investor, you would trade in the _____.
secondary market
The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.
t
A low inventory turnover ratio suggests that:
the firm is holding excess stocks of inventory.
An inventory turnover ratio of 8.5 times indicates that:
the firm will restock its inventory every 42 days.
Assuming everything else equal, one of the concepts to consider to make sound financial decisions is that_______.
the sooner cash is received, the more valuable it is.
The extent to which the operating income can decline before a firm is unable to meet its annual interest costs can be found in:
the times-interest-earned ratio
If a company has a quick ratio of 1.0 and a current ratio of 2.0, then:
the value of current liabilities is equal to the value of inventory
An analysis of a firm's financial ratios over time used to determine the improvement or deterioration in its financial situation is called _____.
trend analysis
Financial intermediaries spread their risk by providing funds to a large number and variety of borrowers by offering many different types of loans. Due to this, the loan portfolios of intermediaries are said to be _____.
well diversified
Market value ratios indicate:
what investors think of the company's future prospects based on its past performance
A limitation of ratio analysis is that:
window-dressing techniques will change the ratios of a firm.
Adam plans to invest $1500 today in a mutual fund. If he earns 12 percent interest compounded monthly, to what amount will his investment grow in 20 years? Use a financial calculator to make the calculation.
$16,339
Mira has saved $25,000 over the years and she has the option of investing it in either of the two investment plans. Investment A offers 12 percent interest compounded monthly, whereas Investment B pays 13 percent interest compounded semiannually. What would be the difference between the future values of the two investments if Mira's investment horizon is seven years? (Round your answer to two decimal places.)
$2,703.79
Helium Brands Ltd. has a beginning balance of retained earnings of $185 million. Helium has a net income of $48 million and has paid a dividend of $15 million in the current year. The ending balance of retained earnings is:
$218 million.
Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam's opportunity cost rate is 7 percent compounded annually, what is the maximum amount he should be willing to pay for the investment today? Use a financial calculator to determine the amount.
$23,089
The statement of retained earnings for Redwood Systems Ltd. shows a retained earnings balance of $300 million on December 31, 2016. In 2016, Redwood had a net income of $60 million and the firm had paid dividends of $20 million to its stockholders. What was the beginning balance of retained earnings for Redwood on January 1, 2016?
$260 million
Violet Solutions Ltd. has net sales of $850 million, variable operating costs of $475 million, and fixed operating costs including depreciation of $100 million. What is the net operating income of Violet Solutions?
$275 million
Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years? Use a financial calculator to determine the amount to be deposited today.
$36,234
Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. Using the equation method, what is the worth of the investment today?
$44,325
Welsh Corporation wants to raise capital to invest in a new project. The capital investment in the project is estimated at $525,000. The firm plans to raise the needed funds by issuing new debt. It is required to pay its investment banker 5 percent of the issue's total value. How much debt does the firm need to issue?
$552,632
Jude wants to receive $1,100 at the beginning of each of the next eight years. If his opportunity cost rate is 9 percent compounded annually, how much must he deposit in an account today? Use a financial calculator to make the calculation.
$6,636
Identify the correct expression for the effective annual rate (EAR).
(1 + Periodic rate of interest)number of borrowing (interest) periods in one year - 1
The proportion of a firm's funds that is provided by shareholders is equal to:
1 minus the debt ratio.
If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that the interest is paid once per year, the effective annual rate of the investment is _____.
11.50%
LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of the two investments?
9.38%; 10.25%
All else equal, in which of the following forms of business would the possibility of an agency problem be the greatest?
A U.S. corporation in which individual stockholders own extremely small proportions of the company.
Which of the following statements is true about net worth?
A firm's net worth is equal to total assets minus total liabilities.
Which of the following statements is true of a hostile takeover?
A hostile takeover occurs when a firm's stock is undervalued relative to its potential.
Identify a true statement about a limited liability company (LLC).
A limited liability company can have more than one type of stock outstanding.
Which of the following is true of corporations that operate in several different countries?
A nation may expropriate the assets of multinational corporations without compensation.
Which of the following agreements were made as a part of the Basel III Accord (2010)?
Agreement to increase banks' capital (owners' equity) requirements in an effort to reduce the risk that mega bank failures will cause future financial crises
Which of the following is the correct expression for the amount of common stock or debt that a company needs to issue after taking into account the flotation costs?
Amount of issue = (Net proceeds + Other flotation costs in dollars) / (1 - Percentage flotation costs)
Which of the following financial statements includes information about a firm's assets, equity, and liabilities?
Balance sheet
How is the book value per share calculated
Book value per share = Common equity ÷ Total number of shares outstanding
Which of the following is a problem when a firm tries to coordinate and control the worldwide operations of its subsidiaries?
