finance final exam

What represents cash outflows from a corporation?

payments of dividends and payment of government taxes

A perpetuity is defined as:

unending equal payments paid at equal time intervals.

What is an example of a sunk cost?

2,000 paid last year to rent equipment

The interest rate that is most commonly quoted by a lender is referred to as the:

Annual percentage rate

Which one of the following statements is correct? The majority of firms in the U.S. are structured as corporations. Corporate profits are taxable income to the shareholders when earned. Corporations can raise large amounts of capital generally easier than partnerships can. Stockholders face no potential losses related to their corporate investment. Corporate shareholders elect the corporate president.

Corporations can raise large amounts of capital generally easier than partnerships can.

Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:

Discounting

Depreciation Expense increases net income True or False

False

Assume you are investing $100 today in a savings account. What term refers to the total value of this investment one year from now?

Future value

What action will increase the present value of an amount to be received sometime in the future?

Increase the discount rate

What are advantages of the corporate form of business ownership?

Limited liability for firm debt, ability to raise capital and unlimited firm life

What is an advantage of the payback method of project analysis

Liquidity bias; ease of use

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period

What method predicts the amount by which the value of a firm will change if a project is accepted?

Net present value

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?

Opportunity cost

Hayley won a lottery and will receive $1,000 each year for the next 30 years. The current value of these winnings is called the:

Present Value

What should a financial manager consider when analyzing a capital budgeting project?

Project start up costs, timing of all projected cash flows, dependability of future cash flows, and dollar amount of each projected cash flow

What party has ultimate control of a corporation?

Shareholders

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Stand alone principle

What type of cost was incurred in the past and cannot be recouped?

Sunk

Why is payback often used as the sole method of analyzing a proposed small project?

The benefits of payback analysis usually outweigh the costs of the analysis.

What is the best way to describe the concept of erosion?

The cash flows of a new project that come at the expense of a firm's existing cash flows

Which one of the following statements concerning a sole proprietorship is correct? A sole proprietorship is designed to protect the personal assets of the owner. The profits of a sole proprietorship are subject to double taxation. The owner of a sole proprietorship is personally responsible for all of the company's debts. There are very few sole proprietorships remaining in the U.S. today. A sole proprietorship is structured the same as a limited liability company.

The owner of a sole proprietorship personally responsible for all of the company's debts

What account is considered most liquid

accounts receivable

defined as a conflict of interest between the corporate shareholders and the corporate managers

agency problem

a stakeholder is:

any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm

The ______ tax rate is equal to total taxes divided by total taxable income

average

Defined as the management of a firm's long term investments

capital budgeting

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

compounding

A business created as a distinct legal entity and treated as a legal "person" is called a:

corporation

What type of business types is best suited to raising large amounts of capital?

corporation

Net working capital is defined as:

current assets minus current liabilities

What is an example of capital budgeting decision?

deciding whether or not to purchase a new machine for the production line

What is an example of a capital structure decision?

determining how much debt should be assumed to fund a project

Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:

discount rate

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

Noncash items refer to:

expenses which do no directly affect cash flows

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:

general partnership

What is the financial statement that summarizes a firm's revenue and expenses over a period of time?

income statement

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

incremental

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flow

Jared invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

interest on interest

Which one of the following statements concerning a sole proprietorship is correct? The life of a sole proprietorship is potentially unlimited. A sole proprietor can generally raise large sums of capital quite easily. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. A sole proprietorship is taxed the same as a C corporation. It is easy to create a sole proprietorship.

it is easy to create a sole proprietorship

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:

limited partner

The percentage of the next dollar you earn that must be paid in taxes is referred to as the ______ tax rate.

marginal

Decisions made by financial managers should primarily focus on increasing what?

market value per share of outstanding stock

Eunchae invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

simple interest

a business owned by a solitary individual who has unlimited liability for its debt is called a:

sole proprietorship

Pro forma financial statements can best be described as financial statements:

that state projected values for future time periods

A project has a net present value of zero. Given this information:

the project's cash inflows equal its cash outflows in current dollar terms.

Defined as a firm's short-term assets and its short-term liabilities

working capital