Cash flows in different subsidiaries are denominated in different currencies.
During the past decade, the areas of greatest worldwide growth lay in the emerging markets of _____.
China, India, and Brazil
Which of the following financial intermediaries operates as a not-for-profit organization?
Credit union
Which of the following steps is a part of a company's Stage II decisions of raising capital?
Deciding whether to go for a best-efforts or underwritten issue
Which of the following steps is a part of a company's Stage I decisions of raising capital?
Deciding whether to go for a competitive bid or a negotiated deal with the investment bank
Which of the following terms refers to the process of converting an exchange that is a not-for-profit organization and is owned by its members, to a stock ownership organization?
Demutualization
Creation of new organizations to monitor rules associated with the capital, liquidity, and risk of institutions to help prevent future failures of mega financial organizations was proposed in which of the following acts?
Dodd-Frank Wall Street Reform and Consumer Protection Act
Which of the following mathematical expressions computes earnings per share?
Earnings per share = Net Income ÷ Number of outstanding shares of common stock
Which of the following statements is true of earnings per share?
Earnings per share is used in measuring the firm's potential for generating future cash flows.
Which of the following ratios recognizes that many firms lease rather than buying a long-term asset?
Fixed charge coverage ratio
Identify the external factor that affects the value of a firm's stock.
General level of economic activity
Which of the following is true about the process of setting the offering price of an issue?
If the company is already publicly owned, the offering price will be based on the existing market price of the stock or the yield on the firm's existing bonds.
Which of the following statements concerning a firm's quest to maximize wealth is correct?
If the government did not mandate socially responsible corporate actions, such as those relating to product safety and fair hiring practices, most firms in competitive markets probably would not pursue such policies voluntarily.
Which of the following statements is correct?
In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms.
Which of the following financial statements summarizes the revenue generated and the expenses incurred by a firm during the accounting period?
Income statement
Which of the following was created to develop and approve a set of common International Financial Reporting Standards (IFRS)?
International Accounting Standards Board (IASB)
Which of the following is the formula to calculate a firm's inventory turnover ratio?
Inventory Turnover = Cost of goods sold ÷ Inventory
Which of the following actions is consistent with social responsibility but is not necessarily inconsistent with stockholder wealth maximization?
Investing in a smokestack filter to reduce sulphur-dioxide emissions in order to reduce the current tax being levied on the firm by the state for its pollution.
Which of the following statements about term life insurance is correct?
It is a relatively short-term contract that provides financial protection for a temporary period.
Which of the following statements is correct?
Maximizing the income statement item "net income" might not be the best goal for a corporation if the managers are interested in maximizing the economic welfare of the firm's stockholders (that is, the firm's stock price).
Treasury bills are issued by the U.S. government. In which type of financial market do outstanding, or already issued treasury bills trade?
Money market
Sarah invests $2700 today in an account that pays 6 percent interest compounded annually. She wants to know the total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to determine the total balance.
N = 5, I/Y = 6, PV = -2,700
How is net income calculated in an income statement?
Net income = Earnings before taxes - Taxes
What is the first item in an income statement used to determine the net income of a firm?
Net sales
How is the net working capital calculated?
Net working capital = current assets minus current liabilities
How is the net worth of a firm calculated?
Net worth = Total assets minus total liabilities
Which of the following is defined as the rate of return on the best available alternative investment of equal risk?
Opportunity cost rate
How is a firm's retained earnings at the end of the year calculated?
Retained earnings = Beginning balance of retained earnings plus net income in the current year minus dividends paid in the current year
Zinc Corporation, a large, well-known public company that frequently issues securities, files a master registration statement with the Securities and Exchange Commission (SEC) and then updates it with a short-form statement just prior to each individual offering. The company is making use of which of the following procedures?
Shelf registration
Which of the following financial statements is included in the annual reports of a company?
Statement of cash flows
Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?
Statement of cash flows
Which form of informational market efficiency states that current market prices of securities reflect all pertinent information?
Strong-form
Which of the following is true about the book value and market value of a firm's debt?
The book value of a firm's debt will be equal to the market value of the firm's debt.
Which of the statements is true about the values recorded in the balance sheet of a firm?
The book values of a firm's debt will be very close to the market values of the firm's liabilities.
Which of the following is a reason for a company to go international?
The company is manufacturing the finished product in their country at a very high production cost.
Which of the following results is due to the greater concentration of ownership in non-U.S. firms?
The greater concentration of ownership in non-U.S. firms permits greater monitoring and control by individuals or groups.
Which of the following is a feature of an S Corporation?
The income of an S Corporation is taxed the same as income earned by proprietorships and partnerships.
Compared to corporations, what is the primary disadvantage of partnerships as forms of business organizations?
The owners of a partnership, that is, the partners, have unlimited liability when it comes to business obligations whereas the owners of a corporation have limited liability.
Which of the following statements is correct?
The riskiness of projected EPS can impact the firm's value.
Which of the following statements is correct?
There are more partnerships and sole proprietorship than corporations in the U.S., but corporations produce more goods and services than do other forms of business.
Which of the following financial intermediaries is also known as a savings and loan association?
Thrift institution
Which of the following is the reason for the formation of underwriting syndicates?
To spread the risk associated with the purchase and distribution of a new issue of securities
Which of the following is true about financial institutions in the United States and those in other countries?
U.S. financial institutions have been much more heavily regulated as compared to their foreign counterparts with regard to expansion (branching) and the services that could be offered.
William and Kate invest in two different securities carrying the same amount of risk. However, William earned a 10 percent return and Kate earned a 7 percent return on their investments. The additional return on William's investment is considered a(n) _____.
abnormal return
When a corporation wants to raise funds by issuing new stocks or bonds, it generally uses the services of _____.
an investment banker
An annuity with payments that occur at the beginning of each period is known as a _____.
annuity due
Mutual funds _____.
are investment companies that use funds provided by savers to buy various types of financial assets, including stocks and bonds in the financial markets
An agreement for the distribution of an issue of securities in which the investment bank handling the transaction gives no assurance that the entire issue will be sold is called a(n) _____.
best-efforts arrangement
Zync Corporation offers a block of its securities for sale to the investment banker that submits the highest price of all interested investment bankers. This procedure is known as a _____.
competitive bid
A depository institution that is owned by its depositors, who are often members of a common organization or association, such as an occupation, a religious group, or a community is called a(an) _____.
credit union
The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____.
discounting
Stock price maximization requires _____.
efficient, low-cost plants that produce high-quality goods and services
Credit unions, mutual funds, and thrift institutions are all examples of _____.
financial intermediaries
Organizations that create various loans and investments from funds provided by depositors are known as _____.
financial intermediaries
The process by which commercial banks transform funds provided by savers into funds used by borrowers is called _____.
financial intermediation
The expenditure incurred by a company in connection with its initial public offer is called the _____.
flotation cost
The Sarbanes-Oxley Act of 2002 requires a publicly-traded corporation to _____.
have a committee that consists of outside directors to oversee the firm's audits
Primary markets are markets _____.
in which various organizations raise funds by issuing new securities
Retained earnings is the total amount of:
income that is saved and reinvested in assets.
If an analyst's goal is to determine how effectively a firm is managing its assets, which of the following sets of ratios would s/he examine?
inventory turnover ratio, days sales outstanding, fixed asset turnover ratio
The management's primary goal is stockholder wealth maximization, which, translates into _____.
maximizing the value of the firm as measured by the price of its common stock
Investment companies that use the money provided by savers to buy various types of financial assets, including stocks and bonds are called _____.
mutual funds
Zync Corporation decides that instead of simply offering a block of its debt securities for sale to the investment banker that submits the highest price, it should come up with a plan with a single investment banker. The procedure that the company has decided to follow is known as a _____.
negotiated deal
An investor invested in a 10-year bond that makes a $50 coupon payment at the end of every six-month period until the bond matures. These coupon payments received by the investor can be referred to as a(an) _____.
ordinary annuity
Shareholders can ensure that firms pursue goals that are in their best interest by _____.
providing incentives to managers to motivate them to take actions that maximize stock prices
A stock with a dual listing is _____.
registered to be traded in more than one capital market
Identify the form of market efficiency where the information about past trends in investment prices is of no use in selecting winning investments, but the investors can still make use of privately held information to earn abnormal return.
semistrong-form efficiency
The future value of an uneven cash flow stream is also referred to as its _____.
terminal value
The days sales outstanding (DSO) ratio of a firm identifies:
the average length of time a firm must wait after making a credit sale before receiving cash.
The firm's statement of retained earnings reports changes in:
the common equity accounts.
Dealer's spread refers to the _____.
the difference between the bid and asked prices of a security and represents the dealer's markup, or profit
The difference between the issuing price of a debt or equity issue and the net proceeds of the issue received by the issuing firm is known as the _____.
underwriter's spread
An arrangement for the sale of a new issue of debt securities in which the investment banking firm typically buys the securities from the issuing firm and then sells the securities in the primary markets, hoping to make a profit, is called a(n) _____.
underwritten arrangement
A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of payment represents a(n) _____.
uneven cash flow stream
The form of informational market efficiency that states that current market prices of securities reflect all information contained in past price movements is known as the _____.
weak-form efficiency
Techniques employed by firms to make their financial statements look better than they actually are, are called:
window-dressing techniques.